FARMERS & MERCHANTS BANCORP INC - Quarter Report: 2022 September (Form 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 September 30, 2022

☐ 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	13,606,651
Class	Outstanding as of October 21, 2022

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 - September 30, 2022 and December 31, 2021	3

	Condensed Consolidated Statements of Income - Three and Nine Months Ended September 30, 2022 and September 30, 2021	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) - Three and Nine Months Ended September 30, 2022 and September 30, 2021	5

	Condensed Consolidated Statements of Changes to Stockholders’ Equity - Three and Nine Months Ended September 30, 2022 and September 30, 2021	6-7

	Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2022 and September 30, 2021	8-9

	Notes to Condensed Consolidated Financial Statements	10

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	50-69

Item 3.	Qualitative and Quantitative Disclosures About Market Risk	70

Item 4.	Controls and Procedures	71

PART II.	OTHER INFORMATION	71

Item 1.	Legal Proceedings	71

Item 1A.	Risk Factors	71

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71

Item 3.	Defaults Upon Senior Securities	71

Item 4.	Mine Safety Disclosures	71

Item 5.	Other Information	72

Item 6.	Exhibits	72

Signatures		73

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)
	September 30, 2022			December 31, 2021
	(Unaudited)
Assets
Cash and due from banks	$	69,680		$	135,485
Federal funds sold		990			45,338
Total cash and cash equivalents		70,670			180,823
Interest-bearing time deposits		5,187			10,913
Securities - available-for-sale		395,485			429,931
Other securities, at cost		8,227			8,162
Loans held for sale		2,182			7,714
Loans, net		2,122,626			1,841,177
Premises and equipment		26,484			26,913
Goodwill		80,434			80,434
Mortgage servicing rights		3,583			3,157
Other real estate owned		-			159
Bank owned life insurance		28,051			27,558
Other assets		40,831			21,359
Total Assets	$	2,783,760		$	2,638,300

Liabilities and Stockholders' Equity

Liabilities
Deposits
Noninterest-bearing	$	506,928		$	473,689
Interest-bearing
NOW accounts		705,888			650,466
Savings		607,375			597,828
Time		462,845			471,479
Total deposits		2,283,036			2,193,462
Federal funds purchased and securities sold under agreements to repurchase		55,802			29,268
Federal Home Loan Bank (FHLB) advances		102,147			24,065
Other borrowings		10,000			40,000
Subordinated notes, net of unamortized issuance costs		34,557			34,471
Dividend payable		2,727			2,461
Accrued expenses and other liabilities		14,913			17,406
Total liabilities		2,503,182			2,341,133

Commitments and Contingencies

Stockholders' Equity
Common stock - No par value 20,000,000 shares authorized; issued and outstanding 14,063,999 shares 9/30/22 and 12/31/21		121,811			122,674
Treasury stock - 956,499 shares 9/30/22, 997,766 shares 12/31/21		(11,547	)		(11,724	)
Retained earnings		208,051			189,401
Accumulated other comprehensive loss		(37,737	)		(3,184	)
Total stockholders' equity		280,578			297,167
Total Liabilities and Stockholders' Equity	$	2,783,760		$	2,638,300

See Notes to Condensed Consolidated Unaudited Financial Statements.

Note: The December 31, 2021, Condensed Consolidated Balance Sheet has been derived from the audited 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					Nine Months Ended
	September 30, 2022			September 30, 2021		September 30, 2022			September 30, 2021
Interest Income
Loans, including fees	$	24,119		$	18,766	$	66,962		$	50,637
Debt securities:
U.S. Treasury and government agencies		1,049			924		3,107			2,532
Municipalities		373			284		995			881
Dividends		93			44		192			125
Federal funds sold		-			10		19			21
Other		213			94		382			221
Total interest income		25,847			20,122		71,657			54,417
Interest Expense
Deposits		2,166			1,221		4,905			3,837
Federal funds purchased and securities sold under agreements to repurchase		416			165		734			494
Borrowed funds		398			87		951			424
Subordinated notes		284			199		837			199
Total interest expense		3,264			1,672		7,427			4,954
Net Interest Income - Before Provision for Loan Losses		22,583			18,450		64,230			49,463
Provision for Loan Losses		1,637			659		3,845			3,000
Net Interest Income After Provision for Loan Losses		20,946			17,791		60,385			46,463
Noninterest Income
Customer service fees		2,300			2,242		7,096			7,254
Other service charges and fees		1,105			1,010		3,111			2,722
Net gain on sale of loans		327			822		1,188			2,823
Net gain on sale of available-for-sale securities		-			-		-			293
Total noninterest income		3,732			4,074		11,395			13,092
Noninterest Expense
Salaries and wages		5,479			5,442		16,347			14,423
Employee benefits		1,392			1,621		4,992			5,530
Net occupancy expense		693			529		1,813			1,652
Furniture and equipment		1,047			903		3,111			2,542
Data processing		781			1,548		2,039			2,481
Franchise taxes		254			372		1,429			1,112
ATM expense		580			460		1,656			1,368
Advertising		578			439		1,115			1,005
Net (gain) loss on sale of other assets owned		-			219		(271	)		421
FDIC assessment		271			296		655			808
Mortgage servicing rights amortization - net		(50	)		285		35			1,314
Consulting fees		254			256		665			873
Other general and administrative		2,192			1,951		6,613			6,211
Total noninterest expense		13,471			14,321		40,199			39,740
Income Before Income Taxes		11,207			7,544		31,581			19,815
Income Taxes		2,253			1,624		6,254			4,003
Net Income	$	8,954		$	5,920	$	25,327		$	15,812
Basic Earnings Per Share	$	0.68		$	0.53	$	1.94		$	1.41
Diluted Earnings Per Share	$	0.68		$	0.53	$	1.94		$	1.41
Dividends Declared	$	0.2100		$	0.1800	$	0.6025		$	0.5200

See Notes to Condensed Consolidated Unaudited Financial Statements

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					Nine Months Ended
	September 30, 2022			September 30, 2021		September 30, 2022			September 30, 2021
Net Income	$	8,954		$	5,920	$	25,327		$	15,812
Other Comprehensive Income (Loss) (Net of Tax):
Net unrealized gain (loss) on available-for-sale securities		(8,197	)		173		(43,738	)		(5,778	)
Reclassification adjustment for realized gain on sale of available-for-sale securities		-			-		-			(293	)
Net unrealized gain (loss) on available-for-sale securities		(8,197	)		173		(43,738	)		(6,071	)
Tax expense (benefit)		(1,721	)		36		(9,185	)		(1,275	)
Other comprehensive income (loss)		(6,476	)		137		(34,553	)		(4,796	)
Comprehensive Income (Loss)	$	2,478		$	6,057	$	(9,226	)	$	11,016

See Notes to Condensed Consolidated Unaudited Financial Statements

[ Remainder of this page intentionally left blank ]

Farmers & Merchants Bancorp, Inc. and Subsidiaries

CONDENSED Consolidated StatementS of Changes TO Stockholders’ Equity

For the THREE and NINE Months Ended September 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
Net income		-			-			-			8,954			-			8,954
Other comprehensive loss		-			-			-			-			(6,476	)		(6,476	)
Purchase of treasury stock		(8,100	)		-			(254	)		-			-			(254	)
Issuance of 53,375 shares of restricted stock (Net of forfeitures - 3,600)		49,775			(1,542	)		529			1,013			-			-
Stock-based compensation expense		-			208			-			-			-			208
Cash dividends declared - $0.21 per share		-			-			-			(2,727	)		-			(2,727	)
Balance - September 30, 2022		13,107,500		$	121,811		$	(11,547	)	$	208,051		$	(37,737	)	$	280,578

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 NINE months Ended September 30, 2021

(000’s Omitted, Except Per Share Data)

(Unaudited)


													Accumulated
	Shares of												Other			Total
	Common			Common			Treasury			Retained			Comprehensive			Stockholders'
	Stock			Stock			Stock			Earnings			Income (Loss)			Equity
Balance - January 1, 2021		11,197,544		$	81,804		$	(11,932	)	$	173,591		$	5,697		$	249,160
Net income		-			-			-			4,909			-			4,909
Other comprehensive loss		-			-			-			-			(5,554	)		(5,554	)
Purchase of treasury stock		(950	)		-			(23	)		-			-			(23	)
Issuance of 750 shares of restricted stock (Net of forfeitures - 600)		150			1			(7	)		6			-			-
Stock-based compensation expense		-			225			-			-			-			225
Cash dividends declared - $0.17 per share		-			-			-			(1,889	)		-			(1,889	)
Balance - March 31, 2021		11,196,744			82,030			(11,962	)		176,617			143			246,828
Net income		-			-			-			4,983			-			4,983
Other comprehensive income		-			-			-			-			621			621
Purchase of treasury stock		(8,929	)		-			(201	)		-			-			(201	)
Forfeiture of 1,975 shares of restricted stock		(1,975	)		58			(47	)		(11	)		-			-
Stock-based compensation expense		-			171			-			-			-			171
Director stock award		3,212			-			38			33			-			71
Cash dividends declared - $0.17 per share		-			-			-			(1,888	)		-			(1,888	)
Balance - June 30, 2021		11,189,052			82,259			(12,172	)		179,734			764			250,585
Net income		-			-			-			5,920			-			5,920
Other comprehensive income		-			-			-			-			137			137
Purchase of treasury stock		(4,732	)		-			(107	)		-			-			(107	)
Issuance of 48,000 shares of restricted stock		48,000			(1,090	)		561			529			-			-
Stock-based compensation expense		-			213			-			-			-			213
Cash dividends declared - $0.18 per share		-			-			-			(2,002	)		-			(2,002	)
Balance - September 30, 2021		11,232,320		$	81,382		$	(11,718	)	$	184,181		$	901		$	254,746

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)
	Nine Months Ended
	September 30, 2022			September 30, 2021
Cash Flows from Operating Activities
Net income	$	25,327		$	15,812
Adjustments to reconcile net income to net cash from operating activities:
Depreciation		2,148			2,073
Amortization of premiums on available-for-sale securities, net		1,632			1,598
Servicing rights amortization and impairment		35			1,314
Amortization of core deposit intangible		597			478
Amortization of customer list intangible		92			92
Net amortization (accretion) of fair value adjustments		(3,392	)		(170	)
Amortization of subordinated note issuance costs		86			20
Stock-based compensation expense		640			609
Director stock award		120			71
Provision for loan loss		3,845			3,000
Gain on sale of loans held for sale		(1,188	)		(2,823	)
Originations of loans held for sale		(61,285	)		(86,720	)
Proceeds from sale of loans held for sale		68,005			93,548
(Gain) Loss on sale of other assets owned		(271	)		421
Gain on sales of securities available-for-sale		-			(293	)
Increase in cash surrender value of bank owned life insurance		(493	)		(475	)
Change in other assets and other liabilities, net		(13,929	)		(1,278	)
Net cash provided by operating activities		21,969			27,277
Cash Flows from Investing Activities
Activity in available-for-sale securities:
Maturities, prepayments and calls		25,061			41,305
Sales		-			9,291
Purchases		(35,986	)		(146,634	)
Activity in other securities, at cost:
Purchases		(65	)		(207	)
Proceeds from redemption of FHLB stock		-			1,522
Change in interest-bearing time deposits		5,726			10,257
Proceeds from sale of other assets owned		430			196
Additions to premises and equipment		(1,706	)		(1,418	)
Loan originations and principal collections, net		(283,836	)		(141,116	)
Acquisition of Ossian Financial Services, Inc., net of cash received		-			228
Net cash used in investing activities		(290,376	)		(226,576	)
Cash Flows from Financing Activities
Net change in deposits		91,432			154,042
Net change in federal funds purchased and securities sold under agreements to repurchase		26,534			(638	)
Proceeds from FHLB advances		100,000			-
Repayment of FHLB advances		(21,855	)		(157	)
Repayment of other borrowings		(30,000	)		-
Purchase of treasury stock		(308	)		(331	)
Proceeds from issuance of subordinated notes		-			34,421
Cash dividends paid on common stock		(7,549	)		(5,666	)
Net cash provided by financing activities		158,254			181,671
Net Decrease in Cash and Cash Equivalents		(110,153	)		(17,628	)
Cash and Cash Equivalents - Beginning of year		180,823			175,706
Cash and Cash Equivalents - End of period	$	70,670		$	158,078

(continued)

FARMERS & MERCHANTS BANCORP, INC. AND SUBSIDIARIES

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


	(in thousands of dollars)
	Nine Months Ended
	September 30, 2022		September 30, 2021
Supplemental Information
Supplemental cash flow information:
Interest paid	$	7,765	$	4,559
Income taxes paid		5,700		5,100
Supplemental noncash disclosures:
Transfer of loans to other real estate owned		-		209
Cash dividends declared not paid		2,627		2,002
The Company purchased the assets of Ossian Financial Services, Inc. for $20,001 on April 30, 2021.
Fair value of assets acquired	$	-	$	137,058
Cash paid for the capital stock		-		20,001
Liabilities assumed	$	-	$	117,057

See Notes to Condensed Consolidated Unaudited Financial Statements.

[ Remainder of this page intentionally left blank ]

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 nine months ended September 30, 2022 are not necessarily indicative of the results that are expected for the year ended December 31, 2022. The condensed consolidated balance sheet of the Company as of December 31, 2021, has been derived from the audited 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, 2021.

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, 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 includes 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 incorporates a valuation amount of $3.9 million which is being 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.

The Company acquired loans in the acquisition that had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

Loans purchased with evidence of credit deterioration since origination and for which it was probable that all contractually required payments would not be collected were considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date included information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages. Purchased credit-impaired loans were accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which included estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans was not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporated the estimate of current key assumptions, such as default rates, severity and prepayment speeds.

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

The carrying amount of those loans is included in loans, net on the balance sheet at September 30, 2022. The amounts of loans at October 1, 2021, December 31, 2021 and September 30, 2022 are as follows:



	(In Thousands)
Balance - October 1, 2021
Consumer Real Estate	$	608
Agricultural Real Estate		118
Commercial Real Estate		234
Commercial & Industrial		5
Carrying amount, net of fair value adjustment of $237	$	728

Balance - December 31, 2021
Consumer Real Estate	$	581
Agricultural Real Estate		114
Commercial Real Estate		5
Commercial & Industrial		-
Carrying amount, net of fair value adjustment of $190	$	510

Balance - September 30, 2022
Consumer Real Estate	$	336
Agricultural Real Estate		108
Commercial Real Estate		-
Commercial & Industrial		-
Carrying amount, net of fair value adjustment of $141	$	303

Loans acquired during 2021 for which it was probable at acquisition that all contractually required payments would not be collected are as follows:


	(In Thousands)
Contractually required payments receivable at acquisition
Consumer Real Estate	$	962
Agricultural Real Estate		146
Commercial Real Estate		293
Commercial & Industrial		6
Total required payments receivable	$	1,407

Cash flows expected to be collected at acquisition	$	728

Basis in acquired loans at acquisition	$	965

During the third quarter 2022, the associated discount of $1 thousand for one consumer real estate purchased credit impaired loan was included in the loan interest income in the Company's consolidated statement of income. Two consumer real estate purchased credit impaired loans with an associated discount of $36 thousand were paid off during the second quarter 2022 in addition to one consumer real estate purchased credit impaired loan with an associated discount of $12 thousand was paid off during the first quarter 2022 and has been included in the loan interest income in the Company’s consolidated statement of income for the nine months ended September 30, 2022. During the fourth quarter 2021, two commercial real estate and one consumer purchased credit impaired loans were paid off in full. The associated discount originally recognized at acquisition of $47 thousand was included in the loan interest income in the Company’s consolidated statement of income for the year ended December 31, 2021. The balance of the fair value adjustment for loans acquired and accounted for under this guidance (ASC 310-30) was $141 thousand at September 30, 2022, $190 thousand at December 31, 2021 and $237 thousand at October 1, 2021.

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 September 30, 2022			Three Months Ended September 30, 2021		Nine Months Ended September 30, 2022			Nine Months Ended September 30, 2021
	(In Thousands)			(In Thousands)		(In Thousands)			(In Thousands)
Beginning Balance	$	4,710		$	-	$	5,262		$	-
Additions		28			-		125			-
Accretion		(330	)		-		(979	)		-
Reclassification from nonaccretable difference		-			-		-			-
Disposals		(2	)		-		(2	)		-
Ending Balance	$	4,406		$	-	$	4,406		$	-

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 is working to 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 $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

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

The fair value of the assets acquired includes 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 incorporates a valuation amount of $59 thousand which will be accreted over 1.4 years.

Certain transferred loans evidenced deterioration of credit quality since origination and management deemed it probable, at acquisition, that all contractually required payments would not be collected.

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.

The carrying amount of those loans is included in loans, net on the balance sheet at September 30, 2022. The amounts of loans at April 30, 2021, December 31, 2021 and September 30, 2022 are as follows:



	(In Thousands)
Balance - April 30, 2021
Consumer Real Estate	$	24
Agricultural Real Estate		981
Commercial Real Estate		315
Commercial & Industrial		314
Carrying amount, net of fair value adjustment of $325	$	1,309

Balance - December 31, 2021
Consumer Real Estate	$	22
Agricultural Real Estate		-
Commercial Real Estate		222
Commercial & Industrial		285
Carrying amount, net of fair value adjustment of $321	$	208

Balance - September 30, 2022
Consumer Real Estate	$	20
Agricultural Real Estate		-
Commercial Real Estate		-
Commercial & Industrial		-
Carrying amount, net of fair value adjustment of $10	$	10

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

Loans acquired during 2021 for which it was probable at acquisition that all contractually required payments would not be collected are as follows:


	(In Thousands)
Contractually required payments receivable at acquisition
Consumer Real Estate	$	28
Agricultural Real Estate		1,142
Commercial Real Estate		527
Commercial & Industrial		360
Total required payments receivable	$	2,057

Cash flows expected to be collected at acquisition	$	1,309

Basis in acquired loans at acquisition	$	1,634

During the third quarter 2022, the associated discount of $311 thousand for six purchased credit impaired loans between two relationships was included in the loan interest income in the Company's consolidated statement of income for the three and nine months ended September 30, 2022. The balance of the fair value adjustment for loans acquired and accounted for under this guidance (ASC 310-30) was $10 thousand at September 30, 2022, $321 thousand at December 31, 2021 and $325 thousand at April 30, 2021.

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


	Three Months Ended September 30, 2022			Three Months Ended September 30, 2021			Nine Months Ended September 30, 2022			Nine Months Ended September 30, 2021
	(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)
Beginning Balance	$	557		$	733		$	645		$	-
Additions		1			-			1			762
Accretion		(44	)		(44	)		(132	)		(73	)
Reclassification from nonaccretable difference		-			-			-			-
Disposals		-			-			-			-
Ending Balance	$	514		$	689		$	514		$	689

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


	(in thousands of dollars, except per share data)				(in thousands of dollars, except per share data)
	Three Months Ended				Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Summary of Operations
Net Interest Income - Before Provision for Loan Losses	$	22,583	$	22,124	$	64,230	$	61,019
Provision for Loan Losses		1,637		659		3,845		3,001
Net Interest Income After Provision for Loan Losses		20,946		21,465		60,385		58,018
Noninterest Income		3,732		4,664		11,394		14,031
Noninterest Expense		12,941		14,167		39,668		41,436
Income Before Income Taxes		11,737		11,962		32,111		30,613
Income Taxes		2,320		2,433		6,321		6,101
Net Income	$	9,417	$	9,529	$	25,790	$	24,512
Basic and Diluted Earnings Per Share	$	0.72	$	0.73	$	1.97	$	1.88

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

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 quarter and nine months ended September 30, 2022 includes approximately $2.9 million and $7.5 million, respectively, net of tax, of operating revenue from Ossian State Bank and Perpetual Federal Savings Bank since January 1, 2022.

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 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, for the three and nine months ended are as follows:


	Three Months Ended September 30, 2022			Three Months Ended September 30, 2021			Nine Months Ended September 30, 2022			Nine Months Ended September 30, 2021
	(In Thousands)			(In Thousands)			(In Thousands)			(In Thousands)
Beginning Balance	$	994		$	1,439		$	1,198		$	1,653
Additions		2			3			10			8
Accretion		(107	)		(108	)		(319	)		(323	)
Reclassification from nonaccretable difference		-			-			-			-
Disposals		-			-			-			(4	)
Ending Balance	$	889		$	1,334		$	889		$	1,334

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 deposits assets and the acquisition of Perpetual Federal Savings Bank resulted in the recognition of $668 thousand in core deposits 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 consolidated balance sheets.

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

The amortization expense of the core deposit intangible for the nine months ended September 30, 2021 was $478 thousand. Of the $795 thousand to be expensed in 2022, $597 thousand has been expensed for the nine months ended September 30, 2022. Annual amortization of core deposit intangible assets is as follows:


	(In Thousands)
	Geneva		Ossian		Perpetual		Total
2022	$	560	$	140	$	95	$	795
2023		560		140		95		795
2024		560		140		95		795
2025		560		140		95		795
2026		-		140		95		235
Thereafter		-		187		169		356
	$	2,240	$	887	$	644		3,771

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 provides 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 nine months ended September 30, 2021 was $92 thousand. Of the $123 thousand to be expensed in 2022, $92 thousand has been expensed for the nine months ended September 30, 2022. Annual amortization expense of customer list intangible is as follows:


	(In Thousands)
	Adams County Financial Resources
2022	$	123
2023		123
2024		123
2025		123
2026		123
Thereafter		47
	$	662

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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 September 30, 2022 and December 31, 2021, are as follows:


	(In Thousands)
	September 30, 2022
	Amortized		Gross Unrealized		Gross Unrealized			Fair
	Cost		Gains		Losses			Value
Available-for-Sale:
U.S. Treasury	$	105,219	$	-	$	(10,057	)	$	95,162
U.S. Government agencies		154,905		-		(16,885	)		138,020
Mortgage-backed securities		104,242		-		(13,978	)		90,264
State and local governments		78,888		46		(6,895	)		72,039
Total available-for-sale securities	$	443,254	$	46	$	(47,815	)	$	395,485


	(In Thousands)
	December 31, 2021
	Amortized		Gross Unrealized		Gross Unrealized			Fair
	Cost		Gains		Losses			Value
Available-for-Sale:
U.S. Treasury	$	90,775	$	-	$	(1,598	)	$	89,177
U.S. Government agencies		159,673		695		(3,482	)		156,886
Mortgage-backed securities		118,550		839		(1,462	)		117,927
State and local governments		64,964		1,498		(521	)		65,941
Total available-for-sale securities	$	433,962	$	3,032	$	(7,063	)	$	429,931

Investment securities will at times depreciate to an unrealized loss position. The Company utilizes the following criteria to assess whether impairment is other than temporary. No one item by itself will necessarily signal that a security should be recognized as an other than temporary impairment.

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.

The underwater security has longer than 10 years to maturity and the loss position had existed for more than 3 years.

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 impairment is judged to be other than temporary, the cost basis of the individual security shall be written down to fair value, thereby establishing a new cost basis. The new cost basis shall not be changed for subsequent recoveries in fair value. The amount of the write down shall be included in current earnings as a realized loss. The recovery in fair value, if any, shall be recognized in earnings when the security is sold. The table below is presented by category of security and length of time in a continuous loss position. The Company currently does not hold any securities with other than temporary impairment.

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

Information pertaining to securities with gross unrealized losses at September 30, 2022 and December 31, 2021, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:


	(In Thousands)
	September 30, 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	$	(1,522	)	$	29,827	$	(8,535	)	$	65,335	$	(10,057	)	$	95,162
U.S. Government agencies		(1,066	)		22,597		(15,819	)		115,423		(16,885	)		138,020
Mortgage-backed securities		(3,176	)		33,338		(10,802	)		56,926		(13,978	)		90,264
State and local governments		(3,840	)		51,876		(3,055	)		18,257		(6,895	)		70,133
Total available-for-sale securities	$	(9,604	)	$	137,638	$	(38,211	)	$	255,941	$	(47,815	)	$	393,579


	(In Thousands)
	December 31, 2021
	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	$	(1,598	)	$	89,177	$	-		$	-	$	(1,598	)	$	89,177
U.S. Government agencies		(1,898	)		86,739		(1,584	)		41,738		(3,482	)		128,477
Mortgage-backed securities		(1,050	)		63,157		(412	)		16,434		(1,462	)		79,591
State and local governments		(296	)		17,727		(225	)		5,487		(521	)		23,214
Total available-for-sale securities	$	(4,842	)	$	256,800	$	(2,221	)	$	63,659	$	(7,063	)	$	320,459

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 nine months ended September 30, 2022 and September 30, 2021.


	Three Months				Nine Months
	(In Thousands)				(In Thousands)
	2022		2021		2022		2021
Gross realized gains	$	-	$	-	$	-	$	293
Gross realized losses		-		-		-		-
Net realized gains	$	-	$	-	$	-	$	293
Tax expense related to net realized gains	$	-	$	-	$	-	$	62

The net realized gains on sales and related tax expense is a reclassification out of accumulated other comprehensive income (loss). The net realized gains are included in net gains on sale of available-for-sale securities and the related tax expense 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 September 30, 2022, 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	$	17,262	$	16,909
After one year through five years		184,900		168,802
After five years through ten years		131,050		113,882
After ten years		5,800		5,628
Total	$	339,012	$	305,221
Mortgage-backed securities		104,242		90,264
Total	$	443,254	$	395,485

Investments with a carrying value of $133.0 million and $115.0 million at September 30, 2022 and December 31, 2021, 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 $6.8 million as of September 30, 2022 and $7.3 million as of December 31, 2021 . Other securities also includes Ohio Equity Fund for Housing Limited Partnership funding of $1.5 million as of September 30, 2022 out of a total of $4.0 million committed and $820 thousand as of December 31, 2021 out of a total $3.0 million committed.

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

NOTE 4 LOANS

Loan balances as of September 30, 2022 and December 31, 2021 are summarized below:


	(In Thousands)
Loans:	September 30, 2022			December 31, 2021
Consumer Real Estate	$	416,001		$	395,873
Agricultural Real Estate		205,089			198,343
Agricultural		128,615			118,368
Commercial Real Estate		1,063,661			848,477
Commercial and Industrial		229,388			208,270
Consumer		70,602			57,737
Other		30,662			32,089
		2,144,018			1,859,157
Less: Net deferred loan fees and costs		(1,402	)		(1,738	)
		2,142,616			1,857,419
Less: Allowance for loan losses		(19,990	)		(16,242	)
Loans - Net	$	2,122,626		$	1,841,177

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 September 30, 2022:


	(In Thousands)
	Fixed		Variable
Consumer Real Estate	$	293,912	$	122,089
Agricultural Real Estate		130,078		75,011
Agricultural		50,658		77,957
Commercial Real Estate		871,664		191,997
Commercial and Industrial		113,171		116,217
Consumer		67,154		3,448
Other		20,862		9,800

As of September 30, 2022 and December 31, 2021 one to four family residential mortgage loans amounting to $182.7 million and $193.2 million, respectively, have been pledged as security for future loans and existing loans the Bank has received from the Federal Home Loan Bank.

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 September 30, 2022 and December 31, 2021, net of deferred loan fees and costs:


September 30, 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	$	1,056	$	167	$	216	$	1,439	$	414,605	$	416,044	$	-
Agricultural Real Estate		189		216		1,550		1,955		202,832		204,787		-
Agricultural		435		88		831		1,354		127,464		128,818		-
Commercial Real Estate		1		-		180		181		1,061,723		1,061,904		-
Commercial and Industrial		203		52		23		278		259,722		260,000		-
Consumer		14		45		47		106		70,957		71,063		-
Total	$	1,898	$	568	$	2,847	$	5,313	$	2,137,303	$	2,142,616	$	-


December 31, 2021	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	$	228	$	-	$	246	$	474	$	395,331	$	395,805	$	-
Agricultural Real Estate		436		-		-		436		197,597		198,033		-
Agricultural		-		-		-		-		118,504		118,504		-
Commercial Real Estate		-		-		180		180		846,930		847,110		-
Commercial and Industrial		21		131		149		301		239,837		240,138		-
Consumer		64		-		-		64		57,765		57,829		-
Total	$	749	$	131	$	575	$	1,455	$	1,855,964	$	1,857,419	$	-

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

The following table presents the recorded investment in nonaccrual loans by class of loans as of September 30, 2022 and December 31, 2021:


	(In Thousands)
	September 30, 2022		December 31, 2021

Consumer Real Estate	$	636	$	824
Agricultural Real Estate		2,214		6,477
Agricultural		1,334		20
Commercial Real Estate		1,178		600
Commercial & Industrial		57		149
Consumer		51		6
Total	$	5,470	$	8,076

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. Included in commercial loans for September 2022 and December 2021 were Paycheck Protection Program (PPP) loans, administered by the Small Business Administration (SBA), in the amounts of $7 thousand and $2.9 million, respectively. The PPP provided loans to eligible businesses through financial institutions like the Bank, with loans being eligible for forgiveness of some or all of the principal amount by the SBA if the borrower meets certain requirements. The SBA guarantees repayment of the loans to the Bank if the borrower’s loan is not forgiven and is then not repaid by the customer. Therefore, there is no allowance for loan losses related to these loans.

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.

[ Remainder of this page intentionally left blank ]

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 September 30, 2022 and December 31, 2021:


	(In Thousands)
	Agricultural				Commercial		Commercial
	Real Estate		Agricultural		Real Estate		and Industrial		Other
September 30, 2022
1-2	$	9,608	$	5,358	$	14,227	$	1,195	$	-
3		50,781		33,381		303,291		66,129		11,110
4		127,806		88,476		705,358		155,223		19,552
5		5,024		240		15,322		3,214		-
6		11,568		1,363		23,706		3,577		-
7		-		-		-		-		-
8		-		-		-		-		-
Total	$	204,787	$	128,818	$	1,061,904	$	229,338	$	30,662


	Agricultural				Commercial		Commercial
	Real Estate		Agricultural		Real Estate		and Industrial		Other
December 31, 2021
1-2	$	8,720	$	4,178	$	10,894	$	4,604	$	-
3		42,180		38,623		238,132		46,547		11,408
4		129,301		75,164		568,038		152,736		20,681
5		4,599		227		14,509		986		-
6		13,233		312		15,537		3,176		-
7		-		-		-		-		-
8		-		-		-		-		-
Total	$	198,033	$	118,504	$	847,110	$	208,049	$	32,089

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 September 30, 2022 and December 31, 2021.


	(In Thousands)
	Consumer		Consumer
	Real Estate		Real Estate
	September 30, 2022		December 31, 2021
Grade
Pass	$	414,490	$	392,940
Special Mention (5)		555		1,673
Substandard (6)		999		1,192
Doubtful (7)		-		-
Total	$	416,044	$	395,805


	(In Thousands)
	Consumer - Credit				Consumer - Other
	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Performing	$	1	$	3,906	$	71,003	$	53,820
Nonperforming		-		13		59		90
Total	$	1	$	3,919	$	71,062	$	53,910

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

Information about impaired loans as of September 30, 2022, December 31, 2021 and September 30, 2021 are as follows:


			(In Thousands)
	September 30, 2022		December 31, 2021		September 30, 2021

Impaired loans without a valuation allowance	$	5,835	$	1,228	$	2,461
Impaired loans with a valuation allowance		4,918		10,711		9,388
Total impaired loans	$	10,753	$	11,939	$	11,849
Valuation allowance related to impaired loans	$	2,436	$	2,184	$	2,400
Total non-accrual loans	$	5,470	$	8,076	$	6,248
Total loans past-due ninety days or more and still accruing	$	-	$	-	$	-
Quarter ended average investment in impaired loans	$	10,662	$	11,676	$	11,639
Year to date average investment in impaired loans	$	11,059	$	12,247	$	12,360

There were no additional funds available to be advanced in connection with impaired loans as of September 30, 2022.

The Bank had approximately $4.0 million of its impaired loans classified as troubled debt restructured (TDR) as of September 30, 2022, $7.6 million as of December 31, 2021 and $6.0 million as of September 30, 2021.

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 third quarter of 2022, three new loans were considered TDR as a result of the continuance of interest only payment modifications. These three loans stem from a single relationship with a borrower. This relationship has a Small Business Administration (SBA) guaranty and consequently the request for the continuance of the interest only period was also approved by the SBA as were previous requests. During the third quarter of 2021, one new loan was considered TDR as a result of being in a deficiency balance upon the sale of property. The loan is set for a 3 year term and 10 year amortization. The ALLL included $1.0 million for the specific allocation on the principal balance of this loan. Year to date 2021, there were two new loans considered TDR with two previously reported TDR loans paid off in June 2021.

Three Months

Pre-

Post-

Nine Months

Pre-

Post-

September 30, 2022

Number of

Modification

September 30, 2022

Number of

Modification

(in thousands)

Contracts

Outstanding

(in thousands)

Contracts

Outstanding

Troubled Debt

Modified in the

Recorded

Troubled Debt

Modified in the

Recorded

Restructurings

Last Three Months

Investment

Restructurings

Last Nine Months

Investment

Commercial Real Estate

Commercial and
Industrial

1,232

Commercial and
Industrial

1,232

Three Months

Pre-

Post-

Nine Months

Pre-

Post-

September 30, 2021

Number of

Modification

September 30, 2021

Number of

Modification

(in thousands)

Contracts

Outstanding

(in thousands)

Contracts

Outstanding

Troubled Debt

Modified in the

Recorded

Troubled Debt

Modified in the

Recorded

Restructurings

Last Three Months

Investment

Restructurings

Last Nine Months

Investment

Commercial Real Estate

382

Commercial and
Industrial

1,000

Commercial and
Industrial

1,000

For the three months ended September 30, 2022 and 2021, there were no TDRs that subsequently defaulted after modification.

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

For the nine month period ended September 30, 2022, there were two impaired agriculture real estate loans of $4.5 million that were classified as TDR and paid off. For the nine month period ended September 30, 2021, there was one impaired commercial real estate loan of $86 thousand and one impaired commercial loan of $480 thousand that were classified as TDR paid off as well as three impaired commercial loans of $809 thousand that were classified as TDR charged off.

For the majority of the Bank’s impaired loans, the Bank will apply the fair value of collateral or use 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 are periodically evaluated. Maximum time of re-evaluation is every 12 months for chattels and titled vehicles and every two years for real estate. In this process, third party evaluations are obtained. Until such time that updated appraisals are received, the Bank may discount the collateral value used.

The Bank uses 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 is realized when unsecured consumer loans, credit card credits and overdraft lines of credit reach 90 days delinquency. At 90 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-off may be realized as further unsecured positions are recognized.

The following tables present loans individually evaluated for impairment by class of loans for the three and nine months ended September 30, 2022 and September 30, 2021 and for the year ended December 31, 2021.


	(In Thousands)
											QTD
							QTD		QTD		Interest
Three Months Ended September 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	$	624	$	624	$	-	$	352	$	1	$	5
Agricultural Real Estate		2,588		2,693		-		2,467		6		1
Agricultural		1,334		1,334		-		1,309		-		-
Commercial Real Estate		1,251		1,251		-		1,505		9		14
Commercial and Industrial		21		21		-		63		-		-
Consumer		17		17		-		17		-		-
With a specific allowance recorded:
Consumer Real Estate		-		-		-		-		-		-
Agricultural Real Estate		-		-		-		-		-		-
Agricultural		-		-		-		-		-		-
Commercial Real Estate		2,936		2,936		500		2,960		39		-
Commercial and Industrial		1,982		1,982		1,936		1,989		72		-
Consumer		-		-		-		-		-		-
Totals:
Consumer Real Estate	$	624	$	624	$	-	$	352	$	1	$	5
Agricultural Real Estate	$	2,588	$	2,693	$	-	$	2,467	$	6	$	1
Agricultural	$	1,334	$	1,334	$	-	$	1,309	$	-	$	-
Commercial Real Estate	$	4,187	$	4,187	$	500	$	4,465	$	48	$	14
Commercial and Industrial	$	2,003	$	2,003	$	1,936	$	2,052	$	72	$	-
Consumer	$	17	$	17	$	-	$	17	$	-	$	-

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


	(In Thousands)
											Interest
Year Ended December 31, 2021			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	$	604	$	604	$	-	$	456	$	5	$	15
Agricultural Real Estate		423		423		-		1,000		33		-
Agricultural		-		-		-		143		18		3
Commercial Real Estate		180		180		-		1,445		70		9
Commercial and Industrial		21		21		-		920		24		158
Consumer		-		-		-		17		-		-
With a specific allowance recorded:
Consumer Real Estate		-		-		-		59		-		-
Agricultural Real Estate		6,302		6,406		691		5,414		54		-
Agricultural		20		20		1		94		-		-
Commercial Real Estate		3,381		3,381		664		2,199		70		3
Commercial and Industrial		982		982		825		498		17		-
Consumer		26		26		3		2		1		-
Totals:
Consumer Real Estate	$	604	$	604	$	-	$	515	$	5	$	15
Agricultural Real Estate	$	6,725	$	6,829	$	691	$	6,414	$	87	$	-
Agricultural	$	20	$	20	$	1	$	237	$	18	$	3
Commercial Real Estate	$	3,561	$	3,561	$	664	$	3,644	$	140	$	12
Commercial and Industrial	$	1,003	$	1,003	$	825	$	1,418	$	41	$	158
Consumer	$	26	$	26	$	3	$	19	$	1	$	-

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


	(In Thousands)
											QTD
							QTD		QTD		Interest
Three Months Ended September 30, 2021			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	$	714	$	714	$	-	$	453	$	1	$	3
Agricultural Real Estate		1,207		1,207		-		1,047		19		-
Agricultural		130		130		-		130		4		-
Commercial Real Estate		180		180		-		2,519		4		1
Commercial and Industrial		215		215		-		525		-		1
Consumer		15		15		-		16		-		-
With a specific allowance recorded:
Consumer Real Estate		-		-		-		-		-		-
Agricultural Real Estate		4,844		4,844		636		5,104		4		-
Agricultural		117		117		54		117		-		-
Commercial Real Estate		3,427		3,427		710		1,395		31		-
Commercial and Industrial		1,000		1,000		1,000		333		2		-
Consumer		-		-		-		-		-		-
Totals:
Consumer Real Estate	$	714	$	714	$	-	$	453	$	1	$	3
Agricultural Real Estate	$	6,051	$	6,051	$	636	$	6,151	$	23	$	-
Agricultural	$	247	$	247	$	54	$	247	$	4	$	-
Commercial Real Estate	$	3,607	$	3,607	$	710	$	3,914	$	35	$	1
Commercial and Industrial	$	1,215	$	1,215	$	1,000	$	858	$	2	$	1
Consumer	$	15	$	15	$	-	$	16	$	-	$	-

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


	(In Thousands)
											YTD
							YTD		YTD		Interest
Nine Months Ended September 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	$	624	$	624	$	-	$	372	$	3	$	10
Agricultural Real Estate		2,588		2,693		-		1,953		19		6
Agricultural		1,334		1,334		-		591		-		2
Commercial Real Estate		1,251		1,251		-		1,162		20		33
Commercial and Industrial		21		21		-		175		2		10
Consumer		17		17		-		18		1		-
With a specific allowance recorded:
Consumer Real Estate		-		-		-		-		-		-
Agricultural Real Estate		-		-		-		1,850		-		-
Agricultural		-		-		-		-		-		-
Commercial Real Estate		2,936		2,936		500		3,270		113		-
Commercial and Industrial		1,982		1,982		1,936		1,665		138		-
Consumer		-		-		-		3		-		-
Totals:
Consumer Real Estate	$	624	$	624	$	-	$	372	$	3	$	10
Agricultural Real Estate	$	2,588	$	2,693	$	-	$	3,803	$	19	$	6
Agricultural	$	1,334	$	1,334	$	-	$	591	$	-	$	2
Commercial Real Estate	$	4,187	$	4,187	$	500	$	4,432	$	133	$	33
Commercial and Industrial	$	2,003	$	2,003	$	1,936	$	1,840	$	140	$	10
Consumer	$	17	$	17	$	-	$	21	$	1	$	-

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


	(In Thousands)
											YTD
							YTD		YTD		Interest
Nine Months Ended September 30, 2021			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	$	714	$	714	$	-	$	485	$	4	$	10
Agricultural Real Estate		1,207		1,207		-		1,191		53		-
Agricultural		130		130		-		161		8		-
Commercial Real Estate		180		180		-		1,768		38		7
Commercial and Industrial		215		215		-		1,206		24		4
Consumer		15		15		-		19		1		-
With a specific allowance recorded:
Consumer Real Estate		-		-		-		-		-		-
Agricultural Real Estate		4,844		4,844		636		5,273		15		-
Agricultural		117		117		54		123		4		-
Commercial Real Estate		3,427		3,427		710		1,800		58		3
Commercial and Industrial		1,000		1,000		1,000		334		2		-
Consumer		-		-		-		-		-		-
Totals:
Consumer Real Estate	$	714	$	714	$	-	$	485	$	4	$	10
Agricultural Real Estate	$	6,051	$	6,051	$	636	$	6,464	$	68	$	-
Agricultural	$	247	$	247	$	54	$	284	$	12	$	-
Commercial Real Estate	$	3,607	$	3,607	$	710	$	3,568	$	96	$	10
Commercial and Industrial	$	1,215	$	1,215	$	1,000	$	1,540	$	26	$	4
Consumer	$	15	$	15	$	-	$	19	$	1	$	-

As of September 30, 2022, the Company had no foreclosed residential real estate property obtained by physical possession and $211 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 $159 thousand of foreclosed residential real estate property obtained by physical possession and $255 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, 2021. As of September 30, 2021, the Company had $167 thousand of foreclosed residential real estate property obtained by physical possession and $129 thousand of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings were in process according to local jurisdictions.

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

The Allowance for Loan and Lease Losses (ALLL) has a direct impact on the provision expense. An increase in the ALLL is funded through recoveries and provision expense. The following tables summarize the activities in the allowance for credit losses.


	(In Thousands)
	Nine Months Ended			Twelve Months Ended
	September 30, 2022			December 31, 2021
Allowance for Loan & Lease Losses
Balance at beginning of year	$	16,242		$	13,672
Provision for loan loss		3,845			3,444
Loans charged off		(334	)		(1,332	)
Recoveries		237			458
Allowance for Loan & Lease Losses	$	19,990		$	16,242
Allowance for Unfunded Loan Commitments & Letters of Credit	$	1,118		$	1,041
Total Allowance for Credit Losses	$	21,108		$	17,283

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

The ALLL does not include an accretable yield of $5.8 and $7.1 million as of September 30, 2022 and December 31, 2021, respectively, nor a nonaccretable yield of $151 and $510 thousand as of September 30, 2022 and December 31, 2021, respectively, related to the acquisitions of Bank of Geneva in 2019 and Ossian State Bank and Perpetual Federal Savings Bank in 2021 as previously discussed in Note 2.

The AULC is reported within other liabilities while the ALLL is netted within the loans, net asset line on the Company’s consolidated balance sheet. The ACL presented above represents the full amount of reserves available to absorb possible credit losses.

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

The following table breaks 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.

Additional analysis, presented in thousands, related to the allowance for credit losses for the three and nine months ended September 30, 2022 and September 30, 2021 in addition to the ending balances as of December 31, 2021 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 September 30, 2022
ALLOWANCE FOR CREDIT LOSSES:
Beginning balance	$	939		$	346	$	754	$	10,427	$	5,365	$	567		$	1,167		$	26		$	19,591
Charge Offs		-			-		-		-		-		(123	)		-			-			(123	)
Recoveries		6			-		1		2		8		35			-			-			52
Provision (Credit)		(19	)		10		1		1,122		297		246			-			(20	)		1,637
Other Non-interest expense related to unfunded		-			-		-		-		-		-			(49	)		-			(49	)
Ending Balance	$	926		$	356	$	756	$	11,551	$	5,670	$	725		$	1,118		$	6		$	21,108
Ending balance: individually evaluated for impairment	$	-		$	-	$	-	$	500	$	1,936	$	-		$	-		$	-		$	2,436
Ending balance: collectively evaluated for impairment	$	926		$	356	$	756	$	11,051	$	3,734	$	725		$	1,118		$	6		$	18,672
Ending balance: loans acquired with deteriorated credit quality	$	-		$	-	$	-	$	-	$	-	$	-		$	-		$	-		$	-
FINANCING RECEIVABLES:
Ending balance	$	416,044		$	204,787	$	128,818	$	1,061,904	$	260,000	$	71,063		$	-		$	-		$	2,142,616
Ending balance: individually evaluated for impairment	$	624		$	2,588	$	1,334	$	4,187	$	2,003	$	17		$	-		$	-		$	10,753
Ending balance: collectively evaluated for impairment	$	414,951		$	202,003	$	127,484	$	1,057,699	$	257,948	$	71,046		$	-		$	-		$	2,131,131
Ending balance: loans acquired with deteriorated credit quality	$	469		$	196	$	-	$	18	$	49	$	-		$	-		$	-		$	732

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


December 31, 2021	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:
Ending Balance	$	857	$	1,040	$	709	$	9,130	$	3,847	$	625	$	1,041	$	34	$	17,283
Ending balance: individually evaluated for impairment	$	-	$	691	$	1	$	664	$	825	$	3	$	-	$	-	$	2,184
Ending balance: collectively evaluated for impairment	$	857	$	349	$	708	$	8,466	$	3,022	$	622	$	1,041	$	34	$	15,099
Ending balance: loans acquired with deteriorated credit quality	$	37	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	37
FINANCING RECEIVABLES:
Ending balance	$	395,805	$	198,033	$	118,504	$	847,110	$	240,138	$	57,829	$	-	$	-	$	1,857,419
Ending balance: individually evaluated for impairment	$	604	$	6,725	$	20	$	3,561	$	1,003	$	26	$	-	$	-	$	11,939
Ending balance: collectively evaluated for impairment	$	394,489	$	191,107	$	118,484	$	843,299	$	238,849	$	57,803	$	-	$	-	$	1,844,031
Ending balance: loans acquired with deteriorated credit quality	$	712	$	201	$	-	$	250	$	286	$	-	$	-	$	-	$	1,449

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
Three Months Ended September 30, 2021
ALLOWANCE FOR CREDIT LOSSES:
Beginning balance	$	649		$	1,217		$	720		$	8,831		$	2,837		$	613		$	1,145		$	220	$	16,232
Charge Offs		(2	)		-			(1	)		-			(5	)		(95	)		-			-		(103	)
Recoveries		3			-			1			3			9			39			-			-		55
Provision (Credit)		146			(291	)		(33	)		(469	)		973			49			-			284		659
Other Non-interest expense related to unfunded		-			-			-			-			-			-			(106	)		-		(106	)
Ending Balance	$	796		$	926		$	687		$	8,365		$	3,814		$	606		$	1,039		$	504	$	16,737
Ending balance: individually evaluated for impairment	$	-		$	636		$	54		$	710		$	1,000		$	-		$	-		$	-	$	2,400
Ending balance: collectively evaluated for impairment	$	796		$	290		$	633		$	7,655		$	2,814		$	606		$	1,039		$	504	$	14,337
Ending balance: loans acquired with deteriorated credit quality	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-	$	-
FINANCING RECEIVABLES:
Ending balance	$	202,370		$	179,051		$	105,722		$	727,418		$	225,382		$	55,619		$	-		$	-	$	1,495,562
Ending balance: individually evaluated for impairment	$	714		$	6,051		$	247		$	3,607		$	1,215		$	15		$	-		$	-	$	11,849
Ending balance: collectively evaluated for impairment	$	201,595		$	173,000		$	105,475		$	723,577		$	223,803		$	55,604		$	-		$	-	$	1,483,054
Ending balance: loans acquired with deteriorated credit quality	$	61		$	-		$	-		$	234		$	364		$	-		$	-		$	-	$	659

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
Nine Months Ended September 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	)		(328	)		-		-			(334	)
Recoveries		15		-			1		7		82			132			-		-			237
Provision (Credit)		54		(684	)		46		2,414		1,747			296			-		(28	)		3,845
Other Non-interest expense related to unfunded		-		-			-		-		-			-			77		-			77
Ending Balance	$	926	$	356		$	756	$	11,551	$	5,670		$	725		$	1,118	$	6		$	21,108
Ending balance: individually evaluated for impairment	$	-	$	-		$	-	$	500	$	1,936		$	-		$	-	$	-		$	2,436
Ending balance: collectively evaluated for impairment	$	926	$	356		$	756	$	11,051	$	3,734		$	725		$	1,118	$	6		$	18,672
Ending balance: loans acquired with deteriorated credit quality																					$	-
FINANCING RECEIVABLES:
Ending balance	$	416,044	$	204,787		$	128,818	$	1,061,904	$	260,000		$	71,063		$	-	$	-		$	2,142,616
Ending balance: individually evaluated for impairment	$	624	$	2,588		$	1,334	$	4,187	$	2,003		$	17		$	-	$	-		$	10,753
Ending balance: collectively evaluated for impairment	$	414,951	$	202,003		$	127,484	$	1,057,699	$	257,948		$	71,046		$	-	$	-		$	2,131,131
Ending balance: loans acquired with deteriorated credit quality	$	469	$	196		$	-	$	18	$	49		$	-		$	-	$	-		$	732

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
Nine Months Ended September 30, 2021
ALLOWANCE FOR CREDIT LOSSES:
Beginning balance	$	633		$	958		$	701		$	7,415	$	3,346		$	606		$	641	$	13	$	14,313
Charge Offs		(2	)		-			(143	)		-		(814	)		(195	)		-		-		(1,154	)
Recoveries		9			-			7			8		19			137			-		-		180
Provision (Credit)		156			(32	)		122			942		1,263			58			-		491		3,000
Other Non-interest expense related to unfunded		-			-			-			-		-			-			398		-		398
Ending Balance	$	796		$	926		$	687		$	8,365	$	3,814		$	606		$	1,039	$	504	$	16,737
Ending balance: individually evaluated for impairment	$	-		$	636		$	54		$	710	$	1,000		$	-		$	-	$	-	$	2,400
Ending balance: collectively evaluated for impairment	$	796		$	290		$	633		$	7,655	$	2,814		$	606		$	1,039	$	504	$	14,337
Ending balance: loans acquired with deteriorated credit quality	$	-		$	-		$	-		$	-	$	-		$	-		$	-	$	-	$	-
FINANCING RECEIVABLES:
Ending balance	$	202,370		$	179,051		$	105,722		$	727,418	$	225,382		$	55,619		$	-	$	-	$	1,495,562
Ending balance: individually evaluated for impairment	$	714		$	6,051		$	247		$	3,607	$	1,215		$	15		$	-	$	-	$	11,849
Ending balance: collectively evaluated for impairment	$	201,595		$	173,000		$	105,475		$	723,577	$	223,803		$	55,604		$	-	$	-	$	1,483,054
Ending balance: loans acquired with deteriorated credit quality	$	61		$	-		$	-		$	234	$	364		$	-		$	-	$	-	$	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. The use of stock for Directors’ retainer, does not have an effect on diluted earnings per share as it is immediately vested.


	(in thousands of dollars)						(in thousands of dollars)
	Three Months Ended						Nine Months Ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Earnings per share
Net income	$	8,954		$	5,920		$	25,327		$	15,812
Less: distributed earnings allocated to participating securities		(26	)		(20	)		(67	)		(49	)
Less: undistributed earnings allocated to participating securities		(42	)		(31	)		(148	)		(77	)
Net earnings available to common shareholders	$	8,886		$	5,869		$	25,112		$	15,686

Weighted average common shares outstanding including participating securities		13,083,145			11,209,732			13,071,859			11,199,309
Less: average unvested restricted shares		(99,838	)		(96,197	)		(111,209	)		(89,075	)
Weighted average common shares outstanding		12,983,307			11,113,535			12,960,650			11,110,234
Basic and diluted earnings per share	$	0.68		$	0.53		$	1.94		$	1.41

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.

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

The estimated fair values, and related carrying or notional amounts, for on and off-balance sheet financial instruments as of September 30, 2022 and December 31, 2021 are reflected below.


	(In Thousands)
	September 30, 2022
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	70,670	$	70,670	$	70,670	$	-	$	-
Interest-bearing time deposits		5,187		5,187		-		5,187		-
Securities - available-for-sale		395,485		395,485		95,162		296,957		3,366
Other securities		8,227		8,227		-		-		8,227
Loans held for sale		2,182		2,219		-		-		2,219
Loans, net		2,122,626		2,080,950		-		-		2,080,950
Interest receivable		9,856		9,856		-		-		9,856

Financial Liabilities:
Interest bearing deposits	$	1,313,263	$	1,313,263	$	-	$	-	$	1,313,263
Non-interest bearing deposits		506,928		506,928		-		506,928		-
Time deposits		462,845		449,985		-		-		449,985
Total Deposits		2,283,036		2,270,176		-		506,928		1,763,248

Federal funds purchased and securities sold under agreement to repurchase		55,802		55,802		-		-		55,802
Federal Home Loan Bank advances		102,147		103,588		-		-		103,588
Other borrowings		10,000		10,000		-		10,000		-
Subordinated notes, net of unamortized issuance costs		34,557		35,003		-		35,003		-
Interest payable		787		787		-		-		787


	(In Thousands)
	December 31, 2021
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	180,823	$	180,823	$	180,823	$	-	$	-
Interest-bearing time deposits		10,913		10,933		-		10,933		-
Securities - available-for-sale		429,931		429,931		89,177		335,981		4,773
Other securities		8,162		8,162		-		-		8,162
Loans held for sale		7,714		7,844		-		-		7,844
Loans, net		1,841,177		1,864,386		-		-		1,864,386
Interest receivable		7,209		7,209		-		-		7,209

Financial Liabilities:
Interest bearing deposits	$	1,248,294	$	1,248,044	$	-	$	-	$	1,248,044
Non-interest bearing deposits		473,689		473,689		-		473,689		-
Time deposits		471,479		475,810		-		-		475,810
Total Deposits		2,193,462		2,197,543		-		473,689		1,723,854

Federal funds purchased and securities sold under agreement to repurchase		29,268		29,268		-		-		29,268
Federal Home Loan Bank advances		24,065		24,305		-		-		24,305
Other borrowings		40,000		40,000		-		40,000		-
Subordinated notes, net of unamortized issuance costs		34,471		35,000		-		35,000		-
Interest payable		1,125		1,125		-		-		1,125

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

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 September 30, 2022 and December 31, 2021, 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)
September 30, 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	$	95,162	$	-	$	-
U.S. Government agencies		-		138,020		-
Mortgage-backed securities		-		90,264		-
State and local governments		-		68,673		3,366
Total Securities Available-for-Sale	$	95,162	$	296,957	$	3,366


December 31, 2021	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	$	89,177	$	-	$	-
U.S. Government agencies		-		156,886		-
Mortgage-backed securities		-		117,927		-
State and local governments		-		61,168		4,773
Total Securities Available-for-Sale	$	89,177	$	335,981	$	4,773

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 nine month periods ended September 30, 2022 and September 30, 2021. 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			State and Local Governments Taxable			State and Local Governments Total
Balance at July 1, 2022	$	2,089		$	1,325		$	3,414

Change in Market Value		(19	)		(29	)		(48	)

Purchases		-			-			-

Payments & Maturities		-			-			-

Reclassification & Adjustments		-			-			-

Balance at September 30, 2022	$	2,070		$	1,296		$	3,366


	(In Thousands)
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	State and Local Governments Tax-Exempt			State and Local Governments Taxable			State and Local Governments Total
Balance at July 1, 2021	$	2,410		$	1,538		$	3,948

Change in Market Value		(9	)		(17	)		(26	)

Purchases		-			-			-

Payments & Maturities		(155	)		-			(155	)

Reclassification & Adjustments		-			-			-

Balance at September 30, 2021	$	2,246		$	1,521		$	3,767

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			State and Local Governments Taxable			State and Local Governments Total
Balance at January 1, 2022	$	2,307		$	2,466		$	4,773

Change in Market Value		(77	)		(181	)		(258	)

Purchases		-			-			-

Payments & Maturities		(160	)		-			(160	)

Reclassification & Adjustments		-			(989	)		(989	)

Balance at September 30, 2022	$	2,070		$	1,296		$	3,366


	(In Thousands)
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	State and Local Governments Tax-Exempt			State and Local Governments Taxable			State and Local Governments Total
Balance at January 1, 2021	$	-		$	1,562		$	1,562

Change in Market Value		(17	)		(41	)		(58	)

Purchases		2,418			-			2,418

Payments & Maturities		(155	)		-			(155	)

Reclassification & Adjustments		-			-			-

Balance at September 30, 2021	$	2,246		$	1,521		$	3,767

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 September 30, 2022 and December 31, 2021, such assets consist primarily of collateral dependent impaired loans. Collateral dependent impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. 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 September 30, 2022 and December 31, 2021, fair value of collateral dependent impaired loans categorized as Level 3 was $2.5 million and $8.5 million, respectively. The specific allocation for impaired loans was $2.4 million and $2.2 million as of September 30, 2022 and December 31, 2021, respectively, which are accounted for in the allowance for loan losses (see Note 4).

During 2021, impairment was recognized on mortgage servicing rights based upon the independent third party’s quarterly valuations. A valuation allowance was established by strata to quantify the likely impairment of the value of the mortgage 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 $1 thousand at September 30, 2022 and $414 thousand at December 31, 2021.

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

Other real estate is reported at either the lower of the fair value of the real estate minus the estimated costs to sell the asset or the cost of the asset. The determination of fair value of the real estate relies primarily on appraisals from third parties. If the fair value of the real estate, minus the estimated costs to sell the asset, is less than the asset's cost, the deficiency is recognized as a valuation allowance against the asset through a charge to expense. The valuation allowance is therefore increased or decreased, through charges or credits to expense, for changes in the asset's fair value or estimated selling costs.

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
	September 30, 2022		Valuation Technique	Unobservable Inputs	Average)
State and local government	$	3,366	Discounted Cash Flow	Credit strength of underlying project or entity / Discount rate	2.13-4.59% (3.96%)

Collateral dependent impaired loans		2,482	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	20.00-23.87% (23.80%)

Mortgage servicing rights		52	Discounted Cash Flow	Constant prepayment rate and probability of default / Discount rate	0.09-1.85% (1.81%)

Other real estate owned - residential		-	Appraisals	Discount to reflect current market	— % ( — %)


	(In Thousands)				Range
	Fair Value at				(Weighted
	December 31, 2021		Valuation Technique	Unobservable Inputs	Average)
State and local government	$	4,773	Discounted Cash Flow	Credit strength of underlying project or entity / Discount rate	0.21-1.77% (1.33%)

Collateral dependent impaired loans		8,527	Collateral based measurements	Discount to reflect current market conditions and ultimate collectability	20.00-53.95% (34.78%)

Mortgage servicing rights		3,157	Discounted Cash Flow	Constant prepayment rate and probability of default / Discount rate	1.94-27.70% (18.44%)

Other real estate owned - residential		99	Appraisals	Discount to reflect current market	32.72% (32.72%)

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

The following table presents assets measured at fair value on a nonrecurring basis at September 30, 2022 and December 31, 2021:


	Assets Measured at Fair Value on a Nonrecurring Basis at September 30, 2022
	(In Thousands)
	Balance at September 30, 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	$	2,482	$	-	$	-	$	2,482
Mortgage servicing rights		52		-		-		52
Other real estate owned - residential		-		-		-		-


	Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2021
	(In Thousands)
	Balance at December 31, 2021		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateral dependent impaired loans	$	8,527	$	-	$	-	$	8,527
Mortgage servicing rights		3,157		-		-		3,157
Other real estate owned - residential		99		-		-		99

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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 $20.4 million in federal funds purchased as of September 30, 2022 and no federal funds purchased as of December 31, 2021. During the same time periods, the Company had $35.4 million and $29.3 million in securities sold under agreement to repurchase.


	September 30, 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	$	20,356	$	-	$	-	$	-	$	20,356
Repurchase agreements
US Treasury & agency securities	$	1,359	$	-	$	5,069	$	29,018	$	35,446
Total	$	21,715	$	-	$	5,069	$	29,018	$	55,802


	December 31, 2021
	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	$	-	$	-	$	-	$	-	$	-
Repurchase agreements
US Treasury & agency securities	$	1,062	$	-	$	3,900	$	24,306	$	29,268
Total	$	1,062	$	-	$	3,900	$	24,306	$	29,268

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 intended to use the net proceeds from the Offering for general corporate purposes, including financing acquisitions and organic growth.

Interest on the Notes will accrue 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.


	September 30, 2022					December 31, 2021
(In Thousands)	Principal		Unamortized Note Issuance Costs			Principal		Unamortized Note Issuance Costs
Subordinated Notes	$	35,000	$	(443	)	$	35,000	$	(529	)

NOTE 9 SUBSEQUENT EVENT

On June 14, 2022, Farmers & Merchants Bancorp, Inc., an Ohio corporation (“F&M”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Peoples-Sidney Financial Corporation, a Delaware corporation (“PPSF”), which provides for the merger of PPSF with and into F&M (the “Merger”) and the merger of PPSF’s wholly-owned banking subsidiary, Peoples Federal Savings and Loan Association (“Peoples Bank”), with and into F&M’s wholly-owned banking subsidiary, The Farmers & Merchants State Bank (“F&M Bank”). All of the outstanding shares of PPSF’s common stock will be converted into

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

the right to receive the cash or stock consideration as described in, and subject to, the terms and conditions of the Merger Agreement.

Based on the closing price of F&M’s common stock on June 14, 2022, of $34.28 per share, the transaction value for the shares of common stock and cash to be paid is approximately $27 million.

The transaction is expected to be a tax-free stock exchange for PPSF’s shareholders who will be receiving F&M’s common stock pursuant to the Merger. Subject to PPSF’s shareholders’ approval of the Merger, regulatory approvals and other customary closing conditions, the parties anticipate completing the Merger in the third or fourth quarter of 2022. A copy of the Merger Agreement is filed as Exhibit 2.1 and incorporated herein by reference.

The Boards of Directors of each of F&M and PPSF have approved the Merger Agreement. The members of the Board of Directors of PPSF have entered into a Voting Agreement pursuant to which each of them has agreed to vote their shares of PPSF common stock in favor of the Merger. A copy of the form of Voting Agreement is attached to the Merger Agreement as Exhibit B.

Subject to the terms and conditions of the Merger Agreement, upon the completion of the Merger, PPSF shareholders will have 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 F&M Shares in the Merger shall be no less than 758,566. Fractional shares of F&M common stock will not be issued in respect of fractional interests arising from the Merger but will be paid in cash pursuant to the Merger Agreement.

During the year, the Company incurred third party acquisition related costs of $357.1 thousand which are included in the Company's consolidated statement of income for the three and nine months ended September 30, 2022. These expenses are comprised primarily of professional fees and to a lesser extent, SEC filing fees and other costs.

The closing of the merger was October 1, 2022, with system conversion slated for December 3-5th.

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 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires 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 include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

The ASU is 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 has completed an analysis to determine that it qualifies as a Smaller Reporting Company. As such, adoption can be postponed until periods beginning after December 15, 2022 (i.e., January 1, 2023, for calendar year entities). Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

The Company began working with a third-party service provider to review methodology options starting 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 ALLL under the ASU guidance. Management continues to refine the methodology as necessary as the Company works towards ASU implementation and adoption. The Company will adopt ASU 2016-13 on January 1, 2023.

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

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

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 will adopt ASU 2022-02 on January 1, 2023.

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

OVERVIEW

The Company continues to increase its loan production at an extremely strong pace, surpassing the previous quarters’ growth. Year over year, the growth has been 44.1% (excluding PPP balances) of which organic growth accounted for 21.3% (excluding PPP and acquisitions). In terms of dollars, the largest increase was in commercial real estate, $334.8 million year over year. In terms of percentages, 105.5% or $202.5 million, was the largest increase and was in consumer real estate. The increase in consumer real estate has been driven by acquisition balances of $193.0 million. With the organic loan growth has also come the need to fund the Allowance for Loan Losses. This expense has also increased and is $800 thousand higher than the same period last year and totaling nearly $3.8 million so far year-to-date in 2022.

F&M Commercial Banking Division entered 2022 Q3 with a strong loan pipeline and demand was still active throughout F&M’s footprint. Client results from 2021 and YTD performance were good, however in Q3 client concerns remained about availability of workforce, interruptions and delays in the supply chain and energy prices. Rising interest rates have not slowed commercial activity dramatically in Q3. Credit quality of the portfolio remains good. Past dues and delinquencies remained low at the end of Q3. Q3 fee income remained solid and kept pace with Q1 and Q2 of 2022.

F&M Agricultural Banking Division also experienced double digit growth as comparing September 30, 2022, to September 30, 2021. The growing conditions throughout our market area have been favorable with average to above average yields anticipated. Commodity prices have remained high and at profitable levels. The overall outlook for grain, livestock and Agri-businesses is optimistic for 2022 as our Ag base appears positioned to make positive financial strides. Land values have continued to remain strong. Focus will begin to shift to 2023 and the direction of commodity prices and input cost. The agriculture portfolio remains healthy and concerns are manageable. Harvesting is well under way for fall 2022.

Where F&M has seen a slow-down in production is in the 1-4 Family Consumer Real Estate Division. Refinances have slowed significantly with the increase in rates. Growth remains in new purchase and in home equity origination. This impact correlates to the lower gain on sale of assets, nearly $1.0 million lower than last year as of the same time period year-to-date September 30th.

The increased loan growth has positively impacted the net interest earnings. Net interest income was $719 thousand higher than last quarter and $14.8 million higher year over year. Funding of the loan growth has also resulted in increased borrowings. Increased rates have driven both deposit rates and borrowing rates significantly higher. Net Interest Margin decreased 5 basis points in comparing the quarters ended September 30, 2022, to September 30, 2021, while the year-to-date margin reported a 1 basis point improvement when comparing 2022 to 2021. 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 in both celebration of the 125th Anniversary and 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 remains within target at approximately 93%. 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.

Overall, net income increased 60.2% for the first three quarters of 2022 as compared to the same time period 2021. Return on Assets improved to 1.25% as compared to 1.01% and Return on Equity improved to 11.72% compared to 8.40% for the same time periods. As might be expected with the previous improvements, year to date earnings per share are $1.94 compared to $1.41. The Company did incur acquisition expenses in the third quarter 2022 though the amount was lower than that of the total acquisition expenses incurred as of September 30, 2021.

The Company plans to follow its strategic growth plans, so on June 14th, Farmers & Merchants Bancorp, Inc., entered into an Agreement and Plan of Merger with Peoples-Sidney Financial Corporation, a Delaware corporation (“PPSF”), which provides for the merger of PPSF with and into F&M and the merger of PPSF’s wholly-owned banking subsidiary, Peoples Federal Savings and Loan Association (“Peoples Bank”), with and into F&M’s wholly-owned banking subsidiary, The Farmers & Merchants State Bank (“F&M Bank”). All the outstanding shares of PPSF’s common stock will be converted into the right to receive the cash or stock consideration as described in, and subject to, the terms and conditions of the Merger Agreement. The closing of the merger was October 1, 2022, with system conversion slated for December 3-5th. Refer to Note 9 Subsequent Event for additional detail on the merger.

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 $113 thousand higher in third quarter 2022 than in second quarter 2022 and year over year in total year-to-date September 30th were $2.0 million higher for 2022 as compared with 2021. Even with that, the operating efficiency ratio remains in the low 50%’s as it has for all of 2022.

2022 remains a year of celebration both in terms of record earnings, strong performance and in our 125th year of strengthening relationships with our customers, employees, shareholders and our communities in support of our mission to “help people live their best lives.” The Company celebrated the latter by ringing the NASDAQ closing bell which commemorated those 125 years and 5 years since F&M had rung the bell and listed on NASDAQ.

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 with past due loans over 30 days below 40 basis points. 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. We look forward to sharing the basis of our strategic plan for the coming years in the next quarter.

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 full-service banking offices throughout Northwest Ohio and Northeast Indiana and a drive-up facility in Archbold. The Bank also operates four Loan Production Offices (LPOs), two in Ohio and one in 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. 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 farm land, 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, 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, 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 September 30, 2022, we had 392 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.

FFCRA requirements to provide paid leave to employees ended on December 31, 2020. Due to the extended duration of the COVID-19 pandemic, employers subject to FFCRA could voluntarily extend the paid leave option until March 31, 2021. If the employer has elected to voluntarily apply the FFCRA extension, employees eligible for leave in 2020 and did not use the leave may take the leave in 2021. Under the American Rescue Plan of 2021 enacted in March 2021, for those employers who voluntarily extend the paid leave option, paid leave was reset starting April 1, 2021. If employees previously exhausted their paid leave under FFCRA, they may be entitled to an additional 10 days/80 hours for use. 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 are 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 apply 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 is 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.

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 ALLL, the valuation of its Mortgage 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.

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 September 30, 2022 there were no OREO property holdings. OREO totaled $159 thousand and $167 thousand as of December 31, 2021 and September 30, 2021 respectively.

The ALLL and 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 ALLL 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 Bank’s methodology provides an estimate of the probable credit losses either by calculating a specific loss per credit or by applying a composite of historical factors over a relevant period of time with current internal and external factors which may affect credit collectability. Such factors which may influence estimated losses are the conditions of the local and national economy, local unemployment trends, and abilities of lending staff, valuation trends of fixed assets, and trends in credit delinquency, classified credits, and credit losses.

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

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

The expected and actual rates of mortgage loan prepayments are the most significant factors driving the potential for the impairment of the value of mortgage 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 mortgage servicing rights relating to loans serviced for others represent an asset. This asset is initially capitalized and included on the Company's consolidated balance sheet. The mortgage 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 mortgage servicing rights. There are a number of factors, however, that can affect the ultimate value of the mortgage servicing rights to the Bank. The expected and actual rates of mortgage loan prepayments are the most significant factors driving the potential for the impairment of the value of mortgage servicing assets. Increases in mortgage 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 mortgage 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 mortgage servicing rights, the Bank receives a valuation of its mortgage servicing rights from an independent third party. The independent third party's valuation of the mortgage 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 mortgage servicing rights, management then establishes a valuation allowance by each stratum, if necessary, to quantify the likely impairment of the value of the mortgage 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 mortgage 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 plans to continue in its growth mode in 2022 led by loan growth from within our newer markets. The Bank is focused on funding the loan growth with the least expensive source of deposits, sale of securities 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 also be a focus especially in our newer markets. The Bank offers the Insured Cash Sweep (“ICS”) product accessed through the Promontory 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.

Liquidity in terms of cash and cash equivalents ended $110.2 million lower as of September 30, 2022 than it was at yearend December 31, 2021. Prior year’s excess liquidity along with an increase in deposits of $89.6 million and an increase of Federal Home Loan Bank advances of $78.1 million helped to fund the $281.4 million increase in net loans since year end 2021. All loan portfolios with the exception of the other portfolio increased compared to December 31, 2021 with the largest increase in the commercial real estate portfolio.

In comparing to the same prior year period, the September 30, 2022 (net of deferred fees and cost) loan balances of $2.1 billion accounted for $647.1 million or 43.3% increase when compared to 2021’s $1.5 billion. The year over year improvement was made up of a combined increase in commercial and industrial related loans of 40.1%. Individual growth was comprised of 46.0% in commercial real estate loans and 18.0% in non-real estate commercial loans. PPP loans of approximately $7.4 thousand and $9.8 million are included in the non-real estate commercial portfolio as of September 30, 2022 and September 30, 2021, respectively. Consumer real estate loans increased by 105.6% and consumer loans by 27.8%. Agricultural related loans increased 17.1% year over year. Individual growth was comprised of 14.4% in agricultural real estate and 21.8% in non-real estate agricultural loans. Other loans decreased by 1.4%. The Company credits the growth not only to the OFSI and PFSB acquisitions but also to the strong team of lenders focused on providing customers valuable localized services and thereby increasing our market share.

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


	(In Thousands)
	September 30, 2022		September 30, 2021		September 30, 2020
	Amount		Amount		Amount
Consumer Real Estate	$	416,044	$	202,370	$	175,595
Agricultural Real Estate		204,787		179,051		192,577
Agricultural		128,818		105,722		103,476
Commercial Real Estate		1,061,904		727,418		593,936
Commercial and Industrial		229,338		194,286		235,793
Consumer		71,063		55,619		53,455
Other		30,662		31,096		9,030

Total Loans, net of deferred fees and costs	$	2,142,616	$	1,495,562	$	1,363,862

The following is a contractual maturity schedule by major category of loans excluding fair value adjustments as of September 30, 2022.


	(In Thousands)
			After One
	Within		Year Within		After
	One Year		Five Years		Five Years
Consumer Real Estate	$	8,071	$	30,228	$	381,388
Agricultural Real Estate		1,173		6,501		197,709
Agricultural		67,112		36,458		25,071
Commercial Real Estate		24,457		308,746		730,563
Commercial and Industrial		82,172		100,392		47,344
Consumer		4,962		39,005		26,737
Other		200		1,346		29,124

While the security portfolio has been utilized to fund loan growth in previous periods, additional sources have been cultivated during 2020, 2021, and 2022. The security portfolio decreased $34.4 million in the first nine months of 2022 from year end 2021 due to an increase of gross unrealized losses of $40.8 million. The security portfolio decreased $31.2 million from September 2021 due to an increase of gross unrealized losses of $44.4 million. The amount of pledged investment securities increased by $22.0 million as compared to year end and $55.9 million as compared to September 30, 2021. Liquidity is improved with the additional option of selling unpledged investment securities if needed to fund loan growth or other initiatives. As of September 30, 2022, pledged investment securities totaled $133.0 million. However, in the current environment, it is unlikely that they would be sold for fundings needs. The current portfolio is in a net unrealized loss position of $47.8 million.

For the Bank, an additional $29.0 million is also available from the Federal Home Loan Bank based on current amounts of pledged collateral. At the present time, only 1-4 family and home equity portfolios are pledged. Additional borrowings would be available if additional portfolios (i.e. commercial real estate) were pledged.

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.

Due to the funding requirement for the acquisition of PFSB to be provided from the holding company, the Company secured borrowings from a correspondent bank. Two loans were secured, the first a $30 million 12-month term note and the second a 12-month line of credit for $10 million. Both loans were advanced on October 1, 2021. Interest on both loans was due quarterly and accrued at a rate 2.50% per annum with reporting and capital covenants included. The structure of the acquisition required all accounting of the transaction to be recorded at the Bank level as Perpetual did not have a holding company. Therefore, the Company advanced funds from the Bank to the Company to facilitate payoff of the term note. The term note and the line of credit balance were paid off in the second quarter of 2022. The line of credit remains open for future liquidity needs.

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.

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 $73 million and $69 million of unsecured borrowing capacity through its correspondent banks as of September 30, 2022 and September 30, 2021 respectively. The Bank also had access to $130.4 million and $94.2 million through a Cash Management Advance with the Federal Home Loan Bank as of September 30, 2022 and September 30, 2021, respectively.

Overall total assets increased 5.5% since year end 2021 and grew 25.5% since September 30, 2021. The largest growth in both periods was in the loan portfolios. Goodwill also increased significantly compared to September 30, 2021. Refer to Note 2 for information on assets acquired from OFSI and PFSB.

Federal Home Loan Bank advances accounted for the largest growth within liabilities, up 324.5% or $78.1 million since year end and 471.7% or $84.3 million over September 30, 2021 balances. Deposits also experienced growth, up 4.1% or $89.6 million since year end 2021 and 22.3% or $416.8 million over September 30, 2021. Refer to Note 2 for information on liabilities acquired from OFSI and PFSB. The growth of deposits correlated to a "flight to safety" scenario as the stock market continues to experience some volatility. Core deposits continue to drive the increase which provide the opportunity to generate additional

noninterest income. This growth aided the Company’s liquidity position and helped to fund the loan growth for the periods along with usage of Federal Home Loan Bank advances and federal funds purchased.

Shareholders’ equity decreased by $16.6 million as of the third quarter of 2022 compared to year end 2021. Earnings exceeded dividend declarations during the nine months ended September 30, 2022. Accumulated other comprehensive loss increased in unrealized loss position by $34.6 million from December 2021 to an unrealized loss of $37.7 million on September 30, 2022. The increase in unrealized loss position has no impact on regulatory tangible book price. The available-for-sale security portfolio is used as a protection to falling rates. If there is an unrealized loss in our security portfolio due to rising interest rates, it bodes well for our adjustable rate loan portfolio and new loan production to price up. Dividends declared increased over the previous quarter by $0.0075 per share to $0.21 per share from $0.2025 per share. Compared to September 30, 2021, shareholders’ equity increased 10.1% or $25.8 million mostly attributable to the issuance of stock in the Perpetual acquisition as discussed in Note 2. Profits were higher year to date September 2022 than year to date September 2021 by $9.5 million.

Basel III regulatory capital requirements include a capital conservation buffer of 2.5%. As of September 30, 2022, the Company and the Bank are both positioned well above the current requirement.

The Holding Company has sufficient liquidity to maintain its dividend policy without relying on the upstreaming of dividends from the Bank.

The Bank continues to be well-capitalized at September 30, 2022 in accordance with Federal regulatory capital requirements as the capital ratios below show:


Tier I Leverage Ratio	9.16	%
Risk Based Capital Tier I	11.25	%
Total Risk Based Capital	12.24	%
Stockholders' Equity/Total Assets	10.44	%
Capital Conservation Buffer	4.24	%

MATERIAL CHANGES IN RESULTS OF OPERATIONS

Comparison of Results of Interest Earnings and Expenses for three month periods ended September 30, 2022 and 2021

Interest Income

When comparing third quarter 2022 to third quarter 2021, average loan balances with the acquisitions of OFSI and PFSB grew $591.5 million with average quarterly PPP loans decreasing $22.6 million. This represented a 39.7% increase in a one-year time period. Interest income on loan balances experienced an increase of $5.7 million as compared to the quarter ended September 30, 2021. This increase was primarily the result of the significant growth in the average quarterly loan balances, 22.0% of which was directly attributable to the Company’s recent acquisitions and 21.3% of which was due to organic loan growth within the Bank’s broader markets. Net fee income for the PPP loans was recognized on a straight line basis over 24 months for the first draw and 60 months for the second draw and was accelerated upon payoff. PPP loan balances at the end of September 2022 were $7 thousand compared to $9.8 million at the end of September 2021. PPP loan income for the quarter included no interest income nor net fee income compared to $56.7 thousand of loan interest income and $2.5 million of net fee income for 2021.

The available-for-sale securities portfolio increased in average balances by $32.1 million when comparing to the same quarter in 2021 while the income increased $263 thousand over third quarter. Federal funds sold and interest-bearing deposits decreased in average balances by $129.1 million as compared to the same quarter in 2021 with increased income of $109 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 OFSI and PFSB.

The overall total average balance of the Bank’s earning assets increased by $494.4 million and interest income for the quarter comparisons was higher for third quarter 2022 by 28.5% or $5.7 million as compared to third quarter 2021. Increases in the prime lending rate between periods has contributed to an increase in rate yield.

Annualized yield, for the quarter ended September 30, 2022, was 4.00% as compared to 3.85% for the quarter ended September 30, 2021. The following charts demonstrate the value of increased loan balances in the balance sheet mix, as well as the impact on the changes in interest rates. 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.


	(In Thousands)
	Quarter to Date Ended September 30, 2022				Annualized Yield/Rate
Interest Earning Assets:	Average Balance		Interest/Dividends		September 30, 2022			September 30, 2021
Loans	$	2,082,486	$	24,119		4.63	%		5.04	%
Taxable investment securities		422,250		1,426		1.35	%		1.18	%
Tax-exempt investment securities		25,169		89		1.79	%		2.20	%
Fed funds sold & other		58,266		213		1.46	%		0.22	%
Total Interest Earning Assets	$	2,588,171	$	25,847		4.00	%		3.85	%

Change in Interest Income Quarter to Date September 30, 2022 Compared to September 30, 2021


	(In Thousands)
Interest Earning Assets:	Total Change		Change Due to Volume			Change Due to Rate
Loans	$	5,353	$	7,446		$	(2,093	)
Taxable investment securities		249		72			177
Tax-exempt investment securities		14		43			(29	)
Fed funds sold & other		109		(72	)		181
Total Interest Earning Assets	$	5,725	$	7,489		$	(1,764	)

Interest Expense

Offsetting the higher interest income for the quarter was an increase in interest expense in 2022 of $1.6 million or 95.2% compared to third quarter 2021. Since 2021, average interest-bearing deposit balances have increased $317.9 million or 22.2% and the Company recognized $945 thousand more in interest expense for the most recent quarter. March 2022 saw the first rate change since 2020 with an increase of 25 basis points which was followed by an increase of 50 basis points and three increases of 75 basis points in June, July and September. Deposit rates have been adjusted with Interest expense on FHLB borrowings and other borrowings increased $311 thousand in the third quarter 2022 over the same time frame in 2021 due to borrowings taken on from the Perpetual acquisition and new FHLB borrowings of $80 million in 2022 used to fund loan growth. Interest expense on fed funds purchased and securities sold under agreement to repurchase increased $251 thousand compared to third quarter 2021. Interest expense on subordinated notes was $85 thousand higher for the most recent quarter. Refer to Note 8 for additional information on subordinated notes. Liabilities assumed from OFSI and PFSB can be seen in Note 2.


	(In Thousands)
	Quarter to Date Ended September 30, 2022				Annualized Yield/Rate
Interest Bearing Liabilities:	Average Balance		Interest		September 30, 2022			September 30, 2021
Savings deposits	$	1,328,344	$	1,586		0.48	%		0.19	%
Other time deposits		423,668		580		0.55	%		1.05	%
Other borrowed money		60,455		398		2.63	%		1.95	%
Fed funds purchased & securities
sold under agreement to repurchase		63,388		416		2.63	%		2.22	%
Subordinated notes		34,538		284		3.29	%		3.34	%
Total Interest Bearing Liabilities	$	1,910,393	$	3,264		0.68	%		0.45	%

Change in Interest Expense Quarter to Date September 30, 2022 Compared to September 30, 2021


	(In Thousands)
Interest Bearing Liabilities:	Total Change			Change Due to Volume		Change Due to Rate
Savings deposits	$	1,026		$	70	$	956
Other time deposits		(81	)		446		(527	)
Other borrowed money		311			207		104
Fed funds purchased & securities
sold under agreement to repurchase		251			187		64
Subordinated notes		85			90		(5	)
Total Interest Bearing Liabilities	$	1,592		$	1,000	$	592

Overall, net interest spread for the third quarter 2022 was 8 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.


	September 30, 2022			September 30, 2021			September 30, 2020
Interest/Dividend income/yield		4.00	%		3.85	%		4.04	%
Interest Expense/cost		0.68	%		0.45	%		0.74	%
Net Interest Spread		3.32	%		3.40	%		3.30	%
Net Interest Margin		3.49	%		3.53	%		3.51	%

Net Interest Income

Net interest income increased $4.1 million for the third quarter 2022 over the same time frame in 2021 with the increase in interest income of $5.7 million offset by the higher interest expense of $1.6 million as previously mentioned. As the new loans added in 2021 and 2022 generate more income, management expects the benefits of the Company’s strategy of repositioning the balance sheet to continue to increase net interest income. In terms of net interest margin, the Bank recognizes competition for deposits is increasing and higher interest rates are putting pressure on the margin which may lead to a tightening.

Comparison of Noninterest Results of Operations for three month periods ended September 30, 2022 and 2021

Provision Expense

The Allowance for Loan and Lease Losses (ALLL) has a direct impact on the provision expense. The increase in the ALLL 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 ALLL 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 ALLL 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 third quarter of 2022 and 2021. The commercial real estate portfolio is currently creating a large impact on the ALLL due to the loan growth.

Total provision for loan losses was $978 thousand higher for the third quarter 2022 as compared to the same quarter 2021. There is still some lingering uncertainty regarding COVID-19; therefore, it is prudent to incorporate the impact of COVID-19 in the evaluation of the adequacy of ALLL. The restaurant and hospitality sectors have been hit especially hard. Risk in the Consumer and 1-4 Family Portfolio has also increased. 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 $20 thousand higher in third quarter 2022 than the same quarter 2021. Recoveries were $3 thousand lower in third quarter 2022 as compared to third quarter 2021. Combined net charge-offs were $23 thousand higher in third quarter 2022 than the same time period 2021.

Past due loans, which include no deferrals related to COVID-19, increased $3.7 million at September 30, 2022 as compared to September 30, 2021. The largest changes were attributed to the increase of past due balances in the agricultural portfolio, agricultural real estate portfolio and consumer real estate portfolio.

The following table breaks down the activity within the ALLL 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 three months ended September 30, 2022, 2021, and 2020.


	(In Thousands)
	Three Months Ended September 30, 2022			Three Months Ended September 30, 2021			Three Months Ended September 30, 2020
Loans, net of deferred fees and costs	$	2,142,616		$	1,495,562		$	1,363,862
Daily average of outstanding loans	$	2,082,486		$	1,490,988		$	1,359,156
Nonaccrual loans	$	5,470		$	6,248		$	7,870
Nonperforming loans*	$	5,470		$	6,248		$	7,870

Allowance for Loan Losses - July 1,	$	18,424		$	15,087		$	9,933
Loans Charged off:
Consumer Real Estate		-			2			-
Agriculture Real Estate		-			-			-
Agricultural		-			1			-
Commercial Real Estate		-			-			-
Commercial and Industrial		-			5			-
Consumer		123			95			79
		123			103			79
Loan Recoveries:
Consumer Real Estate		6			3			2
Agriculture Real Estate		-			-			-
Agricultural		1			1			-
Commercial Real Estate		2			3			2
Commercial and Industrial		8			9			10
Consumer		35			39			28
		52			55			42
Net Charge Offs (Recoveries):
Consumer Real Estate		(6	)		(1	)		(2	)
Agriculture Real Estate		-			-			-
Agricultural		(1	)		-			-
Commercial Real Estate		(2	)		(3	)		(2	)
Commercial and Industrial		(8	)		(4	)		(10	)
Consumer		88			56			51
		71			48			37
Provision for loan loss		1,637			659			1,987
Acquisition provision for loan loss		-			-			-
Allowance for Loan & Lease Losses - September 30,		19,990			15,698			11,883
Allowance for Unfunded Loan Commitments & Letters of Credit - September 30,		1,118			1,039			633
Total Allowance for Credit Losses - September 30,	$	21,108		$	16,737		$	12,516
Ratio of Net Charge-offs to Average Outstanding Loans		0.00	%		0.00	%		0.00	%
Ratio of Nonaccrual Loans to Loans		0.26	%		0.42	%		0.58	%
Ratio of the Allowance for Loan & Lease Losses to Loans		0.93	%		1.05	%		0.87	%
Ratio of the Allowance for Loan & Lease Losses to Nonaccrual Loans		365.44	%		251.26	%		151.01	%
Ratio of the Allowance for Loan & Lease Losses to Nonperforming Loans*		365.44	%		251.26	%		151.01	%

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

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 September 30, 2022 at $5.5 million as compared to $6.2 million as of September 30, 2021. The agricultural real estate portfolio decreased $2.4 million and the commercial and industrial portfolio decreased $485 thousand as compared to September 30, 2021. These decreases offset the increases in the other portfolios.

In determining the allocation for impaired loans, the Bank applies the appraised market value of the collateral securing the asset, reduced by applying a discount for estimated costs of collateral liquidation. In some instances where the discounted market value is less than the loan amount, a specific impairment allocation is assigned, which may be reduced or eliminated by the write down of the credit’s active principal outstanding balance.

For the majority of the Bank’s impaired loans, including all collateral dependent loans, the Bank will apply the appraised market value methodology. However, the Bank may also utilize a measurement incorporating the present value of expected future cash flows discounted at the loan's effective rate of interest. To determine appraised market value, collateral asset values securing an impaired loan are periodically evaluated. Maximum time of re-evaluation is every 12 months for chattels and titled vehicles and every two years for real estate. In this process, third party evaluations are obtained and heavily relied upon. Until such time that updated appraisals are received, the Bank may discount the collateral value used.

The following table presents the balances for allowance for loan losses by loan type at September 30, 2022 and September 30, 2021.


	(In Thousands)					(In Thousands)
	September 30, 2022					September 30, 2021
Balance at End of Period Applicable To:	Amount		% of Loan Category			Amount		% of Loan Category
Consumer Real Estate	$	926		19.42	%	$	796		13.53	%
Agricultural Real Estate		356		9.56	%		926		11.97	%
Agricultural		756		6.01	%		687		7.07	%
Commercial Real Estate		11,551		49.56	%		8,365		48.64	%
Commercial and Industrial		5,670		12.13	%		3,814		15.07	%
Consumer		725		3.32	%		606		3.72	%
Unallocated		6		0.00	%		504		0.00	%
Allowance for Loan & Lease Losses		19,990					15,698
Off Balance Sheet Commitments		1,118					1,039
Total Allowance for Credit Losses	$	21,108				$	16,737

Noninterest Income

Noninterest income was down $342 thousand for the third quarter 2022 over the same time frame in 2021. The Company has seen a decrease in its mortgage production volume and the gain on the sale of these loans was $495 thousand lower for the third quarter 2022 over the same period in 2021. Loan originations on loans held for sale for the third quarter 2022 were $14.2 million with proceeds from sale at $16.6 million for 2022 compared to 2021’s third quarter activity of $21.7 million in originations and $26.8 million in sales. Loan originations driven by the refinance activity associated with the reduction in interest rates has slowed. The mortgages sold were both 1-4 family and agricultural real estate loans originated for sale.

Combined service fees increased by $153 thousand as compared to third quarter 2021. Debit card income increased by $133 thousand and bank owned life insurance cash surrender value increased $17 thousand. Also contributing to the increase was overdraft and returned check charges which increased $342 thousand compared to third quarter 2021. Service fee income for 1-4 family and agricultural real estate loans decreased by $108 thousand while servicing rights income decreased $634 thousand.

The impact of mortgage servicing rights, both to income and expense, is shown in the following table which reconciles the value of mortgage servicing rights. The capitalization runs through noninterest income while the amortization thereof is included in non-interest expense. For the third quarter of 2022 and 2021, mortgage servicing rights caused a net $31 thousand in expense and $22 thousand in income, respectively. The lower capitalized additions for 2022 are attributed to a lower loan origination level of 1-4 families. For loans of 15 years and less, the market value of the mortgage servicing rights was 0.988% in the third quarter 2022 versus 1.160% in third quarter 2021. For loans over 15 years, the value was 1.299% versus a higher 1.355% for the same periods respectively. The carrying value is below the market value of $4.6 million. A valuation allowance of $414 thousand was established during 2021. During first quarter 2022, $134 thousand of the valuation allowance was reversed. An additional $91 thousand of the valuation allowance was reversed during the second quarter of 2022. The third quarter of 2022 saw an additional $188 thousand of the valuation allowance reversed.


	Three Months						Nine Months
	(In Thousands)						(In Thousands)
	2022			2021			2022			2021
Beginning Balance	$	3,615		$	3,146		$	3,571		$	3,320
Capitalized Additions		107			236			461			1,091
Amortization		(138	)		(214	)		(448	)		(926	)
Ending Balance, September 30,		3,584			3,168			3,584			3,485
Valuation Allowance		(1	)		(71	)		(1	)		(388	)
Mortgage Servicing Rights net, September 30,	$	3,583		$	3,097		$	3,583		$	3,097

Noninterest Expense

For the third quarter 2022, noninterest expenses were $850 thousand lower than for the same quarter in 2021. Salaries, wages, and employee benefits (includes normal merit increases, restricted stock expense, incentive payout and all employee benefits) decreased $192 thousand in total. This was comprised of increased salaries of $37 thousand partially offset by decreased benefits of $229 thousand. Advertising and public relations expense increased $128 thousand due in part to the promotion of the 125th anniversary of the Bank. Data processing expenses decreased $767 thousand due to acquisition related data processing expense of $939 thousand in 2021 that was not repeated in 2022. Ohio Financial Institution Tax decreased $117 thousand over third quarter 2021.

Income Taxes

Income tax expense was $629 thousand higher for the third quarter 2022 compared to the same quarter in 2021. Effective tax rates were 20.10% and 21.53% for third quarter 2022 and 2021 respectively.

Net Income

Results overall, net income in the third quarter of 2022 was up $3.0 million as compared to the same quarter last year. Although third quarter 2022 included an increase of $978 thousand of loan loss provision as compared to third quarter 2021, net interest income after provision for loan losses increased $3.2 million during the same period of comparison. The Company has done an exceptional job of growing loans while keeping past dues low. 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 nine month periods ended September 30, 2022 and 2021

Interest Income

Higher loan balances of $583.5 million created an improvement in the interest income for the first nine months of 2022 as compared to the first nine months of 2021. PPP average loan balances decreased $38.7 million year over year. Interest income in total rose 31.7% or $17.2 million with interest income from loans accounting for $16.3 million of the increase. Contributing to the overall improvement was also an increase in securities income of $756 thousand and an increase from fed funds sold and interest-bearing deposits of $159 thousand over 2021. The asset yield increased by 6 basis points to 3.76% for the first nine months of 2022 compared to the first nine months of 2021’s 3.70%.

PPP loan interest income recognized was $2.2 thousand for the first nine months of 2022 with net fee income of $77.2 thousand compared to $291.4 thousand of loan interest income and $3.9 million of net fee income for 2021. The growth factor contribution is shown in the charts which follow.

The average interest earning asset base was $579.4 million higher in the first nine months 2022 than the first nine months of 2021, an increase of approximately 29.5%. Refer to Note 2 Business Combination and Asset Purchase for information on assets acquired from OFSI and PFSB.

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.


	(In Thousands)
	Year to Date Ended September 30, 2022				Annualized Yield/Rate
Interest Earning Assets:	Average Balance		Interest/Dividends		September 30, 2022			September 30, 2021
Loans	$	1,997,081	$	66,962		4.47	%		4.78	%
Taxable investment securities		424,882		4,065		1.28	%		1.21	%
Tax-exempt investment securities		21,794		229		1.77	%		2.31	%
Fed funds sold & other		101,922		401		0.52	%		0.19	%
Total Interest Earning Assets	$	2,545,679	$	71,657		3.76	%		3.70	%

Change in Interest Income Year to Date September 30, 2022 Compared to September 30, 2021


	(In Thousands)
Interest Earning Assets:	Total Change			Change Due to Volume			Change Due to Rate
Loans	$	16,325		$	20,912		$	(4,587	)
Taxable investment securities		779			557			222
Tax-exempt investment securities		(23	)		59			(82	)
Fed funds sold & other		159			(98	)		257
Total Interest Earning Assets	$	17,240		$	21,430		$	(4,190	)

Interest Expense

Interest expense was higher for the first nine months of 2022 compared to the first nine months of 2021. At $7.4 million, the first nine months of 2022 was up $2.5 million as compared to the same time period 2021 or 49.9%.

The average balance of interest-bearing liabilities was higher by $475.6 million in 2022 than the first nine months of 2021. Interest bearing deposits increased $400.2 million while Fed Funds purchased and securities sold under agreement to repurchase increased by a combined $12.6 million. Other borrowed money and subordinated notes increased $36.3 million and $26.5 million, respectively as compared to a year ago. The higher balance coupled with the slight variation of the balance sheet mix, resulted in a 6 basis point increase in the cost of funds at 0.53% for the first nine months of 2022 as compared to 2021’s 0.47%. Liabilities assumed from OFSI and PFSB can be seen in Note 2.

The change chart below shows the increased cost was driven more by volume than rate.


	(In Thousands)
	Year to Date Ended September 30, 2022				Annualized Yield/Rate
Interest Bearing Liabilities:	Average Balance		Interest		September 30, 2022			September 30, 2021
Savings deposits	$	1,315,793	$	2,951		0.30	%		0.20	%
Other time deposits		439,534		1,954		0.59	%		1.15	%
Other borrowed money		54,184		951		2.34	%		3.17	%
Fed funds purchased & securities
sold under agreement to repurchase		42,584		734		2.30	%		2.20	%
Subordinated notes		34,509		837		3.23	%		3.31	%
Total Interest Bearing Liabilities	$	1,886,604	$	7,427		0.53	%		0.47	%

Change in Interest Expense Year to Date September 30, 2022 Compared to September 30, 2021


	(In Thousands)
Interest Bearing Liabilities:	Total Change			Change Due to Volume		Change Due to Rate
Savings deposits	$	1,251		$	321	$	930
Other time deposits		(183	)		1,644		(1,827	)
Other borrowed money		527			862		(335	)
Fed funds purchased & securities
sold under agreement to repurchase		240			208		32
Subordinated notes		638			657		(19	)
Total Interest Bearing Liabilities	$	2,473		$	3,692	$	(1,219	)

Overall, net interest spread figures for the first nine months of 2022 were unchanged from 2021 and down 12 basis points from 2020. Net interest margin for the first nine months of 2022 was higher than the same period of 2021 but lower than 2020. As the chart below illustrates, a slightly higher overall yield on interest earning assets was offset by the increased cost of funds resulting in total net interest margin up 1 basis point since the first nine months of 2021 and under the first nine months of 2020 by 24 basis points.


	September 30, 2022			September 30, 2021			September 30, 2020
Interest/Dividend income/yield		3.76	%		3.70	%		4.30	%
Interest Expense/cost		0.53	%		0.47	%		0.95	%
Net Interest Spread		3.23	%		3.23	%		3.35	%
Net Interest Margin		3.37	%		3.36	%		3.61	%

Net Interest Income

Net interest income was up $14.8 million in the first nine months of 2022 over the same time frame in 2021 due to the higher interest income offset by the increase in interest expense as previously mentioned. As the new loans added in 2021 and 2022 generate more income, management expects the benefits of the Company’s strategy of repositioning the balance sheet to continue to widen this margin as measured in dollars. In terms of net interest margin rate, the Bank recognizes competition for deposits may again increase and put pressure on the margin which may lead to a tightening.

Comparison of Results of Noninterest Results of Operations for nine month period ended September 30, 2022 and 2021

Provision Expense

Total provision for loan losses was $845 thousand higher for the first nine months 2022 than for the first nine months 2021 attributable primarily to growth in the loan portfolio. There is still some lingering uncertainty regarding COVID-19; therefore, it is prudent to incorporate the impact of COVID-19 in the evaluation of the adequacy of Allowance for Loan and Lease Losses (ALLL). The restaurant and hospitality sectors have been hit especially hard. Risk in the Consumer and 1-4 Family Portfolio has increased but the full impact remains unknown. Increases to the Bank’s ALLL for the first nine months of 2022, centered around current customers and businesses that are particularly vulnerable and qualitative factors were adjusted accordingly. Management continues to monitor asset quality, making adjustments to the provision as necessary. Loan charge-offs were $820 thousand lower in the first nine months of 2022 compared to the same period 2021. Recoveries were $57 thousand higher in the first nine months of 2022 as compared to first nine months of 2021. Combined net charge-offs were $877 thousand lower in the nine months ended September 2022 as compared to the same time period 2021. Management continues to evaluate the potential financial implications resulting from COVID-19 and adjusts ALLL qualitative factors as necessary.

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The following table breaks down the activity within the ALLL 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 nine months ended September 30, 2022, 2021, and 2020.


	(In Thousands)
	Nine Months Ended September 30, 2022			Nine Months Ended September 30, 2021			Nine Months Ended September 30, 2020
Loans, net of deferred fees and costs	$	2,142,616		$	1,495,562		$	1,363,862
Daily average of outstanding loans	$	1,997,081		$	1,413,625		$	1,305,998
Nonaccrual loans	$	5,470		$	6,248		$	7,870
Nonperforming loans*	$	5,470		$	6,248		$	7,870

Allowance for Loan Losses - January 1,	$	16,242		$	13,672		$	7,228
Loans Charged off:
Consumer Real Estate		-			2			35
Agriculture Real Estate		-			-			-
Agricultural		-			143			-
Commercial Real Estate		-			-			8
Commercial and Industrial		6			814			165
Consumer		328			195			272
		334			1,154			480
Loan Recoveries:
Consumer Real Estate		15			9			7
Agriculture Real Estate		-			-			-
Agricultural		1			7			-
Commercial Real Estate		7			8			7
Commercial and Industrial		82			19			19
Consumer		132			137			116
		237			180			149
Net Charge Offs (Recoveries):
Consumer Real Estate		(15	)		(7	)		28
Agriculture Real Estate		-			-			-
Agricultural		(1	)		136			-
Commercial Real Estate		(7	)		(8	)		1
Commercial and Industrial		(76	)		795			146
Consumer		196			58			156
		97			974			331
Provision for loan loss		3,845			3,000			4,986
Acquisition provision for loan loss		-			-			-
Allowance for Loan & Lease Losses - September 30,		19,990			15,698			11,883
Allowance for Unfunded Loan Commitments & Letters of Credit - September 30,		1,118			1,039			633
Total Allowance for Credit Losses - September 30,	$	21,108		$	16,737		$	12,516
Ratio of Net Charge-offs to Average Outstanding Loans		0.00	%		0.07	%		0.03	%
Ratio of Nonaccrual Loans to Loans		0.26	%		0.42	%		0.58	%
Ratio of the Allowance for Loan & Lease Losses to Loans		0.93	%		1.05	%		0.87	%
Ratio of the Allowance for Loan & Lease Losses to Nonaccrual Loans		365.44	%		251.26	%		151.01	%
Ratio of the Allowance for Loan & Lease Losses to Nonperforming Loans*		365.44	%		251.26	%		151.01	%

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

Noninterest Income

Noninterest income for the first nine months of 2022 decreased over the first nine months of 2021 by $1.7 million. Gain on sale of loans showed a $1.6 million decrease over the first nine months of 2021. Combined service fees decreased by $231 thousand with increased debit card income of $133 thousand and bank owned life insurance cash surrender value increases of $17 thousand. Servicing rights income decreased by $634 thousand. Service charge income decreased by $6 thousand while overdraft and returned check income increased by $390 thousand. The Company did sell some of its available-for-sale securities in the first nine months of 2021 and recognized a gain of $293 thousand that was not repeated in 2022.

Noninterest Expense

Through the first nine months of 2022, noninterest expenses were $459 thousand higher than in the first nine months of 2021. Third party related acquisition costs decreased $2.1 million for the first nine months of 2022 compared to the first nine months of 2021. The nine months of 2022 included an increase of $1.9 million in salaries and wages partially offset by a decrease of $538 thousand in employee benefits.

Data processing fees were $442 thousand lower than last year. This is a result of acquisition related data processing fees of $939 thousand incurred during the first nine months of 2021 that were not repeated in 2022. Acquisition related consulting fees decreased $349 thousand during the first nine months of 2022. This contributed to overall consulting fees decreasing $208 thousand during that same period. FDIC assessment expense decreased by $153 thousand due to a decreased assessment rate that has offset an increased assessment base. Legal fees decreased $238 thousand over 2021.

Ohio Financial Institution Tax increased $317 thousand in the first nine months of 2022 due to overall growth. General and administrative expenses increased $402 thousand over the first nine months of 2021.

Income Taxes

Income tax expense was $2.3 million higher for the first nine months of 2022 compared to the first nine months of 2021. Effective tax rates were 19.80% and 20.20% for the first nine months of 2022 and 2021 respectively.

Net Income

Overall, net income through the first nine months of 2022 was up $9.5 million as compared to the first nine months of 2021. Increased interest income of $17.2 million partially offset by increased interest expense was the largest contributor to the increased net income for 2022.

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
3.51%	4.30%	Rising	3.00%		91,456	3.21%
3.51%	4.27%	Rising	2.00%		91,605	3.38%
3.49%	3.76%	Rising	1.00%		91,403	3.15%
3.36%	0.00%	Flat	0.00%		88,608	0.00%
3.13%	-7.03%	Falling	-1.00%		83,316	-5.97%
2.96%	-11.99%	Falling	-2.00%		79,707	-10.05%
2.78%	-17.24%	Falling	-3.00%		75,801	-14.45%

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 and a tightening in a falling rate environment. The rising rate scenarios are predicted to expand the net interest margin and produce higher levels of net interest income. Cost of funds are at 0.68% for the quarter and 0.53% for the year so the lowest shock of 100 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 100 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 otherwise noted 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, 2021.

Global Economic and Geopolitical Instability and Inflationary Risks

Instability in global economic conditions and geopolitical matters, as well as volatility in financial markets, could have a material adverse effect on the Company’s results of operations and financial condition. The macroeconomic environment in the United States is susceptible to global events and volatility in financial markets. For example, global demand for products continues to exceed supply during the economic recovery from the COVID-19 pandemic, creating significant inflationary pressures which, in turn, may adversely impact regional and global economic conditions, as well as the Company’s financial condition and results of operations.

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Treasury stock repurchased the quarter ended September 30, 2022.


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
7/1/2022 to 7/31/2022		—			—		—		600,000

8/1/2022 to 8/31/2022		8,100	(2)		31.40		—		600,000

9/1/2022 to 9/30/2022		—			—		—		600,000
Total		8,100			31.40		—		600,000

(1)

From time to time, the Company purchases shares in the market pursuant to a stock repurchase program publicly announced on January 25, 2022. On that date, the Board of Directors authorized the repurchase of 600,000 common shares between January 25, 2022 and December 31, 2022.

(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


2.1		Agreement and Plan of Merger dated June 14, 2022 (incorporated by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed with the Commission on June 15, 2022).
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).
4.2		Form of 3.25% Fixed to Floating Rate Subordinated Note due July 30, 2031 (included as Exhibit A to the Purchase Agreement filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the Commission on August 2, 2021).
10.1		Change in Control Agreement executed by and between the Company and Benet Rupp, dated July 1, 2019.
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 September 30, 2022, 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:	October 25, 2022	By:	/s/ Lars B. Eller
				Lars B. Eller
				President and Chief Executive Officer



Date:	October 25, 2022	By:	/s/ Barbara J. Britenriker
				Barbara J. Britenriker
				Executive Vice-President and
				Chief Financial Officer