Farmers & Merchants Bancorp Inc: Form 10-Q for the period ended Jun 30, 2025
Filed with the SEC on Aug 4, 2025 and accepted by EDGAR at Aug 4, 2025, 12:27 ET.
Management's discussion and analysis
As filed, 97,563 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
OVERVIEW
The largest improvement in profitability of the second quarter of 2025 as compared to the same quarter last year is in the Company’s net interest income generated from the highest net interest margin since third quarter 2022, when looking at individual quarters. Net interest income for the first six months of 2025 is up $8.1 million over the same period last year. This represents a solid base from which to continue improvement for the remainder of 2025 as we expect loan repricing and continued growth in low-cost core deposits to increase the margin going forward. Net interest margin has improved for four consecutive quarters. Year to date net interest margin has increased 47 basis points over year to date last year. Second quarter 2025 net interest margin has improved by 19 basis points over first quarter 2025 and 38 basis points over fourth quarter 2024. The improvement compared to last quarter was driven by a 26 basis point increase in the yield on interest earning assets and a reduction of 7 basis points in the cost of funding. The pricing of existing loans and favorable yields on new production are contributing to the increase in yield on interest earning assets.
There were two primary reasons behind the decrease in the cost of funds for the quarter, the first being the lower repricing of higher cost certificate of deposits (CDs), combined with a balance sheet shift or reduction in CD balances. Some of the CDs that are repricing were specials offered last year that are now converting to standard rates. The second primary reason was a reduction in interest expense due to rate changes in the NOW and savings bucket which includes interest bearing checking, money market accounts and savings accounts. The Company experienced a full six months of the advantage of interest rate cuts implemented due to the Federal Reserve dropping rates over the last four months of 2024. In addition, all of our offices have now converted to deposit origination software that will simplify the origination process and provide additional efficiencies to the Company.
Decreased net charge-offs and lower provision related expense resulted in lower credit cost in the second quarter of 2025 as compared to the first quarter of 2025. The effect of loan growth was partially offset by improved asset quality metrics resulting in a decreased provision for credit losses for the quarter compared to last quarter. Provision for credit losses was $661 thousand for the quarter and net charge-offs were $36 thousand. First quarter 2025 saw a provision for credit losses of $811 thousand and net charge-offs of $285 thousand.
F&M Commercial Banking Division saw loan demand grow in late 2024, continue into first quarter 2025 and remain steady in second quarter 2025. Lending rates and terms remained consistent from fourth quarter 2024 into second quarter 2025. Commercial clients’ primary concerns so far in 2025 remain inflation and any impact of potential tariffs to their business. Credit quality of the commercial portfolio remains strong and second quarter collateral values and auction values are still holding consistent with previous quarters. Past dues and delinquencies remained low for the F&M portfolio, but the team continues to monitor the portfolio closely for the impact from inflationary pressures, input costs and margin compression on the portfolio.
As we review the results of our farm and agribusiness clients from 2024, the performance of our customer base was steady. Yields were average with declined commodity prices making their net income less than prior years. Marketing and crop insurance coverage was and will continue to be important. Most of our customer base's financial position was sound as we enter a period where they anticipate they may have declining net income. Our anticipation is 2025 will be similar to 2024. Planting conditions in our market area varied, as some areas were able to plant early while others were delayed due to wet conditions. We have communicated regularly with our clients potentially affected by the bird flu outbreak and have developed options for individual clients. To date, this portion of our portfolio continues to perform as agreed. Our agribusiness clientele continue to perform well, but declined farm income will potentially affect certain sectors. Loan demand has ranged from steady to soft as our clientele has taken a more conservative approach with anticipated lower net income. Although agricultural usage has increased, borrowers have plenty of availability on lines of credit overall. Global political pressures continue to be monitored. The performance of our agricultural portfolio continues to be monitored but continues to perform well.
Although the housing market has softened, home loan activity has remained strong and steady in all areas. Inventory in our market areas has improved in the midrange values. The Bank participated in the “Welcome Home” program offered through the Federal Home Loan Bank of Cincinnati ("FHLB"). This program assists with grants for down payments. The funds are open to all members of FHLB and capped by overall funds available. The funds were depleted in a matter of hours so the Bank is pleased to have received approval for some of our customers.
Consumer loans decreased during the second quarter 2025 as compared to the first quarter. While other areas showed increases, we did experience a decrease in our auto loan portfolio segment. In response to that, the Bank offered an auto loan special in June that continued into July which has been received favorably.
Overall, asset quality metrics are still favorable. We continue to keep a watchful eye on the overall impact of pending tariffs, which may cause past dues and non-accruals to increase throughout the year. Our credit department continues to monitor all areas and complete stress testing to better prepare our responsiveness to market events.
Noninterest income was $3.9 million for the quarter which was up $219 thousand from second quarter 2024; however, down $227 thousand from last quarter and $64 thousand from fourth quarter 2024. Loan service income and interchange income both decreased as compared to first quarter 2025 and fourth quarter 2024.
Noninterest expense was higher in second quarter 2025 by $1.9 million as compared to same quarter 2024 and $3.2 million higher than fourth quarter 2024. Looking at the difference between the second quarter comparisons, increased employee benefits, specifically group medical insurance was up $132 thousand in 2025 along with payroll taxes increasing by $19 thousand. Consulting services increased by $296 thousand. Most of the increase was related to the use of a consultant to negotiate our core processor services agreement and to explore additional ancillary products to the core banking system. While the base contract negotiation is complete, the consultant will continue to be used. The benefits of using the consultant have far outweighed the cost and will continue to be realized after our consultant services have ended. That being said, data processing and ATM expense increased a combined $973 thousand. In comparing second quarter 2025 to fourth quarter 2024, $664 thousand of the increase is attributable to salary and benefits expenses. Net occupancy and furniture and equipment expenses amounted to a $385 thousand increase. Another $1.6 million in the difference is due to data processing, ATM expense and consulting expenses. Fourth quarter 2024 included a much higher usage of flex credits that were provided in the renegotiation of which some may be used on a wider range of services than others that are product specific. Smaller levels of flex credit will be realized going forward along with lower consulting fee levels throughout 2025.
The Company is encouraged by the higher-than-expected improvement in the net interest margin in the three and six months ended June 30, 2025. Overall net income, which was $2.0 million higher than second quarter 2024 and $758 thousand higher than first quarter 2025, continues on the path for a more profitable 2025. As with every year, challenges will present opportunities and the Bank has additional projects in the works to improve revenue while keeping an eye on costs. The Company remains well-capitalized with sound liquidity levels and strong asset quality; the future appears bright.
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. The Bank includes F&M Insurance Agency, LLC, a subsidiary offering insurance products, which was formed in November of 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, 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 agricultural 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 seven and ten year fixed rate mortgage and a seven year jumbo fixed rate mortgage after which the interest rate will adjust annually for all. 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. The Bank currently participates in three State of Ohio programs: Ag-Link, Grow Now and Home Saver Plus. What all three of these programs have in common, is the ability to provide the Bank an avenue to offer a product that saves both the Bank and the consumer savings over other traditional products. 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 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 June 30, 2025, we had 488 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 and the change in presidential administration. 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 ensure 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, amended the Ability to Repay/Qualified Mortgage Rules. 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. The General QM loan definition amended and 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. For General QM status, applicable to first-lien mortgage loans offered by the Bank, a loan must still observe existing product features, underwriting requirements, and limits on points and fees. Since the Bank, on occasion, 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 amended 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 were required to collect and report data on covered credit applications involving small businesses, including those businesses owned by women or minorities. Small businesses were defined as those businesses (including agricultural businesses) which had gross annual revenue of $5 million of less during its most recent fiscal year. Data collection included 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. Implementation of these final rules would involve significant changes to processes and procedures along with new software configurations to accommodate and capture required data points regarding applications and final action taken. Data would be reported to the CFPB which would then make aggregated information publicly available. These new final rules had a phased implementation period with the largest lenders being required to collect and report data first. A Lender, such as the Bank, that originated at least 500 covered small business loans annually, data collection would have originally commenced on April 1, 2025.
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 was 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 was also based upon another pending lawsuit which awaited 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 in May 2024 ruling 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 of February 7, 2025, an order issued by the New Orleans First Circuit Court of Appeals granted a stay pending appeal and deadlines for compliance were extended further.
Most recently, on June 18, 2025, in light of recent court orders and ongoing litigation, the CFPB published an interim final rule along with a request for public comment. The mandatory compliance dates for the Section 1071 rule were again extended, however, these new mandatory compliance dates do not override the Circuit Court's order that stayed the mandatory compliance dates indefinitely. The Bank, as a member of the American Bankers Association, remains impacted by the stay of the mandatory compliance dates. The CFPB has stated plans to begin new 1071 rulemaking with the issuance of a notice of proposed rulemaking. The Bank remains attentive to these recent developments.
A final rule to amend 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 were 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 joint regulatory agencies 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. A joint press release on March 28, 2025, announced the joint agencies intent to rescind the 2023 Community Reinvestment Act Final Rule and reinstate the CRA framework that existed prior to the October 2023 final rule. As a large bank examined for its CRA performance, the Bank remains attentive to the CRA framework in place prior to the October 2023 final rule.
In July 2025, the Basel Committee on Banking Supervision initiated the implementation of the final phase of the Basel III regulatory capital reforms, commonly referred to as the “Basel III Endgame.” These reforms introduce more stringent capital requirements, revise standardized approaches for credit and operational risks, and eliminate the use of internal models for certain risk calculations. While these changes primarily impact large global banks with assets exceeding $100 billion, the evolving regulatory environment underscores the importance of capital planning and risk management at all banking organizations. We continue to monitor developments to assess any indirect implications for our capital adequacy and regulatory compliance framework.
In July 2025, new federal legislation known as the GENIUS Act was enacted to establish a comprehensive regulatory framework for payment stablecoins issued by banking organizations and their subsidiaries. The GENIUS Act imposes requirements including asset reserve standards, enhanced reporting, independent audits, and supervisory oversight specific to payment stablecoin issuance. As a bank holding company, we are assessing the potential opportunities and compliance obligations under this new law, which could affect our strategic initiatives in digital asset and payment innovation. We continue to evaluate the operational, legal, and regulatory implications of the GENIUS Act as part of our ongoing digital asset strategy.
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 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 Allowance for Credit Losses (ACL) as the accounting area that requires the most subjective or complex judgments, and as such could be the most subject to revision as new information becomes available.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs. Accrued interest receivable totaled $11.9 million and $10.7 million at June 30, 2025 and December 31, 2024, 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. Mortgage loans are charged off at 180 days past due and commercial loans are charged off to the extent principal or interest is deemed uncollectible. Consumer 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, Commercial & Industrial, Agricultural Real Estate, Agricultural, Consumer Real Estate and Consumer. All groups use the average charge-off method for calculating the ACL. This incorporates a historical loss period from March 2000, since Call Report data became more granular regarding loan groupings, and includes several economic cycles. As a percentage, the reserves are the highest against construction and development loans, while farmland loans have the lowest overall reserve due to having such low loss rates.
The Company is utilizing peer data from a peer group of banks in the region of Ohio, Michigan and Indiana with asset sizes less than $5 billion as of June 30, 2025. The reserves are calculated at the loan level and based on the note characteristics, essentially balances times loss rate + qualitative factors + forward look, with the forward looking forecast eliminated after 12 months. In order to provide a reasonable and supportable forward looking forecast, a regression analysis of the Bank’s historical loss rates against the Federal Open Market Committee (FOMC) quarterly economic projections for National Unemployment is completed. Annual projections are broken down using a straight-line approach for quarterly changes.
In addition to this quantitative analysis, management also utilizes qualitative analysis each quarter as a component of the ACL. The qualitative factors include nine categories: ability of staff, changes in collateral values, changes in loan concentration levels, economic conditions, external factors such as regulatory, level and trends in non-accrual or adversely classified loans, loan review results, nature and volume of the portfolio and loan terms, and changes in lending policies and procedures. The methodology allows for additional qualitative factors as other risks emerge. Items within these categories are ranked as baseline, low, medium, or high levels of risk, and the related risk level per 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 $91 thousand at June 30, 2025 and $52 thousand at December 31, 2024. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. At 90 days delinquent, secured consumer loans are charged down to the value of the collateral, if repossession of the collateral is assured and/or in the process of repossession. Consumer mortgage loan deficiencies are charged down upon the sale of the collateral or sooner upon the recognition of collateral deficiency.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a modification to a borrower experiencing financial difficulty will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The loan categories of off-balance sheet exposures are the same as the loan categories for the ACL. The funding assumptions are updated each quarter based on expected utilization percentages.
For more information regarding the actual composition and classification of loans involved in the establishment of the allowance for credit loss, please see Note 4 provided with the notes to consolidated financial statements.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For 2025, the Company plans to have modest loan growth and to continue to focus on earnings improvement. Paydowns and payoffs will be used to fund originations to existing customers and to build relationships in our newer markets. Loan balances as of June 30, 2025, were $63.9 million or 2.5% higher than December 31, 2024 balances and there remains $96.4 million of funds committed to complete construction projects of commercial customers as of June 30, 2025.
The Company continues to focus on growth in the areas of core deposits and the expansion of contingency funding. Growing deposits has been a focus especially in our newer markets since 2024. Core deposits provide additional opportunities for noninterest income. 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 11.9%. As of June 30, 2025, total uninsured deposits of the Bank were $322.7 million of $2.7 billion total deposits. If the amount of coverage is adjusted for what is insured solely by FDIC, the percentage is 21.9% or $592.3 million of uninsured deposits as of June 30, 2025. 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 $23.6 million as of June 30, 2025 since December 31, 2024, while cash and cash equivalents have decreased $88.1 million over the same time period. Cash balances have been used to fund loan growth and to repay maturing FHLB advances. The $88.2 million of cash holdings represents 2.6% of total assets and 3.3% of total deposits as of June 30, 2025. Even though we are currently below the Bank’s internal guideline of 3.5% of cash holdings to total assets, management is comfortable with our position based on our cash forecast modeling. If differences would arise between actual cash and the forecast, the Bank has access to ample short term funding sources. Since June 30, 2024, deposits have increased $69.2 million, or 2.6%, while cash and cash equivalents have decreased $104.8 million or 54.3%. Management has continued to hold biweekly sub-ALCO meetings, of which liquidity is a topic of discussion, in order to be more responsive to opportunities and threats as they arise.
During the first six months of 2025, borrowings from the FHLB decreased $57.6 million with $56.5 million maturing in the second quarter and the remainder through normal paydowns. The Bank utilized four sources for brokered CDs in 2024 for a total of $26.9 million. This was done to establish relationships to test the access of such funds and to 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 quarter with similar or slightly longer fixed interest rate periods. The Bank also tested all correspondent borrowing lines during the first quarter of 2025 to assure availability should the need arise. The availability for overnight borrowing on unsecured Federal Funds lines is $163.0 million. Combining the available line of credit at the holding company level, the Company has $178.0 million overnight borrowing availability.
In comparing to the same prior year period, the June 30, 2025 (at amortized cost) loan balances of $2.6 billion accounted for $65.8 million or 2.6% increase when compared to same period 2024. Individual growth was comprised of 9.4% in non-real estate commercial loans, 3.3% in commercial real estate loans and 10.5% in agricultural loans. Consumer real estate loans decreased by 0.4% while consumer loans decreased by 16.2%. Agricultural related loans increased 3.7% year over year. Individual growth was comprised of 10.5% in non-real estate agricultural loans partially offset by a decline of 0.7% in agricultural real estate loans. Other loans decreased by 6.8%. The Company's strong team of lenders remain focused on providing customers valuable localized services and thereby increasing our market share.
The chart below shows the breakdown by portfolio segment as of June 30, for the last three years, at amortized cost.
(In Thousands)
| June 30, 2025 | June 30, 2024 | June 30, 2023 | |
|---|---|---|---|
| Consumer Real Estate | $524,206 | $526,054 | $506,842 |
| Agricultural Real Estate | 220,760 | 222,280 | 230,531 |
| Agricultural | 158,241 | 143,257 | 128,593 |
| Commercial Real Estate | 1,343,570 | 1,301,256 | 1,278,445 |
| Commercial and Industrial | 293,544 | 268,227 | 253,248 |
| Consumer | 59,973 | 71,603 | 89,138 |
| Other | 24,653 | 26,449 | 28,996 |
| Total Loans, amortized cost | $2,624,947 | $2,559,126 | $2,515,793 |
55
The Bank maintains a well-balanced, diverse and high performing commercial real estate loan portfolio. Gross commercial real estate loans, excluding deferred loan fees and costs, represented 51.25% of the Company's total gross loan portfolio as of June 30, 2025. The tables below present the commercial real estate (CRE) portfolio segment by category, location and loan grade.
| CRE Category | Dollar Balance | Percent of CRE Portfolio | Percent of Total Loan Portfolio |
|---|---|---|---|
| Industrial | $281,599 | 20.92% | 10.72% |
| Retail | 213,309 | 15.85% | 8.12% |
| Multi-family | 213,029 | 15.83% | 8.11% |
| Hotels | 172,026 | 12.78% | 6.55% |
| Office | 139,844 | 10.39% | 5.33% |
| Gas Stations | 77,527 | 5.76% | 2.95% |
| Food Service | 52,205 | 3.88% | 1.99% |
| Senior Living | 31,088 | 2.31% | 1.18% |
| Development | 28,565 | 2.12% | 1.09% |
| Auto Dealers | 26,744 | 1.99% | 1.02% |
| Other | 110,017 | 8.17% | 4.19% |
| Total CRE | $1,345,953 | 100.00% | 51.25% |
| CRE Category(*) | Dollar Balance | Percent of CRE Portfolio |
|---|---|---|
| Owner occupied | $572,846 | 42.56% |
| Non-owner occupied | 531,513 | 39.49% |
| Multi-family | 213,029 | 15.83% |
| Land & Development | 28,565 | 2.12% |
| Total CRE | $1,345,953 | 100.00% |
| * Categories assume construction loans converted to either owner or non-owner occupied. |
| Location | Dollar Balance | Percent of CRE Portfolio |
|---|---|---|
| Southeast Michigan | $469,850 | 34.91% |
| Northwest Ohio | 328,177 | 24.38% |
| Fort Wayne, Indiana | 159,334 | 11.84% |
| Columbus, Ohio | 143,294 | 10.65% |
| Greater Indianapolis, Indiana | 77,124 | 5.73% |
| Dayton/Cincinnati, Ohio | 53,047 | 3.94% |
| Other | 115,127 | 8.55% |
| Total CRE | $1,345,953 | 100.00% |
| CRE Grades | June 30, 2025 | December 31, 2024 | December 31, 2023 |
|---|---|---|---|
| 2 | 2.38% | 0.53% | 0.55% |
| 3 | 46.34% | 38.99% | 36.33% |
| 4 | 45.42% | 56.69% | 58.00% |
| 5 | 3.03% | 1.12% | 5.07% |
| 6 | 2.83% | 2.67% | 0.05% |
| 100.00% | 100.00% | 100.00% |
56
The following is a contractual maturity schedule by portfolio segment at amortized cost excluding fair value adjustments related to acquisitions as of June 30, 2025.
(In Thousands)
| June 30, 2025 Within One Year | After One Year Within Five Years | After Five Years Within Fifteen Years | After Fifteen Years | |
|---|---|---|---|---|
| Consumer Real Estate | $13,549 | $24,600 | $172,843 | $314,468 |
| Agricultural Real Estate | 10,405 | 8,455 | 66,768 | 135,370 |
| Agricultural | 96,083 | 48,865 | 9,046 | 4,253 |
| Commercial Real Estate | 103,246 | 471,062 | 576,220 | 193,088 |
| Commercial and Industrial | 131,336 | 95,341 | 66,437 | 533 |
| Consumer | 2,454 | 45,154 | 12,433 | 35 |
| Other | 204 | 576 | 23,874 | - |
Management feels confident that liquidity needs can be met through additional maturities from the security portfolio, increased deposit generating efforts and additional borrowings. For short term needs, the Bank has the unsecured borrowing capacity through its correspondent banks mentioned above along with access to $167.9 million through a Cash Management Advance with the FHLB as of June 30, 2025. The Bank's secured borrowing capacity limits at the FHLB would have allowed draws based on current collateral pledging of $230.2 million on June 30, 2025.
While the security portfolio has been utilized to fund loan growth in previous periods, additional sources have been cultivated during 2024 and 2025. The security portfolio increased in the first six months of 2025 from year end 2024 due to purchases of $29.8 million offset by maturities and paydowns of $32.8 million, net amortization of $0.1 million and a $7.6 million decrease in unrealized losses. The amount of pledged investment securities increased by $16.4 million as compared to year end and increased $34.4 million as compared to June 30, 2024. As of June 30, 2025 pledged investment securities totaled $268.1 million. The Company plans to make additional purchases of securities the remainder of the year for the purposes of increasing our investment holdings in Community Reinvestment Act (CRA) qualifying securities, liquidity and contingency planning and as a means of balance sheet gap management.
As mentioned previously, an additional $230.2 million is also available to the Bank from the FHLB 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. The CRE holdings may be adjusted quarterly to replace paydowns or increase availability of funds. Based on total asset capacity, the Bank would have nearly $1.2 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 decreased 0.6% or $19.0 million since year end 2024. The largest areas of growth occurred in the loan portfolio of $63.9 million and in the security portfolio of $4.5 million offset by a decrease in cash and cash equivalents of $88.1 million, all of which were discussed above.
Total liabilities decreased $34.5 million or 1.1% since year end 2024. The largest change was a decrease in the FHLB borrowings of $57.6 million of which $56.5 million was due to advances maturing in second quarter 2025. Offsetting the decreased borrowings was total deposits growth of $23.6 million or 0.9%. The mix of deposits saw increases in interest bearing checking, savings and money market deposits offset by decreases in time deposit accounts and noninterest bearing accounts since December 31, 2024. The Bank has adjusted its checking product offerings to decrease the number of overall types and provide better service to our customers.
Shareholders’ equity increased by $15.6 million as of June 30, 2025 compared to year end 2024. Earnings exceeded dividend declarations during the six months ended June 30, 2025. Accumulated other comprehensive loss decreased in unrealized loss position by $6.0 million from December 2024 to an unrealized loss of $19.2 million on June 30, 2025. Dividends declared remained unchanged from the prior quarter at $0.22125 per share and were 0.6% over second quarter 2024’s $0.22 per share. Compared to June 30, 2024, shareholders’ equity increased 8.7% or $28.1 million with $9.4 million attributed to an improvement in accumulated other comprehensive loss. Net income was higher for the quarter ended June 2025 compared to
June 2024 by $2.0 million and $758 thousand higher than first quarter 2025. 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 June 30, 2025, 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 $3.35 million dividend during the second quarter of 2025.
The Bank continues to be well-capitalized at June 30, 2025 in accordance with Federal regulatory capital requirements as the capital ratios below show:
| Tier I Leverage Ratio | 9.16% |
| Risk Based Capital Tier I | 11.39% |
| Total Risk Based Capital | 12.43% |
| Stockholders' Equity/Total Assets | 11.18% |
| Capital Conservation Buffer | 4.43% |
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 and $843 thousand for 2025.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Comparison of Results of Interest Earnings and Expenses for three month periods ended June 30, 2025 and 2024
Interest Income
When comparing second quarter 2025 to second quarter 2024, average loan balances grew $60.9 million which represented a 2.4% increase in a one-year time period. Interest income on loans increased $2.9 million or 8.0% as compared to the quarter ended June 30, 2024. Loan interest income for second quarter 2025 included $546 thousand of fee income related to interest rate swap transactions compared to $20 thousand for second quarter 2024. The associated impact to loan yield and total asset yield for second quarter 2025 was 8 basis points and 7 basis points, respectively, whereas the impact to loan yield was only 1 basis point for second quarter 2024. During the 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 $185 thousand was earned in second quarter 2024. The Company's loan portfolio is 42.5% variable rate with 25.8% of total loans subject to repricing within the next three months.
The available-for-sale securities portfolio increased in average balances by $63.6 million when comparing to the same quarter in 2024 with the income associated with the security portfolio increasing $1.0 million over second quarter 2024. 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 decreased in average balances by $87.7 million as compared to the same quarter in 2024 with decreased income of approximately $1.7 million for the current quarter. The decreased balances are the result of funding loan growth, purchases of available-for-sale securities and repayment of other borrowed money.
The overall total average balance of the Bank’s earning assets increased by $36.8 million and interest income for the quarter comparisons was higher for second quarter 2025 by 5.7% or $2.3 million as compared to second quarter 2024. Rate changes between periods have contributed to approximately 104.6% of the growth.
Annualized yield, for the quarter ended June 30, 2025, was 5.45% as compared to 5.22% for the quarter ended June 30, 2024. The following charts demonstrate loan rate increases accounted for 70.3% of the increased loan interest income while increased loan balances accounted for the remaining 29.7%. 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 $115 thousand for second quarter 2025 and 2024 which resulted in a federal tax savings of $24 thousand.
(In Thousands)
| Interest Earning Assets: | Quarter to Date Ended June 30, 2025 Average Balance | Interest/Dividends | Annualized Yield/Rate June 30, 2025 | June 30, 2024 |
|---|---|---|---|---|
| Loans | $2,617,278 | $39,530 | 6.04% | 5.73% |
| Taxable investment securities | 459,298 | 2,837 | 2.47% | 1.82% |
| Tax-exempt investment securities | 16,682 | 74 | 2.25% | 1.99% |
| Fed funds sold & other | 99,964 | 1,051 | 4.21% | 5.77% |
| Total Interest Earning Assets | $3,193,222 | $43,492 | 5.45% | 5.22% |
Change in Interest Income Quarter to Date June 30, 2025 Compared to June 30, 2024
(In Thousands)
| Interest Earning Assets: | Total Change | Change Due to Volume | Change Due to Rate |
|---|---|---|---|
| Loans | $2,937 | $871 | $2,066 |
| Taxable investment securities | 1,055 | 309 | 746 |
| Tax-exempt investment securities | (8) | (21) | 13 |
| Fed funds sold & other | (1,658) | (1,266) | (392) |
| Total Interest Earning Assets | $2,326 | $(107) | $2,433 |
Interest Expense
Contributing to the increased net interest income for the quarter was a decrease in interest expense of $2.0 million or 10.2% compared to second quarter 2024. Since 2024, average interest bearing deposit balances have increased $63.7 million or 2.9% while the Company recognized $1.7 million less in interest expense for the most recent quarter. During 2024, the Federal Reserve decreased the federal funds rate by 50 basis points in September and 25 basis points in November and December. Deposit rates have been adjusted numerous times with all the rate changes. The following charts demonstrate increased average interest bearing deposit balances accounted for 19.4% of additional interest bearing deposit expense while rate decreases accounted for decreased interest bearing deposit expense of 119.4%.
Interest expense on borrowed funds decreased $331 thousand in the second quarter 2025 over the same time frame in 2024 due to the repayment of FHLB advances. During the current quarter, FHLB borrowings of $57.0 million were repaid compared to new FHLB borrowings of $15.0 million and repayment of $5.5 million in second quarter 2024. Interest expense on fed funds purchased and securities sold under agreement to repurchase decreased $4 thousand compared to second quarter 2024 due to the decrease of $420 thousand in average balances. Cost of funds decreased even with growth in interest bearing deposit balances offset by decreased borrowings and decreased noninterest bearing deposits balances of $4.9 million compared to second quarter 2024. The Bank continues to focus on capturing the full customer relationship; however, it has sometimes resulted in more expensive deposits being brought in. The average cost of funds decreased to 2.83% in second quarter 2025 compared to 3.18% in second quarter 2024. Refer to Note 11 for additional information on subordinated notes.
(In Thousands)
| Interest Bearing Liabilities: | Quarter to Date Ended June 30, 2025 Average Balance | Interest | Annualized Yield/Rate June 30, 2025 | June 30, 2024 |
|---|---|---|---|---|
| NOW accounts and savings deposits | $1,599,067 | $9,479 | 2.37% | 2.73% |
| Time deposits | 626,036 | 5,334 | 3.41% | 3.77% |
| Borrowed funds | 228,708 | 2,411 | 4.22% | 4.14% |
| Fed funds purchased & securities sold under agreement to repurchase | 27,301 | 272 | 3.99% | 3.98% |
| Subordinated notes | 34,856 | 285 | 3.27% | 3.28% |
| Total Interest Bearing Liabilities | $2,515,968 | $17,781 | 2.83% | 3.18% |
59
Change in Interest Expense Quarter to Date June 30, 2025 Compared to June 30, 2024
(In Thousands)
| Interest Bearing Liabilities: | Total Change | Change Due to Volume | Change Due to Rate |
|---|---|---|---|
| NOW accounts and savings deposits | $(714) | $725 | $(1,439) |
| Time deposits | (961) | (401) | (560) |
| Borrowed funds | (331) | (378) | 47 |
| Fed funds purchased & securities sold under agreement to repurchase | (4) | (4) | - |
| Subordinated notes | - | 1 | (1) |
| Total Interest Bearing Liabilities | $(2,010) | $(57) | $(1,953) |
As the following chart indicates, the improvement in yields on interest earning assets of 23 basis points combined with the decreased cost of funds of 35 basis points equated to a 58 basis point improvement in net interest spread when comparing to the same period a year ago. Competition for deposits remains intense with most competitors offering special rates for specific terms.
| June 30, 2025 | June 30, 2024 | June 30, 2023 | |
|---|---|---|---|
| Interest/Dividend income/yield | 5.45% | 5.22% | 4.53% |
| Interest Expense/cost | 2.83% | 3.18% | 2.35% |
| Net Interest Spread | 2.62% | 2.04% | 2.18% |
| Net Interest Margin | 3.22% | 2.71% | 2.73% |
Net Interest Income
Net interest income increased approximately $4.3 million for the second quarter 2025 over the same time frame in 2024 due to the increase in interest income of $2.3 million combined with the interest expense decrease of approximately $2.0 million as previously mentioned. As the new loans added in 2024 and 2025 generate more income, management expects the benefits of the Company’s strategy of repositioning the balance sheet to increase interest income in the long run. Loans as a percentage of earning assets increased to 82.0% in second quarter 2025 compared to 81.0% in second quarter 2024. Loans to total assets increased to 77.7% in second quarter 2025 compared to 77.2% for the same period 2024. The percentage of earning assets to total assets decreased to 94.8% for the three months ended June 30, 2025 compared to 95.3% for the three months ended June 30, 2024. 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 decrease in cost of funds.
Comparison of Noninterest Results of Operations for three month periods ended June 30, 2025 and 2024
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.
Total provision for credit losses increased $56 thousand for the three months ended June 30, 2025 as compared to the same period in 2024. 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 $47 thousand higher during the three months ended June 30, 2025 than the same period in 2024 with all loan charge-offs for the current quarter in the consumer portfolio segment. Recoveries were $26 thousand higher during the three months ended June 30, 2025 as compared to same period in 2024 with 75.0% of total current quarter recoveries in the consumer portfolio segment. Combined net charge-offs were $21 thousand higher in the three months ended June 30, 2025 than the same time period 2024. All of the time periods in 2024 and 2025 had net charge-offs to total loans ratios of 0.01% or lower attesting to the strong asset quality of the Bank's loan portfolio.
Loans past due 30 or more days decreased $681 thousand at June 30, 2025 as compared to June 30, 2024. The largest changes were attributed to the combined decrease of past due balances of $810 thousand in the agricultural and commercial real estate portfolio segments. The agricultural real estate portfolio segment past due balances increased $322 thousand for the same time period.
The following table breaks down the activity within the ACL for each portfolio segment and shows the contribution provided by both recoveries and the provision, along with the reduction of the allowance caused by charge-offs. The time period covered is for the three months ended June 30, 2025, 2024, and 2023.
(In Thousands)
| Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | |
|---|---|---|---|
| Loans, amortized cost | $2,624,947 | $2,559,126 | $2,515,793 |
| Daily average of outstanding loans | $2,615,365 | $2,556,037 | $2,476,795 |
| Nonaccrual loans | $3,745 | $2,487 | $6,295 |
| Nonperforming loans* | $3,745 | $2,487 | $6,295 |
| Allowance for Credit Losses - April 1, | $26,352 | $24,680 | $24,634 |
| Loans Charged off: | |||
| Consumer Real Estate | - | 3 | - |
| Agriculture Real Estate | - | - | - |
| Agricultural | - | - | - |
| Commercial Real Estate | - | - | - |
| Commercial and Industrial | - | - | - |
| Consumer | 132 | 82 | 60 |
| 132 | 85 | 60 | |
| Loan Recoveries: | |||
| Consumer Real Estate | 1 | 1 | 6 |
| Agriculture Real Estate | - | - | 104 |
| Agricultural | 1 | - | - |
| Commercial Real Estate | 16 | 1 | 3 |
| Commercial and Industrial | 6 | 39 | 6 |
| Consumer | 72 | 29 | 74 |
| 96 | 70 | 193 | |
| Net Charge Offs (Recoveries): | |||
| Consumer Real Estate | (1) | 2 | (6) |
| Agriculture Real Estate | - | - | (104) |
| Agricultural | (1) | - | - |
| Commercial Real Estate | (16) | (1) | (3) |
| Commercial and Industrial | (6) | (39) | (6) |
| Consumer | 60 | 53 | (14) |
| 36 | 15 | (133) | |
| Provision for Credit Losses | 661 | 605 | 143 |
| Allowance for Credit Losses - June 30, | 26,977 | 25,270 | 24,910 |
| Allowance for Unfunded Loan Commitments & Letters of Credit - June 30, | 1,308 | 1,928 | 2,099 |
| Total Allowance for Credit Losses - June 30, | $28,285 | $27,198 | $27,009 |
| Ratio of Net Charge-offs to Average Outstanding Loans | 0.00% | 0.00% | -0.01% |
| Ratio of Nonaccrual Loans to Loans | 0.14% | 0.10% | 0.25% |
| Ratio of the Allowance for Credit Losses to Loans | 1.03% | 0.99% | 0.99% |
| Ratio of the Allowance for Credit Losses to Nonaccrual Loans | 720.35% | 1016.08% | 395.71% |
| Ratio of the Allowance for Credit Losses to Nonperforming Loans* | 720.35% | 1016.08% | 395.71% |
*Nonperforming loans are defined as all loans on nonaccrual, plus any loans past due 90 days not on nonaccrual.
The balance of loans, amortized cost at June 30, 2025 and June 30, 2024 within this chart does not include a fair value basis adjustment for derivatives of $1.9 million and $612 thousand, respectively, or a daily average outstanding balance of $1.9 million and $380 thousand, respectively. Refer to Note 7 for additional information related to derivative financial instruments.
Loans classified as nonaccrual were higher as of June 30, 2025 at $3.7 million as compared to $2.5 million as of June 30, 2024. The consumer real estate portfolio segment increased $1.4 million, or 83.5%, as compared June 30, 2024. The agricultural real estate portfolio segment increased $401 thousand, or 668.3%, as compared to June 30, 2024 while the agricultural portfolio segment only increased $13 thousand compared to June 30, 2024. The commercial real estate portfolio segment decreased 74.6% or $414 thousand compared to June 30, 2024. Nonaccrual loans in the commercial and industrial portfolio segment and the consumer portfolio segment also decreased $46 and $83 thousand, respectively, compared to June 30, 2024.
The commercial real estate portfolio segment along with the consumer portfolio segment accounted for the largest component of recoveries for the three months ended June 30, 2025 compared to the commercial and industrial portfolio segment and consumer portfolio segment which accounted for the largest components of recoveries for the three months ended June 30, 2024. The consumer portfolio segment accounted for the entirety of charge-offs for the three months ended June 30, 2025 while the consumer real estate portfolio segment and the consumer portfolio segment accounted for the largest components of charge-offs for the three months ended June 30, 2024.
The following table presents the balances for allowance for credit losses per portfolio segment in terms of dollars, as a percentage of ACL and as a percentage of loans by category at June 30, 2025 and June 30, 2024.
| Balance at End of Period Applicable To: | June 30, 2025 Amount (In Thousands) | % of ACL | % of Loans | June 30, 2024 Amount (In Thousands) | % of ACL | % of Loans |
|---|---|---|---|---|---|---|
| Consumer Real Estate | $3,653 | 13.54% | 19.97% | $3,201 | 12.67% | 20.56% |
| Agricultural Real Estate | 738 | 2.74% | 8.41% | 926 | 3.66% | 8.68% |
| Agricultural | 334 | 1.24% | 6.03% | 285 | 1.13% | 5.60% |
| Commercial Real Estate | 17,354 | 64.33% | 51.19% | 16,319 | 64.58% | 50.85% |
| Commercial and Industrial | 3,376 | 12.51% | 11.18% | 2,801 | 11.08% | 10.48% |
| Consumer | 945 | 3.50% | 2.28% | 1,172 | 4.64% | 2.80% |
| Other | 577 | 2.14% | 0.94% | 566 | 2.24% | 1.03% |
| Allowance for Credit Losses | 26,977 | 100.00% | 100.00% | 25,270 | 100.00% | 100.00% |
| Off Balance Sheet Commitments | 1,308 | 1,928 | ||||
| Total Allowance for Credit Losses | $28,285 | $27,198 |
Noninterest Income
Noninterest income was up $219 thousand, or 5.9%, for the three months ended June 30, 2025 over the same time frame in 2024. Customer service fees increased by $141 thousand as compared to the three months ended June 30, 2024. Mortgage release fees and merchant services, which are included in customer service fees, increased $110 and $54 thousand, respectively, offset by a decrease in credit card fees of $27 thousand over the same time period in 2024. Other service fees increased by $121 thousand compared to the same period in 2024, which includes overdraft and returned check fees of $37 thousand and combined service charges on DDA, savings accounts, ATM and miscellaneous of $66 thousand. Servicing rights income for 1-4 family real estate and agricultural real estate loans increased $103 thousand as compared to the same period in 2024 due to an increase in real estate loans sold as discussed below. Offsetting the increases above were reductions of $71 and $34 thousand for interchange income and gain on sale of assets, respectively, compared to the same period in 2024.
The Company has seen strong and steady mortgage production volume partially due to the improvement of housing inventory in many of our markets. Although the volume of total originations of loans held for sale increased, the gain on the sale of these loans was $57 thousand lower for the three months ended June 30, 2025 over the same period in 2024. Total originations of loans held for sale for the three months ended June 30, 2025 were $17.2 million with proceeds from sale at $13.4 million for 2025 compared to 2024’s activity of $15.8 million in originations and $16.9 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 three months ended June 30, 2025 and 2024, loan servicing rights caused a net $44 thousand in income and $51 thousand in expense, respectively. Capitalized additions of agricultural real estate loan servicing rights were $76 thousand for the three months ended June 30, 2025 compared to no capitalized additions for the three months ended June 30, 2024. Amortization of agricultural real estate loan servicing rights were $74 thousand and $64 thousand for the three months ended June 30, 2025 and 2024, respectively. For 1-4 family real estate loans of 15 years and less, the market value of the loan servicing rights was 1.354% in the second quarter 2025 versus 1.147% in second quarter 2024. For 1-4 family real estate loans over 15 years, the value was 1.561% versus 1.318% for the same periods respectively. At June 30, 2025, the carrying value of certain strata were slightly below the market value thus requiring the establishment of a $3 thousand valuation allowance for 1-4 family real estate and an $84 thousand valuation allowance for agricultural real estate servicing rights.
(In Thousands)
(In Thousands)
| Three Months Ended June 30, 2025 | June 30, 2024 | Six Months Ended June 30, 2025 | June 30, 2024 | |
|---|---|---|---|---|
| Beginning Balance | $5,853 | $5,562 | $5,753 | $5,655 |
| Capitalized Additions | 239 | 136 | 515 | 211 |
| Amortization | (195) | (187) | (371) | (355) |
| Ending Balance, June 30, | 5,897 | 5,511 | 5,897 | 5,511 |
| Valuation Allowance | (87) | (7) | (87) | (7) |
| Servicing Rights net, June 30, | $5,810 | $5,504 | $5,810 | $5,504 |
Noninterest Expense
For the three months ended June 30, 2025, noninterest expenses were $1.9 million or 11.0% higher than for the same period in 2024. Salaries and wages, including normal merit increases, restricted stock expense and incentive payouts, decreased $22 thousand in total. Deferred salary loans costs increased $271 thousand from last year and restricted stock expense increased $73 thousand which were offset by a decrease in incentive expense of $365 thousand compared to 2024. Benefits increased over 2024 by $153 thousand due to increased medical expense of $132 thousand and combined taxes and workmen's compensation of $19 thousand offset with reductions in pension of $12 thousand. The additional cost of the offices is also evident in the increased expenses in net occupancy with additional lease expense of $29 thousand and building depreciation of $60 thousand. Furniture and equipment increased in total $7 thousand which was comprised of increases in maintenance contracts and repairs of $44 and $37 thousand, respectively, and decreases in depreciation and small equipment purchases of $54 and $17 thousand, respectively.
Consulting fees, which increased $296 thousand over the same period in 2024, included $227 thousand for time spent on additional ancillary products related to our core banking operating system in the current quarter. Data processing expenses and ATM expense increased a combined $973 thousand. Second quarter 2024 included a much higher usage of flex credits for data processing and ATM expenses that were provided in the renegotiation of the core processor contract. Some of the flex credits may be used on a wide range of services while others are product specific. General and administrative expense increased $423 thousand. The items on this line of significance include an increase in debit card losses and NSF check losses of $139 thousand combined, an increase in miscellaneous expenses of $103 thousand and decreased Directors' fees of $39 thousand.
Income Taxes
Income tax expense was $511 thousand higher for the three months ended June 30, 2025 compared to the same period in 2024 based mainly on higher earnings. Amortization of qualified affordable housing projects caused income tax expense to increase $112 thousand and $110 thousand for the three months ended June 30, 2025 and 2024, respectively, as presented in Note 8. Effective tax rates were 20.50% and 20.63% for 2025 and 2024, respectively. Excluding the additional $112 and $110 thousand of income tax expense, the effective tax rates would have been 19.34% and 19.09% for the three months ended June 30, 2025 and 2024, respectively.
Net Income
Overall, net income in the three months ended June 30, 2025 was up $2.0 million or 35.7% to $7.7 million as compared to last year's $5.7 million. The biggest contributor to the improvement was net interest income. Net interest income was up $4.3 million or 20.3% due to both increased interest income and decreased interest expense. Provision for credit losses for loans and unfunded commitments increased $101 thousand compared to 2024. Noninterest income increased $219 thousand and noninterest expense increased $1.9 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. The Company is optimistic for continued improvement in profitability due to the opportunity for continued expansion in the net interest margin.
Comparison of Results of Interest Earnings and Expenses for six month periods ended June 30, 2025 and 2024
Interest Income
When comparing the six months ended June 30, 2025 and June 30, 2024, average loan balances grew $31.2 million which represented a 1.2% increase in a one-year time period. Interest income on loans increased $4.8 million or 6.7% as compared to the six months ended June 30, 2024. Loan interest income for the six months ended June 30, 2025 included $831 thousand of fee income related to interest rate swap transactions compared to $117 thousand for the six months ended June 30, 2024. The associated impact to loan yield and total asset yield for the first six months of 2025 was 7 basis points and 5 basis points, respectively, whereas the impact to loan yield and total asset yield was only 1 basis point for both the first six months of 2024. During the 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. The Company's loan portfolio is 42.5% variable rate with 25.9% of total loans subject to repricing during the remainder of 2025 and 37.5% of total loans subject to repricing within the next twelve months.
The available-for-sale securities portfolio increased in average balances by $67.0 million when comparing to the same time period in 2024 with the income associated with the security portfolio increasing $2.1 million over the six months ended June 30, 2024. 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 decreased in average balances by $46.2 million as compared to the same six month period ended June 30, 2024 with decreased income of $2.2 million for the current period. The decreased balances are the result of funding loan growth, purchases of available-for-sale securities and repayment of other borrowed money.
The overall total average balance of the Bank’s earning assets increased by $52.0 million and interest income for the period comparisons was higher for the six months ended June 30, 2025 by 5.9% or $4.7 million as compared to the six month period ended June 30, 2024. Rate changes between periods have contributed to approximately 97.7% of the growth.
Annualized yield, for the six months ended June 30, 2025, was 5.32% as compared to 5.11% for the comparable period ended June 30, 2024. The following charts demonstrate loan rate increases accounted for 81.8% of the increased loan interest income while increased loan balances accounted for the remaining 18.2%. 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 $230 and $272 thousand for the six months ended June 2025 and 2024 which resulted in a federal tax savings of $48 and $57 thousand, respectively.
(In Thousands)
| Interest Earning Assets: | Year to Date Ended June 30, 2025 Average Balance | Interest/Dividends | Annualized Yield/Rate June 30, 2025 | June 30, 2024 |
|---|---|---|---|---|
| Loans | $2,598,011 | $76,602 | 5.90% | 5.60% |
| Taxable investment securities | 458,903 | 5,576 | 2.43% | 1.79% |
| Tax-exempt investment securities | 17,501 | 152 | 2.20% | 2.01% |
| Fed funds sold & other | 102,851 | 2,164 | 4.21% | 5.89% |
| Total Interest Earning Assets | $3,177,266 | $84,494 | 5.32% | 5.11% |
Change in Interest Income Year to Date June 30, 2025 Compared to June 30, 2024
(In Thousands)
| Interest Earning Assets: | Total Change | Change Due to Volume | Change Due to Rate |
|---|---|---|---|
| Loans | $4,809 | $874 | $3,935 |
| Taxable investment securities | 2,108 | 631 | 1,477 |
| Tax-exempt investment securities | (16) | (37) | 21 |
| Fed funds sold & other | (2,227) | (1,361) | (866) |
| Total Interest Earning Assets | $4,674 | $107 | $4,567 |
65
Interest Expense
Contributing to the increased net interest income for the first six months of 2025 was a decrease in interest expense of approximately $3.5 million or 9.0% compared to the same period in 2024. Since 2024, average interest bearing deposit balances have increased $24.5 million or 1.2% while the Company recognized $3.0 million less in interest expense for the most recent six months. During 2024, the Federal Reserve decreased the federal funds rate by 50 basis points in September and 25 basis points in November and December. Deposit rates have been adjusted numerous times with all the rate changes. The following charts demonstrate increased average interest bearing deposit balances accounted for 5.4% of additional interest bearing deposit expense while rate decreases accounted for decreased interest bearing deposit expense of 105.4%.
Interest expense on borrowed funds decreased $470 thousand in the six months ended June 30, 2025 over the same time frame in 2024 due to the repayment of FHLB advances. During the current six months, FHLB borrowings of $57.6 million were repaid compared to new FHLB borrowings of $15.0 million and repayments of $14.6 million in 2024. Interest expense on fed funds purchased and securities sold under agreement to repurchase decreased $17 thousand compared to the first six months of 2024 due to the decrease of $698 thousand in average balances. Cost of funds decreased even with growth in interest bearing deposit balances offset by decreased borrowings compared to 2024. The Bank continues to focus on capturing the full customer relationship; however, it has sometimes resulted in more expensive deposits being brought in. The average cost of funds decreased to 2.84% for the six months ended June 30, 2025 compared to 3.12% for the six months ended June 30, 2024. Refer to Note 11 for additional information on subordinated notes.
(In Thousands)
| Interest Bearing Liabilities: | Year to Date Ended June 30, 2025 Average Balance | Interest | Annualized Yield/Rate June 30, 2025 | June 30, 2024 |
|---|---|---|---|---|
| NOW accounts and savings deposits | $1,524,965 | $18,043 | 2.37% | 2.67% |
| Time deposits | 626,767 | 10,758 | 3.43% | 3.69% |
| Borrowed funds | 237,185 | 4,961 | 4.18% | 4.11% |
| Fed funds purchased & securities sold under agreement to repurchase | 27,391 | 543 | 3.96% | 3.99% |
| Subordinated notes | 34,842 | 569 | 3.27% | 3.28% |
| Total Interest Bearing Liabilities | $2,451,150 | $34,874 | 2.84% | 3.12% |
Change in Interest Expense Year to Date June 30, 2025 Compared to June 30, 2024
(In Thousands)
| Interest Bearing Liabilities: | Total Change | Change Due to Volume | Change Due to Rate |
|---|---|---|---|
| NOW accounts and savings deposits | $(1,557) | $765 | $(2,322) |
| Time deposits | (1,409) | (605) | (804) |
| Borrowed funds | (470) | (556) | 86 |
| Fed funds purchased & securities sold under agreement to repurchase | (17) | (14) | (3) |
| Subordinated notes | - | 2 | (2) |
| Total Interest Bearing Liabilities | $(3,453) | $(408) | $(3,045) |
As the following chart indicates, the improvement in yields on interest earning assets of 21 basis points combined with the decreased cost of funds of 28 basis points equated to a 49 basis point improvement in net interest spread when comparing to the same period a year ago. Competition for deposits remains intense with most competitors offering special rates for specific terms.
| June 30, 2025 | June 30, 2024 | June 30, 2023 | |
|---|---|---|---|
| Interest/Dividend income/yield | 5.32% | 5.11% | 4.47% |
| Interest Expense/cost | 2.84% | 3.12% | 2.10% |
| Net Interest Spread | 2.48% | 1.99% | 2.37% |
| Net Interest Margin | 3.13% | 2.66% | 2.87% |
66
Net Interest Income
Net interest income increased approximately $8.1 million for the six months ended June 30, 2025 over the same time frame in 2024 due to the increase in interest income of $4.7 million combined with the interest expense decrease of approximately $3.5 million as previously mentioned. As the new loans added in 2024 and 2025 and loans repricing higher 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 81.8% for the six months ended 2025 compared to 82.1% for the six months ended 2024. Loans to total assets decreased to 77.6% for the six months ended 2025 compared to 78.2% for the same period 2024. The percentage of earning assets to total assets decreased to 94.9% for the six months ended 2025 compared to 95.2% for the six months ended 2024. 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 decrease in cost of funds.
Comparison of Noninterest Results of Operations for six month periods ended June 30, 2025 and 2024
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.
Provision expense increased $1.2 million for the six months ended June 30, 2025, compared to the same period in 2024. As discussed more thoroughly below, the increase was primarily driven by a combination of higher net charge-offs, a rise in nonaccrual loans, and adjustments to qualitative factors reflecting elevated credit risk in certain portfolio segments. Loan charge-offs were $190 thousand higher during the six months ended June 30, 2025 than the same period in 2024. Recoveries were $61 thousand lower during the six months ended June 30, 2025 as compared to same period in 2024. Net charge-offs increased $251 thousand year-over-year, with the consumer loan segment accounting for the majority of losses. Nonaccrual loans increased by $1.3 million, or 53.4%, from June 30, 2024, due largely to deterioration in the consumer real estate and agricultural real estate portfolios. Management also factored in the continuing impact of high interest rates and inflationary pressures on borrower repayment capacity, particularly in rate-sensitive consumer and agricultural portfolios. These trends resulted in a higher modeled loss rate and adjustments to qualitative reserves.
Loans past due 30 or more days decreased $681 thousand at June 30, 2025 as compared to June 30, 2024. The largest changes were attributed to the combined decrease of past due balances of $810 thousand in the agricultural and commercial real estate portfolio segments. The agricultural real estate portfolio segment past due balances increased $322 thousand for the same time period.
The following table breaks down the activity within the ACL for each portfolio segment 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 six months ended June 30, 2025, 2024, and 2023.
(In Thousands)
| Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | |
|---|---|---|---|
| Loans, amortized cost | $2,624,947 | $2,559,126 | $2,515,793 |
| Daily average of outstanding loans | $2,596,431 | $2,565,566 | $2,437,148 |
| Nonaccrual loans | $3,745 | $2,487 | $6,295 |
| Nonperforming loans* | $3,745 | $2,487 | $6,295 |
| Allowance for Credit Losses - January 1, | $25,826 | $25,024 | $20,313 |
| Adjustment for accounting change | - | - | 3,564 |
| Loans Charged off: | |||
| Consumer Real Estate | - | 13 | - |
| Agriculture Real Estate | - | - | - |
| Agricultural | - | - | - |
| Commercial Real Estate | - | - | - |
| Commercial and Industrial | 25 | 101 | - |
| Consumer | 442 | 163 | 182 |
| 467 | 277 | 182 | |
| Loan Recoveries: | |||
| Consumer Real Estate | 2 | 5 | 13 |
| Agriculture Real Estate | - | - | 104 |
| Agricultural | 10 | - | - |
| Commercial Real Estate | 19 | 4 | 5 |
| Commercial and Industrial | 12 | 105 | 12 |
| Consumer | 103 | 93 | 121 |
| 146 | 207 | 255 | |
| Net Charge Offs (Recoveries): | |||
| Consumer Real Estate | (2) | 8 | (13) |
| Agriculture Real Estate | - | - | (104) |
| Agricultural | (10) | - | - |
| Commercial Real Estate | (19) | (4) | (5) |
| Commercial and Industrial | 13 | (4) | (12) |
| Consumer | 339 | 70 | 61 |
| 321 | 70 | (73) | |
| Provision for Credit Losses | 1,472 | 316 | 960 |
| Allowance for Credit Losses - June 30, | 26,977 | 25,270 | 24,910 |
| Allowance for Unfunded Loan Commitments & Letters of Credit - June 30, | 1,308 | 1,928 | 2,099 |
| Total Allowance for Credit Losses - June 30, | $28,285 | $27,198 | $27,009 |
| Ratio of Net Charge-offs to Average Outstanding Loans | 0.01% | 0.00% | 0.00% |
| Ratio of Nonaccrual Loans to Loans | 0.14% | 0.10% | 0.25% |
| Ratio of the Allowance for Credit Losses to Loans | 1.03% | 0.99% | 0.99% |
| Ratio of the Allowance for Credit Losses to Nonaccrual Loans | 720.35% | 1016.08% | 395.71% |
| Ratio of the Allowance for Credit Losses to Nonperforming Loans* | 720.35% | 1016.08% | 395.71% |
*Nonperforming loans are defined as all loans on nonaccrual, plus any loans past due 90 days not on nonaccrual.
The balance of loans, amortized cost at June 30, 2025 and June 30, 2024 within this chart does not include a fair value basis adjustment for derivatives of $1.9 million and $612 thousand, respectively, or a daily average outstanding balance of $1.6 million and $1.2 million, respectively. Refer to Note 7 for additional information related to derivative financial instruments.
Loans classified as nonaccrual were higher as of June 30, 2025 at $3.7 million as compared to $2.5 million as of June 30, 2024. The consumer real estate portfolio segment increased $1.4 million, or 83.5%, as compared June 30, 2024. The agricultural real estate portfolio segment increased $401 thousand, or 668.3%, as compared to June 30, 2024 while the agricultural portfolio segment only increased $13 thousand compared to June 30, 2024. The commercial real estate portfolio segment decreased 74.6% or $414 thousand compared to June 30, 2024. Nonaccrual loans in the commercial and industrial portfolio segment and the consumer portfolio segment also decreased $46 and $83 thousand, respectively, compared to June 30, 2024.
The consumer portfolio segment accounted for the largest component of recoveries and of charge-offs for the six months ended June 30, 2025 versus the commercial and industrial portfolio segment and consumer portfolio segment which accounted for the largest components of recoveries and of charge-offs for the six months ended June 30, 2024.
Noninterest Income
Noninterest income was up $435 thousand, or 5.7%, for the six months ended June 30, 2025 over the same time frame in 2024. Other service fees increased by $188 thousand as compared to the six months ended June 30, 2024 which includes increased overdraft and returned check charge fees of $69 thousand and combined service charges on DDA, savings accounts, ATM and miscellaneous of $86 thousand. Customer service fees decreased by $76 thousand compared to the same period in 2024. Mortgage release fees, credit card fees and miscellaneous customer service fees, which are included in customer service fees, decreased $38, $62 and $71 thousand, respectively, while merchant services increased $95 thousand for the same time period in 2024. Servicing rights income for 1-4 family real estate and agricultural real estate loans increased $304 thousand as compared to the same period in 2024 due to an increase in real estate loans sold as discussed below. Bank owned life insurance cash surrender value increased $31 thousand while interchange income decreased by $79 thousand as compared to 2024.
The Company has seen improvement in mortgage production volume partially due to the improvement of housing inventory in many of our markets. The gain on the sale of these loans was $120 thousand higher for the six months ended June 30, 2025 over the same period in 2024. Total originations of loans held for sale for the six months ended June 30, 2025 were $30.2 million with proceeds from sale at $27.3 million for 2025 compared to 2024’s activity of $23.4 million in originations and $23.7 million in sales. The mortgages sold were both 1-4 family real estate and agricultural real estate loans originated for sale.
The table showing the impact of loan servicing rights, both to income and expense, can be seen in the three month comparison section. The capitalization runs through noninterest income while the amortization thereof is included in noninterest expense. For the six months ended June 30, 2025 and 2024, loan servicing rights caused a net $144 thousand in income and $144 thousand in expense, respectively. Capitalized additions of agricultural real estate loan servicing rights were $246 thousand for the six months ended June 30, 2025 compared to no capitalized additions for the six months ended June 30, 2024. Amortization of agricultural real estate loan servicing rights were $139 thousand and $124 thousand for the six months ended June 30, 2025 and 2024, respectively. At June 30, 2025, the carrying value of certain strata were slightly below the market value thus requiring the establishment of a $3 thousand valuation allowance for 1-4 family real estate and an $84 thousand valuation allowance for agricultural real estate servicing rights.
Noninterest Expense
For the six months ended June 30, 2025, noninterest expenses were $2.8 million or 8.1% higher than for the same period in 2024. Salaries and wages, including normal merit increases, restricted stock expense and incentive payouts, increased $10 thousand in total. Salaries and deferred salary loan costs increased $143 thousand from last year. Restricted stock expense decreased $8 thousand while incentive expense decreased $123 thousand from 2024. The increase in salaries was due to the investment in people for our strategic growth initiative and staffing of new offices. Benefits increased over 2024 with the increased medical expense of $324 thousand and combined taxes and workmen's compensation of $136 thousand offset with reductions in pension of $100 thousand. The additional cost of the offices is also evident in the increased expenses in net occupancy with additional lease expense of $82 thousand, building depreciation of $120 thousand and building repairs and maintenance of $85 thousand. Furniture and equipment decreased $68 thousand.
Consulting fees increased $855 thousand over the same period in 2024 of which the majority was for time spent to our core banking operating system for the base contract negotiation and additional ancillary products. Data processing expenses and ATM expense increased a combined $1.0 million. The first six months of 2024 included a much higher usage of flex credits for data processing and ATM expenses that were provided in the renegotiation of the core processor contract. Some of the flex credits may be used on a wide range of services while others are product specific. General and administrative expense increased $574 thousand. The items on this line of significance include increases in charitable giving expenses of $51 thousand, combined debit card losses and NSF check losses of $129 thousand and miscellaneous expenses of $132 thousand over the same period in 2024.
Income Taxes
Income tax expense was $900 thousand higher for the six months ended June 30, 2025 compared to the same period in 2024 based mainly on higher earnings. Amortization of qualified affordable housing projects caused income tax expense to increase $224 thousand and $220 thousand for the six months ended June 30, 2025 and 2024, respectively, as presented in Note 8. Effective tax rates were 20.57% and 20.78% for 2025 and 2024, respectively. Excluding the additional $ 224 and $220 thousand of income tax expense, the effective tax rates would have been 19.35% and 19.20% for the six months ended June 30, 2025 and 2024, respectively.
Net Income
Overall, net income in the six months ended June 30, 2025 was up $3.6 million or 32.8% to $14.7 million as compared to last year's $11.0 million. The biggest contributor to the improvement was net interest income. Net interest income was up $8.1 million or 19.6% with increased interest income accounting for the largest contribution and decreased interest expense contributed at a lower amount. Provision for credit losses for loans and unfunded commitments increased $1.2 million compared to 2024. Noninterest income increased $435 thousand and noninterest expense increased $2.8 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. The Company is optimistic for continued improvement in profitability due to the opportunity for continued expansion in the net interest margin.
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, 4,246 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Market risk is the exposure to loss resulting from changes in interest rates and equity prices. The primary market risk to which we are subject is interest rate risk. Much of our interest rate risk arises from the instruments, positions and transactions entered for purposes other than trading such as loans, available for sale securities, interest bearing deposits, short-term borrowings and long-term borrowings. Interest rate risk occurs when interest bearing assets and liabilities reprice at different times as market interest rates change. For example, if fixed rate assets are funded with variable rate debt, the spread between asset and liability rates will decline or turn negative if rates increase.
Interest rate risk is managed within an overall asset/liability framework. The principal objectives of asset/liability management are to manage sensitivity of net interest spreads and net income to potential changes in interest rates. Funding positions are kept within predetermined limits designed to ensure that risk-taking is not excessive and that liquidity is effectively managed. If our asset/liability management strategies are unsuccessful, our profitability may be adversely affected. The Company employs a sensitivity analysis utilizing interest rate shocks to help in this analysis.
At June 30, 2025, the shocks presented assume an immediate change of rate in the percentages and directions shown:
| 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 |
|---|---|---|---|---|---|
| 3.39% | -5.82% | Rising | 3.00% | 100,252 | -8.82% |
| 3.46% | -3.63% | Rising | 2.00% | 103,532 | -5.83% |
| 3.63% | 0.97% | Rising | 1.00% | 109,591 | -0.32% |
| 3.59% | 0.00% | Flat | 0.00% | 109,946 | 0.00% |
| 3.50% | -2.74% | Falling | -1.00% | 108,187 | -1.60% |
| 3.30% | -8.30% | Falling | -2.00% | 103,487 | -5.88% |
| 3.14% | -12.69% | Falling | -3.00% | 100,364 | -8.72% |
The Bank’s static balance sheet shifted from slightly asset-sensitive in March to mostly neutral in June. This shift was aided by a material addition of floating-rate liabilities combined with a deeper inversion in market rates for the 2–5-year points on the curve. This inversion brought down repricing rate assumptions for significant asset categories. 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. 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 whereas savings and money market accounts are beneficial due to the variability of the interest in both rate and immediate option to reprice. CD pricing has been more cautious in response to growing market and geopolitical uncertainties.
The Bank was aggressive in dropping its non-maturity deposit rates in the last 4 months of 2024 while the Fed was cutting their rate. We will have some continued opportunity to be aggressive with future Fed rate cuts, particularly with our higher deposit rates. While net interest income drops in a falling interest rate environment, there are potential revenues and other factors that can insulate the Bank’s overall income, such as prepayment penalty fees, mortgage fees, and rate floors. The Bank’s monthly cost of funds increased slightly from 2.81% in March to 2.83% in June. Older loans and investments will continue to reprice higher, in aggregate, in the next twelve months based on current rates. The Bank continues to review and adjust its assumptions concerning decay rates, deposit betas, key rate ties, and loan prepayment speeds. Rates are modified as index rates change. Directional changes shown above are within the Bank's risk tolerance. The effect of the rate shocks may be mitigated to the extent that not all lines of business are directly tied to an external index and actual balance sheet composition may differ from prediction. The Company must continue its trajectory of improved pricing discipline for its new loans and deposits.
Controls and procedures
As filed, 791 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
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, 6,987 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
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, 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.
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.
Trade Policy Risk
The ongoing trade policies and tariff initiatives being pursued by the U.S. government under the administration of President Trump could present potential risks unique to the markets within which we operate. Many of our commercial borrowers operate in agriculture, food processing, and manufacturing; industries that are particularly sensitive to changes in trade policy. The imposition of tariffs on imported goods, the added potential for retaliatory tariffs by foreign governments, or other similar restrictions on international trade could increase costs for domestic manufacturers and consumers alike, as well as reduce demand abroad for U.S. exports, and disrupt supply chains. Any prolonged trade tensions could negatively impact the broader economic environment in the Midwest where the Bank operates, potentially leading to reduced consumer spending, lower economic growth, and decreased demand for other banking products and services. If these factors lead to financial strain on our borrowers, we may experience increased credit risk, higher loan delinquencies, and a potential decline in loan demand.
As a result, our financial performance, including credit quality and loan growth, could be adversely affected by these policy changes. While we actively monitor these developments and work closely with our agricultural customers, there is no assurance that we can fully mitigate the risks posed by tariff initiatives or other trade-related disruptions. These factors could materially affect our business, financial condition, and results of operations.
Emerging financial technologies such as digital assets, stablecoins, and distributed ledger systems may reduce the demand for traditional banking services and create new competitive pressures that adversely affect our business.
The rapid development and increasing regulatory acceptance of financial technologies such as digital assets (including cryptocurrencies and tokenized money), stablecoins, and distributed ledger technologies (DLT) could materially alter the landscape of financial services in the coming years. These technologies enable near-instantaneous value transfer, programmable money, and peer-to-peer settlement mechanisms, many of which may operate outside the traditional banking system.
Large technology companies, fintech platforms, and digital asset service providers—some of which are not subject to the same regulatory or capital constraints as depository institutions—are increasingly offering products that compete with core banking functions, such as payments, custody, lending, and liquidity management. The adoption of digital financial infrastructure by governments or central banks, such as central bank digital currencies (CBDCs), or by major corporate platforms could accelerate these shifts.
As a relatively small financial institution, we may be disproportionately impacted by these developments. Our ability to compete with larger institutions or well-capitalized technology entrants in developing or integrating such technologies is limited by our size, risk appetite, and regulatory obligations. A failure to adapt to or participate in these emerging ecosystems—either directly or through strategic partnerships—could erode our relevance in key banking functions, reduce our share of customer deposits and fee income, and adversely affect our long-term growth prospects and financial condition.
Risks Related to Regulation of Payment Stablecoins and Digital Assets
Recent federal legislation, including the GENIUS Act enacted in mid-2025, established new regulatory requirements for payment stablecoins issued by banking organizations and their subsidiaries. Compliance with these requirements involves maintaining adequate asset reserves, extensive reporting obligations, independent audits, and increased supervisory oversight. Our potential involvement in issuing or supporting payment stablecoins could expose us to regulatory compliance risks, increased operational costs, and evolving legal uncertainties. Additionally, rapid changes in digital asset regulation or adverse regulatory interpretations could adversely affect our business strategies and prospects in this emerging market, which could materially impact our financial condition and results of operations.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2025-06-30. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Selling, general and administrative | 3 months2025-04-01 to 2025-06-30 | $1.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months2025-01-01 to 2025-06-30 | $3.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Income tax | 3 months2025-04-01 to 2025-06-30 | $2.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months2025-01-01 to 2025-06-30 | $3.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2025-04-01 to 2025-06-30 | $7.7m | us-gaap:NetIncomeLoss |
| Net income | 6 months2025-01-01 to 2025-06-30 | $14.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months2025-04-01 to 2025-06-30 | $0.56 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months2025-01-01 to 2025-06-30 | $1.07 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months2025-04-01 to 2025-06-30 | $0.56 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months2025-01-01 to 2025-06-30 | $1.07 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 6 months2025-01-01 to 2025-06-30 | $12.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months2025-01-01 to 2025-06-30 | $1.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months2025-01-01 to 2025-06-30 | $6.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months2025-01-01 to 2025-06-30 | $23.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | At period end2025-06-30 | $3.35bn | us-gaap:Assets |
| Total liabilities | At period end2025-06-30 | $2.99bn | us-gaap:Liabilities |
| Shareholders' equity | At period end2025-06-30 | $350.8m | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0000950170-25-101771. Last ingested by Listed: Oct 27, 2026, 13:43 ET. Listed shows no prices and gives no investment advice.