# Farmers & Merchants Bancorp Inc: Form 10-Q for the period ended Sep 30, 2024

- Company: [Farmers & Merchants Bancorp Inc](/companies/fmao.md) (CIK 792966)
- Form: 10-Q
- Filed: 2024-11-06
- Accepted by EDGAR: Nov 6, 2024, 15:07 ET
- Period: 2024-09-30
- Accession: 0000950170-24-122145
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/792966/000095017024122145/fmao-20240930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/792966/000095017024122145/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Selling, general and administrative | 3 months, 2024-07-01 to 2024-09-30 | $1.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2024-01-01 to 2024-09-30 | $4.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Income tax | 3 months, 2024-07-01 to 2024-09-30 | $1.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2024-01-01 to 2024-09-30 | $4.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-07-01 to 2024-09-30 | $6.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2024-01-01 to 2024-09-30 | $17.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-07-01 to 2024-09-30 | $0.48 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2024-01-01 to 2024-09-30 | $1.28 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-07-01 to 2024-09-30 | $0.48 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2024-01-01 to 2024-09-30 | $1.28 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 9 months, 2024-01-01 to 2024-09-30 | $29.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2024-01-01 to 2024-09-30 | $1.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2024-01-01 to 2024-09-30 | $8.9m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2024-01-01 to 2024-09-30 | $664.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2024-09-30 | $3.39bn | us-gaap:Assets |
| Total liabilities | at 2024-09-30 | $3.05bn | us-gaap:Liabilities |
| Shareholders' equity | at 2024-09-30 | $335.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 101,663 characters.

### OVERVIEW

The benefits of slowing our growth continue to be evident in the financials as we realized a slight widening of our net interest margin accompanied with continued strong asset quality. Last quarter was aided by the collection of over $6.4 million in funds on nonaccrual loans, accounting for the largest improvement year-to-date. The payment provided for a principal decrease of $5.3 million and the processing of interest and fees of over $1 million. Past due loans over 30 days were 0.21% of total loans as of June 30, 2024, and remained low at 0.20% for September 30, 2024. Our net interest margin improved 2 basis points at 2.68% year-to-date as of September 30th compared to 2.66% year-to-date as of June 30, 2024. This was accomplished by increasing our asset yield greater than the cost funds increase. We are optimistic about continued improvement in asset yield from loans repricing higher and slowing, with eventually reversing, the direction of our cost of funds.

The F&M Commercial Banking Division saw loan demand continue to soften in Q3 2024. Overall lending rates have increased throughout 2024 and expect to retract with the Federal Reserve Board's 50 basis point reduction in the federal funds rate in September. Commercial clients have seen material availability improve, but inflationary impacts remain a concern in 2024. Credit quality of the commercial portfolio remains solid and Q3 collateral values and auction values are still holding consistent with previous quarters. F&M continues to monitor the portfolio closely for the impact of higher rates and inflationary pressures.

We experienced a minor uptick in Special Mention and Classified loans in the portfolio for the quarter, but criticized assets are still trending down for the year as our asset quality has remained very healthy.

Nonetheless, the Bank is seeing signs in the commercial real estate market that present future challenges as interest rate adjusters reset for adjustable-rate loans and commercial real estate in the office and retail sectors shows increasing vacancy. Asset quality remains very solid with non-performing assets declining, but the Bank continues to stress test its loan portfolio and credit metrics for weakness. The Bank is monitoring its commercial real estate portfolio very carefully and has internal thresholds in place for loan categories including office, retail, hospitality, non-owner occupied, development, and related segments.

The Bank had 18% of its commercial and agricultural loan portfolio reviewed by an independent third-party in the second quarter with no recommended risk rating changes and no material findings. The Bank expects to have a similar review with comparable coverage of the loan portfolio in the fourth quarter as well.

The Bank will benefit in profitability from the repricing loans and will continue to monitor that the tighter cash flows do not become a material issue of concern. For new borrowers, the higher price of credit remains an impediment to borrowing, as the cash flow is negatively impacted which speaks to why loan growth has slowed overall.

The F&M Home Loan Team stayed consistent in production. Mortgage rates have recovered and lowered to being in the low 6.00% range. Housing inventory is still low but has seen a slight increase this quarter. The Bank’s Home Loan Team continues to find the best mortgage solutions for all our clients while looking for opportunities to help with housing initiatives in our underserved areas of our communities utilizing our Hometown Advantage Mortgage program. Our gain on sale of loans has exceeded the yearly budget through the nine months ended September 30, 2024.

Harvest began in the F&M Ag portfolio in Q3 and we will monitor yields and farm income as we enter Q4. The growing conditions throughout our market area generally were favorable but late season dryness will likely reduce production. Commodity prices have declined from prior years highs with an expected decline in net farm income. The performance of our Ag businesses has been solid, but a decline in net farm income can potentially impact their performance. The strong profits realized in prior years has positioned our customer base well for a potential decline in income. Loan demand has been flat. Overall, the performance and financial standing of our agricultural portfolio remains strong.

The Bank was excited to have become a participant in the OHIO HOMEBUYER PLUS Saver program offered in conjunction with the State of Ohio to future Ohio homeowners to save for a home purchase within the next five years. During the quarter, the State of Ohio changed the terms of the offering due to the extremely unexpected high demand for the program. The Bank suspended offering of the product until such time as we can adjust our offering to the new conditions of the State. We expect to offer again in the fourth quarter under modified terms. The Bank can offer a higher than market interest rate to our depositor with the State placing a lower than market rate CD with the Bank to provide funding. The adjusted program is capped at $100 million in use and an account limitation of $100 thousand with the State only matching the first $25,000 with a lower than market rate.

Last quarter, the Bank had seen an increase in the number of foreclosure demand notices that needed to be sent. Three quarters of the notices were delivered to in-house customers with the total balance just under $1 million. The borrowers were spread throughout our market area and it represented the highest number of notices sent and the highest dollar amount of past due ($3.1 million) in the consumer home loan portfolio since the onset of COVID in 2020. For the current quarter ended, the number of active foreclosure demand notices are down along with the dollar amount of over 30 days past due. The Bank does not have any Other Real Estate Owned and 2 accounts are in the foreclosure process which will likely not be resolved until 2025.

Since the Federal Reserve raised rates the last couple of years, our net interest margin has suffered from our earning assets not repricing as quickly or by as much as our cost of funds. And while we are still not surpassing 2023 levels, we did see improvement in 2nd and 3rd quarters as mentioned previously. It is wonderful to see the expansion of the net interest margin, no matter how slight. The Bank continues to focus on lowering the cost of new funds and is enjoying the benefits of loans repricing higher.

Overall, net income for the quarter was higher than the previous quarter by over $800 thousand and over same quarter last year by $1.7 million. On a year-to-date basis, net income surpassed September 30, 2023’s by $313 thousand. The benefits of adjusting our focus for 2024 has begun to show in the financials. Capital balances as of September 30, 2024, increased $18.8 million over same date 2023. At the same time, the Company continues to increase our dividend for our shareholders, which remains a priority. The declared dividend in September 2024 included matching the previous quarterly declaration and adding a 1/8th of a cent to it. The Company’s annual dividend will have increased from $0.2375 in 2004 to $0.8825 in 2024, reflecting a 6.8% compound annual growth rate over this period. The Company continues to focus on improving our capital and overall financial performance. The steps may be small; however, they are continuing to move in a more positive direction.

### NATURE OF ACTIVITIES

Farmers & Merchants Bancorp, Inc. (the “Company”) is a financial holding company incorporated under the laws of Ohio in 1985. Our subsidiary is The Farmers & Merchants State Bank (the “Bank”), a local independent community bank that has been primarily serving Northwest Ohio, Northeast Indiana and Southeast Michigan since 1897. F&M Insurance Agency, LLC was formed in November of 2023. Farmers & Merchants Risk Management, Inc., a captive insurance company formed in December 2014 and located in Nevada was a subsidiary of the Company which was dissolved in December 2023. We report our financial condition and net income on a consolidated basis and we have only one segment.

Our executive offices are located at 307 North Defiance Street, Archbold, Ohio 43502, and our telephone number is (419) 446-2501. The Bank operates thirty-seven full-service banking offices throughout Northwest Ohio, Northeast Indiana and Southeast Michigan along with a drive-up facility in Archbold. The Bank also operates four Loan Production Offices (LPOs), two in Ohio with one in Indiana and one in Michigan.

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

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

The Bank has established underwriting policies and procedures which facilitate operating in a safe and sound manner in accordance with supervisory and regulatory guidance. Within this sphere of safety and soundness, the Bank's practice has been to not promote innovative, unproven credit products which may not be in the best interest of the Bank or its customers. The Bank does offer a hybrid mortgage loan. Hybrid loans are loans that start out as a fixed rate mortgage but after a set number of years automatically adjust to an adjustable rate mortgage. The Bank offers a three year, a five year and a seven year fixed rate mortgage after which the interest rate will adjust annually. In order to offer longer term fixed rate mortgages, the Bank does participate in the Freddie Mac, Farmer Mac and Small Business Lending programs. The Bank also normally retains the servicing rights on these partially or 100% sold loans. In order for the customer to participate in these programs they must meet the requirements established by those agencies. In addition, the Bank does sell some of its longer term fixed rate agricultural mortgages into the secondary market with the aid of brokers. With the acquisition of Perpetual Federal Savings Bank in the fourth quarter of 2021 and the addition of Peoples Federal Savings in the fourth quarter of 2022, the Bank saw an increase in fixed rate, long-term mortgage loans to our portfolio from that banking service area. The Bank began offering a low income home buyer mortgage program, currently Hometown Advantage Mortgage Program, in November of 2023.

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

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

Consumer Loans:

- Maximum loan to value (LTV) for cars, SUVs, and trucks is 110% depending on whether direct or indirect.
- Loans above 100% are generally the result of sales tax.
- Boats, campers, motorcycles, RV's and Motor Coaches range from 80%-90% based on age of vehicle.
- 1st or 2nd mortgages on 1-4 family homes maximum range from 80-85%.
- Raw land LTV maximum ranges from 65%-75% depending on whether or not the property has been improved.

Commercial/Agriculture:

Accounts Receivable:

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

Inventory:

- Agriculture:
- Livestock and grain up to 80% LTV, crops (insured) up to 75% and Warehouse Receipts up to 87%.
- Commercial:
- Maximum LTV of 50% on raw and finished goods.
- Floor plan:
- New/used vehicles to 100% of wholesale.
- New/Used recreational vehicles and manufactured homes to 80% of wholesale.

Equipment:

- New, not to exceed (NTE) 80% of invoice, used NTE 50% of listed book or 75% of appraised value.
- Restaurant equipment up to 35% of market value.
- Heavy trucks, titled trailers NTE 75% LTV and aircraft up to 75% of appraised value.

Real Estate:

- Maximum LTVs range from 70%-80% depending on type.
- Maximum LTV on non-traditional loan up to 85%.

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

In December of 2014, the Company became a financial holding company within the meaning of the Bank Holding Company Act of 1956 as amended (the “Act”), in order to provide the flexibility to take advantage of the expanded powers available to a financial holding company under the Act. Our holding company is regulated and examined by the Federal Reserve. Our subsidiary bank is in turn regulated and examined by the Ohio Division of Financial Institutions and the Federal Deposit Insurance Corporation. The activities of our bank subsidiary are also subject to other federal and state laws and regulations. The Company also formed a captive insurance company (the “captive”) in December 2014 and dissolved it in December 2023. The Captive was located in Nevada and regulated by the State of Nevada Division of Insurance.

The Bank formed an insurance agency, F&M Insurance Agency, LLC, in November 2023 to offer insurance products to our customers. The insurance agency is organized in Ohio and regulated by the State of Ohio, Division of Insurance.

The Bank’s primary market includes communities located in the Ohio counties of Butler, Champaign, Defiance, Fulton, Hancock, Henry, Lucas, Shelby, Williams, Wood and in the Indiana counties of Adams, Allen, DeKalb, Jay, Steuben and

Wells. The Michigan footprint includes Oakland County. In our banking activities, we compete directly with other commercial banks, credit unions, farm credit services, and savings and loan institutions in each of our operating localities. In a number of our locations, we compete against entities which are much larger than us. The primary factors in competing for loans and deposits are the rates charged as well as location and quality of the services provided.

At September 30, 2024, we had 446 full time equivalent employees. The employees are not represented by a collective bargaining unit. We provide our employees with a comprehensive benefit program, some of which is contributory. We consider our employee relations to be good.

### RECENT REGULATORY DEVELOPMENTS

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

Under the Truth in Lending Act (TILA) Ability to Repay requirements, the Bank focuses on Qualified Mortgage (QM) status for mortgage loans originated as they provide certain presumptions of compliance under the Ability to Repay rules adopted under the Dodd-Frank Act. In satisfying QM requirements, any mortgage lender regardless of their size can make loans which are entitled to the QM presumption of compliance. New final rules, effective October 2022, amending the Ability to Repay/Qualified Mortgage Rules were implemented. The General QM Final Rule amended the definition of the QM category to offset the impact of the sunsetting of the temporary Government Sponsored Enterprise (GSE) QMs. Amended General QM loan definition removed the 43% debt-to-income limit, eliminated Appendix Q underwriting standards and any requirement to use them as a qualification for General QM status, and instead implemented price-based thresholds. The Bank complies with the revised price-based new General QM Loan definition and its requirements. Since the Bank sells fixed rate consumer mortgage loans to the Federal Home Loan Mortgage Corporation, it remains attentive to their current loan underwriting requirements. On occasion, the Bank does make Non-Qualified Mortgages. Approvals and originations of both Non-QM loans and Higher Priced Mortgage Loans are periodically reported to the Bank’s Loan Committee.

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

Lenders that originated at least 2,500 small business loans annually were originally required to begin data collection on October 1, 2024. Lenders that originated at least 500 small business loans annually were originally required to begin data collection as of April 1, 2025. For those lenders that originated at least 100 small business loans annually, data collection was originally required to begin as of January 1, 2026. The Bank conducted a preliminary assessment based on the number of covered loans originated in 2022. Based on the preliminary assessment, the Bank would be subject to the original data collection requirements as of April 1, 2025. Data collection and reporting of small business loans does not include nonprofit or government entities or businesses with gross annual revenues that exceed $5 million. Additionally, data collection involves demographic information collected from a loan applicant regarding that applicant’s status as a minority-owned business, a women-owned business, and an LGBTQI+-owned business, as well as the applicant’s principal owners’ ethnicity, race, and sex. Applicants can refuse to provide demographic information. Implementation of these final rules will involve significant changes to processes and procedures in conjunction with new software configurations to accommodate and capture required data points regarding applications and final action taken.

A lawsuit filed in April 2023 by the Texas Bankers Association and Rio Bank based in McAllen, Texas in the U.S. District Court for the Southern District of Texas challenged the CFPB's final rule implementing Section 1071 of the Dodd-Frank Act. Shortly thereafter, the American Bankers Association joined the lawsuit as a plaintiff. The argument is the final rule far exceeded the statutory scope of Section 1071, failed to take into consideration relevant industry comments, and did not conduct appropriate cost-benefit analysis. Additionally, the constitutionality of the CFPB was challenged based on its funding structure, and which is based upon another pending lawsuit which is awaiting a hearing by the U.S. Supreme Court regarding CFPB's funding. On July 31, 2023, an injunction was granted by a federal judge in the Southern District of Texas banning the CFPB from requiring Rio Bank, and members of both the Texas Bankers Association and the American Bankers Association from complying with the final rules implementing Section 1071 of the Dodd-Frank Act until the Supreme Court of the United States rules on the CFPB's funding. On August 4, 2023, a motion was filed by the Independent Community Bankers of America, the Independent Bankers Association of Texas, and Texas First Bank in the U.S. District Court for the Southern District of Texas requesting expansion of the injunction previously granted. In late October 2023, the federal judge granted the expansion of the injunctive relief to provide a nationwide injunction to all community banks and covered financial institutions thus ensuring relief was not limited by trade association membership. The U.S. Supreme Court issued its long-awaited decision on the challenge to the CFPB’s funding mechanism on May 16, 2024. The Supreme Court ruled that the CFPB’s funding does not violate the U.S. Constitution’s Appropriations Clause. Subsequently, the CFPB issued an interim final rule on June 25, 2024, to make date related adjustments on a day for day basis based on recent court orders involving ongoing litigation. This extended compliance dates for beginning data collection by 290 days. As a lender that originates at least 100 small business loans annually, data collection must now begin on January 16, 2026 with a filing deadline of June 1, 2027. The Bank remains attentive to the ongoing arguments, appeals, and related cases in the litigation involving the Section 1071 final rule.

A final rule with amendments to the Community Reinvestment Act (CRA) was jointly released by the Federal Reserve, the FDIC, and Office of the Comptroller of the Currency on October 24, 2023. These amendments are intended to update how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated. The final rule was effective on April 1, 2024, with certain amendments effective April 1, 2024, through January 1, 2031, and other amendments in the final rule were delayed indefinitely. The final CRA rules were published in the *Federal Register* on February 1, 2024. On February 5, 2024, the American Bankers Association, the U.S. Chamber of Commerce, the Independent Community Bankers of America, along with four state associations jointly sued the Federal Reserve, FDIC, and Office of Comptroller of the Currency for exceeding their statutory authority. The lawsuit filed in the U.S. District Court for the Northern District of Texas requested the regulatory agencies vacate the rule and sought a preliminary injunction pausing the new rules while the court decided the merits of the case. On March 21, 2024, the Federal Reserve, FDIC, and Office of Comptroller of the Currency issued an interim final rule and a technical corrections final rule related to the CRA final rule both effective on April 1, 2024. The Agencies also requested comments on the interim final rule for a period of 45 days after publication in the *Federal Register*. The interim final rule extended two provisions of the CRA final rule from April 1, 2024, to January 1, 2026. Then on March 29, 2024, the district court judge granted a temporary injunction to pause the implementation of CRA final rule while the case moves forward. The injunction extended implementation dates on a day for day basis for each day the injunction remains in place. As a large bank examined for its CRA performance, the Bank remains attentive to the outcome of the preliminary injunction granted and the significant impact of the amendments made by the final CRA rules.

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

### CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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

The net income from operations of foreclosed real estate held for sale is reported either in noninterest income or noninterest expense depending upon whether the property is in a gain or loss position overall. At September 30, 2024, December 31, 2023, and September 30, 2023 there were no OREO property holdings.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs. Accrued interest receivable totaled $12.1 million and $10.1 million at September 30, 2024 and December 31, 2023, respectively, and was reported in Other Assets on the condensed consolidated balance sheets and is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipation of 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. Consumer and credit card loans continue to accrue interest until they are charged off no later than 120 days past due unless the loan is in the process of collection. Past-due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

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

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

The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The 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. 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 CECL calculation consist of Commercial Real Estate, Construction & Land Development, Multi-family real estate, Commercial & Industrial, Farmland, Agriculture, Single Family Real Estate, Home Equity Lines of Credit, 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.

Due to the Company’s loss history not being sufficient enough to predict future losses, the Company is utilizing peer data from a peer group of 307 banks in the region with asset sizes less than $5 billion. 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. The Bank previously also included the FOMC’s forecasted change in real GDP as a second independent variable in its forward look regression; however, it was removed in the second quarter of 2024 due to reflecting little statistically significant correlation to the Bank’s historical loss rates. The impact of this change to the ACL was immaterial due to the variable having such a low coefficient value at this time. 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 to assess the general reserve on the loan portfolio. 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 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 $53 thousand at September 30, 2024 and $386 thousand at December 31, 2023. 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.

Inherent in most estimates is imprecision. Bank regulatory agencies and external auditors periodically review the Bank’s methodology and adequacy of the ACL. Any required changes in the ACL or loan charge-offs by these agencies or auditors may have a material effect on the ACL.

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 with the notes to consolidated financial statements.

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

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

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

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

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

The Bank’s servicing rights relating to loans serviced for others represent an asset. The servicing rights are amortized as noninterest expense in proportion to, and over the period of the estimated future net servicing income of the underlying servicing rights. There are a number of factors, however, that can affect the ultimate value of the servicing rights to the Bank. The expected and actual rates of agricultural real estate loans and single 1-4 family loan prepayments are the most significant factors driving the potential for the impairment of the value of servicing assets. Increases in loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced, meaning that the present value of the servicing rights is less than the carrying value of those rights on the Bank's balance sheet.

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

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

The accuracy of these estimates and assumptions by management and its third party valuation specialist can be directly tied back to the fact that management has only been required to record minor valuation allowances through its income statement over time based upon the valuation of each stratum of servicing rights in the single family real estate. The valuation of the agricultural real estate rights is evaluated for the most reasonable and representative values as the market for these is not as widely known and accepted as the single family.

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 will be recognized in the period identified. Periodically, the Bank will have an independent third party assess the possibility of impairment of goodwill. The goodwill impairment analysis was last performed as of September 30, 2023 by an independent third party. The goodwill impairment analysis consisted of a first step goodwill impairment test which was used to identify potential impairment by comparing the fair value of the relevant reporting entity with its carrying value, including goodwill. The analysis was performed under guidance of FASB ASC 350. In the quantitative testing completed as of September 30, 2024, the excess fair value of capital was $16.2 million or 4.5% over the carrying value and was approximately 0.2 times the value of goodwill being carried. The testing completed as of September 30, 2024 shows improvement compared to the testing completed as of September 30, 2023.

### MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The Company had begun to experience a slowdown in its growth mode in the last half of the year of 2023. For the first half of 2024, the Company intentionally slowed even further. During the third quarter of 2024, loan balances decreased $23.9 million, or 0.9% compared to second quarter of 2024. The outlook for the remainder of 2024 is to have little to no loan growth as the avenue to greater profitability is to focus on earnings improvement. Currently, funding large loan growth would be a deterrent to that focus. Therefore, we have chosen to participate out a portion of our larger loans, both new loans and some existing, with other financial institutions. Paydowns and payoffs will be used to fund originations to existing customers and to build relationships in our newer markets. Loan balances as of September 30, 2024, were $43.8 million lower than December 31, 2023 balances; however, there remains $102.1 million of funds committed to complete construction projects of business customers as of September 30, 2024.

Where the Company continues to focus on growth is in the areas of core deposits and the expansion of contingency funding. Growing deposits has been a focus especially in our newer markets throughout 2024. The Bank has increased the number of team members in our Treasury Management area and has continued to offer specials in our deposit offerings. The Bank offers the Insured Cash Sweep (ICS) product and CDARS, a certificate of deposit registry, accessed through the IntraFi network of financial institutions which helps to reduce the amount of pledged securities needed. The Bank’s uninsured deposit ratio remains low at 10.5%. As of September 30, 2024, total uninsured deposits of the Bank were $283.2 million of $2.7 billion total deposits. If the amount of coverage is adjusted for what is insured by FDIC alone, the percentage is 20.9% or $560.8 million of uninsured deposits as of September 30, 2024. The underlying difference between these two percentages is the protection required for public funds for which the Bank pledges securities. A State insurance fund exists for public funds in Indiana. The state of Michigan also does not require the pledging of collateral for public funds though some entities do request it.

Deposits have increased $77.4 million as of September 30, 2024 since December 31, 2023, and cash and cash equivalents have increased $103.3 million over the same time period. The nearly $245.5 million of cash holdings represents 7.2% of total assets and 9.1% of total deposits as of September 30, 2024. The Bank is comfortable with operating at this level as 5% is the guideline the Bank has established. Since June 30, 2024, deposits have increased $43.7 million or 1.7% and cash and cash equivalents have increased $52.4 million or 27.2%. The management liquidity meetings had increased in frequency in 2023 to weekly and additional reports and analysis were built throughout the year in order to be more responsive to opportunities and threats as they arose. Reaching many of the guidelines, such as the cash ratio mentioned, has enabled those meetings to be lowered to a biweekly frequency. With the Federal Reserve’s Bank Term Funding Program (BTFP) ending in March of 2024, $32.2 million of securities were moved to the Federal Reserve’s Discount Window program for borrowing capacity while the remainder of the $61.7 million pledged as of the end of December 2023 were released. The Company had not utilized any funding from the BTFP.

During the third quarter 2024, borrowings from the Federal Home Loan Bank “FHLB” decreased $3.0 million through normal paydowns. The Bank continued its use of brokered CDs in third quarter 2024 by utilizing one additional source in the amount of $295 thousand for a total of $26.9 million from four sources. This was done to establish relationships to test the access of such funds and decrease the cost of funds going forward. To assure a proper net interest margin over the 3 and 4-year time period of these CDs, the Bank internally looked at loan originations in the first quarter with similar or slightly longer fixed interest rate periods. The Bank also tested all correspondent borrowing lines during the third quarter to assure availability should the need arise. The availability for overnight borrowing on unsecured Federal Funds lines is $118.0 million. Combining the available line of credit at the holding company level, the Company has $133 million overnight borrowing availability.

In comparing to the same prior year period, the September 30, 2024 (net of deferred fees and cost) loan balances of $2.5 billion accounted for $5.7 million or 0.2% increase when compared to 2023. The year over year improvement was made up of an increase in commercial and industrial related loans of 0.5%. Individual growth was comprised of 3.9% in non-real estate commercial loans offset by a decline of 0.2% in commercial real estate loans. Consumer real estate loans increased by 2.2% while consumer loans decreased by 18.8%. Agricultural related loans increased 2.4% year over year. Individual growth was comprised of 11.0% in non-real estate agricultural loans offset by a decline of 2.4% in agricultural real estate loans. Other loans decreased by 16.6%. The Company's strong team of lenders remain focused on providing customers valuable localized services and thereby increasing our market share. The acquisition of Peoples Federal Savings and Loan Association in the fourth quarter of 2022 brought $101.8 million of loans to the portfolio. See Note 2 to the consolidated financial statements.

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

*(In Thousands)*

|  | September 30, 2024 | September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: |
| Consumer Real Estate | $524,270 | $512,990 | $416,044 |
| Agricultural Real Estate | 220,051 | 225,370 | 204,787 |
| Agricultural | 137,587 | 123,971 | 128,818 |
| Commercial Real Estate | 1,298,929 | 1,301,614 | 1,061,904 |
| Commercial and Industrial | 260,488 | 250,756 | 229,338 |
| Consumer | 68,050 | 83,822 | 71,063 |
| Other | 25,916 | 31,083 | 30,662 |
| Total Loans, net of deferred fees and costs | $2,535,291 | $2,529,606 | $2,142,616 |

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 51.29% of the Company's total gross loan portfolio as of September 30, 2024. The below charts break out the commercial real estate portfolio by category, location and loan grade.

| CRE Category | Dollar Balance | Percent of CRE Portfolio | Percent of Total Loan Portfolio |
| --- | ---: | ---: | ---: |
| Industrial | $274,953 | 21.13% | 10.84% |
| Retail | 237,622 | 18.26% | 9.36% |
| Multi-family | 223,926 | 17.21% | 8.83% |
| Hotels | 141,642 | 10.89% | 5.58% |
| Office | 134,973 | 10.37% | 5.32% |
| Gas Stations | 62,028 | 4.77% | 2.45% |
| Food Service | 46,526 | 3.58% | 1.83% |
| Development | 30,999 | 2.38% | 1.22% |
| Senior Living | 29,866 | 2.29% | 1.18% |
| Auto Dealers | 25,068 | 1.93% | 0.99% |
| Other | 93,557 | 7.19% | 3.69% |
| Total CRE | $1,301,160 | 100.00% | 51.29% |

| CRE Category(\*) | Dollar Balance | Percent of CRE Portfolio |
| --- | ---: | ---: |
| Non-owner occupied | $538,703 | 41.40% |
| Owner occupied | 507,532 | 39.01% |
| Multi-family | 223,926 | 17.21% |
| Land & Development | 30,999 | 2.38% |
| Total CRE | $1,301,160 | 100.00% |
| \* Categories assume construction loans converted to either owner or non-owner occupied. |  |  |

| Location | Dollar Balance | Percent of CRE Portfolio |
| --- | ---: | ---: |
| Southeast Michigan | $459,695 | 35.33% |
| Northwest Ohio | 338,953 | 26.05% |
| Columbus, Ohio | 153,663 | 11.81% |
| Fort Wayne, Indiana | 141,866 | 10.90% |
| Dayton/Cincinnati, Ohio | 56,375 | 4.33% |
| Greater Indianapolis, Indiana | 48,919 | 3.76% |
| Other | 101,689 | 7.82% |
| Total CRE | $1,301,160 | 100.00% |

60

| CRE Grades | September 30, 2024 | December 31, 2023 | December 31, 2022 |
| ---: | ---: | ---: | ---: |
| 2 | 0.56% | 0.55% | 0.80% |
| 3 | 37.27% | 36.33% | 32.10% |
| 4 | 58.34% | 58.00% | 64.20% |
| 5 | 3.67% | 5.07% | 0.80% |
| 6 | 0.16% | 0.05% | 2.10% |
|  | 100.00% | 100.00% | 100.00% |

The following is a contractual maturity schedule by major category of loans excluding fair value adjustments as of September 30, 2024.

*(In Thousands)*

|  | September 30, 2024 Within One Year | After One Year Within Five Years | After Five Years Within Fifteen Years | After Fifteen Years |
| --- | ---: | ---: | ---: | ---: |
| Consumer Real Estate | $20,535 | $25,029 | $157,928 | $323,136 |
| Agricultural Real Estate | 6,864 | 6,136 | 64,741 | 142,868 |
| Agricultural | 72,558 | 51,831 | 9,718 | 3,171 |
| Commercial Real Estate | 150,658 | 373,753 | 571,625 | 205,198 |
| Commercial and Industrial | 104,773 | 95,156 | 60,279 | 928 |
| Consumer | 2,979 | 54,269 | 10,307 | 41 |
| Other | 10 | 1,063 | 24,847 | - |

Management feels confident that liquidity needs can be met through additional maturities from the security portfolio, increased deposits and additional borrowings. For short term needs, the Bank has the unsecured borrowing capacity through its correspondent banks mentioned above along with access to $163.7 million through a Cash Management Advance with the Federal Home Loan Bank as of September 30, 2024. The Bank's secured borrowing capacity limits at the Federal Home Loan Bank would have allowed draws on the Cash Management Advance of $151.4 million on September 30, 2024.

While the security portfolio has been utilized to fund loan growth in previous periods, additional sources have been cultivated during 2022, 2023, and 2024. The security portfolio increased in the first nine months of 2024 from year end 2023 due to purchases of $56.1 million offset by maturities and paydowns of $21.0 million, net amortization of $0.9 million and a $12.2 million decrease in unrealized losses. The amount of pledged investment securities decreased by $8.8 million as compared to year end and increased $1.5 million as compared to September 30, 2023. As of September 30, 2024, pledged investment securities totaled $247.0 million. The Company does plan to do additional purchases of securities the remainder of the year for the purposes of increasing the holdings for liquidity and contingency planning and as a means of balance sheet gap management. The purchases in third quarter 2024 were done with a focus on improving our investments in Community Reinvestment Act (CRA) qualifying securities.

An additional $151.4 million is also available to the Bank from the Federal Home Loan Bank based on current amounts of pledged collateral. The Bank has pledged eligible 1-4 family, home equity, commercial real estate, multifamily real estate portfolios and specific securities. Multifamily real estate was added to our assets pledged to the FHLB in second quarter 2024 and additional commercial real estate holdings were designated as pledges to increase the availability in first quarter 2024. Based on total asset capacity, the Bank would have nearly $1.1 billion available to borrow.

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

Overall total assets increased only 3.2% or $106.0 million since year end 2023. The intended and largest growth in cash holdings was discussed above.

Total deposits accounted for the largest growth within liabilities of $77.4 million or 3.0%. The mix of deposits saw increases in interest bearing checking, savings and money market deposits along with time deposit accounts since December 31, 2023. Noninterest-bearing accounts saw decreases from December 31, 2023.

Shareholders’ equity increased by $18.8 million as of the third quarter of 2024 compared to year end 2023. Earnings exceeded dividend declarations during the nine months ended September 30, 2024. Accumulated other comprehensive loss decreased in unrealized loss position by $9.6 million from December 2023 to an unrealized loss of $19.4 million on September 30, 2024. Dividends declared were $0.22125 per share during the third quarter compared to $0.22 per share during the second quarter, an increase of 0.6%. This represents an increase of 5.4% over the third quarter of 2023 dividend of $0.21 per share. Compared to September 30, 2023, shareholders’ equity increased 10.6% or $32.2 million with $20.1 million attributed to an improvement in accumulated other comprehensive loss. Net income was higher for the quarter ended September 2024 compared to September 2023 by $1.7 million and net income improved by $834 thousand over second quarter 2024. We are encouraged that net interest income has continued to improve quarter over quarter since third quarter 2023.

Basel III regulatory capital requirements include a capital conservation buffer of 2.5%. As of September 30, 2024, the Company and the Bank are both positioned well above the current requirement.

While the Holding Company generally has sufficient liquidity to maintain its dividend policy without relying on the upstreaming of dividends from the Bank, the Bank declared a $3.0 million dividend during both the first, second and third quarters of 2024.

The Bank continues to be well-capitalized at September 30, 2024 in accordance with Federal regulatory capital requirements as the capital ratios below show:

|  |  |
| --- | ---: |
| Tier I Leverage Ratio | 8.74% |
| Risk Based Capital Tier I | 11.28% |
| Total Risk Based Capital | 12.28% |
| Stockholders' Equity/Total Assets | 10.60% |
| Capital Conservation Buffer | 4.28% |

The implementation of ASU 2016-13 (CECL) resulted in an entry which reduced retained earnings $3.4 million on January 1, 2023. This adjustment is permitted to be spread over three years when calculating regulatory capital, which for 2023 was over $2.5 million. This adjustment decreased to $1.7 million for 2024.

### MATERIAL CHANGES IN RESULTS OF OPERATIONS

### Comparison of Results of Interest Earnings and Expenses for three month periods ended September 30, 2024 and 2023

### Interest Income

When comparing third quarter 2024 to third quarter 2023, average loan balances grew $15.0 million which represented a 0.6% increase in a one-year time period. Interest income on loans increased $3.1 million or 9.1% as compared to the quarter ended September 30, 2023. In third quarter 2023, the Company reversed loan interest income from one relationship in the amount of approximately $492 thousand of which approximately $324 thousand was previously recognized in prior periods. Third quarter 2023 also included loan income of $594 thousand from the recovery of two acquired relationships that had been fully charged off prior to acquisition. The Company's loan portfolio is 34.5% variable with 19.5% of total loans subject to repricing within the next three months.

The available-for-sale securities portfolio increased in average balances by $17.7 million when comparing to the same quarter in 2023 while the income associated with the security portfolio increased $545 thousand over third quarter 2023. The increased balances were the result of increasing our holdings for liquidity and contingency planning purposes and to improve our investments in CRA qualifying securities. Federal funds sold and interest-bearing deposits increased in average balances by $111.7 million as compared to the same quarter in 2023 with increased income of $1.9 million for the current quarter. The increased balances are the result of the focus on liquidity and deposit generation.

The overall total average balance of the Bank’s earning assets increased by $144.5 million and interest income for the quarter comparisons was higher for third quarter 2024 by 15.2% or $5.5 million as compared to third quarter 2023. Increases in the prime lending rate between periods has contributed to approximately 73.2% of the growth.

Annualized yield, for the quarter ended September 30, 2024, was 5.27% as compared to 4.79% for the quarter ended September 30, 2023. The following charts demonstrate increased loan balances accounted for 6.5% of the increased loan interest income while rate increases accounted for the remaining 93.5%. The yields on tax-exempt securities and the portion of the tax-exempt IDB loans included in loans have been tax adjusted based on a 21% tax rate in the charts to follow. The tax-exempt interest income was $114 and $133 thousand for the third quarter 2024 and 2023 which resulted in a federal tax savings of $24 and $28 thousand, respectively.

*(In Thousands)*

| Interest Earning Assets: | Quarter to Date Ended September 30, 2024 Average Balance | Interest/Dividends | Annualized Yield/Rate September 30, 2024 | September 30, 2023 |
| --- | ---: | ---: | ---: | ---: |
| Loans | $2,551,899 | $36,873 | 5.78% | 5.33% |
| Taxable investment securities | 415,943 | 2,107 | 2.03% | 1.58% |
| Tax-exempt investment securities | 19,661 | 81 | 2.09% | 1.77% |
| Fed funds sold & other | 197,258 | 2,840 | 5.76% | 4.36% |
| Total Interest Earning Assets | $3,184,761 | $41,901 | 5.27% | 4.79% |

#### Change in Interest Income Quarter to Date September 30, 2024 Compared to September 30, 2023

*(In Thousands)*

| Interest Earning Assets: | Total Change | Change Due to Volume | Change Due to Rate |
| --- | ---: | ---: | ---: |
| Loans | $3,090 | $200 | $2,890 |
| Taxable investment securities | 548 | 87 | 461 |
| Tax-exempt investment securities | (3) | (19) | 16 |
| Fed funds sold & other | 1,907 | 1,219 | 688 |
| Total Interest Earning Assets | $5,542 | $1,487 | $4,055 |

### Interest Expense

Offsetting a portion of the higher interest income improvement for the quarter was an increase in interest expense in 2024 of $3.6 million or 21.7% compared to third quarter 2023. Since 2023, average interest-bearing deposit balances have increased $170.6 million or 8.4% and the Company recognized $3.6 million more in interest expense for the most recent quarter. During September 2024, the Federal Reserve decreased the federal funds rate by 50 basis points whereas 2023 had four increases to the federal funds rate of 25 basis points in February, March, May and July. Deposit rates have been adjusted numerous times with all the rate changes. The following charts demonstrate increased average interest-bearing deposit balances accounted for 26.4% of the increased interest-bearing deposit expense while rate increases accounted for the remaining 73.6%.

Interest expense on FHLB borrowings and other borrowings increased $63 thousand in the third quarter 2024 over the same time frame in 2023 due to new FHLB borrowings in 2023 used to fund loan growth. During the current quarter, FHLB borrowings of $3.0 million were paid off. Interest expense on fed funds purchased and securities sold under agreement to repurchase decreased $72 thousand compared to third quarter 2023 due to the decrease of $6.6 million in average balances. Another factor in the increased cost of funds is the change in the mix of funding. Growth has occurred in interest bearing deposit balances offset by decreased borrowings while noninterest bearing deposits balances decreased $17.6 million compared to third quarter 2023. The Bank continues to focus on capturing the full customer relationship; however, it has resulted in more expensive deposits being brought in. The average cost of funds increased to 3.21% in third quarter 2024 compared to 2.82% in third quarter 2023. Refer to Note 11 for additional information on subordinated notes.

*(In Thousands)*

| Interest Bearing Liabilities: | Quarter to Date Ended September 30, 2024 Average Balance | Interest | Annualized Yield/Rate September 30, 2024 | September 30, 2023 |
| --- | ---: | ---: | ---: | ---: |
| Savings deposits | $1,538,387 | $10,691 | 2.78% | 2.24% |
| Other time deposits | 667,224 | 6,256 | 3.75% | 3.38% |
| Other borrowed money | 264,539 | 2,804 | 4.24% | 4.11% |
| Fed funds purchased & securities |  |  |  |  |
| sold under agreement to repurchase | 27,481 | 277 | 4.03% | 4.09% |
| Subordinated notes | 34,769 | 284 | 3.27% | 3.28% |
| Total Interest Bearing Liabilities | $2,532,400 | $20,312 | 3.21% | 2.82% |

63

#### Change in Interest Expense Quarter to Date September 30, 2024 Compared to September 30, 2023

*(In Thousands)*

| Interest Bearing Liabilities: | Total Change | Change Due to Volume | Change Due to Rate |
| --- | ---: | ---: | ---: |
| Savings deposits | $3,018 | $961 | $2,057 |
| Other time deposits | 606 | (6) | 612 |
| Other borrowed money | 63 | (20) | 83 |
| Fed funds purchased & securities |  |  |  |
| sold under agreement to repurchase | (72) | (68) | (4) |
| Subordinated notes | - | 1 | (1) |
| Total Interest Bearing Liabilities | $3,615 | $868 | $2,747 |

Overall, net interest spread for the third quarter 2024 was 9 basis points higher than same period last year. As the following chart indicates, the improvement in yields on interest earning assets of 48 basis points offset the increased cost of funds of 39 basis points when comparing to the same period a year ago. Competition for deposits remains intense with most competitors offering special rates for specific terms.

|  | September 30, 2024 | September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: |
| Interest/Dividend income/yield | 5.27% | 4.79% | 4.00% |
| Interest Expense/cost | 3.21% | 2.82% | 0.68% |
| Net Interest Spread | 2.06% | 1.97% | 3.32% |
| Net Interest Margin | 2.71% | 2.59% | 3.49% |

### Net Interest Income

Net interest income increased approximately $1.9 million for the third quarter 2024 over the same time frame in 2023 with the increase in interest income of $5.5 million offset by the interest expense increase of $3.6 million as previously mentioned. As the new loans added in 2023 and 2024 generate more income, management expects the benefits of the Company’s strategy of repositioning the balance sheet to increase interest income in the long run. Loans as a percentage of earning assets decreased to 80.1% in third quarter 2024 compared to 83.4% in third quarter 2023. Loans to total assets decreased to 76.1% in third quarter 2024 compared to 78.8% for the same period 2023. The percentage of earning assets to total assets increased to 95.0% in 2024 compared to 94.4% in 2023. In terms of net interest margin, the Bank recognizes competition for deposits will continue; however, there is a greater opportunity for gradual improvement with loans repricing upwards in the next year and a likely continuing slight decrease in cost of funds.

### Comparison of Noninterest Results of Operations for three month periods ended September 30, 2024 and 2023

### Provision Expense

The Allowance for Credit Losses (ACL) has a direct impact on the provision expense. The increase in the ACL is funded through recoveries and provision expense. The following tables both deal with the allowance for credit losses. The first table breaks down the activity within ACL for each loan portfolio class and shows the contribution provided by both the recoveries and the provision along with the reduction of the allowance caused by charge-offs. The second table discloses how much of the ACL is attributed to each class of the loan portfolio, as well as the percent that each particular class of the loan portfolio represents to the entire loan portfolio in the aggregate. The commercial and industrial loan portfolio along with the consumer loan portfolio accounted for the largest component of recoveries while the consumer loan portfolio accounted for the largest component of charge-offs for the three months ended September 30, 2024 versus the consumer loan portfolio and consumer real estate loan portfolio accounted for the largest component of recoveries and the consumer loan portfolio accounted for the largest component of charge-offs for the three months ended September 30, 2023.

Total provision for credit losses decreased $178 thousand for the three months ended September 30, 2024 as compared to the same period in 2023. Management continues to monitor asset quality, making adjustments to the provision as necessary. The impact of higher interest rates and inflation are taken into consideration when reviewing qualitative factors. Loan charge-offs were $25 thousand lower during the three months ended September 30, 2024 than the same period in 2023. Recoveries were unchanged at $55 thousand during the three months ended September 30, 2024 as compared to same period in 2023. Combined net charge-offs were $25 thousand lower in the three months ended September 30, 2024 than the same time period 2023.

Loans past due 30 or more days decreased $4.3 million at September 30, 2024 as compared to September 30, 2023. The largest changes were attributed to the combined decrease of past due balances of $4.2 million in the agricultural loan portfolio and agricultural real estate loan portfolio. The consumer real estate loan portfolio past due balances increased $1.1 million for the same time period.

The following table breaks down the activity within the ACL for each loan portfolio class and shows the contribution provided by both recoveries and the provision, along with the reduction of the allowance caused by charge-offs. The time period covered is for the three months ended September 30, 2024, 2023, and 2022.

*(In Thousands)*

|  | Three Months Ended September 30, 2024 | Three Months Ended September 30, 2023 | Three Months Ended September 30, 2022 |
| --- | ---: | ---: | ---: |
| Loans, net of deferred fees and costs | $2,535,291 | $2,529,606 | $2,142,616 |
| Daily average of outstanding loans | $2,550,297 | $2,536,885 | $2,082,486 |
| Nonaccrual loans | $2,898 | $22,447 | $5,470 |
| Nonperforming loans\* | $2,898 | $22,447 | $5,470 |
| Allowance for Credit Losses - July 1, | $25,270 | $24,910 | $18,424 |
| Loans Charged off: |  |  |  |
| Consumer Real Estate | - | - | - |
| Agriculture Real Estate | - | - | - |
| Agricultural | - | - | - |
| Commercial Real Estate | 15 | - | - |
| Commercial and Industrial | 5 | - | - |
| Consumer | 103 | 148 | 123 |
|  | 123 | 148 | 123 |
| Loan Recoveries: |  |  |  |
| Consumer Real Estate | 1 | 14 | 6 |
| Agriculture Real Estate | - | 1 | - |
| Agricultural | - | - | 1 |
| Commercial Real Estate | 3 | 1 | 2 |
| Commercial and Industrial | 22 | 6 | 8 |
| Consumer | 29 | 33 | 35 |
|  | 55 | 55 | 52 |
| Net Charge Offs (Recoveries): |  |  |  |
| Consumer Real Estate | (1) | (14) | (6) |
| Agriculture Real Estate | - | (1) | - |
| Agricultural | - | - | (1) |
| Commercial Real Estate | 12 | (1) | (2) |
| Commercial and Industrial | (17) | (6) | (8) |
| Consumer | 74 | 115 | 88 |
|  | 68 | 93 | 71 |
| Provision for Credit Losses | 282 | 460 | 1,637 |
| Allowance for Credit Losses - September 30, | 25,484 | 25,277 | 19,990 |
| Allowance for Unfunded Loan Commitments & Letters of Credit - September 30, | 1,661 | 2,023 | 1,118 |
| Total Allowance for Credit Losses - September 30, | $27,145 | $27,300 | $21,108 |
| Ratio of Net Charge-offs to Average Outstanding Loans | 0.00% | 0.00% | 0.00% |
| Ratio of Nonaccrual Loans to Loans | 0.11% | 0.89% | 0.26% |
| Ratio of the Allowance for Credit Losses to Loans | 1.01% | 1.00% | 0.93% |
| Ratio of the Allowance for Credit Losses to Nonaccrual Loans | 879.37% | 112.61% | 365.44% |
| Ratio of the Allowance for Credit Losses to Nonperforming Loans\* | 879.37% | 112.61% | 365.44% |

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

The balance of loans, net of deferred fees and costs at September 30, 2024 within this chart does not include a fair value basis adjustment for derivatives of $3.0 million or a daily average outstanding balance of $1.6 million.

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

Loans classified as nonaccrual were lower as of September 30, 2024 at $2.9 million as compared to $22.4 million as of September 30, 2023. The agricultural real estate loan portfolio accounted for 80.9% or $15.8 million of the decrease as compared to September 30, 2023. The agricultural loan portfolio decreased $4.6 million compared to September 30, 2023. The commercial and industrial loan portfolio decreased $815 thousand while the consumer real estate loan portfolio increased $1.5 million compared to September 30, 2023.

The following table presents the balances for allowance for credit losses per loan category in terms of dollars, as a percentage of ACL and as a percentage of loans at September 30, 2024 and September 30, 2023.

| Balance at End of Period Applicable To: | September 30, 2024 Amount (In Thousands) | % of ACL | % of Loan Category | September 30, 2023 Amount (In Thousands) | % of ACL | % of Loan Category |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Consumer Real Estate | $3,363 | 13.20% | 20.68% | $3,842 | 15.20% | 20.28% |
| Agricultural Real Estate | 937 | 3.68% | 8.68% | 315 | 1.25% | 8.91% |
| Agricultural | 261 | 1.02% | 5.43% | 185 | 0.73% | 4.90% |
| Commercial Real Estate | 16,455 | 64.57% | 52.26% | 16,805 | 66.48% | 51.46% |
| Commercial and Industrial | 3,382 | 13.27% | 10.27% | 2,708 | 10.71% | 11.14% |
| Consumer | 1,086 | 4.26% | 2.68% | 1,422 | 5.63% | 3.31% |
| Allowance for Credit Losses | 25,484 | 100.00% | 100.00% | 25,277 | 100.00% | 100.00% |
| Off Balance Sheet Commitments | 1,661 |  |  | 2,023 |  |  |
| Total Allowance for Credit Losses | $27,145 |  |  | $27,300 |  |  |

### Noninterest Income

Noninterest income was up $296 thousand or 8.1% for the three months ended September 30, 2024 over the same time frame in 2023. Customer service fees increased by $52 thousand as compared to the three months ended September 30, 2023. Mortgage release fees, which are included in customer service fees, increased $74 thousand over the same time period in 2023. Servicing rights income for 1-4 family real estate and agricultural real estate loans increased $208 thousand as compared to the same period in 2023. Miscellaneous customer service charges increased by $22 thousand and bank owned life insurance cash surrender value increased $44 thousand.

The Company has seen relatively flat mortgage production volume due to the heightened borrowing costs and continued lack of housing inventory in many of our markets. The gain on the sale of these loans was $79 thousand lower for the three months ended September 30, 2024 over the same period in 2023. Originations of loans held for sale for the three months ended September 30, 2024 were $13.2 million with proceeds from sale at $13.3 million for 2024 compared to 2023’s activity of $11.4 million in originations and $12.1 million in sales. The mortgages sold were both 1-4 family real estate and agricultural real estate loans originated for sale.

The impact of loan servicing rights, both to income and expense, is shown in the following table which reconciles the value of loan servicing rights. The capitalization runs through noninterest income while the amortization thereof is included in noninterest expense. For the nine months ended September 30, 2024 and 2023, loan servicing rights caused a net $38 thousand in income and $2.1 million in income, respectively. The higher capitalized additions for 2023 are attributed to the initial establishment of $2.2 million of rights related to agricultural real estate loans. Capitalized additions of agricultural real estate loan servicing rights were $216 thousand and approximately $2.3 million for the nine months ended September 30, 2024 and 2023, respectively. Amortization of agricultural real estate loan servicing rights were $191 thousand and $62 thousand for the same time periods, respectively. For 1-4 family real estate loans of 15 years and less, the market value of the loan servicing rights was 1.034% in the third quarter 2024 versus 1.057% in third quarter 2023. For 1-4 family real estate loans over 15 years, the value was 1.266% versus 1.176% for the same periods respectively. At September 30, 2024, the carrying value of certain strata were slightly below the market value thus requiring the establishment of a $2 thousand valuation allowance for 1-4 family real estate and a $47 thousand valuation allowance for agricultural real estate.

*(In Thousands)*

*(In Thousands)*

|  | Three Months Ended September 30, 2024 | September 30, 2023 | Nine Months Ended September 30, 2024 | September 30, 2023 |
| --- | ---: | ---: | ---: | ---: |
| Beginning Balance | $5,511 | $5,637 | $5,655 | $3,549 |
| Capitalized Additions | 359 | 158 | 570 | 2,567 |
| Amortization | (177) | (105) | (532) | (426) |
| Ending Balance, September 30, | 5,693 | 5,690 | 5,693 | 5,690 |
| Valuation Allowance | (49) | (3) | (49) | (3) |
| Servicing Rights net, September 30, | $5,644 | $5,687 | $5,644 | $5,687 |

### Noninterest Expense

For the three months ended September 30, 2024, noninterest expenses were $381 thousand or 2.2% higher than for the same period in 2023. Salaries and wages (includes normal merit increases, restricted stock expense and incentive payout) increased $936 thousand in total. This was comprised of an increase to our incentive accrual to match potential payout which accounted for $939 thousand. The increase was due to the investment in people for our strategic growth initiative and staffing of new offices. Benefits increased over 2023 with the increased medical expense of $111 thousand and taxes of $46 thousand offset with reductions in pension of $95 thousand. The additional cost of the offices is also evident in the increased expenses in net occupancy with additional lease expense of $82 thousand and building depreciation of $166 thousand offset with reduced general insurance expense of $50 thousand. Furniture and equipment increased with additional maintenance contract expense of $274 thousand.

Data processing expenses and ATM expense decreased a combined $669 thousand as a result of the new 60 month contract signed in December 2023. General and administrative expense decreased $191 thousand. The other items on this line of significance include the reduction in postage and printing expenses of $118 thousand combined and debit card losses of $44 thousand.

### Income Taxes

Income tax expense was $472 thousand higher for the three months ended September 30, 2024 compared to the same period in 2023 based mainly on higher earnings. 2024 included an additional $111 thousand of income tax expense related to the adoption of ASU 2023-02 LIHTC as presented in Note 8 and Note 12. Effective tax rates were 19.64% and 19.01% for 2024 and 2023, respectively. Excluding the additional $111 thousand of income tax expense, the effective tax rate would have been 18.28%.

### Net Income

Results overall, net income in the three months ended September 30, 2024 was up $1.7 million or 36.4% to $6.5 million as compared to last year's $4.8 million. Net interest income was up $1.9 million or 9.8% as the increased interest income exceeded the increased interest expense. Provision for credit losses for loans and unfunded commitments decreased $369 thousand compared to 2023. Noninterest income increased $296 thousand and noninterest expense increased $381 thousand as described above. The Company remains strong, stable, and well capitalized and has the capacity to continue to cover the increased costs of expansion.

### Comparison of Results of Interest Earnings and Expenses for nine month periods ended September 30, 2024 and 2023

### Interest Income

When comparing the nine months ended September 30, 2024 and September 30, 2023, average loan balances grew $91.0 million which represented a 3.7% increase in a one-year time period. Interest income on loan balances increased $13.8 million or 14.6% as compared to the nine months ended September 30, 2023. During second quarter 2024, the Company recognized loan interest income of slightly more than $1.0 million related to the payoff of one nonaccrual relationship of which approximately $379 thousand was earned in 2024. In third quarter 2023, the Company reversed loan interest income from one relationship in the amount of approximately $492 thousand of which approximately $324 thousand was previously recognized in prior periods. Third quarter 2023 also included loan income of $594 thousand from the recovery of two acquired relationships that had been fully charged off prior to acquisition. The Company reversed previously recognized loan interest income from one relationship in the amount of approximately $463 thousand in second quarter 2023. The Company's loan portfolio is 34.5% variable with 19.5% of total loans repricing during the remainder of 2024 and 29% of total loans subject to repricing within the next twelve months.

The available-for-sale securities portfolio decreased in average balances by $3.6 million when comparing to the same period in 2023 while the income increased $1.0 million over the nine months ended September 30, 2023. The decreased balances were used to fund loan growth. Federal funds sold and interest-bearing deposits increased in average balances by $97.4 million as compared to the same nine month period ended September 30, 2023 with increased income of $5.4 million for the current period. The increased balances are the result of the focus on liquidity and deposit generation. During the first quarter of 2023, securities of $21.6 million with an annual yield of $274 thousand were swapped at a loss of $891 thousand with securities with an annual yield of $1.6 million. The loss was recouped in 0.67 years.

The overall total average balance of the Bank’s earning assets increased by $184.7 million and interest income for the period comparisons was higher for the nine months ended September 30, 2024 by 19.9% or $20.2 million as compared to the nine month period ended September 30, 2023. Increases in the prime lending rate between periods has contributed to approximately 69.7% of the growth while increased volume contributed the remaining 30.3% of growth.

Annualized yield, for the nine months ended September 30, 2024, was 5.17% as compared to 4.57% for the comparable period ended September 30, 2023. The following charts demonstrate the increased loan balances accounted for 25.3% of the increased loan interest income while rate increases accounted for the remaining 74.7%. The yields on tax-exempt securities and the portion of the tax-exempt IDB loans included in loans have been tax adjusted based on a 21% tax rate in the charts to follow. The tax-exempt interest income was $386 and $425 thousand for the nine months ended September 2024 and 2023 which resulted in a federal tax savings of $81 and $89 thousand, respectively.

*(In Thousands)*

| Interest Earning Assets: | Year to Date Ended September 30, 2024 Average Balance | Interest/Dividends | Annualized Yield/Rate September 30, 2024 | September 30, 2023 |
| --- | ---: | ---: | ---: | ---: |
| Loans | $2,561,774 | $108,666 | 5.66% | 5.12% |
| Taxable investment securities | 397,466 | 5,575 | 1.87% | 1.53% |
| Tax-exempt investment securities | 20,684 | 249 | 2.03% | 1.88% |
| Fed funds sold & other | 165,227 | 7,231 | 5.84% | 3.67% |
| Total Interest Earning Assets | $3,145,151 | $121,721 | 5.17% | 4.57% |

#### Change in Interest Income Year to Date September 30, 2024 Compared to September 30, 2023

*(In Thousands)*

| Interest Earning Assets: | Total Change | Change Due to Volume | Change Due to Rate |
| --- | ---: | ---: | ---: |
| Loans | $13,815 | $3,495 | $10,320 |
| Taxable investment securities | 1,031 | 6 | 1,025 |
| Tax-exempt investment securities | (28) | (59) | 31 |
| Fed funds sold & other | 5,365 | 2,677 | 2,688 |
| Total Interest Earning Assets | $20,183 | $6,119 | $14,064 |

69

### Interest Expense

Offsetting a portion of the higher interest income improvement for the nine months ended September 30, 2024 was an increase in interest expense of $18.6 million or 46.3% compared to the same period in 2023. Since 2023, average interest-bearing deposit balances have increased $156.8 million or 7.9% and the Company recognized $16.8 million more in interest expense for the most recent nine months. During September 2024, the Federal Reserve decreased the federal funds rate by 50 basis points whereas 2023 had four increases to the federal funds rate of 25 basis points in February, March, May and July. Deposit rates have been adjusted numerous times with all the rate changes. The following charts demonstrate increased average interest-bearing deposit balances accounted for 14.6% of the increased interest-bearing deposit expense while rate increases accounted for the remaining 85.4%.

Interest expense on FHLB borrowings and other borrowings increased $2.1 million in the nine months ended September 30, 2024 over the same time frame in 2023 due to new FHLB borrowings in 2023 and 2024 used to offset loan growth. During the current year, new FHLB borrowings of $15 million were undertaken while $17.7 million FHLB borrowings were paid off. Interest expense on fed funds purchased and securities sold under agreement to repurchase decreased $344 thousand compared to 2023. The average cost of funds increased to 3.16% for the nine months ended September 2024 compared to 2.35% for the nine months ended September 2023. Refer to Note 11 for additional information on subordinated notes.

*(In Thousands)*

| Interest Bearing Liabilities: | Year to Date Ended September 30, 2024 Average Balance | Interest | Annualized Yield/Rate September 30, 2024 | September 30, 2023 |
| --- | ---: | ---: | ---: | ---: |
| Savings deposits | $1,487,809 | $30,291 | 2.71% | 1.83% |
| Other time deposits | 662,129 | 18,423 | 3.71% | 2.81% |
| Other borrowed money | 264,310 | 8,235 | 4.15% | 3.99% |
| Fed funds purchased & securities |  |  |  |  |
| sold under agreement to repurchase | 27,887 | 837 | 4.00% | 4.18% |
| Subordinated notes | 34,741 | 853 | 3.27% | 3.28% |
| Total Interest Bearing Liabilities | $2,476,876 | $58,639 | 3.16% | 2.35% |

#### Change in Interest Expense Year to Date September 30, 2024 Compared to September 30, 2023

*(In Thousands)*

| Interest Bearing Liabilities: | Total Change | Change Due to Volume | Change Due to Rate |
| --- | ---: | ---: | ---: |
| Savings deposits | $11,437 | $1,575 | $9,862 |
| Other time deposits | 5,369 | 885 | 4,484 |
| Other borrowed money | 2,101 | 1,777 | 324 |
| Fed funds purchased & securities |  |  |  |
| sold under agreement to repurchase | (344) | (306) | (38) |
| Subordinated notes | - | 3 | (3) |
| Total Interest Bearing Liabilities | $18,563 | $3,934 | $14,629 |

Overall, net interest spread for the nine months ended September 30, 2024 was 21 basis points lower than last year. As the following chart indicates, the improvement in yields on interest earning assets of 60 basis points did not offset the increased cost of funds of 81 basis points when comparing to the same period a year ago. Competition for deposits is intense with most competitors offering special rates for specific terms.

|  | September 30, 2024 | September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: |
| Interest/Dividend income/yield | 5.17% | 4.57% | 3.76% |
| Interest Expense/cost | 3.16% | 2.35% | 0.53% |
| Net Interest Spread | 2.01% | 2.22% | 3.23% |
| Net Interest Margin | 2.68% | 2.77% | 3.37% |

70

### Net Interest Income

Net interest income increased $1.6 million for the nine months ended September 30, 2024 over the same time frame in 2023 with the increase in interest income of $20.2 million offset by the higher interest expense of $18.6 million as previously mentioned. As the new loans added in 2023 and 2024 generate more income, management expects the benefits of the Company’s strategy of repositioning the balance sheet to continue to increase interest income in the long run. Loans as a percentage of earning assets decreased to 81.5% for the nine months ended 2024 compared to 83.5% for the nine months ended September 2023. Loans to total assets decreased to 77.5% for the nine months ended 2024 compared to 78.8% for the same time period 2023. The percentage of earning assets to total assets increased to 95.1% in 2024 compared to 94.4% in 2023. In terms of net interest margin, the Bank recognizes competition for deposits will continue; however, the Bank has a greater opportunity for gradual improvement as loans reprice upwards in the next year coupled with a likely continuing slight decrease in cost of funds.

### Comparison of Noninterest Results of Operations for nine month periods ended September 30, 2024 and 2023

### Provision Expense

The Allowance for Credit Losses (ACL) has a direct impact on the provision expense. The increase in the ACL is funded through recoveries and provision expense. The following table details the allowance for credit losses. The table breaks down the activity within ACL for each loan portfolio class and shows the contribution provided by both the recoveries and the provision along with the reduction of the allowance caused by charge-offs. The commercial and industrial loan portfolio and consumer loan portfolio accounted for the largest component of both charge-offs and recoveries for nine months ended September 30, 2024. The consumer loan portfolio accounted for the largest component of charge-offs while the consumer loan portfolio and agricultural real estate loan portfolio accounted for the largest component of recoveries for the same time period 2023.

Total provision for credit losses was $822 thousand lower for the nine months ended September 30, 2024 as compared to the same period in 2023. This is due to decreased loan growth coupled with improved asset quality metrics during the nine months ended September 30, 2024 compared to 2023. Management continues to monitor asset quality, making adjustments to the provision as necessary. The impact of higher interest rates and inflation are taken into consideration when reviewing qualitative factors. Loan charge-offs were $70 thousand higher for the nine months ended September 30, 2024 than the same period in 2023. Recoveries were $48 thousand lower in the nine months ended September 30, 2024 as compared to 2023. Combined net charge-offs were $118 thousand higher for the nine months ended September 30, 2024 than for the same time period in 2023. The decrease in unfunded provision expense of $408 thousand is a result of unfunded balances decreasing. Unfunded construction exposure was down due to draws and fewer originations. The loan portfolio continues to be of strong credit quality.

Loans past due 30 days or more decreased $4.3 million at September 30, 2024 as compared to September 30, 2023. The largest changes were attributed to the decreases of past due balances in the combined agricultural loan portfolios of $4.2 million. The consumer real estate loan portfolio past due balances increased $1.1 million for the same time period.

The following table breaks down the activity within the ACL for each loan portfolio class and shows the contribution provided by both recoveries and the provision, along with the reduction of the allowance caused by charge-offs. The time period covered is for the nine months ended September 30, 2024, 2023 and 2022.

*(In Thousands)*

|  | Nine Months Ended September 30, 2024 | Nine Months Ended September 30, 2023 | Nine Months Ended September 30, 2022 |
| --- | ---: | ---: | ---: |
| Loans, net of deferred fees and costs | $2,535,291 | $2,529,606 | $2,142,616 |
| Daily average of outstanding loans | $2,560,440 | $2,470,770 | $1,997,081 |
| Nonaccrual loans | $2,898 | $22,447 | $5,470 |
| Nonperforming loans\* | $2,898 | $22,447 | $5,470 |
| Allowance for Credit Losses - January 1, | $25,024 | $20,313 | $16,242 |
| Adjustment for accounting change | - | 3,564 | - |
| Loans Charged off: |  |  |  |
| Consumer Real Estate | 13 | - | - |
| Agriculture Real Estate | - | - | - |
| Agricultural | - | - | - |
| Commercial Real Estate | 15 | - | - |
| Commercial and Industrial | 106 | - | 6 |
| Consumer | 266 | 330 | 328 |
|  | 400 | 330 | 334 |
| Loan Recoveries: |  |  |  |
| Consumer Real Estate | 6 | 27 | 15 |
| Agriculture Real Estate | - | 105 | - |
| Agricultural | - | - | 1 |
| Commercial Real Estate | 7 | 6 | 7 |
| Commercial and Industrial | 127 | 18 | 82 |
| Consumer | 122 | 154 | 132 |
|  | 262 | 310 | 237 |
| Net Charge Offs (Recoveries): |  |  |  |
| Consumer Real Estate | 7 | (27) | (15) |
| Agriculture Real Estate | - | (105) | - |
| Agricultural | - | - | (1) |
| Commercial Real Estate | 8 | (6) | (7) |
| Commercial and Industrial | (21) | (18) | (76) |
| Consumer | 144 | 176 | 196 |
|  | 138 | 20 | 97 |
| Provision for credit loss | 598 | 1,420 | 3,845 |
| Allowance for Credit Losses - September 30, | 25,484 | 25,277 | 19,990 |
| Allowance for Unfunded Loan Commitments & Letters of Credit - September 30, | 1,661 | 2,023 | 1,118 |
| Total Allowance for Credit Losses - September 30, | $27,145 | $27,300 | $21,108 |
| Ratio of Net Charge-offs to Average Outstanding Loans | 0.01% | 0.00% | 0.00% |
| Ratio of Nonaccrual Loans to Loans | 0.11% | 0.89% | 0.26% |
| Ratio of the Allowance for Credit Losses to Loans | 1.01% | 1.00% | 0.93% |
| Ratio of the Allowance for Credit Losses to Nonaccrual Loans | 879.37% | 112.61% | 365.44% |
| Ratio of the Allowance for Credit Losses to Nonperforming Loans\* | 879.37% | 112.61% | 365.44% |

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

The balance of loans, net of deferred fees and costs at September 30, 2024 within this chart does not include a fair value basis adjustment for derivatives of $3.0 million or a daily average outstanding balance of $1.3 million.

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

Loans classified as nonaccrual were lower as of September 30, 2024 at $2.9 million as compared to $22.4 million as of September 30, 2023. The agricultural real estate loan portfolio saw the largest decrease at $15.8 million while the commercial and industrial loan portfolio decreased $815 thousand as compared to September 30, 2023. The agricultural loan portfolio decreased $4.6 million compared to September 30, 2023. These decreases were offset by an increase in the consumer real estate loan portfolio of $1.5 million.

### Noninterest Income

Noninterest income was down $540 thousand for the nine months ended September 30, 2024 over the same time frame in 2023. Servicing rights income for 1-4 family and agricultural real estate loans decreased $2.0 million. This was due to the establishment of agricultural real estate servicing rights of $1.5 million in the first quarter of 2023 and a change in the accounting estimate of $712 thousand in the second quarter of 2023. Combined service fees increased by $214 thousand as compared to the nine months ended September 30, 2023. Bank owned life insurance cash surrender value increased $99 thousand.

The Company has seen relatively flat mortgage production volume. The gain on the sale of these loans was $167 thousand higher for the nine months ended September 30, 2024 over the same period in 2023. Originations of loans held for sale for the nine months ended September 30, 2024 were $36.5 million with proceeds from sale at $37.1 million for 2024 compared to 2023’s activity of $26.3 million in originations and $26.6 million in sales. The mortgages sold were both 1-4 family and agricultural real estate loans originated for sale.

### Noninterest Expense

For the nine months ended September 30, 2024, noninterest expenses were $1.7 million higher than for the same period in 2023. Salaries, wages, and employee benefits (includes normal merit increases, restricted stock expense, incentive payout and all employee benefits) increased $3.3 million in total. This was comprised of increased salaries of $3.2 million which included one-time special payments of $388 thousand; restricted stock award expense of $120 thousand which was primarily attributed to the acceleration of stock awards and incentive accrual of $1.9 million. Employee benefits increased $93 thousand over 2023. The increase was due to the investment in people for our strategic growth initiative. Advertising and public relations expense decreased $563 thousand due to expenses in 2023 related to the new logo launch that were not repeated in 2024. Data processing and ATM expenses decreased $1.7 million as a result of the new 60 month contract signed in December 2023. The additional cost of offices is also evident in the increased expenses in net occupancy with additional lease expenses of $358 thousand and building depreciation of $397 thousand offset with reduced general insurance expense of $135 thousand and increased building rent generated by FM Investments of $130 thousand. Furniture and equipment increased with additional maintenance contract expense of $515 thousand and furniture and equipment depreciation of $56 thousand. Professional fees increased $326 thousand over 2023. FDIC assessments also increased by $215 thousand over the same period in 2023. General and administrative expense decreased $885 thousand as 2023 included $469 thousand related to the conversion of the credit card platform and $108 thousand of scorecard conversion expense that represented awards to customers that the Company paid to honor rather than allowing them to be lost in the conversion. The other items on this line of significance include the reduction in postage and printing expense combined of $243 thousand and check and other losses of $88 thousand.

### Income Taxes

Income tax expense was $254 thousand higher for the nine months ended September 30, 2024 compared to the same period in 2023, due to higher earnings. 2024 included an additional $331 thousand of income tax expense related to the adoption of ASU 2023-02 LIHTC as presented in Note 8 and Note 12. Effective tax rates were 20.36% and 19.72% for nine months ended September 30, 2024 and 2023 respectively. Excluding the additional $331 thousand of income tax expense, the effective rate would have been 18.86%.

### Net Income

Results overall, net income for the nine months ended September 30, 2024 was up $313 thousand as compared to the same period last year. Net interest income was up $1.6 million or 2.6% as the increased interest income exceeded the increased interest expense. Provision for credit losses for loans and unfunded commitments decreased $1.2 million compared to 2023. Noninterest income decreased $540 thousand and noninterest expense increased $1.7 million as described above. The Company remains strong, stable, and well capitalized and has the capacity to continue to cover the increased costs of expansion.

FORWARD LOOKING STATEMENTS

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

## Market risk

As filed, 5,334 characters.

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

Interest rate risk is managed within an overall asset/liability framework. The principal objectives of asset/liability management are to manage sensitivity of net interest spreads and net income to potential changes in interest rates. Funding positions are kept within predetermined limits designed to ensure that risk-taking is not excessive and that liquidity is properly managed. In the event that our asset/liabilities management strategies are unsuccessful, our profitability may be adversely affected. The Company employs sensitivity testing utilizing interest rate shocks to help in this analysis.

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

| Interest Rate Shock on Net Interest Margin Net Interest Margin (Ratio) | % Change to Flat Rate | Rate Direction | Rate Changes by | Interest Rate Shock on Net Interest Income Cumulative Total ($000) | % Change to Flat Rate |
| ---: | ---: | --- | ---: | ---: | ---: |
| 2.85% | -8.21% | Rising | 3.00% | 87,889 | -9.24% |
| 2.95% | -5.06% | Rising | 2.00% | 91,146 | -5.88% |
| 3.13% | 0.54% | Rising | 1.00% | 96,770 | -0.07% |
| 3.11% | 0.00% | Flat | 0.00% | 96,837 | 0.00% |
| 3.14% | 1.01% | Falling | -1.00% | 98,061 | 1.27% |
| 3.11% | -0.04% | Falling | -2.00% | 97,509 | 0.70% |
| 3.03% | -2.67% | Falling | -3.00% | 95,580 | -1.30% |

The net interest margin represents the forecasted twelve month margin. The Company also reviews shocks with a 4.00% fluctuation and over a 24 month time frame. It also shows the effect rate changes will have on both the margin and net interest income. The goal of the Company is to 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 additional services provided. Savings and money market accounts are beneficial due to the variability of the interest in both rate and immediate option to reprice. Certificate of deposit pricing is more favorable in shorter terms with the future long term rate movements unknown at this time.

The shock chart currently shows a slight widening in net interest margin over the next twelve months in a rising rate environment up to a 1.00% increase and a tightening compared to 2.00% as it moves from 1.00% towards the 3.00% increase. There is also a slight widening in net interest margin as rates fall 1.00% and a tightening as rates continue to fall 2.00% and 3.00%. This is indicative of what the Company experienced over the previous 18 months when rates increased quickly. A benefit in the initial 100 basis point rise was overshadowed by the higher spread increase in the cost of funds as the rates continued to rise. The 1.00% rising rate scenario is predicted to expand the net interest margin and produce a higher level of net interest income. Cost of funds are at 3.16% for the year so the falling shock of 300 basis points is where the Bank can take partial advantage and reprice some funds to match the level of shock. However, there are certificates of deposit and FHLB term advances whose ability to reprice are outside of the twelve month term. Much of the legacy nonmaturity deposit rates are also lower than the percentage of shock. This is why the negative percentage increases as the rate decrease rises. Once the shocks are falling over 200 basis points, there are limited funds to reprice lower and the loss on net interest income continues to build. The average duration of the majority of the assets is outside the 12 month shock period. Older loans continue to reprice higher in the next twelve months based on current rates and impacting positively for the 100 basis points drop. The majority of the newer loans added to the commercial real estate portfolio begin with an initial fixed rate period of three to five years whose variable adjustment is outside of the current shock time frame. The Bank continues to review and uses external assistance to monitor and adjust our assumptions concerning decay rates, key rate ties on certain deposit accounts and prepayment speeds on loans. Rates are modified as index rates change. Both directional changes 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 concentrate on increasing loan spreads on variable loans and limit the increase on cost of funds where possible.

## Controls and procedures

As filed, 791 characters.

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

## Risk factors

As filed, 10,863 characters.

Except as indicated below, there have been no material changes in the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

### Liquidity Risk

Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits, and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets, and its access to alternative sources of funds. The bank failures in 2023 exemplify the potentially catastrophic results of the unexpected inability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institution’s ability to satisfy its obligations to depositors. We continually strive to ensure our funding needs are met by maintaining a level of liquidity through asset and liability management. If we become unable to obtain funds when needed, it could have a material adverse effect on our business, financial condition, and results of operations.

### Interest Rate Risk with Respect to the Value of Our Securities Portfolio

As a result of inflationary pressures and the resulting rapid increases in interest rates over the prior two fiscal years, the trading value of previously issued government and other fixed income securities has declined significantly. These securities make up a majority of the securities portfolio of most banks in the U.S., including the Company’s, resulting in unrealized losses embedded in the held-to-maturity portion of U.S. banks’ securities portfolios. While the Company does not currently intend to sell these securities, if the Company were required to sell such securities to meet liquidity needs, it may incur losses, which could impair the Company’s capital, financial condition, and results of operations and require the Company to raise additional capital on unfavorable terms, thereby negatively impacting its profitability. While the Company has taken actions to maximize its funding sources, there is no guarantee that such actions will be successful or sufficient in the event of sudden liquidity needs.

### Uninsured Deposit Risk

Uninsured deposits based on FDIC coverage as a percentage of total deposits was 20.9% as of September 30, 2024, and as of the same date, total uninsured deposits (includes public deposits with protection over FDIC) was 10.5%. The use of the financial network products, such as the Certificate of Deposit Account Registry (CDARS) and an Insured Cash Sweep which makes FDIC coverage available to larger depositors, contributes to the low uninsured percentage. Uninsured deposits historically have been viewed by the FDIC as less stable than insured deposits. According to statements made by the FDIC staff and the leadership of the federal banking agencies, customers with larger uninsured deposit account balances often are small- and mid-sized businesses that rely upon deposit funds for payment of operational expenses and, as a result, are more likely to closely monitor the financial condition and performance of their depository institutions. As a result, in the event of financial distress, uninsured depositors historically have been more likely to withdraw their deposits. If a significant portion of our deposits were to be withdrawn within a short period of time such that additional sources of funding would be required to meet withdrawal demands, we may be unable to obtain funding at favorable terms, which may have an adverse effect on our net interest margin. Obtaining adequate funding to meet our deposit obligations may be more challenging during periods of elevated prevailing interest rates, such as the present, and our ability to attract depositors during a time of actual or perceived distress or instability in the marketplace may be limited. Further, interest rates paid for non-deposit borrowings generally exceed the interest rates paid on deposits, and this spread may be exacerbated by higher prevailing interest rates.

### Recent Events Impacting the Financial Services Industry

A heightened likelihood of rate changes is impacting the financial services industry as institutions may be impacted by a mismatch of the amount of assets versus liabilities on the balance sheet immediately repricing. Adding to the possible rate change is the complication of the length and effect of an inverted yield curve. The first rate change will assess the validity of assumptions in the institutions’ asset liability models.

The outcome of the upcoming political races has the potential to cause disruption within the industry. Many regulatory regulations are currently in a limbo status and whose enactment or enforcement may or may not become effective depending on the results of the elections in the fourth quarter 2024.

### Inflation Risk

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

### Climate Change Risk

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

While our primary markets have seemingly been minimally impacted by climate change to date, the increasing unpredictability of severe weather events, primarily droughts and flooding, could have a significant impact on our agricultural customers; loans to which comprise approximately 14.1% of the Bank’s total loan portfolio.

### Quantitative Modeling Risk

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

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

### Global Economic and Geopolitical Instability and Inflationary Risks

Geopolitical conditions, terrorist attacks, military conflicts, natural disasters, severe weather, widespread health emergencies or pandemics, information or cybersecurity incidents (including intrusion into or degradation or unavailability of systems or technology by cyberattacks), operational incidents and other catastrophic events can have a material adverse effect on our business. Political and social conditions, including actions upending geopolitical stability (such as from tensions involving China and the U.S., as well as continued conflict between Russia and Ukraine), fiscal and monetary policies (including developments related to the U.S. federal debt ceiling, budgetary issues and government shutdowns), trade wars and tariffs, labor shortages, regional or domestic hostilities, economic sanctions and the prospect or occurrence of more widespread conflicts could also negatively affect our business, operations and partners, consumer and business spending, including consumer spending patterns and business investment, and demand for credit.

While the stock market continues to remain robust through the third quarter of 2024, certain indicators suggest that there could be looming trouble in the national and global economies related to increased fiscal deficits and the need for additional borrowing by the U.S. government to fund both its operations and to service its existing debt. In addition, data supplied by the Federal Reserve continues to show a systematic decline in consumer confidence in the U.S. since the beginning of 2024. Some of the basis for the current consumer sentiment is related to pressure on home values, primarily in the sunbelt states, as well as increasing concern over job security. While personal consumption has remained relatively strong on a national basis through August of 2024, many economists warn that a significant reduction in consumer spending may become a factor going into fiscal year 2025.

Filed Nov 6, 2024.
Source: SEC EDGAR, the filing index for accession 0000950170-24-122145. Last ingested by Listed: Oct 27, 2026, 13:43 ET. No prices; not investment advice.