ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reclassification
Certain 2024 and 2023 amounts within the loans disclosure (Note 4) and the loan section of Management's Discussion and Analysis have been reclassified to conform with current year presentation to provide additional information to the reader. The reclassifications had no effect on income.
Critical Accounting 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.
All significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the notes to the consolidated financial statements and in the management's discussion and analysis of 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 Allowance for Credit Losses (ACL) as the accounting area that requires the most subjective or complex judgments, and as such could be the most subject to revision as new information becomes available.
The total allowance for credit losses represents management's estimate of credit losses inherent in the Bank's loan portfolio and unfunded loan commitments at the report date. The estimate is a composite of a variety of factors including experience, collateral value, and the general economy. The collection and ultimate recovery of the book value of the collateral, in most cases, is beyond our control.
For more information regarding the estimate and calculation used to establish the ACL, please see Note 1 to the consolidated financial statements provided herewith.
2025 in Review
The focus for 2025 was to improve profitability through the control of loan growth and improvement in the customer gathering of core deposits to fund loans. Cost control, balance sheet management and overall revenue enhancement were included. The Bank strove to reduce dependency on high-cost deposits and expand our contingent liability funding options. As the numbers show, we have been successful in all these areas and begin 2026 with a continuing focus on strong core deposit growth, moderate loan growth and controlling costs.
The largest contributor to better profitability was the increase in the net interest margin from 2.72% to 3.28%, a 56-basis point increase and net interest spread increasing 60 basis points in comparing year-end 2024 to year-end 2025. Loan growth at just under 6%, was funded by a decreased cash position by 44.6%, a 1.6% increase in deposits and a slight 1.3% decrease in investments. Most importantly, both sides of the balance sheet showed improved profitability. The asset yield improved from 5.17% for 2024 to 5.45% for 2025, a nice 28 basis point increase in a declining interest rate environment. The cost of interest-bearing liabilities decreased by 32 basis points for the year, 2024 at 3.12% and 2025 at 2.80%, respectively. In terms of dollars, net interest income increased $18.4 million year over year, easily surpassing the $4.5 million gain in 2024 over 2023.
The provision for credit losses related to loans increased by $1.65 million, predominately resultant from loan growth and, to a lesser extent, some weaker macro-economic data . Please refer to Note 4 for further analysis of both our loan portfolio and the associated allowance for credit loss.
The loan growth mentioned previously occurred mostly in the commercial and agricultural portfolios. F&M Commercial Banking Division had increased demand in the fourth quarter 2025 and overall solid growth for 2025. The commercial and the commercial real estate portfolios, combined, grew $84.0 million in outstandings year over year. Solid loan growth in the Commercial & Industrial sector was $17.9 million, or 6% in the last quarter of 2025 and $37.2 million for the year or 12%. We saw overall higher line of credit utilization as well as some new customers were added in the fourth quarter in the transportation sector. Lending rates and terms remained consistent with the previous quarter and an overall downward trend for 2025. Economic factors, inflation, and the impact on potential tariffs remained the largest concerns to commercial business in the F&M footprint in 2025. The commercial team continues to monitor the portfolio and borrowing bases closely for the impact from credit and inflationary pressures. Credit quality and past dues remained sound and collateral values and auction values are still holding consistent with previous quarters and 2024.
The largest single portfolio growth occurred in Agricultural, increasing 44% or $66.2 million in 2025 as compared to 2024. The Agricultural and Elevator portfolio saw increased usage in the 4 th quarter of 2025, as our clients managed through the harvest season. Elevator line of credit usage increased from 29% at December 31, 2024 to 61% at December 31, 2025, and resulted in balances outstanding of $37.5 million at year-end 2025 compared to $14.1 million at year-end 2024. Throughout our market area grain farmers were affected by the late season drought, but overall yields were better than anticipated. Margins continue to be tight for grain farmers as commodity prices have remained lower due to ample supply. Crop insurance and government payments will provide support. Agricultural businesses have performed well, but the decline in net farm income has had the greatest impact on those in equipment sales resulting in higher Agricultural equipment dealer line utilization from additional usage from existing customers as well as new business with new customers. Seasonal demand of short-term borrowings was strong in last quarter of 2025 but moving forward is anticipated to be flat. Delinquencies continue to be low with positive performance within the Agricultural portfolio.
The Home Loan Division saw an increase to our production but predominantly in our HELOC balances. This growth was $21.7 million for the year or a 34% increase over 2024. We saw overall higher line of credit utilization, up from 40% on December 31, 2024, to 45% on December 31, 2025, as well as additional new customer growth. This is due to mortgage rates still being higher than what most borrowers have on their current mortgages thus making home equities the best option for borrowers in most cases. We did see a slight increase in construction loans which is a sign of communities looking to increase housing inventory. Fixed mortgage rates started declining in the 3 rd quarter of 2025 which increased refinance opportunities. Limited inventory, while better than previous years, was still prevalent in most of the communities F&M Bank serves.
The aforementioned growth in the other portfolio sectors has reduced the Bank’s overall relative concentration in Commercial Real Estate (CRE) and Development, and our growth rate in non-owner-occupied CRE has decreased. The largest sector increases within CRE were hospitality and retail. The largest geographic increase with CRE was in the state of Michigan.
Overall, past due loans remain low, though increasing slightly, with some increase in Agriculture and Farmland portfolio. Non-accruals remain low, though increasing, with the larger increase in the Agriculture and Farmland portfolio. Special Mention and Substandard loans rose again in the fourth quarter and were up significantly for the year. While we have experienced migration to more criticized and classified assets, our adversely classified loans as a percentage of capital remain sound. We have also
experienced a migration to our less risky grades (2- and 3-grades) that increased $156 million in 2025 from 35% of the Commercial/Agricultural portfolio to 40%, which has resulted in a much lower concentration of baseline 4-grade loans. There was some further migration within the Criticized assets from Special Mention to Substandard in the fourth quarter, but we don’t expect to incur any losses at this time.
The Bank continues to see the benefit of originating higher yielding loans and having our longer duration loans amortize down. The Bank has much more floating-rate loans today than at this time last year and the concentration of longer-term, fixed-rate loans is decreasing.
A $1.5 million improvement occurred in noninterest income items for 2025 as compared 2024. Apart from net gain (loss) on sale of other assets owned and interchange income, all other line-item components experienced increased revenue over prior year. Items of note are the increase in cash surrender values in the Bank Owned Life Insurance due to the additional purchase of $18 million and the approximately $6.8 million surrender of policies. This improvement is expected to continue through 2026 with additional surrenders over the next 2 years. Loan servicing income and net gain on sale of loans increased reflecting the additional sale of loans both in the home loan portfolio and in the agricultural real estate partial sales. The Bank continues to earn servicing income as those managed portfolio balances continue to increase. Lastly, the additional revenue from our Treasury management team and the FM Investments division are evident in the other service charges and fees increase over 2024. The Bank also leased out a portion of our excess office space in Hicksville to medical providers. The Bank will continue to look for other opportunities to turn excess space at our offices into revenue opportunities.
In 2024, we focused on investing in our infrastructure and technology. These investments, along with a higher incentive expense (due to improved performance) for 2025, are much of the reason for the increase in noninterest expense of $8.1 million for 2025 as compared to 2024. The Bank also opened an additional office in the 3 rd quarter of 2025 in Troy, Michigan. This office brings our total to 2 located in Michigan. Those offices manage over $514 million in loans and $64.6 million in deposits. ATM expense reports a significant increase of $923 thousand due to 2024 being lower from contract credits having been applied. It is in line with 2023 at $18 thousand lower than 2023. Data processing has the same experience and for the same reason as the ATM expense. 2025 is $2.24 million higher than 2024 though $540 thousand higher than 2023. The only noninterest expense that did not increase was in the FDIC assessments. This is a regulatory fee imposed by the FDIC. It fluctuates quarterly and the decrease reflects improved metrics at the Bank upon which they base the charges along with deposit balances.
Overall, a strong last quarter helped to complete the strong year for F&M. Improvement in the bottom line of $7.4 million or a 28.4% increase over year-end 2024. Declared dividends per share were increased in the last two quarters of the year to reflect the improved profitability. Capital increased 10.6% or $35.7 million. The Company’s previous 3-year strategic plan has closed, and the next 3-year plan is being finalized. The Company has laid a framework from which to build continued improvement.
Material Changes in Results of Operations
Net Interest Income
The discussion now centers on the individual line items of the Company's consolidated statement of income and their effect on net income. This section will focus on the most traditional and impactful source of revenue contributing to the profitability of the Company which is net interest income.
Net interest income is the difference between interest income earned on interest earning assets, such as loans and securities, and interest expense paid on interest-bearing liabilities used to fund those assets, such as interest-bearing deposits and other borrowings. Net interest income is affected by changes in both interest rates and the amount and composition of earning assets and liabilities. The change in net interest income is most often measured by two statistics – interest spread and net interest margin. The difference between the yields earned on earning assets and the rates paid for interest-bearing liabilities represents the interest spread. The net interest margin is the difference of funds (interest expense) between the yield on earning assets and the cost as a percentage of earning assets. Because noninterest-bearing sources of funds such as demand deposits and stockholders’ equity also support earning assets, the net interest margin exceeds the net interest spread.
The work began in 2024 to focus on increasing profitability through management of the balance sheet and thereby improving our net interest margin and spread. The success of that strategy became apparent in 2024 and expanded in 2025. The Company utilized new pricing models in both loans and deposits that worked in tandem with each other. Introduced in mid-2024, the models continue to be tweaked to improve effectiveness and are updated collaboratively within multiple divisions of the Bank. The goal is to keep the models simple for ease of use and to remain focused on improving profitability.
Following the rapid rise of interest rates from March of 2020 to July of 2023, to the cuts beginning in September 2024, the Company has experienced the most volatile interest rate environment in decades. The Federal Reserve decreased rates three times during 2025 by 25 basis points each time on September 17th, October 29 th and December 10 th . The charts to follow will emphasize how well we managed the switch in rate positions from 2023.
For 2025, net interest income grew 21.4% or almost $18.4 million over 2024’s. The growth was split almost equally between interest income improvement and interest expense. 54.3% of the improvement was in interest income, increasing by nearly $10 million. Interest expense decreased by $8.4 million when comparing 2025 to 2024. The next step in reviewing the improvement is to determine what drove the improvement. Our goal for 2025 was to hold the loan portfolio mostly flat and increase core deposits, especially in transaction accounts. The following charts show in totality, interest income improvement was due to rate improvement exclusively. The only category impacted negatively in both volume and rate change was Federal Funds sold and other, as would be expected with the Fed rate drops and putting excess cash to better use in loans. Average balances in loans grew $75.2 million which is basically flat considering the overall portfolio is over $2.6 billion. Security activity for the year was limited to replacement purchases and for CRA investments. Both loans and investments’ profitability benefited more due to rate changes than due to growth. Increasing rates in a falling rate environment is a feat and credit goes to both lenders and use of the loan pricing model.
In 2024, the focus was on increasing profitability while also repositioning the balance sheet. The effects of which can be seen in the improvement of $4.5 million to net interest income as compared to 2023. Total interest income increased $23.8 million which was offset by increased interest expense of approximately $19.3 million. Interest and fee income from loans were responsible for $16.0 million of the improved interest income with rate accounting for 78.6% of this increase. Average loan balances increased $65.7 million from the prior year and accounted for 21.4% of the increased loan interest income. As of December 31, 2024, the Company’s loan portfolio was 36.0% variable with 31.4% of total loans subject to repricing within the next twelve months. The Company’s loan portfolio on December 31, 2023, was 31.6% variable with 24.9% of total loans repricing within the next twelve months. The security portfolio, used for purposes of liquidity and contingency planning as a means of balance sheet gap management, increased $11.8 million in average during 2024 as compared to 2023 with associated interest income increasing $1.9 million over 2023. Average federal funds sold and interest-bearing deposit balances increased $91.3 million as compared to the prior year and generated an additional $5.9 million in interest income. During 2024, the prime rate decreased 50 basis points in September and 25 basis points in both November and December to end the year at 7.50%.
During the first quarter of 2023, securities of $21.6 million with an annual yield of $274 thousand were swapped at a loss of $891 thousand with securities with an annual yield of $1.6 million. In 2023, there were four additional 25 basis point increases in February, March, May and July to end the year at 8.50%. Overall, total interest income was $23.8 million higher for 2024 than 2023 on an additional $168.8 million in total average earning assets.
Interest expense (which includes deposits, federal funds purchased, securities sold under agreement to repurchase, borrowed funds and subordinated notes) all decreased in 2025 as compared to 2024, while for 2024 as compared to 2023, they all increased from all interest-bearing funding sources with the exception of federal funds purchased and securities sold under agreement to repurchase. Interest expense decreased $8.4 million on lower average balances from interest-bearing liabilities of $18.6 million in 2025 versus 2024. Average interest-bearing balances decreased in 2025 in all areas except for NOW accounts and savings deposits and subordinated notes. Borrowed funds decreased $49.4 million as maturing prior year borrowings were able to be paid off and not replaced with new borrowings during 2025. The best result is the increase in noninterest-bearing demand deposits, average balances increased $22.4 million in the core deposit gathering efforts in 2025. Time deposits decreased in average balances during 2025 as compared to 2024 with the impact being a decrease of interest expense of $3.8 million. The lower interest expense was driven more by changing rates than in decreased average balances. The largest interest expense decrease due to changes in rate, was in NOW accounts and savings deposits. The decrease attributed to rate was $4.5 million while volume change drove an increase in interest expense of $2.0 million. The net result being a decrease of interest expense due to NOW accounts and savings deposits of over $2.4 million.
For 2024, average interest-bearing liabilities increased $183.3 million over 2023 with approximately $19.3 million additional interest expense. Overall, the funding goal the last three years has been to grow core deposits. Two strategies have been employed through the years, one of allowing expensive time deposits to run off until needed for funding and secondly to offer new noninterest-bearing deposit products. Both strategies were designed to assist in controlling interest expense while also providing funding for loan growth. In 2024 and 2023, liquidity needs and loan growth created the need to quickly generate deposits. Competition within the market areas forced us to increase rates for deposits during the prior two years. In 2024, average interest-bearing deposits increased $149.0 million compared to 2023. During 2024, interest expense from deposits increased by $17.5 million from 2023. The majority, 81.7%, of the increased deposit expense of 2024 and 95.5%, of the increased expense of 2023 was influenced by rates rather than due to additional cost associated with deposit growth. Borrowed fund balances increased in 2024 $41.9 million as a means to provide liquidity which resulted in an additional interest expense of $2.1 million.
Total interest expense equaled $69.3, $77.7, and $58.4 million for 2025, 2024, and 2023, respectively. The decreased expense for 2025 as compared to 2024 was 79.1% due to change in rates being paid in a falling rate environment. The increased expense was approximately 76.2% attributable to the higher interest rate environment in 2024 as compared to 2023.
This concludes the discussion by the independent components of the ratios. Now the discussion moves on to the percentages and the change in the net interest margin and spread.
For 2025, we saw a reversal of the trend of a declining net interest margin and spread comparing 2023 to 2024. The improved interest income and reduced interest expense for 2025 resulted in a 56 and 60 basis points improvement in net interest margin and spread, respectively. The asset yield for 2025 improved 28 basis points as compared to 2024 and the interest expense/cost decreased 32 basis points in the same comparison. Net interest margin for 2025 was 3.28% compared to 2024’s 2.72%. Net interest spread was 2.65% for 2025 versus 2.05% for 2024. Disciplined loan growth, payoffs of expensive borrowings and using excess liquidity to accomplish those improvements were the primary factors. The Company had predicted improved profitability in a declining rate environment.
The increased interest expense of 2024 resulted in the net interest margin remaining flat while interest spread decreased 9 basis points compared to 2023 due to the cost of funds increasing more than the increase in asset yield. For 2024, average loan balances increased $65.7 million over the prior year with increased interest income of $16.0 million. In 2024, the Bank was able to see the impact of a higher rate environment with 78.6% of the increased interest income related to rate changes as presented in the charts below. Average balances of federal funds sold and interest-bearing deposits with other institutions increased $91.3 million and increased interest rates generated an additional $5.9 million in interest income over 2023. The overall asset yield for 2024 increased 50 basis points as compared to 2023.
Interest expense for 2025 was lower by $8.4 million than 2024. In comparing interest expense/cost, 2025 was lower by 32 basis points compared to 2024, capturing back some of the higher 2024 increase in cost. 2024 was 59 basis points higher than 2023. 2.80%, 3.12% and 2.53% was the interest expense/cost for 2025, 2024 and 2023, respectively. 2025 improvement was driven 79.1% by changes in interest rates and the other 20.9% by volume changes in the portfolio.
For 2024, interest expense continued to increase and was 33.0% higher than 2023 and was 76.2% impacted by changes in interest rates. Competition for deposits continued to be extremely high and rate shopping between financial institutions was apparent. The Company’s goal was to increase core deposits, including savings deposits, which increased $126.0 million while noninterest-bearing demand deposits decreased $14.8 million in average balances, respectively as compared to 2023. In 2024, time deposits increased $41.9 million in average balances year over year. The increased interest expense in 2024 for savings deposits and time deposits accounted for 91.1% of the total interest expense increase. Overall, cost of funds increased 59 basis points or 23.3% over 2023 with only 23.8% due to volume increases. The remaining 76.2% was related to changes in interest rates.
The Company will always prefer to see improvement in real dollars over percentages. The strategy for increasing core deposits, to mitigate the higher cost of funds and to continue the opportunity for fee dollars from services provided, continues to be a top focus for 2026.
Total assets of the Company increased overall as did the earning assets in both average and year-end during 2025 and 2024. This matched the increase in interest dollars. The percentage of average earning assets to total average assets reflects the best utilization of funds. The total increase in average earning assets was $19.1 million with the ratio of earning assets to assets decreasing to 94.63% versus 95.06% for 2024. The ratio was 93.81% for 2023. For 2023 and 2025, the addition of new offices increased the non-earning assets with cash balances held at the new offices and the investment in the capital assets of their building and furniture. One office in Troy, MI was added in 3 rd quarter 2025. One of the areas that has helped to improve the profitability over the years was the percentage of average loans to total assets. For 2025, the average balance of loans to total average assets was 78.25%, 76.82% for 2024 and 78.02% for 2023. Overall yield improves when the balances of the highest yielding asset, which is loans, increases. The goal is, as always, to improve the net interest margin and spread and thereby improve profitability.
Net interest spread is the difference between what the Company earns on its assets and what it pays on its liabilities. It is generally from this spread that the Company must fund its operations and generate profit. When the asset yield decreases so must funding costs in order to maintain the same profitability. It becomes increasingly challenging as the asset yield gets closer to the prime lending rate, or the break-even point, of operations. In a rising rate environment, the challenge is to hold the cost steady while allowing time for the asset portfolio to rise. Floors and ceilings on variable products also impact the level of increase in either scenario. The floors provide yield protection in a lower rate environment while the rising rates will not benefit the asset yield until the spread plus prime is higher than the floor. The challenge is to increase the spread during renewals and on new loans.
After the rate hikes in 2022 and 2023, most loans had increased over the floors in 2024 and the falling rates in 2025 now puts the spotlight on this key factor to profitability.
The following tables present net interest income, interest spread and net interest margin for the three years 2023 through 2025, comparing average outstanding balances of earning assets and interest-bearing liabilities with the associated interest income and expense. The tables show the corresponding average rates of interest earned and paid. Average outstanding loan balances include non-performing loans, real estate loans held for sale and carrying value adjustments related to interest rate swaps of $1.7, $1.1, and $2.7 million for 2025, 2024 and 2023, respectively. Average outstanding security balances are computed based on carrying values including unrealized gains and losses on available-for-sale securities.
The yield on tax-exempt investment securities shown in the following charts were computed on a tax equivalent basis. The yield on loans has also been tax adjusted for the portion of tax-exempt IDB loans included in the total. Total interest earning assets is therefore also reflecting a tax equivalent yield in both line items, also within the net interest spread and margin. The adjustments were based on a 21% tax rate for all years. The tax-exempt interest income was $697, $503, and $590 thousand for 2025, 2024 and 2023, respectively which resulted in a federal income tax savings of $121, $106, and $124 thousand, respectively.
(In Thousands)
Average
Interest/
Balance
Dividends
Yield/Rate
ASSETS
Interest Earning Assets:
Loans
Taxable investment securities
Tax-exempt investment securities
Federal funds sold and other
Total Interest Earning Assets
Noninterest Earning Assets:
Cash and cash equivalents
Other assets
Total Assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
NOW accounts and savings deposits
Time deposits
Borrowed funds
Federal funds purchased and securities sold under
agreement to repurchase
Subordinated notes
Total Interest-Bearing Liabilities
Noninterest-Bearing Liabilities:
Noninterest-bearing demand deposits
Other
Total Liabilities
Shareholders' Equity
Total Liabilities and Shareholders' Equity
Interest/Dividend income/yield
Interest Expense/cost
Net Interest Spread
Net Interest Margin
(In Thousands)
Average
Interest/
Balance
Dividends
Yield/Rate
ASSETS
Interest Earning Assets:
Loans
Taxable investment securities
Tax-exempt investment securities
Federal funds sold and other
Total Interest Earning Assets
Noninterest Earning Assets:
Cash and cash equivalents
Other assets
Total Assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
NOW accounts and savings deposits
Time deposits
Borrowed funds
Federal funds purchased and securities sold under
agreement to repurchase
Subordinated notes
Total Interest-Bearing Liabilities
Noninterest-Bearing Liabilities:
Noninterest-bearing demand deposits
Other
Total Liabilities
Shareholders' Equity
Total Liabilities and Shareholders' Equity
Interest/Dividend income/yield
Interest Expense/cost
Net Interest Spread
Net Interest Margin
(In Thousands)
Average
Interest/
Balance
Dividends
Yield/Rate
ASSETS
Interest Earning Assets:
Loans
Taxable investment securities
Tax-exempt investment securities
Federal funds sold and other
Total Interest Earning Assets
Noninterest Earning Assets:
Cash and cash equivalents
Other assets
Total Assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
NOW accounts and savings deposits
Time deposits
Borrowed funds
Federal funds purchased and securities sold under
agreement to repurchase
Subordinated notes
Total Interest-Bearing Liabilities
Noninterest-Bearing Liabilities:
Noninterest-bearing demand deposits
Other
Total Liabilities
Shareholders' Equity
Total Liabilities and Shareholders' Equity
Interest/Dividend income/yield
Interest Expense/cost
Net Interest Spread
Net Interest Margin
The following tables show changes in interest income, interest expense and net interest resulting from changes in volume and rate variances for major categories of earnings assets and interest-bearing liabilities.
(In Thousands)
Net
Change Due to
Change Due to
Change
Volume
Rate
Interest Earning Assets:
Loans
Taxable investment securities
Tax-exempt investment securities
Federal funds sold and other
Total Interest Earning Assets
Interest-Bearing Liabilities:
NOW accounts and savings deposits
Time deposits
Borrowed funds
Federal funds purchased and securities sold
under agreement to repurchase
Subordinated notes
Total Interest-Bearing Liabilities
(In Thousands)
Net
Change Due to
Change Due to
Change
Volume
Rate
Interest Earning Assets:
Loans
Taxable investment securities
Tax-exempt investment securities
Federal funds sold and other
Total Interest Earning Assets
Interest-Bearing Liabilities:
NOW accounts and savings deposits
Time deposits
Borrowed funds
Federal funds purchased and securities sold
under agreement to repurchase
Subordinated notes
Total Interest-Bearing Liabilities
Noninterest Income
The discussion now focuses on the noninterest income and expense generated by the Company for the years ended 2023 through 2025. For 2025, noninterest income was $17.1 million, an increase of $1.5 million or 9.7% from 2024. Noninterest income decreased $284 thousand or 1.8% in total for 2024 as compared to 2023 which ended at $15.9 million.
Other service charges increased $517 thousand as compared to 2024. Of this total, service charges increased $252 thousand while overdraft, returned check charges and recurring overdraft fees increased $206 thousand over 2024. Business charges accounted for $236 thousand while consumer charges accounted for the remaining $222 thousand of the aforementioned. Wire transfers increased $52 thousand as compared to 2024. Customer service fees increased $94 thousand over 2024 which was mainly comprised of increased credit card fees of $100 thousand, rental income primarily from excess office space in the Hicksville branch of $49 thousand, merchant services of $38 thousand and release fees of $25 thousand offset by decreased miscellaneous fees of $101 thousand. Other service charges and fees increased $130 thousand during 2024 as compared to 2023 with overdraft, returned check charges and recurring overdraft fees accounting for $68 thousand of the increase. Wire transfer fees and service charges accounted for $29 and $22 thousand, respectively, of the increase as compared to 2023.
Interchange revenue and fees collected on foreign ATM usage (noncustomers utilizing our ATMs) continues to be a significant contributor to overall noninterest income at $5.2 million for 2025 which was a decrease of $168 thousand when comparing to 2024. Interchange revenue increased $78 thousand to $5.4 million during 2024 as compared to 2023. Included in interchange revenue is a Mastercard growth credit of $240 thousand, $213 thousand and $196 thousand for 2025, 2024 and 2023, respectively. In December of 2019, the Bank became a principal with Mastercard and received a $1.75 million signing bonus. The signing bonus was based on achieving $1.1 billion in signature transactions over five years. The bonus was recognized over 60 months with $319 thousand included in 2024's $5.4 million and $351 thousand included in 2023’s $5.3 million. While more depositors are using electronic methods for purchasing, the expense attributable to card fraud has offset a portion of the revenue gain. Further discussion can be found in the noninterest expense section regarding the net effect of debit card activity.
Loan servicing income increased $346 thousand as compared to 2024. Capitalized servicing rights for 1-4 family real estate loans and agricultural real estate loans accounted for $277 thousand of the increase. Loan servicing income decreased $1.9 million during 2024 as compared to 2023. The establishment of agricultural real estate servicing rights during 2023 recognized $2.3 million of servicing income that was not present in prior years.
The Bank has seen an increase in its mortgage production volume and the corresponding gains on the sale of these loans. Loan originations have increased from $36.4 million in 2023 to $53.7 million in 2024 to $62.8 million in 2025 as a direct result of lower interest rates. Net gain on sales of loans was $1.3 million, $859 thousand and $699 thousand in 2025, 2024 and 2023, respectively. The net gain on sale of loans is derived from sales of real estate loans into the secondary market. Of these loan types, the Bank sells 100% of the residential loans and 90% of the agricultural loans. Residential loans contributed to 39.8% of the gains in 2025, 45.9% in 2024 and 84.3% in 2023. In conjunction with these sales, the Bank maintains servicing rights. The
income from one to four mortgage servicing rights was $645 thousand, $502 thousand and $415 thousand for 2025, 2024 and 2023, respectively. Agriculture mortgage servicing rights income was $458 thousand, $324 thousand and $2.3 million in 2025, 2024 and 2023, respectively.
The cash surrender value of bank owned life insurance increased $405 thousand or 42.0% as compared to 2024, the result of an additional purchase of $18.0 million of bank owned life insurance in October 2025, and $131 thousand or 15.7% in 2024 compared to 2023.
For 2025, net gain (loss) on sale of other assets owned consisted of a loss of $43 thousand on disposal of assets and a $2 thousand gain on the sale of other real estate owned which compared to a gain on disposal of assets of $71 thousand for 2024 and a $135 thousand loss on disposal of assets in 2023.
The last item in the noninterest income section is the net gain or loss on sale of investments. During the first quarter of 2023, securities were swapped at a loss of $891 thousand with securities with a higher annual yield. The loss was recouped by the higher yield during the first eight months of 2023. The Bank did not sell any securities in 2025 or 2024. The available-for-sale security portfolio has improved to approximately a $15.0 million unrealized loss position as of December 31, 2025, from a $36.7 million unrealized loss position as of December 31, 2023.
Noninterest Expense
Noninterest expense increased 11.8% in 2025 to $76.8 million as compared to 2024 and was preceded by a 2.2% increase in 2024 as compared to 2023. Represented in dollars, 2025 was $8.1 million higher than 2024 and 2024 was $1.5 million higher than 2023. One of the largest factors behind the increase in both years was the expense of employee salaries and wages. During 2025, an additional $1.4 million was spent over 2024 which correlates to a 4.7% increase. When making the same analysis for 2024 as compared to 2023, 2024’s costs increased $3.3 million or 12.1%. Three main components flow into salaries and wages: base salary, deferred costs, and incentives comprised of restricted stock award expense and performance incentives. 2025 and 2024 saw an increase due to our continued investment in people and staffing needs. Normal yearly increases to the employees were included in all years. Base pay was up $1.6 million for 2025 over the previous year and 2024 was up $1.4 million over 2023. The offsetting deferred cost increased $791 thousand in 2025 as compared to 2024 and $433 thousand in 2024 as compared to 2023. The full time equivalent number of employees at each year-end increased to 474 for 2025, 473 for 2024 and 456 for 2023.
Incentive pay as it relates to performance was up $533 thousand in 2025 over 2024 and $2.2 million in 2024 over 2023. The Return on Assets multiple used to award incentive pay increased in 2025 to 1.135 compared to 1.043 in 2024 and 0.36 in 2023. The expense for the restricted stock awards increased in 2025 due to an additional 504 shares granted, a higher market price and $34 thousand for the acceleration of stock awards for retirement. Restricted stock award expense increased in 2024 even though 4,056 fewer shares were granted. This was due to higher market value rates and $108 thousand for the acceleration of stock awards for executive retirements. Restricted stock award expense increased in total $34 thousand in 2025 over 2024 and $79 thousand in 2024 over 2023. The awards incorporate a three year vesting period so the increase of any one year carries forward through the next two years. This expense should continue to increase as the Company continues its expansion strategy. For further discussion in incentive pay and restricted stock awards, see Note 12 of the consolidated financial statements.
Employee benefits expense increased $785 thousand or 9.2% in 2025 as compared to 2024. Employee group insurance expense with an increase of $571 thousand accounted for the largest portion of the increase. Employers FICA expense increased $225 thousand for 2025. The cost of the 401(k) retirement plan decreased $7 thousand for 2025 as compared to 2024. The contribution portion relating to the discretionary profit-sharing percentage was 4.40% in 2025. Employee benefits expense increased in 2024 as compared to 2023. The 401(k) retirement plan accounted for the largest portion of the increase, which was an increase of $601 thousand over 2023. The contribution portion relating to the discretionary profit-sharing percentage was 4.5% in 2024 compared to 1.7% in 2023. Overall, employee benefits increased $1.0 million or 13.6% from 2023.
Net occupancy expense typically increases as the Company expands. Net occupancy expense increased $278 thousand for 2025 and $319 thousand in 2024. One factor that can offset occupancy expense is the receipt by the Company of building rent as it is netted out of occupancy expense. The greatest contributor to building rent comes from the division of FM Investments within the Bank. Building rent as generated from FM Investments increased by $125 thousand in 2025 as compared to 2024. Rent is received in lieu of commissions. This revenue was able to partially offset increased lease expense of $147 thousand, utilities of $116 thousand, building repair and maintenance expenses of $76 thousand and building depreciation of $43 thousand. Building rent as generated by FM Investments was higher by $195 thousand in 2024 which offset increased lease expense of $439 thousand, building depreciation expense of $328 thousand and building repair and maintenance expenses of $39 thousand.
Furniture and equipment steadily increase as we continue to add facilities and invest in technology. Annual maintenance costs continue to grow and become a greater piece of the overall cost. As new services are provided to our customers, the backroom cost to supply them continues to rise. The Company accepts it is an expected cost of doing business and keeping our services relevant to the industry. Furniture and fixture expense increased $312 thousand for 2025 as compared to 2024 with increased maintenance contracts of $399 thousand and repairs of $75 thousand which were offset by decreased depreciation of $132 thousand and rental expenses of $21 thousand. For 2024, furniture and fixtures increased $242 thousand over 2023 with increased maintenance contracts of $192 thousand and depreciation of $63 thousand offset by decreased rental expenses of $15 thousand.
The largest noninterest expense increase for 2025 as compared to 2024 was data processing costs at $2.2 million. ATM expense also increased $923 thousand over 2024. Both expense lines had a much smaller usage of flex credits as compared to 2024. Beginning in December of 2025, flex credits of $75 thousand per month will be used until they are exhausted in August of 2028. Data processing costs and ATM expense were lower in 2024 as compared to 2023 by $1.7 million and $941 thousand, respectively, as a result of using credits from the 67 month amended agreement commencing on January 1, 2024. Some of the flex credits may be used on a wide range of services while others are product specific. As the pricing on many services is based on number of accounts which the Bank fully expects to increase with the growth from the newer offices and overall Bank growth, data processing costs are expected to increase. Included in ATM expense are the debit card fees incurred which offset the debit card income as discussed in the noninterest income section.
Advertising and public relations only increased $55 thousand as compared to 2024 and decreased in 2024 by $463 thousand as compared to 2023. 2023 included additional expenses related to new office and the launch of our new logo.
FDIC assessments decreased $390 thousand in 2025 from 2024 due to a decrease in the quarterly assessment multiplier. 2024 FDIC assessments increased $127 thousand due to an increase in the assessment base as compared to 2023. With continued growth, the assessment base increases which can lead to a greater expense.
A correlating expense to the Company's refinancing activity as it relates to loans sold to the secondary market, is the amortization of servicing rights for 1-4 family real estate loans and agricultural real estate loans. The amortization is the expense that offsets the income recognized when the loan is first sold. Income is recorded when the real estate loan is first sold with servicing retained and is therefore recognized immediately. The amortization, however, is calculated over the life of the loan and accelerated as loans are paid off early. An increase in this expense can be driven by two activities: an increase in the number of sold loans and/or by the acceleration of the expense from payoff and refinance activity. The best picture of the bottom line impact is achieved by netting the income with the expense each year. During 2025, combined servicing rights yielded a net loss of $305 thousand which included an increase to the valuation allowance of $786 thousand of which all but $3 thousand was attributable to agricultural real estate servicing rights. For 2024, combined servicing rights yielded a net income of $98 thousand along with the establishment of a $97 thousand valuation allowance. For 2023, combined servicing rights yielded a net income of $2.1 million along with the establishment of a $7 thousand valuation allowance. Included in the capitalized additions for 2023 was $2.3 million for the initial establishment of agricultural real estate servicing rights offset by corresponding amortization of $123 thousand. The value (or income) of the servicing right when the loans are sold also impacts the net position. As of December 31, 2025, 3,597 1-4 family real estate loans and 658 agricultural loans were being serviced with corresponding balances of $362.6 million and $153.4 million, respectively. At December 31, 2024, 3,677 1-4 family real estate loans and 619 agricultural loans were being serviced with corresponding balances of $364.3 million and $141.9 million, respectively. At December 31, 2023, 3,749 1-4 family real estate loans and 593 agricultural loans were being serviced with corresponding balances of $367.8 million and $135.8 million, respectively.
The impact of servicing rights to both noninterest income and expense is shown in the following table:
(In Thousands)
Beginning of Year
Capitalized Additions
Amortization
Ending Balance, December 31
Valuation Allowance
Servicing Rights net, December 31
Loan and collection related expenses, included in the loan expense, increased $284 thousand as compared to 2024 while 2024’s expenses decreased $73 thousand from 2023. The other component of loan expense is approval fees which decreased $34 and $22 thousand in 2025 from 2024 and 2024 to 2023, respectively.
Consulting fees increased $786 thousand to $1.7 million as compared to 2024 with most of the increase attributed to the time spent to our core banking operating system for the base contract negotiation, additional ancillary products and monthly invoice reviews. In looking at 2024, consulting fees only increased $45 thousand over 2023.
Professional fees which consist of legal fees and audit, accounting and exam fees increased $136 thousand in 2025 over 2024. Auditing, accounting and exam fees accounted for $98 thousand of the increase while legal fees were the remaining $38 thousand. In 2024, professional fees increased $363 thousand over 2023 with increased auditing, accounting and exam fees accounting for $289 thousand of the increase primarily the result of outsourcing internal audit.
Other general and administrative expense increased $516 thousand as compared to 2024 but decreased $952 thousand in 2024 as compared to 2023. For 2025, the largest increases were miscellaneous expenses of $340 thousand which included $133 thousand for the MEC penalty owed on the gain on cash surrender value of bank owned life insurance policies and $76 thousand in penalties, miscellaneous NSF check and other losses of $169 thousand and CDARs fees of $114 thousand. Credit card expense decreased $340 thousand from 2024 and decreased $576 thousand from 2023. 2023 included $351 thousand that was returned in 2025 which was used as a retainer to cover any delinquencies that occurred after the conversion. Postage and stationery, supplies and printing decreased $171 and $140 thousand, respectively, as 2023 included additional costs in these categories related to the launch of the new logo.
Allowance for Credit Losses
The total allowance for credit losses (ACL) represents management’s estimate of expected credit losses inherent in the Bank’s loan portfolio and unfunded loan commitments at the report date. Please see Note 1 in the consolidated financial statements for additional information related to the ACL.
Provision expense increased by approximately $1.7 million for 2025 as compared to 2024 and decreased by $754 thousand for 2024 as compared to 2023. The increase in provision for 2025 was attributed to loan growth, net charge-off activity, a rise in nonaccrual loans and adjustments to qualitative factors reflecting elevated credit risk in certain portfolio segments. Sustained strong asset quality and reduced loan balances kept the provision expense lower in 2024. Management continues to monitor asset quality, making adjustments to the provision as necessary. Total net charge-offs were $734, $142 and $551 thousand for 2025, 2024 and 2023, respectively. The consumer portfolio segment had the largest charge-off activity during 2025 at $758 thousand which was up from $346 and $425 thousand in 2024 and 2023, respectively. Of the total 2025 consumer charge-offs, $364 thousand was for automobiles and trucks and $157 thousand was for recreational vehicles. The commercial and industrial portfolio segment had $250 and $106 thousand of charge-offs in 2025 and 2024, respectively; however, had the highest level of charge-off activity in 2023 at $565 thousand. The 2025 commercial and industrial charge-offs were for four relationships with one of the relationships accounting for approximately 59% of the total. Consumer recoveries were $221, $189 and $197 thousand for 2025, 2024 and 2023, respectively. Of the total 2025 consumer recoveries, $53 thousand was for automobiles and trucks and $60 thousand was for recreational vehicles. Consumer net charge-offs were $537, $157 and $228 thousand in 2025, 2024 and 2023, respectively. Net charge-offs in the commercial and industrial portfolio segment were $216 and $481 thousand in 2025 and 2023, respectively with 2024 being a net recovery of $27 thousand.
Watch list loan balances are comprised of loans graded 5-8. At year-end December 31, 2025, these loans totaled $169.4 million and were $102.9 million higher than December 31, 2024. Grade 5 increased $52.9 million in 2025 as compared to 2024, Grade 6 and Grade 7 increased $49.9 million and $134 thousand, respectively, in the same comparison. Commercial real estate, agricultural and commercial loans saw the largest increases over 2024 at $64.9, $19.6 and $11.5 million, respectively. These three categories comprised approximately 90.0% of the watch list loans. Of the total $169.4 million of watch list loans at December 31, 2025, 41.1% were classified as special mention, 58.8% were classified as substandard and 0.01% were classified as doubtful.
At year-end December 31, 2024, these loans totaled $66.5 million and were $38.4 million lower than December 31, 2023. Commercial real estate, agricultural real estate and commercial loans comprised $49.6 million, $6.1 million and $5.2 million of the watch list loans, respectively. Grade 5 decreased $62.9 million in 2024 as compared to 2023 and Grade 6 increased $24.9 million in the same comparison. There were no Grade 7 loans at December 31, 2024, a decrease of $257 thousand from 2023. At December 31, 2024, of the $66.5 million watch list loans, 25.1% were classified as special mention and 74.9% were classified as substandard. No loans were classified as doubtful.
At year-end December 31, 2023, these loans totaled $104.9 million and were $44.9 million higher than December 31, 2022. Grade 5 increased $54.9 million in 2023 as compared to 2022 and Grade 6 decreased $10.4 million in the same comparison. Grade 7 increased $257 thousand over 2022. Of the aggregate watch list loan balances, as of December 31, 2023, 75.8% of the watch list was classified as special mention, with an additional 23.8% classified as substandard and a small 0.2% or $257 thousand of the $104.9 million watch list was classified as doubtful.
In response to these fluctuations and the offset by loan growth during 2023 through 2025, the Bank’s ACL to outstanding loan coverage percentage changed to 1.02% as of December 31, 2025, 1.01% as of December 31, 2024 and 0.97% as of December 31, 2023. In addition, for 2023, our allowance for credit losses does not include a $363 thousand credit mark associated with the Bank of Geneva acquisition. No credit mark for Bank of Geneva remained at December 31, 2024. For 2024 and 2023, our allowance for credit losses also does not include a $107 thousand or a $294 thousand credit mark associated with the Ossian State Bank acquisition. No credit mark for Ossian State Bank remained at December 31, 2025. The credit mark not included in the allowance for credit losses associated with the Perpetual Federal Savings Bank acquisition for 2025, 2024 and 2023 was $112 thousand, $1.5 million and $2.8 million, respectively. 2025, 2024 and 2023 also include a $104 thousand, $335 thousand and $566 thousand credit mark associated with the Peoples Federal Savings and Loan acquisition. Together, all of the credit marks further support the current position of the ACL.
All commercial and agricultural relationships with lines of credit greater than $100,000 and aggregate loan exposure greater than $250,000 are reviewed annually by the Bank’s Credit Department. All commercial and agricultural relationships with term debt only and aggregate loan exposure greater than $1,000,000 are also reviewed by the Bank’s Credit Department. These reviews are conducted to identify early signs of deterioration.
To establish the specific reserve allocation for real estate, a discount to the market value is established to account for liquidation expenses. The discounting percentage used for real estate mirrors the discounting of real estate as provided for in the Bank’s Loan Policy. However, unique or unusual circumstances may be present which will affect the real estate value and, when appropriately identified, can adjust the discounting percentage at the discretion of management.
The ACL increased approximately $1.4 million during 2025 which was comprised of an increase to the allowance for credit losses of approximately $1.9 million and a decrease to unfunded loan commitments of $506 thousand. During 2024, the ACL increased $131 thousand which included an increase to the allowance for credit losses of $802 thousand and a decrease to unfunded loan commitments of $671 thousand. The ACL increased $5.7 million during 2023. The loans past due 30+ days to total loans percentages were 0.29%, 0.22% and 0.44% for December 31, 2025, 2024 and 2023, respectively.
Please see Note 4 in the consolidated financial statements for additional tables regarding the composition of the ACL.
Income Taxes
Income tax expense was $2.6 million higher for 2025 as compared to 2024 as result of increased pretax income of approximately $10.0 million in addition to a taxable $1.3 million gain on cash surrender value of bank owned life insurance policies. For 2024, income tax expense was $1.1 million higher than 2023 due to an increase in pretax income of $4.2 million. Amortization of qualified affordable housing projects as discussed in Note 19 caused income tax expense to increase $436 and $417 thousand for 2025 and 2024, respectively. Effective tax rates were 21.67%, 20.37% and 19.63% for 2025, 2024 and 2023 respectively. Excluding the $280 thousand tax expense from the gain on bank owned life insurance and the amortization of the qualified housing projects, the effective tax rate would have been 20.0% and 19.1% for 2025 and 2024, respectively. The effect of tax-exempt interest from holding tax-exempt securities and Industrial Development Bonds (IDBs) was $146, $127 and $149 thousand for 2025, 2024 and 2023, respectively less the TEFRA adjustments of $25, $21 and $20 thousand respectively. Beginning in 2025, the effect of tax-exempt interest also includes 25% of the qualified interest income from loans secured by rural or agricultural real estate. During 2025 and 2024, the effect of investments reported under the proportional amortization method was $436 and $422 thousand, respectively.
Material Changes in Financial Condition
The shifts in the balance sheet during 2023 through 2025 have positioned the Company for continued improvement in profitability. On the asset side, interest income increased primarily from loan growth with funding for the increase provided by growth in core deposits, other time deposits and growth in other borrowings. The cost of funds beginning in 2023 has been impacted by the increase of both interest-bearing liabilities, the pressure on rates from competition for funds and a rising rate environment. In 2023 and 2024, the rate pressure from competition was extremely high with many depositors rate shopping. Going forward, there is a heightened focus on controlling the cost of funds. Loan growth contributed to an increase in interest income in 2023 through 2025.
Average earning assets increased in balances for all years during 2023 through 2025 with loan growth the primary factor for the increase.
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
Summary of Consolidated Statements of Income
(In Thousands, except share data)
Summary of Income:
Interest income
Interest expense
Net Interest Income
Provision for Credit Losses - Loans*
Provision for (Recovery of) Credit Losses -
Off Balance Sheet Credit Exposures*
Net Interest Income After Provision for
Credit Losses*
Noninterest income (expense), net
Net Income Before Income Taxes
Income Taxes
Net Income
Per Share of Common Stock:
Earnings per common share outstanding**
Net Income
Dividends
Weighted average number of shares
outstanding, including participating
securities
*ASU 2016-13 was adopted during the first quarter of 2023; therefore, 2021 and 2022 provision amounts reflect the incurred loss method.
**Based on weighted average number of shares outstanding.
Summary of Consolidated Balance Sheets
(In Thousands)
Total assets
Loans, net
Total deposits
Stockholders' equity
Key Ratios
Return on average equity
Return on average assets
Loans to deposits
Capital to assets
Dividend payout
Securities
The investment portfolio is primarily used to provide overall liquidity for the Bank. It is also used to provide required collateral for pledging to the Bank’s Ohio public depositors for amounts on deposit in excess of the FDIC coverage limits. It may also be used to pledge for additional borrowings from third parties. Investments are made with the above criteria in mind while still seeking a fair market rate of return and looking for maturities that fall within the projected overall strategy of the Bank. The possible need to fund future loan growth is also a consideration.
The Bank uses Intrafi’s ICS product which utilizes a nation-wide bank network to provide FDIC insurance coverage to the Bank’s depositors to protect balances over $250 thousand. The Bank is using the product to replace pledging securities for the Bank’s Ohio public customers and commercial sweep customers; thereby increasing liquidity.
All of the Bank’s security portfolio is categorized as available for sale and as such is recorded at fair value. All mortgage-backed securities are government sponsored enterprises.
The Company increased its security portfolio in 2024 for purposes of liquidity, Community Reinvestment Act (CRA), and contingency planning as a means of balance sheet gap management. Security balances as of December 31 are summarized below:
(In Thousands)
U.S. Treasury
U.S. Government agencies
Mortgage-backed securities
State and local governments
The following table sets forth the maturities of investment securities as of December 31, 2025 and the weighted average yields of such securities calculated on the basis of cost and effective yields weighted for the scheduled maturity of each security. Tax-equivalent adjustments, using a twenty-one percent rate, have been made in yields on obligations of state and political subdivisions. Stocks of domestic corporations have not been included. Maturities of mortgage-backed securities are based on the average life at the prepayment speed rather than the stated maturity date of the security. Due to prepayments, actual maturities may be different.
Maturities
(Amounts in Thousands)
After One Year
Within One Year
Within Five Years
Amount
Yield
Amount
Yield
U.S. Treasury
U.S. Government agencies
Mortgage-backed securities
State and local governments
Taxable state and local governments
After Five Years
Within Ten Years
After Ten Years
Amount
Yield
Amount
Yield
U.S. Treasury
U.S. Government agencies
Mortgage-backed securities
State and local governments
Taxable state and local governments
As of December 31, 2025, the Bank also holds stock in the Federal Home Loan Bank of Cincinnati and Indianapolis at a cost of $13.0 million. This is required in order to obtain Federal Home Loan Bank loans, with the Indianapolis relationship having stock and a letter of credit which originated from the Bank of Geneva acquisition.
Loan Portfolio
The Bank’s various loan portfolio segments are subject to varying levels of credit risk. Management mitigates these risks through portfolio diversification and through standardization of lending policies and procedures.
Risks are mitigated through an adherence to the Bank’s loan policies, with any exception being recorded and approved by senior management or committees comprised of senior management. The Bank’s loan policies define parameters to essential underwriting guidelines such as loan-to-value ratio, cash flow and debt-to-income ratio, loan requirements and covenants, financial information tracking, collection practice and others. The maximum loan amount to any one borrower is limited by the Bank’s legal lending limits and is stated in policy. On a broader basis, the Bank restricts total aggregate funding in comparison to Bank capital to any one business or agricultural sector by an approved sector percentage to capital limitation.
For agricultural loans, the vulnerability to commodity prices is offset by the farmer’s ability to hedge their position with the use of the future contracts whereas the risk related to weather is often mitigated by requiring crop insurance. For commercial real estate and commercial and industrial loans, the Bank employs 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.
The following table shows the Bank’s gross loan portfolio by segment, excluding loans held for sale, by category of loan as of December 31 of each year:
(In Thousands)
Loans:
Consumer Real Estate
Agricultural Real Estate
Agricultural
Commercial Real Estate
Commercial and Industrial
Consumer
Other
The Bank maintains a well-balanced, diverse and high performing commercial real estate loan portfolio. Commercial real estate loans, excluding deferred loan fees and other costs, represented 49.96% of the Company's total gross loan portfolio as of December 31, 2025. The below tables present the commercial real estate (CRE) portfolio segment by category, location and loan grade:
CRE Category
Dollar
Balance
Percent of
CRE
Portfolio
Percent of
Total Loan
Portfolio
Industrial
Multi-family
Retail
Hotels
Office
Gas Stations
Food Service
Development
Auto Dealers
Senior Living
Other
Total CRE
CRE Category (*)
Dollar
Balance
Percent of
CRE
Portfolio
Owner occupied
Non-owner occupied
Multi-family
Land & Development
Total CRE
* Categories assume construction loans converted to either owner or non-owner occupied.
Location
Dollar
Balance
Percent of
CRE
Portfolio
Southeast Michigan
Northwest Ohio
Fort Wayne, Indiana
Columbus, Ohio
Greater Indianapolis, Indiana
Dayton/Cincinnati, Ohio
Other
Total CRE
CRE Grades
December 31, 2025
December 31, 2024
December 31, 2023
The following table shows the contractual maturity by portfolio segment at amortized cost excluding fair value adjustments related to acquisitions as of December 31, 2025:
(In Thousands)
After One
After Five
Within
Year Within
Years Within
After
One Year
Five Years
Fifteen Years
Fifteen Years
Consumer Real Estate
Agricultural Real Estate
Agricultural
Commercial Real Estate
Commercial and Industrial
Consumer
Other
The following table shows the distribution of fixed and variable rate loans by portfolio segment as of December 31, 2025:
(In Thousands)
Fixed
Variable
Rate
Rate
Consumer Real Estate
Agricultural Real Estate
Agricultural
Commercial Real Estate
Commercial and Industrial
Consumer
Other
Variable rate loans that have reached ceiling or floor limits are reported as fixed rate loans until such time as their rates adjust away from those limits.
The following tables present the Company's amortized cost of nonaccrual loans by portfolio segment as of December 31, 2025 and 2024:
(In Thousands)
December 31, 2025
Nonaccrual
Loans Past
With No
Due Over
Allowance
89 Days
for Credit Loss
Nonaccrual
Still Accruing
Consumer Real Estate
Agricultural Real Estate
Agricultural
Commercial Real Estate
Commercial & Industrial
Consumer
Total
(In Thousands)
December 31, 2024
Nonaccrual
Loans Past
With No
Due Over
Allowance
89 Days
for Credit Loss
Nonaccrual
Still Accruing
Consumer Real Estate
Agricultural Real Estate
Agricultural
Commercial Real Estate
Commercial & Industrial
Consumer
Total
Although loans may be classified as non-performing, some pay on a regular basis, and many continue to pay interest irregularly or at less than original contractual rates. Interest income that would have been recorded under the original terms of these loans would have aggregated $1.2 million as of December 31, 2025, $794 thousand as of December 31, 2024 and $1.2 million as of December 31, 2023. Any collections of interest on nonaccrual loans are included in interest income when collected unless it is on a loan with expected credit loss and with a specific allocation. A collection of interest on a loan with an expected credit loss and with a specific allocation is applied to the loan balance to decrease the allocation. Total interest collections, whether on an accrued or cash basis, amounted to $152 thousand for 2025, $1.2 million for 2024 and $431 thousand for 2023.
Loans are placed on nonaccrual status in the event that the loan is in past due status for more than 90 days or payment in full of principal and interest is not expected. The Bank had nonaccrual loan balances of $11.3 million at December 31, 2025 compared to balances of $3.1 million and $22.4 million as of year-end 2024 and 2023, respectively. All of the balances of nonaccrual loans for the past three years were collaterally secured.
As of December 31, 2025, the Bank had $164.3 million of loans which it considers to be “potential problem loans” in that the borrowers are experiencing financial difficulties which are not reflected in the table above. Commercial real estate, agriculture, commercial and agricultural real estate loans totaled $113.0 million, $21.0 million, $18.2 million and $7.9 million respectively. As of December 31, 2024, the Bank had $63.0 million of these loans. Commercial real estate, agricultural real estate, commercial and agricultural loans comprised $49.8 million, $6.1 million, $5.0 million and $1.5 million respectively. At December 31, 2023, the Bank had $102.8 million of these loans. These loans are subject to constant management attention and are reviewed at least monthly. The amount of the potential problem loans was considered in management’s determination of the allowance for credit losses at December 31, 2025, 2024 and 2023.
In extending credit to families, businesses and governments, banks accept a measure of risk against which an allowance for possible credit losses is established by way of expense charges to earnings. This expense is determined by management based on a detailed monthly review of the risk factors affecting the loan portfolio, including general economic conditions, changes in the portfolio mix, past due loan-loss experience and the financial condition of the Bank’s borrowers.
As of December 31, 2025, the Bank had loans outstanding to individuals and firms engaged in the various fields of agriculture in the amount of $218.1 million with an additional $217.0 million in agricultural real estate loans which compared to $152.1 and $216.4 million, respectively, as of December 31, 2024. The ratio of this segment of loans to the total loan portfolio is not considered unusual for a bank engaged in and servicing rural communities.
As of December 31, 2025 and 2024, the Bank had $51 and $65 thousand, respectively, of its loans that were considered modified for borrowers experiencing financial difficulty, none of which was included in nonaccrual loans. As of December 31, 2023, the Bank had $357 thousand of its loans that were considered modified for borrowers experiencing financial difficulty, of which $255 thousand was included in nonaccrual loans. Such loans do not include interest rate modifications to reflect a decrease in market interest rates or maintain a relationship with the debtor, where the debtor is not experiencing financial difficulty and can obtain funding from other sources.
Updated appraisals are required on all collateral dependent loans. The Bank may also require an updated appraisal of a watch list loan which the Bank monitors under its loan policy. On a quarterly basis, Bank management reviews properties supporting asset dependent loans to consider market events that may indicate a change in value has occurred.
To determine observable market value, collateral asset values securing a collateral dependent 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 existing collateral value used.
Performing “non-watch list” loans secured in whole or in part by real estate, do not require an updated appraisal unless the loan is rewritten and additional funds advanced. Watch List loans secured in whole or in part by real estate require updated appraisals every two years. All loans are subject to loan-to-value limitations as found in the Bank’s loan policies irrespective of their grade. The Bank’s watch list is reviewed on a quarterly basis by management and any questions as to value are addressed at that time.
The majority of the Bank’s loans are made by lenders who live and work in the market area. Thus, their evaluation of the independent valuation is also valuable and serves as a double check.
On extremely rare occasions, the Bank will make adjustments to the recorded values of collateral securing commercial real estate loans without acquiring an updated appraisal for the subject property. The Bank has no formalized policy for determining when collateral value adjustments between regularly scheduled appraisals are necessary, nor does it use any specific methodology for applying such adjustments. However, on a quarterly basis as part of its normal operations, the Bank’s senior management and the Credit Analyst Department will meet to review all commercial credits either deemed to be collateral dependent or on the Bank’s watch list. An external review by an independent firm of 35% of our larger credits is also completed annually. In addition to analyzing the recent performance of these loans, management and the Enterprise Risk Management Committee will also consider any general market conditions that might warrant adjustments to the value of particular real estate collateralizing commercial loans. In addition, management conducts annual reviews of all commercial loans exceeding certain outstanding balance thresholds. In each of these situations, any information available to management regarding market conditions impacting a specific property or other relevant factors are considered, and lenders familiar with a particular
commercial real estate loan and the underlying collateral may be present to provide their opinion on such factors. If the available information leads management to conclude a valuation adjustment is warranted, such an adjustment may be applied on the basis of the information available. If management concludes that an adjustment is warranted but lacks the specific information needed to reasonably quantify the adjustment, management will order a new appraisal on the subject property even though one may not be required under the Bank’s general policies for updating appraisals.
Note 4 of the consolidated financial statements may also be reviewed for additional tables dealing with the Bank’s loans and ACL.
The Company adopted ASU 2016-13 on January 1, 2023, using the modified retrospective method for all financial assets measured at amortized cost and off balance sheet credit exposures. ASU 2016-13 requires an expected credit losses approach, referred to as the Current Expected Credit Losses (CECL) approach to evaluating the allowance for credit losses.
The transition adjustment of the CECL adoption included an increase in the allowance for credit losses of $3.6 million, increase in the allowance for unfunded loan commitment and letters of credit of $0.9 million and a $3.4 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on our consolidated balance sheets, with the $1.1 million tax impact portion being recorded as part of the deferred tax asset in other assets on our consolidated balance sheets. Actual charge-off of loan balances is based upon periodic evaluations of the loan portfolio by management. These evaluations consider several factors, including, but not limited to, general economic conditions, financial condition of the borrower, and collateral. For regulatory capital calculations, the capital decrease of $3.4 million was amortized over a 3 year period.
As discussed previously and presented in the table on the next page, charge-offs increased to $1.0 million for 2025. 73.7% of the charge-offs stemmed from the consumer portfolio segment. Charge-offs were $480 thousand for 2024 and $990 thousand for 2023. Recoveries were $294 thousand in 2025 compared to $338 and $439 thousand for 2024 and 2023, respectively. The net charge-offs for the last three years were all under $800 thousand with 2025 the highest at $734 thousand and 2024 the lowest at $142 thousand. Management has factored in the continuing impact of high interest rates and inflationary pressures on borrowers' repayment capacity, especially in rate-sensitive consumer real estate, agricultural and commercial portfolio segments. These trends resulted in a higher modeled loss rate and adjustment to qualitative reserves.
During 2025, nonaccrual loans increased $8.1 million or 260.3% as compared to 2024 to $11.3 million. This increase was comprised of $1.7 million in consumer real estate, $5.2 million in agricultural real estate and $1.4 million in agricultural portfolio segments. One relationship accounts for $6.3 million of 2025 nonaccruals in the agricultural related portfolio segments. The increase to nonaccruals caused the ratio of the allowance for credit losses to nonaccrual loans to decrease to 245.98% at December 31, 2025. At December 31, 2024, two borrower relationships resulted in a decrease to nonaccrual totals in the agricultural real estate and agricultural portfolio segments. The decrease to nonaccruals caused the ratio of the allowance for credit losses to nonaccrual loans to increase from 111.95% at December 31, 2023 to 826.70% at December 31, 2024.
For 2025, increased net charge-offs and loan growth contributed to an increase in provision expense as compared to 2024 and 2023 where controlled loan originations resulted in lower provision expense. Overall, the ACL increased from $25.0 million at year-end 2023 to $27.7 million at year-end 2025. After adding the allowance for unfunded loan commitments, the ACL ended 2025 at $28.7 million.
The following table breaks down the activity within the ACL for each portfolio segment and shows the contribution provided by both the recoveries and the provision along with the reduction of the allowance caused by charge-offs for the years ended December 31, 2025, 2024 and 2023:
(In Thousands)
Loans, amortized cost
Daily average of outstanding loans
Nonaccrual loans
Nonperforming loans*
Allowance for Credit Losses - Jan 1
Adjust for accounting change (ASU 2016-13)
Loans Charged off:
Consumer Real Estate
Agricultural Real Estate
Agricultural
Commercial Real Estate
Commercial and Industrial
Consumer
Loan Recoveries:
Consumer Real Estate
Agricultural Real Estate
Agricultural
Commercial Real Estate
Commercial and Industrial
Consumer
Net Charge-offs (Recoveries):
Consumer Real Estate
Agricultural Real Estate
Agricultural
Commercial Real Estate
Commercial and Industrial
Consumer
Provision for credit losses
Allowance for Credit Losses - Dec 31
Allowance for Unfunded Loan
Commitments & Letters of Credit - Dec 31
Total Allowance for Credit Losses - Dec 31
Ratio of Net Charge-offs to Average
Outstanding Loans
Ratio of Nonaccrual Loans to Loans
Ratio of the Allowance for Credit
Losses to Loans
Ratio of the Allowance for Credit
Losses to Nonaccrual Loans
Ratio of the Allowance for Credit
Losses to Nonperforming Loans
*Nonperforming loans are defined as all loans on nonaccrual, plus any loans past due 90 days not on nonaccrual.
The balance of loans, amortized cost at December 31, 2025, 2024 and 2023 within this chart do not include a fair value basis adjustment for derivatives of $1.7 million, $1.1 million and $2.7 million, respectively, or a daily average outstanding balance of $1.7 million and $1.5 million at December 31, 2025 and 2024, respectively.
The following table presents the balances for allowance for credit losses per portfolio segment in terms of dollars, as a percentage of ACL and as a percentage of loans:
Amount
Amount
Amount
ACL
Loan
ACL
Loan
ACL
Loan
Balance at End of Period
Applicable To:
Consumer Real Estate
Agricultural Real Estate
Agricultural
Commercial Real Estate
Commercial and Industrial
Consumer
Other
Allowance for Credit Losses
Off Balance Sheet
Commitments
Total Allowance for
Credit Losses
Deposits
The amount of outstanding time certificates of deposits and other time deposits in amounts of $100,000 or more by maturity both in total and uninsured greater than $250,000 as of December 31, 2025 are as follows:
(In Thousands)
Over Three
Over Six
Months
Months Less
Over
Under
Less Than
Than One
One
Three Months
Six Months
Year
Year
Time Deposits
Uninsured Time Deposits
The following table presents the average amount of and average rate paid on each deposit category:
(In Thousands)
Noninterest
Interest
Savings
Time
DDAs
DDAs
Accounts
Accounts
December 31, 2025:
Average balance
Average rate
December 31, 2024:
Average balance
Average rate
December 31, 2023:
Average balance
Average rate
Uninsured deposits greater than $250,000 are presented by year in the table below:
(In Thousands)
Uninsured Deposits
Liquidity
Competition for deposits has become a constant factor in the liquidity challenge for financial institutions. Gone are the years of abundant deposits provided through government intervention during the COVID years. Time deposits which had been off the balance sheets of many, returned vigorously in 2023 and 2024. In 2025, we strived to limit the reliance on these instruments due to the expense and the focus on short term rates due to the inverted and still slightly inverted yield curve. Time deposits (CDs) reached a high in average balances in 2024 at $663.3 million costing 3.73%. Average balances of CDs dropped to $618.2 million with a carrying cost of 3.38% in 2025 by design. Overall deposits still grew at just over 2% or $54.3 million in 2025 as compared to 2024. Nice increases can be seen in all the other three categories and especially in the beneficial noninterest-bearing DDAs. A new product, “Bank at Work” was introduced is 2025 along with increasing commercial relationships and focused on the gathering of DDAs. The Bank began testing “smart safes” enabling our commercial customers to have safes on site and receiving credit for the cash balances being held in their deposit accounts at the Bank. The Bank continues to offer this service to more of our cash heavy customers. Interest and noninterest-bearing DDAs accounted for $62.3 million of growth over 2024 average balances. These are vital to the success of the Bank as they also provide opportunities for additional noninterest fee revenue with service charges and Treasury management fees.
The Company continued holding bi-weekly, what is termed “sub-ALCO”, meetings along with continuing the use of a liquidity dashboard and cashflow projection in 2025. The liquidity dashboard and cashflow projection are actively managed documents which continue to be enhanced to provide the most accurate forecast of liquidity positions for the next five months. The cashflow projection includes loan pipeline expectations and runoffs and maturities of both sources and uses of funds.
The strategy of 2024 of slowing loan growth was modified to leveling and providing additional funds in our newer markets and to meet the needs of existing customers. Loan balances reversed the decreasing position of 2024 and grew in average balances 2.9% or $75.2 million. Excess cash balances funded a portion of this growth, decreasing $70.1 million. The Bank obtained
additional sources for funding and the interest rate earned on cash balances was no longer as favorable in the declining rate environment of 2025 which fostered maintaining a lower cash holding position.
In addition to cash and cash equivalent balances of $97.7 million, the Bank has access to $213 million in unsecured Federal Funds lines for overnight funds from our correspondent banking relationships, of which a $50 million line of credit was added in the fourth quarter. The Company also has a $15 million line of credit. Federal Home Loan Bank borrowings decreased $18.7 million during the year and the Bank currently has $227.4 million borrowed at various terms and rates as of December 31, 2025. A cash management advance access of $167.9 million also exists with the FHLB. The Bank has also established four market sources for brokered CDs which were utilized in 2024 to fund similar termed fixed rate loans to maintain margin for profitability for a total of $26.9 million and verify accessibility of funds. Lastly, the Bank’s secured borrowing capacity limits at the FHLB would have allowed draws based on current collateral pledging of $103.4 million in availability to borrow; however, any amount borrowed over $10.3 million may require additional stock purchases. Pledged collateral included eligible 1-4 family, home equity, and specific commercial and multi-family real estate loans.
The investment portfolio of the Bank has $266.5 million of pledged securities with $149.2 million available to use as collateral for future pledged borrowings. Currently, securities may be pledged to offset public deposits, our repurchase agreement portfolio or at the Federal Discount Window. Purchases of $49.7 million in the portfolio during 2025 were mainly to increase our holdings in Community Reinvestment Act (CRA) qualifying securities, liquidity, and contingency planning and as a means of balance sheet gap management.
The Company has the tools to monitor liquidity and can manage the risks to ensure adequate liquidity is maintained. With multiple funding sources and daily access, the Company put the money to work with earning assets at 95% of total assets for 2025.
Asset/Liability Management
The primary functions of asset/liability management are to assure adequate liquidity and maintain an appropriate balance between interest earning assets and interest-bearing liabilities. It involves the management of the balance sheet mix, maturities, re-pricing characteristics and pricing components to provide an adequate and stable net interest margin with an acceptable level of risk. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates.
Changes in net income, other than those related to volume arise when interest rates on assets re-price in a time frame or interest rate environment that is different from that of the re-pricing period for liabilities. Changes in net interest income also arise from changes in the mix of interest-earning assets and interest-bearing liabilities.
Historically, the Bank has maintained liquidity through cash flows generated in the normal course of business, loan repayments, maturing earning assets, the acquisition of new deposits, and borrowings. The Bank's asset and liability management program is designed to maximize net interest income over the long term while taking into consideration both credit and interest rate risk. Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. Overnight federal funds on which rates change daily and loans that are tied to the market rate differ considerably from long-term investment securities and fixed rate loans. Similarly, time deposits over $100,000 and money market accounts are much more interest rate sensitive than passbook savings accounts. The Bank utilizes shock analysis to examine the amount of exposure an immediate rate change of 100, 200, 300, 400 and 500 basis points in both increasing and decreasing directions would have on the financials. The Bank may also utilize shock analysis to examine predicted federal fund rate changes to expedite our ability to respond more quickly with our adjustments. Acceptable ranges of earnings and equity at risk are established and decisions are made to maintain those levels based on the shock results.
Throughout 2025, the Bank held bi-weekly "sub-ALCO" meetings to discuss various topics and rate scenarios.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and service.
Contractual Obligations
Contractual obligations of the Company totaled $909.5 million as of December 31, 2025. Time deposits, contractual agreements for certificates of deposits held by its customers, were $597.8 million. Securities sold under agreement to repurchase were $22.7 million. Short term debt consisted of $15.0 million of federal funds purchased at December 31, 2025. Long term debt was comprised of borrowings with the Federal Home Loan Bank of $227.4 million and subordinated notes of $35.0 million. Short term and long term debt is further defined in Note 10 of the consolidated financial statements.
Capital Resources
A strong capital base is essential for the Company and the Bank. As of December 31, 2025, the Company had capital of $370.9 million, up $35.7 million, over December 31, 2024’s balance. Accumulated other comprehensive income (AOCI) improved $13.3 million to a loss position of $11.9 million at December 31, 2025 compared to a loss position of $25.3 million at December 31, 2024 which was the result of interest rate movements and the available-for-sale securities portfolio. Due to the commitment to provide a steady and ever-increasing dividend and improved profitability of the Company in 2025 over 2024, two dividend declaration increases occurred during 2025, one in the 3 rd quarter and one in the 4 th quarter. Dividends declared in 2025 totaled $0.90 per share at a cost of over $12.3 million. Dividend payments received by our shareholders in 2024 were $0.89125 at a cost of $12.2 million. These costs encompass the additional expense associated with our restricted stock award program.
The Company approved a Stock Repurchase Plan on January 28, 2025, by which 650,000 shares could be purchased in the open market, or in privately negotiated transactions, of our outstanding stock through December 31, 2025. No shares were purchased in 2025. A similar resolution was passed on January 27, 2026, authorizing share purchases of 650,000 under the same conditions and valid through December 31, 2026. On December 31, 2025, the Company held 816,351 shares in treasury stock compared to 864,889 shares as of the same date in 2024. The reduction in treasury stock for 2025 is attributed to the issuance of 60,673 shares of restricted stock awards and 8,200 shares as a portion of the Directors' retainer which was offset by forfeitures of restricted stock awards of 6,707 shares and 13,628 shares returned to account for tax payable on vested stock awards.
The Company switched stock transfer agents on May 29, 2025, from Computershare to Broadridge Corporate Issuer Solutions, LLC.
Shareholders approved a 10-year long term stock incentive plan at our 2025 annual meeting under which Company stock may be used for employee stock awards and director compensation. This plan replaced the previous plan which had expired almost concurrently. Stock awarded to employees is generally a 3-year cliff vesting restricted stock offering. Shares totaling 60,673 were awarded to Senior Management on March 1, 2025, and other officers of the Company were awarded restricted stock shares on August 26, 2025, totaling 131 employees receiving restricted shares at those times. The Company may also use stock as a tool for new hires. During 2024, the Company awarded 60,169 shares to 111 employees with forfeits of 5,811. Shares forfeited during 2025 amounted to 6,707. During the vesting period of the aforementioned restricted stock awards, employees receive dividends or dividend equivalent compensation on the shares. The vesting period may be accelerated by approval of the Board or the Compensation Committee of the Board for terms stated in the agreement, generally for retirement of employees. Shares from restricted stock awards may also be returned to the Company to cover the tax liability of vested shares. 13,628 shares were returned to cover employees’ tax liability in 2025 compared to 16,891 shares in 2024. As of December 31, 2025,164,667 shares are being held in restricted stock awards to employees as compared to 158,183 the year prior. For more detailed information, please see Note 12: Employee Benefit Plans in the consolidated financial statements. 7,912 shares were given as part of our Director compensation on June 5, 2025, compared to 8,874 on June 6, 2024. Prorated shares of 288 and 54 were awarded to new Directors in 2025 and 2024, respectively. The number of shares given is impacted by the share price on day of grant.
The Company’s strong capital base is supported by our regulatory capital ratios where a well-capitalized status is maintained by both the Company and the Bank. On December 31, 2025, the Bank had total risk-based capital ratio of 12.53% compared to 12.40% same date 2024. Core capital to risk-based assets ratio of 11.51% on December 31, 2025, compares to 11.40% on December 31, 2024. Both ratios are above regulatory guidelines. The Bank’s leverage ratio is 9.47% at yearend 2025 compared to 8.81% for yearend 2024 and is in excess of regulatory guidelines. Under Basel III, the common equity tier 1 capital to risk weighted assets ratio is well above the required 4.5% and 6.5% well capitalized levels with the Bank at 11.51%. Adding on the required conservation buffer of 2.5% to the previous regulatory ratios and the Bank remains well above the requirements. The Bank’s capital conservation buffer was 4.53% on December 31, 2025, and was 4.40% on December 31, 2024. For further discussion and analysis of regulatory capital requirements, refer to Note 16 of the Consolidated Audited Financial Statements.
The Company’s subsidiary, the Bank, is restricted by regulations from making dividend distributions in excess of certain prescribed amounts. Upon prior regulatory approval, the Bank may be allowed to pay above the prescribed amounts. No such request was needed in 2024 or 2025.
ITEM 7a. QUANTITATIVE AND QUALITAT IVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk is the exposure to loss resulting from changes in interest rates and equity prices. The primary market risk to which we are subject is interest rate risk. Much of our interest rate risk arises from the instruments, positions and transactions entered 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 reprice 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 effectively managed. If our asset/liabilities management strategies are unsuccessful, our profitability may be adversely affected. The Company employs a sensitivity analysis utilizing interest rate shocks to help in this analysis. The shocks presented below assume instantaneous rates shocks on a static balance sheet as of December 31, 2025.
At December 31, 2025, the shocks presented below assume an immediate change of rate in the percentages and directions shown:
Interest Rate Shock on
Interest Rate Shock on
Net Interest Margin
Net Interest Income
Net Interest
% Change
Rate
Rate
Cumulative
% Change
Margin (Ratio)
to Flat Rate
Direction
changes by
Total ($000)
to Flat Rate
Rising
Rising
Rising
Flat
Falling
Falling
Falling
The Bank’s balance sheet is slightly asset-sensitive after coming through 175 basis points of Fed rate cuts from September 2024 through December 2025. The net interest margin represents the forecasted twelve-month margin. The Company also reviews shocks with a 5.00% fluctuation and over a 24-month time frame, as well as alternate yield curve scenarios. The goal of the Company is to gather more core deposits, such as checking and savings accounts. Checking accounts are preferable for the lower cost of funds and the opportunity to garner noninterest revenue from services provided. Savings and money market accounts are beneficial due to the variability of the interest in both rate and immediate option to reprice. Many of the CD renewals in 2025 went into shorter terms which are beneficial to the Bank in a falling rate environment.
The Bank was aggressive in dropping its non-maturity deposit rates while the Fed was cutting their rate over the past 15 months. We will have less of an opportunity to be as aggressive with future Fed rate cuts. The Bank’s monthly cost of funds dropped from 2.89% at December 31, 2024 to 2.58% at December 31, 2025. Older loans and investments will continue to reprice higher, in aggregate, in the next twelve months based on current rates. The Bank continues to review and adjust its assumptions concerning decay rates, deposit betas, key rate ties, and loan prepayment speeds. Rates are modified as index rates change. Directional changes shown above are within the Bank's risk tolerance. 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 continue its trajectory of improved pricing discipline for its new loans and deposits.
ITEM 8. FINANCI AL STATEMENTS
Index To Consolidated Financial Statements
Report of Independent Registered Public Accounting Firms.
Consolidated Balance Sheets at December 31, 2025 and 2024.
Consolidated Statements of Income for the years ended December 31, 2025, 2024 and 2023.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2025, 2024 and 2023.
Consolidated Statements of Changes to Shareholders’ Equity for the years ended December 31, 2025, 2024 and 2023.
Consolidated Statements of Cash Flows for the years ended December 31, 2025, 2024 and 2023.
Notes to Consolidated Financial Statements.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Farmers & Merchants Bancorp, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of Farmers & Merchants Bancorp, Inc (the “Company”) as of December 31, 2025, the related consolidated statements of income, comprehensive income, changes to stockholders' equity, and cash flows for the year ended December 31, 2025, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2025, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO framework”).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2025, and the results of its operations and its cash flows for the ended December 31, 2025, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2025, based on criteria established in the COSO framework.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report Regarding Internal Control and Compliance with Designated Laws and Regulations. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relate.
Allowance for Credit Losses on Collectively Evaluated Loans – Refer to Notes 1 and 4 to the consolidated financial statements
Critical Audit Matters Description
Management’s estimate of the allowance for credit losses (ACL) at December 31, 2025, includes a reserve on collectively evaluated loans. In the current year, significant assumptions in management’s estimate of the reserve on collectively evaluated loans include (i) the determination of its peer group, (ii) the determination of the estimated remaining life of each portfolio segment, and (iii) qualitative factor adjustments. In evaluating whether qualitative factor adjustments are necessary, management considers internal and external qualitative and credit market risk factors to reflect credit risks not fully captured by historical loss experience or forecast economic conditions.
Significant judgment was required by management in the selection and application of these subjective assumptions. Accordingly, performing audit procedures to evaluate the Company’s estimated ACL involved a high degree of auditor judgment and required significant effort, including the involvement of professionals with specialized skill and knowledge.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the Company’s estimate of the ACL on collectively evaluated loans included, but were not limited to, the following:
Testing the design and operating effectiveness of management’s controls over key assumptions and judgments.
Testing the completeness and accuracy of data utilized by management.
Evaluating the relevance and reliability of information used by management in the development of the estimate.
Evaluating the reasonableness of significant assumptions used in management’s estimate through a combination of evaluating the reasonableness of certain assumptions and developing an independent range of reasonable outcomes for the collectively evaluated component of the ACL for comparison to management’s estimate.
/s/ Plante & Moran, PLLC
Columbus, Ohio
February 27, 2026
We have served as the Company’s auditor since 2025.
Report of Independent Registered Public Accounting Firm
Shareholders, Board of Directors, and Audit Committee
Farmers & Merchants Bancorp, Inc.
Archbold, Ohio
Opinion on the Consolidated Financial Statements
We have audited, before the effects of the retrospective adjustments to the income tax disclosures for the adoption of Accounting Standards Update 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), discussed in Notes 1 and 11 to the consolidated financial statements, the accompanying consolidated balance sheet of Farmers and Merchants Bancorp, Inc. (the “Company”) as of December 31, 2024, the related consolidated statements of income, comprehensive income, changes to stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2024, and the related notes (collectively referred to as the “financial statements”). In our opinion, before the effects of the retrospective adjustments to the Company’s income tax disclosures for the adoption of ASU 2023-09 discussed in Notes 1 and 11, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2024, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to audit, review, or apply any procedures to the retrospective adjustments to the Company’s income tax disclosures discussed in Notes 1 and 11, and accordingly, we do not express an opinion or any other form of assurance about whether such retrospective adjustments are appropriate and have been properly applied. Those adjustments were audited by Plante & Moran, PLLC.
Change in Accounting Principle
As discussed in Note 1 and Note 4 to the financial statements, in 2023, the Company changed its method of accounting for credit losses on financial instruments due to the adoption of Accounting Standards Codification Topic 326: Financial Instruments – Credit Losses .
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We served as the Company’s auditor from 2014 to 2025.
/s/ Forvis Mazars, LLP
Fort Wayne, Indiana
February 26, 2025
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Consolidated B alance Sheets
December 31, 2025 and 2024
(000’s Omitted, Except Share Data)
Assets
Assets
Cash and due from banks
Federal funds sold
Total cash and cash equivalents
Interest-bearing time deposits
Securities - available-for-sale
Other securities, at cost
Loans held for sale
Loans, net of allowance for credit losses of $ 27,688 and $ 25,826
Premises and equipment
Goodwill
Loan servicing rights
Bank owned life insurance
Other assets
Total Assets
Liabilities and Stockholders' Equity
Liabilities
Deposits
Noninterest-bearing
Interest-bearing
NOW accounts
Savings
Time
Total deposits
Federal funds purchased and securities sold under agreement to repurchase
Federal Home Loan Bank (FHLB) advances
Subordinated notes, net of unamortized issuance costs
Dividend payable
Accrued expenses and other liabilities
Total liabilities
Commitments and Contingencies
Stockholders' Equity
Common stock - No par value authorized 40,000,000 shares 12/31/25 and
20,000,000 shares 12/31/24; issued 14,564,425 shares 12/31/25 and
12/31/24; outstanding 13,748,074 shares 12/31/25 and 13,699,536
shares 12/31/24
Treasury stock - 816,351 shares 12/31/25 and 864,889 shares 12/31/24
Retained earnings
Accumulated other comprehensive loss
Total stockholders' equity
Total Liabilities and Stockholders' Equity
See Notes to Consolidated Financial Statements
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2025, 2024 and 2023
(000’s Omitted, Except Per Share Data)
Interest Income
Loans, including fees
Debt securities:
U.S. Treasury and government agencies
Municipalities
Dividends
Federal funds sold
Other
Total interest income
Interest Expense
Deposits
Federal funds purchased and securities sold under agreements to
repurchase
Borrowed funds
Subordinated notes
Total interest expense
Net Interest Income - Before Provision for Credit Losses
Provision for Credit Losses - Loans
Provision for (Recovery of) Credit Losses - Off Balance Sheet
Credit Exposures
Net Interest Income - After Provision for Credit Losses
Noninterest Income
Customer service fees
Other service charges and fees
Interchange income
Loan servicing income
Net gain on sale of loans
Increase in cash surrender value of bank owned
life insurance
Net gain (loss) on sale of other assets owned
Net loss on sale of available-for-sale securities
Total noninterest income
Noninterest Expense
Salaries and wages
Employee benefits
Net occupancy expense
Furniture and equipment
Data processing
Franchise taxes
ATM expense
Advertising
FDIC assessment
Servicing rights amortization - net
Loan expense
Consulting fees
Professional fees
Intangible asset amortization
Other general and administrative
Total noninterest expense
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income (continued)
Years Ended December 31, 2025, 2024 and 2023
(000’s Omitted, Except Per Share Data)
Income Before Income Taxes
Income Taxes
Net Income
Basic Earnings Per Share
Diluted Earnings Per Share
Dividends Declared
See Notes to Consolidated Financial Statements
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2025, 2024 and 2023
(000’s Omitted)
Net Income
Other Comprehensive Income (Net of Tax):
Net unrealized gain on available-for-sale securities
Reclassification adjustment for realized loss on sale of
available-for-sale securities
Net unrealized gain on available-for-sale securities
Tax expense
Other comprehensive income
Comprehensive Income
See Notes to Consolidated Financial Statements
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes to Stockholders’ Equity
For the Years Ended December 31, 2025, 2024 and 2023
(000’s Omitted, Except Per Share Data)
Accumulated
Shares of
Other
Total
Common
Common
Treasury
Retained
Comprehensive
Stockholders'
Stock
Stock
Stock
Earnings
Loss
Equity
Balance - January 1, 2023
Cumulative change in accounting principle
Balance - January 1, 2023 (as adjusted for change in accounting principle)
Net income
Other comprehensive income
Purchase of treasury stock
Issuance of 64,425 shares of restricted stock
(Net of forfeitures - 6,350 )
Stock-based compensation expense
Director stock awards
Cash dividends declared - $ 0.85 per share
Balance - December 31, 2023
Net income
Other comprehensive income
Purchase of treasury stock
Issuance of 60,169 shares of restricted stock
(Net of forfeitures - 5,811 )
Stock-based compensation expense
Director stock awards
Cash dividends declared - $ 0.8825 per share
Balance - December 31, 2024
Net income
Other comprehensive income
Purchase of treasury stock
Issuance of 60,673 shares of restricted stock
(Net of forfeitures - 6,707 )
Stock-based compensation expense
Director stock awards
Cash dividends declared - $ 0.90 per share
Balance - December 31, 2025
See Notes to Consolidated Financial Statements
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2025, 2024 and 2023
(000’s Omitted)
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash from operating activities:
Depreciation
Amortization of premiums on available-for-sale securities, net
Capitalized additions to servicing rights
Servicing rights amortization and impairment
Amortization of core deposit intangible
Amortization of customer list intangible
Net accretion of fair value adjustments
Amortization of subordinated note issuance costs
Stock-based compensation expense
Director stock awards
Deferred income taxes
Provision for credit losses - loans
Provision for (recovery of) credit losses - off balance sheet credit exposures
Gain on sale of loans held for sale
Originations of loans held for sale
Proceeds from sale of loans held for sale
Gain on derivatives
Loss (gain) on sale of other assets owned
Loss on sales of available-for-sale securities
Increase in cash surrender value of bank owned life insurance
Change in other assets and other liabilities, net
Net cash provided by operating activities
Cash Flows from Investing Activities
Activity in available-for-sale securities:
Maturities, prepayments and calls
Sales
Purchases
Activity in other securities, at cost:
Purchases
Purchases of FHLB stock
Proceeds from redemption of FHLB stock
Purchase of bank owned life insurance
Proceeds from bank owned life insurance
Change in interest-bearing time deposits
Proceeds from sale of other assets owned
Additions to premises and equipment
Net (increase) decrease on loan originations and principal collections
Net cash used in investing activities
Cash Flows from Financing Activities
Net change in deposits
Net change in federal funds purchased and securities sold under agreements
to repurchase
Proceeds of FHLB advances
Repayment of FHLB advances
Repayment of other borrowings
Purchase of treasury stock
Cash dividends paid on common stock
Net cash provided by financing activities
Net (Decrease) Increase in Cash and Cash Equivalents
Cash and Cash Equivalents - Beginning of Year
Cash and Cash Equivalents - End of Year
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Years Ended December 31, 2025, 2024 and 2023
(000’s Omitted)
Supplemental Information
Supplemental cash flow information:
Interest paid
Federal income taxes paid
State income taxes paid
Supplemental noncash disclosures:
Transfer of loans to other real estate owned
Transfer of loans from loans held for sale
Cash dividends declared not paid
See Notes to Consolidated Financial Statements
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
Note 1 - Summary of Significant Accounting Policies
Nature of Operations
The Farmers & Merchants Bancorp, Inc. (the Company) through its bank subsidiary, The Farmers & Merchants State Bank (the Bank) provides a variety of financial services to individuals and small businesses through its offices in Northwest Ohio, Northeast Indiana and Southeast Michigan.
Consolidation Policy
The consolidated financial statements include the accounts of Farmers & Merchants Bancorp, Inc. and its wholly-owned subsidiaries, The Farmers & Merchants State Bank (the Bank), a commercial banking institution and Farmers & Merchants Risk Management, Inc. (the Captive), a Captive insurance company which was dissolved in December 2023. The Bank includes F&M Insurance Agency, LLC, a subsidiary offering insurance products which was formed in November 2023. All significant inter-company balances and transactions have been eliminated.
Reclassification
Certain 2024 and 2023 amounts within the loans disclosure (Note 4) and the loan section of Management's Discussion and Analysis have been reclassified to conform with current year presentation to provide additional information to the reader. The reclassifications had no effect on income.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses. Actual results could differ from those estimates.
The determination of the adequacy of the allowance for credit losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral.
The Bank’s loans are generally secured by specific items of collateral including real property, consumer assets, and business assets. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on local economic conditions in the communities we serve.
While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. This includes cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds sold are outstanding for one day periods.
Restrictions on Cash and Amounts Due from Banks
The Federal Reserve Bank did not require the Company to maintain minimum balances of cash on hand during the past three years. The Company and its subsidiaries maintain cash balances with high quality financial institutions. At times such balances may be in excess of the federally insured limits.
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
Securities
Debt securities are classified as available-for-sale. Securities available-for-sale are carried at fair value with unrealized gains and losses reported in other comprehensive income (loss). Net realized gains and losses on securities available for sale are included in noninterest income and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income (loss). Gains and losses on sales of securities are determined on the specific identification method.
Investment securities will at times depreciate to an unrealized loss position. Declines in the fair value of securities below their cost that are deemed to result from a deterioration in the credit quality of the issuer are recorded in the Company's consolidated statement of income as a component of the provision for credit loss. In estimating whether the unrealized loss requires an allowance for credit losses, management considers whether (1) the fair value of the security has significantly declined from book value, (2) a downgrade has occurred that lowered the credit rating, (3) dividends have been reduced or eliminated or scheduled interest payments have not been made and (4) 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. This situation would require an immediate write down to fair value. With the exception of the fourth factor, no one item by itself will necessarily signal that an allowance for credit losses on investment securities should be established,
If the unrealized loss is determined to be the result of a credit quality concerns, the present value of the cash flows expected to be collected is compared to the amortized cost basis. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Adjustments to the allowance are recorded in the Company's consolidated statement of income as a component of the provision for credit losses. The Company did not record an allowance for credit losses on its investment securities available for sale as the unrealized losses were attributed to changes in interest rates, not credit quality. Accrued interest receivable on available-for-sale debt securities totaled $ 1.8 million and $ 1.9 million at December 31, 2025 and 2024, respectively, and is included within other assets on the consolidated balance sheets. These amounts are excluded from the estimate of expected credit losses.
Other Securities
Other securities consist of stock in the Federal Home Loan Banks of Cincinnati and Indianapolis (the “FHLBs”), which is held to enable the Bank to conduct business with the entities. The FHLBs sell and purchase their stock at par. The FHLBs stock is carried at cost and held as collateral security for all indebtedness of the Bank to the Federal Home Loan Bank. The FHLBs stock is evaluated for impairment as conditions warrant.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs. Accrued interest receivable totaled $ 11.7 and $ 10.7 million at December 31, 2025 and December 31, 2024, respectively, and was reported in Other Assets on the Company’s consolidated balance sheets and is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipated repayments.
Interest income on mortgage and commercial loans is discontinued and placed on nonaccrual status at the time the loan is 90 days delinquent unless the loan is well secured and in process of collection. All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method, interest income is recorded when the payment is received in cash. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
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. Con sumer loans are charged off at 90 days delinquent, unless the loan is secured and repossession of the collateral is assured and in process; then in lieu of charging off the entire loan balance, the loan may be written down to the discounted value of the collateral. Mortgage loans are charged off or charged down at 180 days delinquent or if there is a deficiency balance upon sale of collateral. Partial charge offs can occur upon recognition of lack of collateral value, but no later than 180 days past due. Commercial loans are charged off or charged down at 120 days delinquent, unless an established and approved work-out plan is agreed upon or the litigation of the loan will likely result in recovery of the loan balance. In the event of a bankruptcy filing by a borrower, unsecured debt is charged off upon notification and a partial charge off is made for under-secured portions of debt.
Loan origination and commitment fees and certain direct loan origination costs are deferred and amortized as a net adjustment to the related loan’s yield. The Bank is generally amortizing these costs over the contractual life of such loans.
Allowance for Credit Losses
The Allowance for Credit Losses (ACL) represents management’s estimate of expected credit losses inherent in the Bank’s loan portfolio and unfunded loan commitments at the report date. The ACL methodology is regularly reviewed for its appropriateness and is approved annually by the Board of Directors or a sub-committee of the Board of Directors, such as the Enterprise Risk Management Committee. This written methodology is consistent with Generally Accepted Accounting Principles which provides for a consistently applied analysis.
The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off. The ACL reflects the Company’s estimated credit losses over the life of the loan. Management assesses changes in prepayment assumptions, interest rates, collateral values, portfolio composition, trends in non-performing loans, and other economic factors. In addition to an extensive internal loan monitoring process, the Company also aims to have an annual external, independent loan review of approximately 35 % of its commercial and agricultural loan portfolio segment. Management in turn assesses the results from the reviews to make changes in internal risk ratings of loans and the related ACL.
The Bank’s methodology provides an estimate of the expected credit losses either by calculating a reserve per credit or by applying our methodology to groupings based on similar risk characteristics. The loan portfolio was grouped based on loans of similar type, including acquired loans. The loan groupings for the ACL calculation consist of Commercial Real Estate, Commercial & Industrial, Agricultural Real Estate, Agricultural, Consumer Real Estate, and Consumer. All groups use the average charge-off method for calculating the ACL. This incorporates a historical loss period from March 2000, since Call Report data became more granular regarding loan groupings, and includes several economic cycles. As a percentage, the reserves are the highest against construction and development loans, while farmland loans have the lowest overall reserve due to having such low loss rates.
The Company is utilizing peer data from a peer group of banks in the region of Ohio, Michigan and Indiana with asset sizes less than $ 5 billion as of December 31, 2025. The reserves are calculated at the loan level and based on the note characteristics, essentially balances times loss rate + qualitative factors + forward look, with the forward looking forecast eliminated after 12 months. In order to provide a reasonable and supportable forward looking forecast, a regression analysis of the Bank’s historical loss rates against the Federal Open Market Committee (FOMC) quarterly economic projections for National Unemployment is completed. Annual projections are broken down using a straight-line approach for quarterly changes.
In addition to this quantitative analysis, management also utilizes qualitative analysis each quarter as a component of the ACL. The qualitative factors include nine categories: ability of staff, changes in collateral values, changes in loan concentration levels, economic conditions, external factors such as regulatory, level and trends in non-accrual or adversely classified loans, loan review results, nature and volume of the portfolio and loan terms, and changes in lending policies and procedures. The methodology allows for additional qualitative factors as other risks emerge. Items within these categories are ranked as baseline, low, medium, or high levels of risk, and the related risk level per
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
categories dictates the level of qualitative factor that is used depending on the standard deviation level from historical loss.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation; reserves for expected credit losses for collateral-dependent loans are based on the expected shortfall of the loan based on the discounted collateral value. This specific reserve portion of the ACL was $ 145 thousand at December 31, 2025 and $ 52 thousand at December 31, 2024. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. 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.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a modification to a borrower experiencing financial difficulty will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The loan categories of off balance sheet exposures are the same as the loan categories for the ACL. The funding assumptions are updated each quarter based on expected utilization percentages.
For more information regarding the actual composition and classification of loans involved in the establishment of the allowance for credit loss, please see Note 4 provided here with the notes to consolidated financial statements.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized in a valuation allowance by charges to income.
Derivative Financial Instruments
The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. The Company enters into interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position.
Designating an interest rate swap as an accounting hedge allows the Company to recognize gains and losses, less any ineffectiveness, in the Company's consolidated statements of income within the same period that the hedged item affects earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related interest rate swaps. The fair value of interest rate swaps with a positive fair value are reported in other assets in the Company's consolidated balance sheets while interest rate swaps with a negative fair value are reported in accrued expenses and other liabilities in the Company's consolidated balance sheets.
Net cash settlements on derivative financial instruments that qualify as hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Cash flows on hedges are classified in the Company's consolidated statements of cash flows in the same line as the cash flows of the item being hedged.
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
S ervicing Assets
Servicing assets are recognized as separate assets when rights are acquired through purchase or sale of financial assets. These rights are composed of servicing rights for 1-4 family real estate loans and agricultural real estate loans. The Bank’s servicing rights relating to fixed rate 1-4 family real estate loans and agricultural real estate loans that it has sold without recourse but services for others for a fee represent an asset on the Bank’s balance sheet.
Capitalized servicing rights are amortized into noninterest expense in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to capitalized servicing rights. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. The 1-4 family real estate and agricultural real estate valuations are similar in concept; however, utilize different strata, prepayment speeds and other assumptions in order to account for the differences in behavior between agricultural real estate loans and 1-4 family real estate loans. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. Fees received for servicing loans owned by investors are based on a percentage of the outstanding monthly principal balance of such loans and are included in operating income as loan payments are received. Costs of servicing loans are charged to expense as incurred.
Goodwill and Other Intangible Assets
Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed for impairment at least annually. If possible impairment is likely, the Bank will utilize the assistance of an independent third party for an appraisal and any such impairment is recognized in the period identified. The goodwill impairment analysis consists of a first step goodwill impairment test which is used to identify potential impairment by comparing the fair value of the relevant reporting entity with its carrying value, including goodwill. The analysis is performed under guidance of FASB ASC 350. As of December 31, 2025, the Bank concluded it is unlikely impairment of goodwill has occurred from the goodwill established from the Bank’s prior acquisitions. Since the establishment of goodwill, there has been no impairment recognized.
Other intangible assets consist of core deposit and customer list intangible assets arising from business acquisitions. They are initially measured at fair value and then are amortized on a straight-line method over their estimated useful lives and evaluated for impairment. These assets are included in other assets on the Company's consolidated balance sheets.
Qualified Affordable Housing Project Investments
The Company invests in certain qualified affordable housing projects. The Company has elected to account for its investment in qualified affordable housing projects using the proportional amortization method described in FASB ASU 2014-01, "Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Low-Income housing Tax Credit Projects (A Consensus of the FASB Emerging Issues Task Force)", which was updated in March 2023 and released as FASB ASU 2023-02. Under the proportional amortization method, an investor amortizes the initial cost of the investment to income tax expense in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. See Note 11 of the Notes to the Consolidated Financial Statements.
Off Balance Sheet Instruments
In the ordinary course of business, the Bank has entered into commitments to extend credit, including commitments, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
Other Real Estate Owned
Other real estate held for sale is carried at the lower of fair value of the real estate minus estimated costs to sell the asset, or the cost of the assets. Costs of holding other 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 an allowance is established by a charge to noninterest expense if the carrying value exceeds the fair value minus the estimated costs to sell. The net loss from operations of other real estate held for sale is reported in noninterest expense. The Bank held no other real estate at December 31, 2025 or December 31, 2024.
Premises and Equipment
Land is carried at cost. Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is based on the estimated useful lives of the various properties and is computed using straight-line and accelerated methods. Costs for maintenance and repairs are charged to operations as incurred. Gains and losses on dispositions are included in current operations.
Bank Owned Life Insurance
Bank owned life insurance policies are carried at their cash surrender value. The Bank recognizes tax-free income from the periodic increases in the cash surrender value of these policies and from death benefits.
Revenue Recognition
Accounting Standards Codification 606, “Revenue from Contracts with Customers" (ASC 606) provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenue generated from financial instruments, including loans and investment securities, are not included within the scope of ASC 606. Revenue-generating activities that are within the scope of ASC 606 that are presented as noninterest income in the Company’s consolidated statements of income include:
Customer service fees – these include miscellaneous service fees and transaction-based fees charged for certain services, such as credit card. Revenue is recognized when the performance obligation is completed, which is generally after a transaction is completed or monthly for account maintenance services.
Other service charges and fees – these include service fees charged for deposit account maintenance and activity along with transaction-based fees charged for certain services, such as overdraft activities, returned check charges and wire transfers. Revenue is recognized when the performance obligation is completed, which is generally after a transaction is completed or monthly for account maintenance services.
Interchange income – transaction-based fees charged for debit card. Revenue is recognized when the performance obligation is completed, which is generally after a transaction is completed or monthly for account maintenance services.
Income Tax
The Company’s income tax expense consists of the following components for federal and state: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in tax expense. Based on management’s analysis, the Company did not have any uncertain tax positions as of December 31, 2025 and 2024. With a few exceptions, the Company is no longer subject to U.S. Federal, state or local examinations by tax authorities for years before 2022.
Earnings Per Share
Basic earnings per share is 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 stock-based compensation plans.
Stock-Based Compensation
The fair value of restricted common stock is the fair market value on the date of grant. The fair value of restricted stock is amortized as compensation expense on a straight-line basis over the vesting period of the grants. Compensation expense recognized is included in salaries and wages in the consolidated statements of income.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation – put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Treasury Stock
Common stock shares repurchased are recorded at market value on date of purchase. Restricted shares when awarded are removed from treasury stock using the weighted average method.
Other Comprehensive Income (Loss)
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of other comprehensive income (loss).
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
The components of other comprehensive income and related tax expense are as follows:
(In Thousands)
Net unrealized gain on available-for-sale securities
Reclassification adjustment for loss on sale of
available-for-sale securities
Net unrealized gain on available-for-sale securities
Tax expense
Other comprehensive income
Advertising Expense
Advertising costs are generally expensed as incurred and are recorded as advertising, a component of noninterest expense.
Recent Accounting Pronouncements
In October 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-06 "Disclosure Improvements - Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative." The amendments in this Update are the result of the FASB’s decision to incorporate into the Accounting Standards Codification certain disclosure requirements, referred by the SEC, that require incremental information to US GAAP. Topics in the ASU that have applicability to the Company are as follows:
* Statement of Cash Flows - requires an accounting policy disclosure in annual periods of where cash flows associated with derivative instruments and their related gains and losses are presented in the statement of cash flows.
* Debt - requires disclosure of amounts and terms of unused lines of credit and unfunded commitments and the weighted-average interest rate on outstanding short-term borrowings.
* Derivatives and Hedging - adds cross-reference to disclosure requirements related to where cash flows associated with derivative instruments and their related gains and losses are presented in the statement of cash flows.
The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. If by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed from the Accounting Standards Codification and will not become effective for any entity. Management is reviewing the provisions of ASU 2023-06, and does not expect the adoption of the ASU to have a material effect on the Company’s financial statements.
In December 2023, the FASB issued ASU 2023-09 "Income Taxes (Topic 740) - Improvements to Income Tax Disclosures." The amendments in this Update require that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income [or loss] by the applicable statutory income tax rate). The amendments also require disclosure of the amount of income taxes paid (net of refunds received) disaggregated by federal (national) and state jurisdictions. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments in this Update should be applied on a prospective basis and retrospective application is permitted. Management adopted the Update effective December 31, 2025 , as required, without material effect on the Company’s financial position or results of operations.
In November 2024, the FASB issued ASU 2024-03 Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40) . The amendments in this Update require disclosure, in the notes to financial statements, of specified information about certain costs and expenses. The amendments require that at each
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
interim and annual reporting period (1) the Company disclose the amounts of (a) employee compensation, (b) depreciation, and (c) intangible asset amortization included in each relevant expense caption. A relevant expense caption is an expense caption presented on the face of the income statement within continuing operations that contains any of the expense categories listed. (2) Include certain amounts that are already required to be disclosed under current generally accepted accounting principles (GAAP) in the same disclosure as the other disaggregation requirements. (3) Disclose a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively. (4) Disclose the total amount of selling expenses and, in annual reporting periods, the Company’s definition of selling expenses. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted. The amendments in this Update should be applied either (1) prospectively to financial statements issued for reporting periods after the effective date of this Update or (2) retrospectively to any or all prior periods presented in the financial statements. Management is currently evaluating the Update and does not expect adoption of the Update to have a material effect on the Company’s financial position or results of operations.
In November 2025, the FASB issued ASU 2025-08 Financial Instruments—Credit Losses (Topic 326) — Purchased Loans . The amendments in this Update expand the population of acquired financial assets subject to the gross-up approach in Topic 326. In accordance with the amendments in this Update, loans (excluding credit cards) acquired without credit deterioration and deemed “seasoned” are purchased seasoned loans and accounted for using the gross-up approach at acquisition. All non- PCD (purchased financial asset with credit deterioration) loans (excluding credit cards) that are acquired in a business combination are deemed seasoned. Other non-PCD loans (excluding credit cards) are seasoned if they were purchased at least 90 days after origination and the acquirer was not involved in the origination of the loans. The amendments in this Update are effective for all entities for annual reporting periods beginning after December 15, 2026, and interim reporting periods within those annual reporting periods. The amendments in this Update should be applied prospectively to loans that are acquired on or after the initial application date. Early adoption is permitted in an interim or annual reporting period in which financial statements have not yet been issued or made available for issuance. Management is currently evaluating the Update and does not expect adoption of the Update to have a material effect on the Company’s financial position or results of operations.
In November 2025, the FASB issued ASU 2025-09 Derivatives and Hedging (Topic 815) — Hedge Accounting Improvements. The amendments in this Update are intended to more closely align hedge accounting with the economics of an entity’s risk management activities. The amendments included in five issues addressed in this Update are intended to better reflect those strategies in financial reporting by enabling entities to achieve and maintain hedge accounting for highly effective economic hedges of forecasted transactions. The issues addressed in the ASU include:
(1) expanding the hedged risks permitted to be aggregated in a group of individual forecasted transactions in a cash flow hedge by changing the requirement to designate a group of individual forecasted transactions from having a shared risk exposure to having a similar risk exposure;
(2) providing a model to facilitate the application of cash flow hedge accounting to forecasted interest payments on variable-rate debt instruments with contractual terms that permit the borrower to change the interest rate index and interest rate tenor (that is, reset frequency) upon which interest is accrued (commonly referred to as “choose-your-rate” debt instruments);
(3) expanding hedge accounting for forecasted purchases and sales of nonfinancial assets;
(4) updating the hedge accounting guidance to accommodate differences in the loan and swap markets that developed after the cessation of the London Interbank Offered Rate. Specifically, the amendments in this Update eliminate the requirement to apply the net written option test to a compound derivative comprising a swap and a written option designated as the hedging instrument in a cash flow hedge or a fair value hedge of interest rate risk; and
(5) eliminating the recognition and presentation mismatch related to a dual hedge strategy (that is, a hedge for which a foreign currency-denominated debt instrument is both designated as the hedging instrument in a net investment hedge and designated as the hedged item in a fair value hedge of interest rate risk).
For public business entities, the amendments in this Update are effective for annual reporting periods beginning after December 15, 2026, and interim periods within those annual reporting periods. Early adoption is permitted on any date on or after the issuance of this Update. Entities should apply the amendments in this Update on a prospective
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
basis for all hedging relationships. An entity may elect to adopt the amendments in this Update for hedging relationships that exist as of the date of adoption. Upon adoption of the amendments in this Update, entities are permitted to modify certain critical terms of certain existing hedging relationships without de-designating the hedge. Management is currently evaluating the Update and does not expect adoption of the Update to have a material effect on the Company’s financial position or results of operations.
In December 2025, the FASB issued ASU 2025-11 Interim Reporting (Topic 270) -- Narrow-Scope Improvements. The amendments in this Update clarify interim disclosure requirements and the applicability of Topic 270. The amendments in this Update result in a comprehensive list of interim disclosures that are required by GAAP. In developing the list of disclosures required by other Topics, the FASB Board focused on identifying the interim disclosures that are currently required under GAAP. The objective of the amendments is to provide clarity about the current requirements, rather than evaluate whether to expand or reduce interim disclosure requirements. The amendments in this Update also include a disclosure principle that requires entities to disclose events since the end of the last annual reporting period that have a material impact on the entity. The amendments in this Update are effective for public business entities for interim reporting periods within annual reporting periods beginning after December 15, 2027. Early adoption is permitted. The amendments in this Update can be applied either (1) prospectively or (2) retrospectively to any or all prior periods presented in the financial statements. Management is currently evaluating the Update and does not expect adoption of the Update to have a material effect on the Company’s financial position or results of operations.
In December 2025, the FASB issued ASU 2025-12 Codification Improvements . The amendments in this Update represent changes to the Codification that (1) clarify, (2) correct errors, or (3) make minor improvements. The amendments make the Codification easier to understand and apply. The amendments in this Update are varied in nature and may affect the application of guidance in cases in which the original guidance may have been unclear. Codification improvements are generally not expected to have a significant effect on current accounting practice or result in significant costs to most entities. The amendments in this Update are effective for all entities for annual reporting periods beginning after December 15, 2026, and interim reporting periods within those annual reporting periods. Early adoption is permitted in both interim and annual reporting periods in which financial statements have not yet been issued or made available for issuance. Management is currently evaluating the Update and does not expect adoption of the Update to have a material effect on the Company’s financial position or results of operations.
Note 2 – Business Combination & Asset Purchase
Changes in accretable yield, or income expected to be collected, for the acquisition of Peoples Federal Savings and Loan completed in 2022, are as follows:
(In Thousands)
Beginning Balance
Accretion
Disposals
Ending Balance
Changes in accretable yield, or income expected to be collected, for the acquisition of Perpetual Federal Savings Bank completed in 2021, are as follows:
(In Thousands)
Beginning Balance
Additions
Accretion
Ending Balance
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
Changes in accretable yield, or income expected to be collected, for the acquisition of Ossian State Bank completed in 2021, are as follows:
(In Thousands)
Beginning Balance
Additions
Accretion
Disposals
Ending Balance
Accretable yield, or income expected to be collected, for the acquisition of Bank of Geneva completed in 2019, are as follows:
(In Thousands)
Beginning Balance
Additions
Accretion
Ending Balance
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 thousand in core deposits assets, the acquisition of Perpetual Federal Savings Bank resulted in the recognition of $ 668 thousand in core deposits and the acquisition of Peoples Federal Savings and Loan resulted in the recognition of $ 6.0 million in core deposits which are all being amortized over the remaining economic useful life of 7 years on a straight-line basis. Core deposit intangible is included in other assets on the Company's consolidated balance sheets.
The amortization expense for the years ended December 31, 2025, 2024 and 2023 was $ 1.7 million for each of the three years presented.
Future amortization expense of core deposit intangible assets is as follows:
(In Thousands)
Ossian
Perpetual
Peoples
Total
Total
The purchase of Adams County Financial Resources in 2020 resulted in the allocation of $ 800 thousand to customer list intangible, included in other assets, to be amortized over 6.5 years on a straight-line basis.
The customer list intangible amortization expense for the years ended December 31, 2025, 2024 and 2023 was $ 123 thousand for each of the three years presented. Future amortization expense of customer list intangible is as follows:
(In Thousands)
Total
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
Note 3 – Securities
The amortized cost and fair value of securities, with gross unrealized gains and losses, follows:
(In Thousands)
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Available-for-Sale:
U.S. Treasury
U.S. Government agencies
Mortgage-backed securities
State and local governments
Total available-for-sale securities
(In Thousands)
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Available-for-Sale:
U.S. Treasury
U.S. Government agencies
Mortgage-backed securities
State and local governments
Total available-for-sale securities
Information pertaining to securities with gross unrealized losses at December 31, 2025 and 2024, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:
(In Thousands)
Less Than Twelve Months
Twelve Months & Over
Gross
Gross
Unrealized
Fair
Unrealized
Fair
Losses
Value
Losses
Value
U.S. Treasury
U.S. Government agencies
Mortgage-backed securities
State and local governments
Total available-for-sales securities
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
(In Thousands)
Less Than Twelve Months
Twelve Months & Over
Gross
Gross
Unrealized
Fair
Unrealized
Fair
Losses
Value
Losses
Value
U.S. Treasury
U.S. Government agencies
Mortgage-backed securities
State and local governments
Total available-for-sales securities
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 rate changes, 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.
The Company had no realized gains on sales of investment securities during the years ended December 31, 2025 and 2024. Sales of $ 22.0 million in 2023 generated gross realized losses for the year ended December 31, 2023 as presented below:
(In Thousands)
Gross realized gains
Gross realized losses
Net realized losses
Tax benefit related to net realized losses
The net realized loss on sales and related tax benefit is a reclassification out of accumulated other comprehensive loss. The net realized loss is included in net loss on sale of securities available-for-sale and the related tax benefit is included in income taxes in the consolidated statements of income.
The amortized cost and fair value of debt securities at December 31, 2025, 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
After one year through five years
After five years through ten years
After ten years
Total
Mortgage-backed securities
Total
Investments with a carrying value and fair value of $ 238.2 million at December 31, 2025 and $ 221.9 million at December 31, 2024 were pledged to secure public deposits and securities sold under repurchase agreements. Investments with a carrying value of $ 28.3 million and $ 29.9 million as of December 31, 2025 and December 31, 2024, respectively, were pledged to the Federal Reserve's Discount Window to provide additional borrowing capacity.
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
Note 4 - Loans
The Company had $ 3.9 million in loans held for sale at December 31, 2025 as compared to $ 3.0 million in loans held for sale at December 31, 2024.
Loan balances at December 31 are summarized below:
(In Thousands)
Loans:
Consumer Real Estate
Agricultural Real Estate
Agricultural
Commercial Real Estate
Commercial and Industrial
Consumer
Other
Less: Net deferred loan fees and costs
Less: Allowance for credit losses
Less: Basis adjustment related to fair value hedges
Loans - Net
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 other factors.
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 refinance of capital assets such as machinery and equipment and livestock. The production of crops and livestock is especially vulnerable to commodity prices and weather.
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 other factors.
Commercial and Industrial: Loans to proprietorships, partnerships, 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.
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 other factors.
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.
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
The following table shows the contractual maturity by portfolio segment at amortized cost excluding fair value adjustments related to acquisitions at December 31, 2025:
(In Thousands)
After One
After Five
Within
Year Within
Years Within
After
One Year
Five Years
Fifteen Years
Fifteen Years
Total
Consumer Real Estate
Agricultural Real Estate
Agricultural
Commercial Real Estate
Commercial and Industrial
Consumer
Other
The distribution of fixed rate loans and variable rate loans by portfolio segment is as follows as of December 31, 2025:
(In Thousands)
Fixed
Variable
Rate
Rate
Consumer Real Estate
Agricultural Real Estate
Agricultural
Commercial Real Estate
Commercial and Industrial
Consumer
Other
Variable rate loans that have reached ceiling or floor limits are reported as fixed rate loans until such time as their rates adjust away from those limits.
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
The following table represents the contractual aging at amortized cost in past due loans by portfolio segment of loans as of December 31, 2025 and 2024:
(In Thousands)
December 31, 2025
30-59 Days
Past Due
60-89 Days
Past Due
Greater Than
90 Days
Total
Past Due
Current
Total
Financing
Receivables
Consumer Real Estate
Agricultural Real Estate
Agricultural
Commercial Real Estate
Commercial and Industrial
Consumer
Other
Total
(In Thousands)
December 31, 2024
30-59 Days
Past Due
60-89 Days
Past Due
Greater Than
90 Days
Total
Past Due
Current
Total
Financing
Receivables
Consumer Real Estate
Agricultural Real Estate
Agricultural
Commercial Real Estate
Commercial and Industrial
Consumer
Other
Total
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
The following tables present the amortized cost of nonaccrual loans by portfolio segment as of December 31, 2025 and December 31, 2024:
(In Thousands)
December 31, 2025
Nonaccrual
Loans Past
With No
Due Over
Allowance
89 Days
for Credit Loss
Nonaccrual
Still Accruing
Consumer Real Estate
Agricultural Real Estate
Agricultural
Commercial Real Estate
Commercial & Industrial
Consumer
Total
(In Thousands)
December 31, 2024
Nonaccrual
Loans Past
With No
Due Over
Allowance
89 Days
for Credit Loss
Nonaccrual
Still Accruing
Consumer Real Estate
Agricultural Real Estate
Agricultural
Commercial Real Estate
Commercial & Industrial
Consumer
Total
Interest income on nonaccrual loans, recognized on a cash basis, was $ 146 thousand and $ 93 thousand for the years ended December 31, 2025 and 2024, respectively.
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.
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
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.
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.
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
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.
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
The following tables present the risk category of loans at amortized cost by portfolio segment and year of origination, based on the most recent analysis performed as of December 31, 2025 and 2024:
(In Thousands)
December 31, 2025
Term Loans Amortized Cost Basis by Origination Year
Revolving
Revolving
Loans
Loans
Term
Amortized
Converted
Grand
Prior
Total
Cost Basis
to Term
Total
Consumer Real Estate
Risk Rating
Pass (1-4)
Special Mention (5)
Substandard (6)
Doubtful (7)
Total Consumer Real Estate
Gross charge-offs YTD
Agricultural Real Estate
Risk Rating
Pass (1-4)
Special Mention (5)
Substandard (6)
Doubtful (7)
Total Agricultural Real Estate
Gross charge-offs YTD
Agricultural
Risk Rating
Pass (1-4)
Special Mention (5)
Substandard (6)
Doubtful (7)
Total Agricultural
Gross charge-offs YTD
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
(In Thousands)
December 31, 2025
Term Loans Amortized Cost Basis by Origination Year
Revolving
Revolving
Loans
Loans
Term
Amortized
Converted
Grand
Prior
Total
Cost Basis
to Term
Total
Commercial Real Estate
Risk Rating
Pass (1-4)
Special Mention (5)
Substandard (6)
Doubtful (7)
Total Commercial Real Estate
Gross charge-offs YTD
Commercial & Industrial
Risk Rating
Pass (1-4)
Special Mention (5)
Substandard (6)
Doubtful (7)
Total Commercial & Industrial
Gross charge-offs YTD
Other
Risk Rating
Pass (1-4)
Special Mention (5)
Substandard (6)
Doubtful (7)
Total Other
Gross charge-offs YTD
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
(In Thousands)
December 31, 2024
Term Loans Amortized Cost Basis by Origination Year
Revolving
Revolving
Loans
Loans
Term
Amortized
Converted
Grand
Prior
Total
Cost Basis
to Term
Total
Consumer Real Estate
Risk Rating
Pass (1-4)
Special Mention (5)
Substandard (6)
Doubtful (7)
Total Consumer Real Estate
Gross charge-offs YTD
Agricultural Real Estate
Risk Rating
Pass (1-4)
Special Mention (5)
Substandard (6)
Doubtful (7)
Total Agricultural Real Estate
Gross charge-offs YTD
Agricultural
Risk Rating
Pass (1-4)
Special Mention (5)
Substandard (6)
Doubtful (7)
Total Agricultural
Gross charge-offs YTD
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
(In Thousands)
December 31, 2024
Term Loans Amortized Cost Basis by Origination Year
Revolving
Revolving
Loans
Loans
Term
Amortized
Converted
Grand
Prior
Total
Cost Basis
to Term
Total
Commercial Real Estate
Risk Rating
Pass (1-4)
Special Mention (5)
Substandard (6)
Doubtful (7)
Total Commercial Real Estate
Gross charge-offs YTD
Commercial & Industrial
Risk Rating
Pass (1-4)
Special Mention (5)
Substandard (6)
Doubtful (7)
Total Commercial & Industrial
Gross charge-offs YTD
Other
Risk Rating
Pass (1-4)
Special Mention (5)
Substandard (6)
Doubtful (7)
Total Other
Gross charge-offs YTD
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
For consumer loans, the Company evaluates credit quality based on the aging status of the loan, as was previously stated, and by payment performance. Consumer loans are placed on nonperforming status in the event that the loan is in past due status for more than 90 days or payment in full of principal and interest is not expected. The following tables present the amortized cost based on payment performance as of December 31, 2025 and 2024 by year of origination:
(In Thousands)
December 31, 2025
Term Loans Amortized Cost Basis by Origination Year
Revolving
Loans
Term
Amortized
Grand
Prior
Total
Cost Basis
Total
Consumer
Payment Performance
Performing
Nonperforming
Total Consumer
Gross charge-offs YTD
(In Thousands)
December 31, 2024
Term Loans Amortized Cost Basis by Origination Year
Revolving
Loans
Term
Amortized
Grand
Prior
Total
Cost Basis
Total
Consumer
Payment Performance
Performing
Nonperforming
Total Consumer
Gross charge-offs YTD
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
The following table presents collateral-dependent loans grouped by portfolio segment as of December 31, 2025 and 2024:
(In Thousands)
Collateral
Dependent Loans
December 31, 2025
December 31, 2024
Consumer Real Estate
Agricultural Real Estate
Agricultural
Commercial Real Estate
Commercial & Industrial
Consumer
Total
The Bank periodically evaluates collateral asset values for collateral dependent loans to determine fair value and to measure any anticipated shortfall. 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 collateral securing the agricultural collateral dependent loans as of December 31, 2025 includes primarily farmland and rental properties , and to a lesser extent, farm and transportation equipment.
The specific reserve portion of the ACL for collateral dependent loans was $ 145 thousand and $ 52 thousand at December 31, 2025 and 2024, respectively.
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
The Company periodically modifies a loan for a borrower experiencing financial difficulty in an effort to enhance the borrowers' performance on the note. Modification programs focused on payment pattern changes and/or modified maturity dates with most receiving a combination of the two concessions. The modifications normally do no t result in the contractual forgiveness of principal. No modifications to borrowers experiencing financial difficulty were made during 2025 or 2024.
For the years ended December 31, 2025 and 2024, there were no modifications to borrowers experiencing financial difficulty that subsequently defaulted after modification.
As of December 31, 2025, the Company had no foreclosed residential real estate property obtained by physical possession and $ 1.4 million of consumer real estate loans secured by residential real estate properties for which foreclosure proceedings were in process according to local jurisdictions. This compares to the Company having no foreclosed residential real estate property obtained by physical possession and $ 890 thousand of consumer real estate loans secured by residential real estate properties for which foreclosure proceedings were in process according to local jurisdictions as of December 31, 2024.
On January 1, 2023, the Company adopted Accounting Standards Update ("ASU") No. 2016-13 - "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" and implemented the current expected credit losses accounting standard. As a result, the Company recorded a one-time adjustment from equity into the allowance for credit losses and unfunded commitment liability in the amount of $ 4.5 million, or $ 3.4 million, net of tax.
Allowance for Credit Losses (ACL) has a direct impact on the provision expense. An increase in the ACL is funded through recoveries and provision expense.
The Company segregates its allowance into two reserves: The Allowance for Credit Losses (ACL) and the Allowance for Unfunded Loan Commitments and Letters of Credit (AULC). When combined, these reserves constitute the total ACL calculated under the Current Expected Credit Losses (CECL) methodology.
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
The following tables present the activity within the ACL for each portfolio segment and shows the contribution provided by both the recoveries and the provision along with the reduction of the allowance caused by charge-offs for the years ended December 31, 2025 and 2024:
(In Thousands)
Consumer
Real Estate
Agricultural
Real Estate
Agricultural
Commercial
Real Estate
Commercial
and Industrial
Consumer
Other
Total
ALLOWANCE FOR CREDIT
LOSSES
Beginning balance
Provision for (recovery of) credit
losses - loans
Charge-offs
Recoveries
Ending Balance
(In Thousands)
Unfunded
Loan
Commitment
& Letters of
Credit
ALLOWANCE FOR UNFUNDED LOAN COMMITMENTS AND
LETTERS OF CREDIT
Beginning balance
Recovery of credit losses - off
balance sheet credit exposures
Ending Balance
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
(In Thousands)
Consumer
Real Estate
Agricultural
Real Estate
Agricultural
Commercial
Real Estate
Commercial
and Industrial
Consumer
Other
Total
ALLOWANCE FOR CREDIT
LOSSES
Beginning balance
Provision for (recovery of) credit
losses - loans
Charge-offs
Recoveries
Ending Balance
(In Thousands)
Unfunded
Loan
Commitment
& Letters of
Credit
ALLOWANCE FOR UNFUNDED LOAN COMMITMENTS AND
LETTERS OF CREDIT
Beginning balance
Recovery of credit losses - off
balance sheet credit exposures
Ending Balance
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
Note 5 – Premises and Equipment
The major categories of banking premises and equipment and accumulated depreciation at December 31 are summarized below:
(In Thousands)
Land
Buildings (useful life 15 - 39 years)
Furnishings (useful life 3 - 15 years)
Less: Accumulated depreciation
Premises and Equipment (Net)
Depreciation expense for the years ended December 31, 2025, 2024 and 2023 amounted to $ 3.6 , $ 3.8 and $ 3.4 million, respectively.
Note 6 - Leases
The Bank leases space for retail branches, LPOs and ATMs. Our leases have remaining lease terms of 4 months to just under 13 years , some of which may include options to renew the leases and some of which may include options to terminate the leases prior to the end date of the lease term. The Bank does receive rental income for the leasing of available space.
The below tables provide information on the Bank’s operating leases:
(In Thousands)
December 31, 2025
December 31, 2024
December 31, 2023
Operating lease cost (1)
Operating cash flows (2)
(1) Included in net occupancy expense on Company's consolidated statement of income
(2) Included in customer service fees on Company's consolidated statement of income
(In Thousands)
December 31, 2025
December 31, 2024
Operating lease assets (1)
Operating lease liabilities (2)
(1) Included in other assets on Company's consolidated balance sheets
(2) Included in accrued interest and other liabilities on Company's consolidated balance sheets
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
Operating lease term and discount rates of our lessee arrangements at December 31, 2025 and 2024 were as follows:
December 31, 2025
December 31, 2024
Weighted average remaining lease term (years)
Weighted average discount rate
The future lease payments based on maturity for our lessee liability arrangements at December 31, 2025 are as follows:
(In Thousands)
2031 and thereafter
Total future lease payments
Less: interest
Present value of operating lease liability arrangements
Note 7 - Servicing
Loans serviced for others are not included in the accompanying Company's consolidated balance sheets. The unpaid principal balances of 1-4 family real estate loans serviced for others were $ 362.6 and $ 364.3 million at December 31, 2025 and 2024, respectively. Unpaid principal balances of agricultural real estate loans serviced for others were $ 153.4 million at December 31, 2025 and $ 141.9 million at December 31, 2024.
The balance of capitalized servicing rights at December 31, 2025 and 2024 for 1-4 family real estate loans, was $ 3.6 million and $ 3.5 million, respectively. Agricultural real estate loan servicing rights, established in 2023, were $ 2.4 million and $ 2.2 million at December 31, 2025 and 2024, respectively. The capitalized addition of servicing rights is included in loan servicing income on the Company's consolidated statement of income.
The fair value of the capitalized servicing rights for 1-4 family real estate loans as of December 31, 2025 and 2024 was $ 4.5 million and $ 4.8 million, respectively. Capitalized servicing rights for agricultural real estate loans had a fair value of $ 1.5 million and $ 2.7 million as of December 31, 2025 and 2024. The valuations were completed by stratifying the loans into like groups based on loan type and term. Impairment was measured by estimating the fair value of each stratum, taking into consideration an estimated level of prepayment based upon current market conditions. An average constant prepayment rate for 1-4 family real estate loans of 9.8 % and 6.1 % were utilized for December 31, 2025 and 2024, respectively. Agricultural real estate loans utilize an average constant prepayment rate based on the Bank's last twelve months of data. The average monthly constant prepayment rate was 1.054 % and 0.184 % for fixed rate agricultural loans at December 31, 2025 and 2024, respectively. In 2025, two 1-4 family real estate strata, which included 72 of the total 3,597 loans, were slightly below the carrying value using a discount yield of 5.48 % which resulted in the need to establish an additional $ 3 thousand valuation allowance for a total valuation allowance of $ 5 thousand. In 2024, two 1-4 family real estate strata, which included 82 of the total 3,677 loans, were slightly below the carrying value using a discount yield of 5.98 % which resulted in the need to establish a $ 2 thousand valuation allowance. At December 31, 2025, the carrying value of all fourteen agricultural real estate strata, which included 658 loans, using an approximate discount rate of 7.97 % were higher than the fair value requiring an additional $ 783 thousand valuation allowance to be established for a total valuation allowance of $ 878 thousand. During 2024,the carrying value of 10 agricultural real estate strata, which included 33 of the total 619
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
loans, using an approximate discount rate of 8.62 % were higher than fair value requiring a $ 95 thousand valuation allowance to be established.
The following summarizes servicing rights capitalized and amortized during each year:
(In Thousands)
Beginning of Year
Capitalized Additions
Amortization
Ending Balance, December 31
Valuation Allowance
Servicing Rights net, December 31
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
Note 8 - Deposits
Time deposits as of December 31 consist of the following:
(In Thousands)
Time deposits under $250,000
Time deposits of $250,000 or more
At December 31, 2025 the scheduled maturities for time deposits are as follows:
(In Thousands)
Thereafter
Note 9 – Federal Funds Purchased and Securities Sold Under Agreement to Repurchase
The Bank’s policy requires qualifying securities to be used as collateral for the underlying repurchase agreements. As of December 31, 2025 and 2024, securities with a fair value of $ 40.3 million and $ 43.0 million, respectively, were pledged to secure the repurchase agreements. The table below presents the daily securities sold under agreement to repurchase and the term repurchase agreements. It does not include the Bank’s federal funds purchased.
Daily Securities Sold Under Agreement to Repurchase
Amount
Weighted
Maximum Amount
Approximate
Approximate
Outstanding
Average
Borrowings
Average
Weighted Average
at End
Rate End
Outstanding
Outstanding in
Interest Rate
of Period (000's)
of Period
Month End (000's)
Period (000's)
For the Period
Securities Sold Under Agreement to Repurchase
Amount
Weighted
Maximum Amount
Approximate
Approximate
Outstanding
Average
Borrowings
Average
Weighted Average
at End
Rate End
Outstanding
Outstanding in
Interest Rate
of Period (000's)
of Period
Month End (000's)
Period (000's)
For the Period
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
The Company had $ 15.0 million of federal funds purchased as of December 31, 2025 and no federal funds purchased as of December 31, 2024. The $ 22.7 million in securities sold under agreements to repurchase were comprised of U.S. Treasuries and government agency securities. The table below shows the remaining contractual maturity in the repurchase agreements and the collateral pledged as of December 31, 2025:
(In Thousands)
December 31, 2025
Remaining Contractual Maturity of the Agreements
Overnight & Continuous
Up to 30 days
30-90 days
Greater Than
90 days
Total
Federal funds purchased
Repurchase agreements
US Treasury & agency securities
Total
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
Note 10 – Borrowings and Subordinated Notes
Federal Home Loan Bank Advances
Long term debt consists of various loans from the Federal Home Loan Banks. Repayment structures vary, ranging from monthly installments, annual payments or upon maturity. Interest payments are due monthly. Total borrowings were $ 227.4 million excluding an amortizing $ 26 thousand for fair value related to the acquisitions with a weighted average rate of 4.07 % for December 31, 2025 compared to $ 246.1 million excluding an amortizing $ 39 thousand for fair value with a weighted average rate of 4.21 % for December 31, 2024. In 2024, the Bank entered a $ 15 million, 10 year , 3 month Bermudan Putable advance with a fixed rate of 3.40 % and quarterly put options owned by FHLB. The put options have not been exercised to date and the next possible putable exercise date is February 6, 2026. This advance is included with the 2026 maturities in the below table. The advances were secured by a pledge of $ 191.6 and $ 202.0 million of 1-4 family real estate and HELOC loans as of December 31, 2025 and 2024, respectively under a blanket collateral agreement. The Bank has also pledged eligible commercial real estate loans of $ 231.8 and $ 369.5 million as of December 31, 2025 and December 31, 2024, respectively, to the FHLB. During the second quarter of 2024, the Bank also began pledging eligible multi-family real estate loans to the FHLB which amounted to $ 29.1 and $ 47.7 million as of December 31, 2025 and December 31, 2024, respectively.
The advances are subject to pre-payment penalties and the provisions and conditions of the credit policy of the Federal Home Loan Bank. The table below shows the maturities of the borrowings outstanding at December 31, 2025, exclusive of the fair value adjustment.
(In Thousands)
Total
The Bank also had access to $ 167.9 million and $ 163.7 million through a Cash Management Advance with the Federal Home Loan Bank as of December 31, 2025 and December 31, 2024, respectively. An additional $ 103.4 million at December 31, 2025, and $ 159.5 million at December 31, 2024, were available from the Federal Home Loan Bank based on current pledging.
Other
The Bank had access to $ 213 million, which includes a new $ 50 million line of credit, and $ 163 million of unsecured borrowings through correspondent banks as of December 31, 2025 and December 31, 2024, respectively. The Bank had a borrowing capacity under the Federal Reserve's Discount Window of $ 28.3 million and $ 29.9 million at December 31, 2025 and 2024, respectively. The Company has established a $ 15 million variable line of credit tied to prime with a correspondent bank that matures on September 27, 2027 . As of December 31, 2025, there were no outstanding borrowings on the line of credit.
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
Subordinated Notes
The Company has $ 35 million aggregate principal amount of 3.25 % fixed-to-floating rate subordinated notes due July 30, 2031 (the “Notes”). The Notes qualify as Tier 2 capital for regulatory purposes until July 30, 2026. Beginning July 31, 2026, the Note amount that qualifies as Tier 2 capital is reduced in proportionate amounts until July 30, 2031.
Interest on the Notes accrues at a rate equal to (i) 3.25% per annum from the original issue date of July 2021 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.
December 31, 2025
December 31, 2024
(In Thousands)
Principal
Unamortized Note Issuance Costs
Principal
Unamortized Note Issuance Costs
Subordinated Notes
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
Note 11 – Income Taxes
The components of income tax expense for the years ended December 31 are as follows:
(In Thousands)
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Total Income Tax
The following is a reconciliation of the statutory federal income tax rate to the effective tax rate:
Amount
% of Pretax
Amount
% of Pretax
Amount
% of Pretax
Income
Income
Income
Federal income tax at statutory rates
(Decrease) increase resulting from:
State income tax, net of federal benefit
Tax exempt interest
Investments reported under proportional
amortization method
Section 831 deduction
Other
Total Income Tax
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
Deferred tax assets and liabilities at December 31 are comprised of the following:
(In Thousands)
Deferred Tax Assets:
Allowance for credit losses
Deferred compensation
Net unrealized loss on available-for-sale securities
Fair value adjustments
Other
Total deferred tax assets
Deferred Tax Liabilities:
Accreted discounts on bonds
Depreciation
FHLB stock dividends
Intangible amortization
Loan servicing rights
Prepaids
Other
Total deferred tax liabilities
Net Deferred Tax Asset
For the years ended December 31, 2025, 2024 and 2023, all state income taxes were paid to the State of Indiana.
The Peoples Federal Savings and Loan acquisition included a net operating loss (NOL) carryforward of approximately $ 2.8 million that had a remaining balance of $ 824 thousand and $ 1.4 million at December 31, 2025 and 2024, respectively. The NOL carryforward will expire in 2027 .
The Company has additional paid-in capital that is considered restricted resulting from the acquisition of Perpetual in 2021 of approximately $ 2.8 million and from the acquisition of Peoples in 2022 of approximately $ 2.2 million. No deferred tax liability is required to be recorded for the Company’s tax bad debt reserves arising before December 31, 1987, unless it is apparent that the reserves will reverse in the near future. Unrecognized deferred taxes on these reserves would total $ 1.0 million. If the portion of retained earnings representing these reserves is used for any purpose other than to absorb bad debts, it will be added to future taxable income and the related tax will be recognized as expense.
Note 12 - Employee Benefit Plans
The Bank has established a 401(k) defined contribution plan which allows eligible employees to save at a minimum one percent of eligible compensation on a pre-tax or post-tax basis, subject to certain Internal Revenue Service limitations. The Bank will match 50 % of employee 401(k) contributions up to six percent of total eligible compensation. In addition, the Bank may make a discretionary contribution from time to time as is deemed advisable. A participant is 100 % vested in the participant’s deferral contributions. Employer matching contributions are funded each payroll period and are immediately vested. Non-elective employer contributions are immediately vested at 100 %. Employees are immediately eligible upon hire to contribute to the plan and receive matching contributions. In order to be eligible for discretionary contributions, employees must work 1,000 hours in the plan year and be employed on the last day of the year. Contributions expensed for the 401(k) profit sharing plan for both the employer matching contribution and the discretionary contribution were $ 2.1 million , $ 2.0 million and $ 1.4 million for 2025, 2024 and 2023, respectively.
Restricted Stock Awards
The Company has a Long-Term Stock Incentive Plan which provides for shares of the Company's restricted stock to be issued to employees. Under the plan, the shares generally vest 100 % in three years. During the 3 year vesting period, the employees receive dividends or dividend equivalent compensation on the shares. Compensation expense
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
applicable to the restricted stock awards totaled $ 1.4 million, $ 1.4 million and $ 1.3 million for the years ending December 31, 2025, 2024, and 2023, respectively.
The table below summarizes the details of the restricted shares issued, vested, and forfeited for the years ending December 31, 2025, 2024 and 2023:
Year Ended December 31,
Number of
Shares
Number of Employees
Number of
Shares
Number of Employees
Number of
Shares
Number of Employees
Restricted shares issued
Restricted shares vested
Restricted shares awarded due to
retirement
Restricted shares awarded for other
Restricted shares forfeited
The following table summarizes the activity of restricted stock awards as of December 31:
Year Ended December 31,
Number of
Shares
Weighted
average
fair value
per award
Number of
Shares
Weighted
average
fair value
per award
Number of
Shares
Weighted
average
fair value
per award
Beginning of period
Granted
Vested
Forfeited
Nonvested, end of period
As of December 31, 2025, there was $ 2.1 million of unrecognized compensation cost related to the nonvested portion of restricted stock awards under the plan to be recognized over the next three years .
Note 13 – Earnings Per Share
The Compensation Committee of the Company has determined that it is appropriate to award shares of the common stock of the Company to Directors, whether outside or also an officer of the Company or the Bank, as a portion of their retainer for services rendered. 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 Thursday of June. 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 prior day closing price. On June 5, 2025, ten Directors each received $ 17,496 which equated to 762 shares and one Director received $ 6,704 which equated to 292 shares. On July 29, 2025, one new Director received 288 prorated shares worth $ 7,436 . On June 7, 2024, twelve Directors each received $ 15,007 worth of shares which equated to 716 shares while one Director received a prorated dollar amount of $ 5,911 which equated to 282 shares. On December 5, 2024, one new Director received 54 prorated shares worth approximately
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
$ 1,730 . On June 2, 2023, twelve Directors each received $ 14,997 worth of shares which equated to 754 shares. The use of stock for Directors' retainer, does not have an effect on diluted earnings per share as it is immediately vested.
The table below presents basic and diluted earnings per share for the years ended December 31, 2025, 2024, and 2023:
(In Thousands, Except Per Share Data)
Year Ended
December 31,
December 31,
December 31,
Earnings per share
Net income
Less: distributed earnings allocated to
participating securities
Less: undistributed earnings allocated to
participating securities
Net earnings available to common
shareholders
Weighted average common shares outstanding
including participating securities
Less: average unvested restricted shares
Weighted average common shares outstanding
Basic and diluted earnings per share
Note 14 – Related Party Transactions
In the ordinary course of business, the Bank has granted loans to senior officers and directors and their affiliated companies amounting to $ 2.4 million and $ 56.2 million at December 31, 2025 and 2024, respectively. Two new loans were approved during 2025 for $ 416 thousand. During 2025, subsequent advances totaled $ 130 thousand and payments of $ 19.5 million were received. Loans of $ 34.8 million at December 31, 2024 were no longer reportable in 2025 due to changes in the Board composition and/or their outside related responsibilities. The difference in related borrowings amounted to $ 53.8 million, net decrease. Deposits of directors, executive officers and companies in which they have a direct or indirect ownership as of December 31, 2025 and 2024, amounted to $ 8.3 million and $ 43.2 million, respectively.
Note 15 - Off Balance Sheet Activities
Credit Related Financial Instruments
The Bank is a party to credit related financial instruments with off balance sheet risk in the normal course of business to meet the financing need of its customers. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Company's consolidated balance sheets.
The Bank's exposure to credit loss is represented by the contractual amount of these commitments. The Bank follows the same credit policies in making commitments as it does for on-balance sheet instruments. The allowance for credit losses as it relates to unfunded loan commitments (AULC) is included under other liabilities (see Note 4).
At December 31, 2025 and 2024, the following financial instruments were outstanding whose contract amounts represent credit risk:
(In Thousands)
Commitments to extend credit
Standby letters of credit
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
Commitments to extend credit and Standby Letters of Credit all include exposure to some credit loss in the event of nonperformance of the customer. The Bank’s credit policies and procedures for credit commitments and financial guarantees are the same as those for extensions of credit that are recorded in the financial statements. Due to the fact that these instruments have fixed maturity dates, and because many of them expire without being drawn upon, they generally do not present any significant liquidity risk to the Bank.
Collateral Requirements
To reduce credit risk related to the use of credit-related financial instruments, the Bank might deem it necessary to obtain collateral. The amount and nature of the collateral obtained is based on the Bank's credit evaluation of the customer. Collateral held varies but may include cash, securities, accounts receivable, inventory, property, plant, and real estate.
Legal Contingencies
Various legal claims also arise from time to time in the normal course of business, which, in the opinion of management, will have no material effect on the Company’s consolidated financial statements.
Note 16 - Minimum Regulatory Capital Requirements
The Company (on a consolidated basis) and the Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off balance sheet items as calculated under regulatory accounting practices.
The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by the Basel III Capital Rules, the comprehensive capital framework for U.S. banking organizations, to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1 capital, Tier 1 capital and Total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).
In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to include most components of accumulated other comprehensive income in Common Equity Tier 1.
Common Equity Tier 1 is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities, and subject to transition provisions.
The Common Equity Tier 1, Tier 1 and Total capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets. Risk-weighted assets are calculated based on regulatory requirements and include total assets, with certain exclusions, allocated by risk weight category, and certain off balance sheet items, among other things. The leverage ratio is calculated by dividing Tier 1 capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets, among other things.
The Basel III Capital Rules require the Company and Bank to maintain (i) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 4.5 %, plus a 2.5 % “capital conservation buffer” (which is added to the 4.5% Common Equity Tier 1 capital ratio, effectively resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 7.0 %), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0 %, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5 %), (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0 %, plus the capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
in a minimum total capital ratio of 10.5 %) and (iv) a minimum leverage ratio of 4.0 %, calculated as the ratio of Tier 1 capital to average quarterly assets.
The capital conservation buffer is designed to absorb losses during periods of economic stress and, as detailed above, effectively increases the minimum required risk-weighted capital ratios. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
Management believes, as of December 31, 2025, that the Bank meets all the capital adequacy requirements to which it is subject.
As of December 31, 2025, the most recent notification from the FDIC indicated the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To remain categorized as well capitalized, the Bank will have to maintain minimum total risk-based, Tier I risk-based, Common Equity Tier 1 and Tier I leverage ratios as disclosed in the table to follow. There are no conditions or events since the most recent notification that management believes have changed the Bank’s prompt corrective action category.
The following tables present actual and required capital ratios as of December 31, 2025 and December 31, 2024 under the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.
The Company and Bank's actual and required capital amounts and ratios as of December 31, 2025 and 2024 are as follows:
Actual
Minimum Capital Required
Required to be Considered
Well-Capitalized
As of December 31, 2025
Amount
Ratio
Amount
Ratio
Amount
Ratio
Common Equity Tier 1 Capital
(to Risk Weighted Assets):
Consolidated
Farmers & Merchants State
Bank
Total Risk-Based Capital
(to Risk Weighted Assets):
Consolidated
Farmers & Merchants State
Bank
Tier 1 Capital
(to Risk Weighted Assets):
Consolidated
Farmers & Merchants State
Bank
Tier 1 Leverage Capital
(to Adjusted Total Assets):
Consolidated
Farmers & Merchants State
Bank
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
Actual
Minimum Capital Required
Required to be Considered
Well-Capitalized
As of December 31, 2024
Amount
Ratio
Amount
Ratio
Amount
Ratio
Common Equity Tier 1 Capital
(to Risk Weighted Assets):
Consolidated
Farmers & Merchants State
Bank
Total Risk-Based Capital
(to Risk Weighted Assets):
Consolidated
Farmers & Merchants State
Bank
Tier 1 Capital
(to Risk Weighted Assets):
Consolidated
Farmers & Merchants State
Bank
Tier 1 Leverage Capital
(to Adjusted Total Assets):
Consolidated
Farmers & Merchants State
Bank
The above tables exclude the capital conservation buffer requirements.
Note 17 - Restrictions of Dividends & Inter-company Borrowings
The Bank is restricted as to the amount of dividends that can be paid. Dividends declared by the Bank that exceed the net income for the current year plus retained income for the preceding two years must be approved by federal and state regulatory agencies. Under this formula, dividends of $ 52.7 million may be paid without prior regulatory approval. Regardless of formal regulatory restrictions, the Bank may not pay dividends that would result in its capital levels being reduced below the minimum requirements shown above. Under current Federal Reserve regulations, the Bank is limited as to the amount and type of loans it may make to the Company. These loans are subject to qualifying collateral requirements on which the amount of the loan may be based.
Note 18 - Derivative Financial Instruments
The Bank entered into three pay-fixed receive variable interest rate swap transactions, with a combined notional value of $ 100 million, designated and qualifying as accounting hedges during the last quarter of 2023.
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
The following table presents amounts that were recorded on the Company's consolidated balance sheets related to cumulative basis adjustments for interest rate swap derivatives designated as fair value accounting hedges as of December 31, 2025 and 2024:
(In Thousands)
Carrying Amount of
the Hedged Assets
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of
the Hedged Assets
Carrying Amount of
the Hedged Assets
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of
the Hedged Assets
Line Item in the Consolidated Balance Sheets in which the Hedged Item is Included
December 31, 2025
December 31, 2025
December 31, 2024
December 31, 2024
Loans
The following table presents a summary of interest rate swap derivatives designated as fair value accounting hedges of fixed-rate receivables used in the Bank's asset/liability management activities at December 31, 2025 and 2024, identified by the underlying interest rate-sensitive instruments:
Weighted Average Rate
Instruments Associated With
Notional Value (000's)
Weighted Average
Remaining Maturity (years)
Fair Value (000's)
Receive
Pay
Loans
USD-SOFR-OIS
Total swap portfolio at December 31, 2025
USD-SOFR-OIS
Weighted Average Rate
Instruments Associated With
Notional Value (000's)
Weighted Average
Remaining Maturity (years)
Fair Value (000's)
Receive
Pay
Loans
USD-SOFR-OIS
Total swap portfolio at December 31, 2024
USD-SOFR-OIS
These derivative financial instruments were entered into for the purpose of managing the interest rate risk of certain assets and liabilities. The Bank pledged $ 2.3 million of cash collateral to counterparties as security for its obligations related to these interest rate swap transactions at both December 31, 2025 and 2024. Collateral posted and received is dependent on the market valuation of the underlying hedges.
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
The following table presents the notional amount and fair value of interest rate swaps utilized by the Bank at December 31, 2025 and 2024:
(In Thousands)
December 31, 2025
December 31, 2024
Notional Amount
Fair Value
Notional Amount
Fair Value
Asset Derivatives
Derivatives designated as hedging instruments
Interest rate swaps associated with loans
Total contracts
Liability Derivatives
Derivatives designated as hedging instruments
Interest rate swaps associated with loans
Total contracts
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
The following table presents the effects of the Bank's interest rate swap agreements on the Company’s consolidated statements of income during the years ended December 31, 2025 and 2024.
(In Thousands)
Line Item in the Consolidated Statements of Income
December 31, 2025
December 31, 2024
December 31, 2023
Interest Income
Loans, including fees
Other
Total interest income
Note 19 - Qualified Affordable Housing Project Investments
The Company invests in certain qualified affordable housing projects. The Company has elected to account for its investment in qualified affordable housing projects using the proportional amortization method. Under the proportional amortization method, an investor amortizes the initial cost of the investment to income tax expense in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. See Note 11 of the Notes to the Consolidated Financial Statements.
At December 31, 2025 and December 31, 2024, the balance of the Company's investments in qualified affordable housing projects was $ 3.1 million and $ 3.6 million, respectively. This balance is reflected in the other assets line on the consolidated balance sheets. The unfunded commitments related to the investments in qualified affordable housing projects totaled $ 418 thousand and $ 880 thousand at December 31, 2025 and December 31, 2024, respectively. This balance is reflected in the accrued expense and other liabilities line on the consolidated balance sheets.
The Company did no t incur any impairment losses related to its investments in qualified affordable housing projects in 2025 or 2024.
The following tables present the Company's investments in qualified affordable housing projects as of December 31, 2025 and 2024 along with the related expenses and tax credits recognized for the years ended December 31, 2025 and 2024:
(In Thousands)
December 31, 2025
December 31, 2024
Low-income-housing tax credit investments
Unfunded commitments
Net funded low-income-housing tax credit
investments
(In Thousands)
Year to Date Ended
December 31, 2025
December 31, 2024
Amortization expense
Tax credits recognized
Note 20 - 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
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
assets including deferred tax assets, Bank premises and equipment and intangibles. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of the estimates.
Fair Value Measurements
In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities in active markets that the Company has the ability to access.
Available-for-sale securities - When quoted prices are available in an active market, securities are valued using the quoted price and are classified as Level 1. The quoted prices are not adjusted.
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.
Interest rate swaps classified as Level 2 are valued using the prices obtained from an independent pricing service and not adjusted. The fair value of interest rate swaps with a positive fair value are reported as assets while interest rate swaps with a negative fair value are reported as liabilities.
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 four 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.
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
The estimated fair values, and related carrying or notional amounts, for on and off balance sheet financial instruments not carried at fair value as of December 31, 2025 and 2024, are reflected below.
(In Thousands)
December 31, 2025
December 31, 2024
Carrying
Fair
Carrying
Fair
Amount
Value
Level 1
Level 2
Level 3
Amount
Value
Level 1
Level 2
Level 3
Financial Assets:
Cash and cash equivalents
Interest-bearing time deposits
Other securities
Loans held for sale
Loans, net
Interest receivable
Financial Liabilities:
Noninterest-bearing deposits
Interest-bearing deposits
Time deposits
Total Deposits
Fed funds purchased and
securities sold under
agreement to repurchase
Federal Home Loan Bank
advances
Subordinated notes
Interest payable
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
The following tables presents information about the Company's assets and liabilities measured at fair value on a recurring basis as of December 31, 2025 and December 31, 2024 segregated by level within the fair value hierarchy utilized to measure fair value:
Assets and Liabilities Measured at Fair Value on a Recurring Basis (In Thousands)
Quoted Prices in
Significant
Significant
Active Markets
Observable
Observable
for Identical
Inputs
Inputs
December 31, 2025
Assets (Level 1)
(Level 2)
(Level 3)
Assets-(Securities Available-for-Sale)
U.S. Treasury
U.S. Government agencies
Mortgage-backed securities
State and local governments
Total Securities Available-for-Sale
Interest rate swaps liabilities
Quoted Prices in
Significant
Significant
Active Markets
Observable
Observable
for Identical
Inputs
Inputs
December 31, 2024
Assets (Level 1)
(Level 2)
(Level 3)
Assets-(Securities Available-for-Sale)
U.S. Treasury
U.S. Government agencies
Mortgage-backed securities
State and local governments
Total Securities Available-for-Sale
Interest rate swaps liabilities
The following tables present the changes in the Level 3 fair value category of which unobservable inputs are relied upon for the years ended December 31, 2025 and December 31, 2024:
(In Thousands)
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
State and Local
State and Local
State and Local
Governments
Governments
Governments
Tax-Exempt
Taxable
Total
Balance at January 1, 2025
Change in Fair Value
Payments & Maturities
Balance at December 31, 2025
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
(In Thousands)
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
State and Local
State and Local
State and Local
Governments
Governments
Governments
Tax-Exempt
Taxable
Total
Balance at January 1, 2024
Change in Fair Value
Payments & Maturities
Balance at December 31, 2024
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.
There were no securities that transferred in or out of Level 3 during 2025 or 2024.
The Company also has assets that, under certain conditions, are subject to measurement at fair value on a nonrecurring basis. At December 31, 2025 and 2024, such assets consist of collateral dependent loans and loan servicing rights. Collateral dependent loans categorized as Level 3 assets consist of non-homogeneous loans that have expected credit losses. The Company may also estimate the fair value of certain nonperforming loans using a discounted cash flow method of 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 December 31, 2025, collateral dependent loans categorized as Level 3 were $ 860 thousand and $ 3.0 million at December 31, 2024. The specific allocation for collateral dependent loans was $ 145 thousand as of December 31, 2025 and $ 52 thousand as of December 31, 2024. The specific allocations are accounted for in the allowance for credit losses (see Note 4).
During 2024 and 2023, impairment was recognized on loan 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 loan 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.
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
The following tables present assets measured at fair value on a nonrecurring basis:
(In Thousands)
Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2025
Quoted Prices in
Markets for
Significant
Significant
Balance at
Identical
Observable Inputs
Unobservable Inputs
December 31, 2025
Assets (Level 1)
(Level 2)
(Level 3)
Collateral dependent
loans
Loan servicing
rights
(In Thousands)
Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2024
Quoted Prices in
Markets for
Significant
Significant
Balance at
Identical
Observable Inputs
Unobservable Inputs
December 31, 2024
Assets (Level 1)
(Level 2)
(Level 3)
Collateral dependent
loans
Loan servicing
rights
The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements:
(In Thousands)
Fair Value at December 31, 2025
Valuation Technique
Unobservable Inputs
Range
(Weighted Average)
State and local
government
Discounted Cash Flow
Credit strength of underlying project or entity / Discount rate
Collateral dependent
loans
Collateral based measurements
Discount to reflect current market conditions and ultimate collectability
Loan servicing
rights
Discounted Cash Flow
Constant prepayment rate and probability of default / Discount rate
(In Thousands)
Fair Value at December 31, 2024
Valuation Technique
Unobservable Inputs
Range
(Weighted Average)
State and local
government
Discounted Cash Flow
Credit strength of underlying project or entity / Discount rate
Collateral dependent
loans
Collateral based measurements
Discount to reflect current market conditions and ultimate collectability
Loan servicing
rights
Discounted Cash Flow
Constant prepayment rate and probability of default / Discount rate
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
Note 21 – Condensed Financial Statements of Parent Company
Balance Sheets
(In Thousands)
Assets
Cash
Interest-bearing time deposits
Related party receivables:
Dividends and accounts receivable from subsidiary
Accrued interest receivable - available-for-sale securities /
interest-bearing time deposits
Securities - available-for-sale
Investment in subsidiaries
Other assets
Total Assets
Liabilities
Subordinated notes, net of unamortized issuance costs
Dividends payable
Accrued interest payable
Accrued expenses
Total Liabilities
Stockholders' Equity
Total Liabilities and Stockholders' Equity
Statements of Income and Comprehensive Income
(In Thousands)
Income
Dividends from subsidiaries
Distributed earnings of dissolved subsidiary
Interest - available-for-sale securities / interest-bearing
time deposits
Noninterest income
Total income
Expenses
Interest expense
Operating expenses
Total expenses
Income Before Income Taxes and Equity in
Undistributed Earnings of Subsidiaries
Income Tax Benefit
Equity in undistributed earnings of subsidiaries
Net Income
Other Comprehensive Income:
Unrealized gains on securities, net of taxes
Comprehensive Income
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
Statements of Cash Flows
(In Thousands)
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiaries
Amortization of premiums on available-for-sale securities, net
Amortization of subordinated notes issuance fees
Stock-based compensation expense
Director stock awards
Changes in assets and liabilities:
Other assets and liabilities
Net cash provided by operating activities
Cash Flows from Investing Activities
Activity in available-for-sale securities:
Maturities, prepayments and calls
Sales
Purchases
Activity in certificates of deposit
Maturities
Purchases
Net cash (used in) provided by investing activities
Cash Flows from Financing Activities
Repayments of other borrowings
Purchase of treasury stock
Payment of dividends
Net cash used in financing activities
Net Change in Cash and Cash Equivalents
Cash and Cash Equivalents - Beginning of year
Cash and Cash Equivalents - End of year
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
Note 22 – Quarterly Financial Data
Quarterly Financial Data - UNAUDITED
(In Thousands, Except Per Share Data)
Quarter Ended in 2025
Mar 31
June 30
Sep 30
Dec 31
Summary of Income:
Interest income
Interest expense
Net Interest Income
Provision for Credit Losses - Loans
Provision for (Recovery of) Credit Losses - Off Balance
Sheet Credit Exposures
Net Interest Income After Provision for Credit Losses
Other expense
Net income before income taxes
Income taxes
Net income
Earnings per Common Share
Average common shares outstanding
(In Thousands, Except Per Share Data)
Quarter Ended in 2024
Mar 31
June 30
Sep 30
Dec 31
Summary of Income:
Interest income
Interest expense
Net Interest Income
Provision for (Recovery of) Credit Losses - Loans
Recovery of Credit Losses - Off Balance
Sheet Credit Exposures
Net Interest Income After Provision for Credit Losses
Other expense
Net income before income taxes
Income taxes
Net income
Earnings per Common Share
Average common shares outstanding
Note 23 - Segment Reporting
The Company has one reportable operating segment, commercial banking. While our chief operating decision makers (CODM) monitor revenue streams of various products and services, the identifiable segments’ operations are managed, and financial performance is evaluated on a Company wide basis. The commercial banking segment provides a broad array of financial products and services including commercial, agricultural, and residential mortgage as well as consumer lending activities, commercial and consumer banking services, wealth advisory services and insurance to individual and business clients through most of its banking center locations in Ohio, Indiana, and Michigan.
Farmers & Merchants Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2025, 2024, 2023
The accounting policies of the commercial banking segment are the same as those described in Note 1 of the Notes to Consolidated Financial Statements. The CODM assess performance for the commercial banking segment and decide how to allocate resources based on net income which is also reported on the Consolidated Statements of Income as net income. The measure of segment assets is reported on the Consolidated Balance Sheets as total assets.
The CODM use net income to evaluate income generated from segment assets (return on average total assets) in deciding whether to reinvest profits into the commercial banking segment or to pay dividends or fund acquisitions. Net income is also used by the CODM to monitor budget versus actual results. Net income as well as other common company-wide financial performance and credit quality metrics such as return on average assets, return on average equity, earnings per common share, net interest margin, operating efficiency and nonaccrual loans to total loans, among others, are used for competitive analysis by benchmarking to the Company’s competitors as well as used in assessing the performance of the segment and for establishing management’s compensation. Loans, investments and deposits provide revenue in the banking operation. Interest expense, provisions for credit losses, salaries, wages and associated employee benefits, and data processing are the significant expenses in the banking operation.
The Company’s CODM are the President and senior management team of the Company.
Note 24 – Subsequent Events
On January 27, 2026, the Company announced the authorization by its Board of Directors for the Company’s repurchase, either on the open market, or in privately negotiated transactions, of up to 650,000 shares of its outstanding common stock commencing January 27, 2026 and ending December 31, 2026.
ITEM 9. CHANGE IN AND DISAGREEMENTS WI TH ACCOUNTING AND FINANCIAL DISCLOSURE
No disagreements exist on accounting and financial disclosures or related matter.
