Farmers & Merchants Bancorp Inc: Form 10-Q for the period ended Jun 30, 2026

OVERVIEW

The Company continues to realize the benefits of being disciplined in the execution of our strategic plan. The largest benefit evident is the improvement in overall profitability. Net income is up 45.79% or over $6.7 million year to date compared to year-to-date 2025. On a quarterly basis, net income is up 23.17% compared to 1st quarter 2026 and 53.01% compared to same quarter last year. In comparing year-to-date June 30, 2026, to June 30, 2025, both aspects of net interest income have improved due to our pricing discipline – interest income is up $4.45 million and interest expense decreased by $2.29 million. Interest income from loans benefited with a higher average balance and a higher yield in comparing both the second quarters and the six months of 2026 to 2025.

Total deposits also grew in comparisons of the two periods, mainly in money market and certificate of deposit balances. Interest expense decreased in comparing 2026 to 2025 in both second quarter and year-to-date performances. Deposit growth enabled FHLB borrowings to be paid off along with the continuing paydown of the amortized borrowings. This all culminated with net interest margin for the 2nd quarter 2026 at 3.48% compared to 3.22% for the same period a year ago and year-to-date at 3.45% compared to 3.13% a year ago. We expect the net interest margin to continue to improve with the percentage of favorable repricing in the loan portfolio in the next 18 months.

A portion of our strategic plan focuses on improvement in noninterest income while controlling noninterest expense. Noninterest income has favorable comparisons in the quarter’s performance and year-to-date. In terms of dollars, it is higher than first quarter 2026, second quarter 2025 and year-to-date as of June 30th comparisons. The largest contributors to this success are gain on sale of loans and our restructure of our Bank Owned Life Insurance “BOLI” portfolio. Gain on sale of loans originates out of three real estate portfolios, 1-4 family, agricultural and small business. The improvement in gain on sale for 2026 is driven mostly by the agricultural real estate portfolio where we sell 90% of the loan and maintain 10% and receive servicing income for the life of the loan.

Operating expenses are up slightly due mainly to employee expenses, as we accrue with higher performance payouts. In comparing the first half of 2026 to the first half of 2025, furniture and equipment include our newest office in 2026 that was not added until the second half of 2025. Consulting fees are also considerably lower in 2026 versus 2025 which included one-time fees associated with data processing. A couple of upcoming projects will increase consulting fees in the second half.

Overall, we have seen improvement in our past due loans and nonaccrual/nonperforming loan balances. The Bank is back to a more normal range of 0.34% of loans past due, following a couple quarters with higher levels of past due loans. Consumer, Home Loans and Commercial loan past due percentages are all well below last year’s averages. Agricultural Real Estate past due loans includes one loan of $3.8 million as of June 2026. Nonaccrual loan balances are down 33.31% from last quarter; however, remain 97.14% higher when compared to second quarter 2025. Agricultural Real Estate nonaccrual loans remain higher than other loan segments primarily due to one loan that is in the work out process.

In looking at the current economy in our market areas, a great deal of attention remains on the agricultural section. For our grain farmers, the planting season was relatively timely and overall crop conditions are good in our market area. Projected margins are tight for 2026 but government subsidies have provided some support. Land values remain stable showing continued demand for land with financially able buyers. The livestock market continues to be profitable. The agricultural and grain elevator lines of credit saw increased usage in the first quarter of 2026, and we are starting to see some reductions in line usage area for the second quarter. Our agricultural equipment dealers continue to endure lower sales, but the overall performance of agricultural businesses has been acceptable.

The Commercial Banking Division realized flat growth for the first half of 2026. Loan volume in first half was consistent with previous quarters; however, the expected payoffs and normal amortization outweighed the overall production. Lending rates and overall terms remained consistent with the previous quarter, however, there are more competitive pressures on offerings as we finished the second quarter. The Iran conflict's impact on the economy, oil and overall inflation remained the largest concerns to commercial business in the F&M footprint year-to-date 2026. The commercial team continues to monitor the portfolio and borrowing bases closely for the impact of credit and inflationary pressures. Credit quality and past due pressures exist but remained sound in second quarter. Collateral values and auction values are still consistent with previous quarters.

The Bank made the decision to discontinue the Indirect Lending Department as of March 2026 and directed that business to our direct consumer lending department. This contributed to a decrease in the consumer loan portfolio of 13.4% or $7.89 million as compared to year-end 2025 and 14.1% or $8.40 million as compared to June 30, 2025.

Fixed home loan originations to be sold to the secondary market experienced the highest dollar volume by quarter of the last 2 years at $16.8 million. Similarly, the same is true for the actual dollar volume of sold loans during the quarter at $15.4 million.

We continue to see home equities being the driver to higher balances in the consumer real estate portfolio segment. Home equities account for increased balances of $8.53 million since year-end 2025 and $5.39 million over first quarter of 2026, while the overall consumer real estate portfolio segment shows a smaller gain in comparison to the same time periods of $7.0 million and lower by $1.55 million, respectively.

Overall, net income continues to expand in 2026 at a greater percentage than our asset growth. When comparing June 30, 2026, to June 30, 2025, assets grew 4.67% while net income grew 45.79%. Our continued attention on maximizing revenues while limiting expenses is serving us well. The Company remains well capitalized with sound liquidity levels and strong asset quality.

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-eight full-service banking offices throughout Northwest Ohio, Northeast Indiana and Southeast Michigan along with a drive-up facility in Archbold. The Bank also operates three Loan Production Offices (LPOs), two in Ohio and one in Indiana.

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, 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. 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 laws and 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 mortgage 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 secondary mortgage market, Farm Service Agency (FSA) guaranteed secondary agricultural market 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 four State of Ohio programs: Ag-Link, Grow Now, Ohio Homebuyers Plus and Buckeye Business Advantage. These four programs allow the Bank to offer a more competitive interest rate to customers. 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. In November 2023, the Bank began offering a home buyer mortgage program, Hometown Advantage Mortgage Program, which is available to low- and moderate-income home buyers as well as on properties located in low- and moderate-income census tracts. In the first quarter 2026, the Bank rolled out a CD/Savings secured loan product for credit building or credit repair to be secured by a time deposit or savings account with a minimum $1,000 loan amount, no origination costs, and no minimum credit score or debt-to-income requirements. This loan product is also intended to assist low- and moderate-income individuals with strengthening their credit.

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%.
• Loans with LTVs 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, 2026, we had 477 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 continue to monitor federal regulatory developments that may impact operations, capital, and strategic initiatives. Changes in laws, rules, and guidance present operational and compliance challenges and require ongoing evaluation of policies, procedures, and systems.

Truth in Lending Act – Ability to Repay / Qualified Mortgage. The Bank monitors consumer mortgage loans to ensure they meet Qualified Mortgage (QM) requirements, which provide a presumption of compliance under TILA’s Ability to Repay rules. The final General QM Rule, effective October 2022, eliminated the 43% debt-to-income limit, removed Appendix Q underwriting standards, and established price-based thresholds for QM status. Loans must still meet underwriting standards, product features, and points-and-fees limits. The Bank occasionally originates Non-QM and Higher Priced Mortgage Loans, which are reviewed periodically by the Loan Committee.

Equal Credit Opportunity Act (ECOA) / Section 1071 – Small Business Lending Data Collection. The CFPB’s Section 1071 rule requires covered institutions to collect and report demographic data on small business credit applications. Court injunctions originally stayed mandatory compliance for community banks, including the Bank. On May 1, 2026, the rule was finalized with an effective date of June 30, 2026 and compliance date of January 1, 2028 to begin data collection. The finalized rule revised certain provision of Regulation B, Subpart B which implements the Equal Credit Opportunity Act. Revisions included coverage of certain credit transactions and financial institutions; covered transaction thresholds for financial institutions subject to reporting; the definition of small business; and exclusion of certain data points not specifically required by Section 1071 statutory language. Initial analysis indicates the Bank may not immediately be subject to data reporting requirements as of January 1, 2028. The Bank continues to evaluate these final rules to gauge impact on small business lending operations, monitor loan volume of reportable loans, and assess these changes in connection with its fair lending program and broader compliance management system.

Equal Credit Opportunity Act / Regulation B Amendments. In April 2026, the CFPB issued final amendments to Regulation B addressing disparate impact, discouragement of applicants or prospective applicants, and special purpose credit programs. These amendments may affect fair lending compliance, credit policy administration, training, monitoring, and documentation practices. The Bank continues to evaluate these changes in connection with its fair lending program and broader consumer compliance management system.

Community Reinvestment Act (CRA) Updates. The 2023 CRA rule, jointly issued by the Federal Reserve, FDIC, and OCC, is subject to ongoing litigation and its implementation is currently paused. The agencies have proposed rescinding the 2023 framework and reverting to pre-October 2023 standards. The Bank continues to operate under the prior framework and monitors regulatory updates.

Financial Data Transparency Act. In June 2026, multiple federal financial regulatory agencies issued final joint data standards under the Financial Data Transparency Act to promote interoperability and standardization of regulatory data. Although implementation requirements will depend on subsequent agency actions and the specific reporting obligations applicable to the Company and the Bank, these standards may affect future regulatory reporting formats, data governance, system capabilities, and internal controls over regulatory submissions. The Company and the Bank continue to monitor implementation timelines and assess potential operational impacts.

Basel III Endgame. The Basel Committee initiated the final phase of Basel III reforms in July 2025, increasing capital requirements, revising standardized approaches, and limiting internal model usage. While these rules primarily affect global banks, the Bank continues to assess potential indirect implications for capital adequacy and regulatory compliance.

Community Bank Leverage Ratio. In April 2026, the federal banking agencies finalized revisions to the Community Bank Leverage Ratio framework, lowering the minimum leverage ratio from 9% to 8% and extending the grace period for temporary noncompliance from two quarters to four quarters, effective July 1, 2026. The change may provide qualifying community banking organizations with additional flexibility to use the simplified capital framework and reduce certain regulatory reporting and capital calculation burdens. The Company and the Bank continue to evaluate eligibility, capital planning considerations, and any related Call Report or regulatory reporting impacts.

Supervisory Ratings and Risk-Based Examination Focus. In May 2026, the federal banking agencies requested comment on proposed revisions to the Uniform Financial Institutions Rating System, commonly referred to as the CAMELS rating system. Separately, the OCC and other agencies have continued to emphasize risk-based supervision and the removal of reputation risk as a standalone supervisory consideration. These developments may affect the scope, focus, and documentation expectations for examinations, including greater emphasis on material financial risks, governance, internal controls, and risk management practices. The Bank continues to monitor these supervisory developments and assess related policy, procedure, and examination preparation impacts.

GENIUS Act – Payment Stablecoins. Enacted in July 2025, the GENIUS Act establishes standards for payment stablecoins issued by banks, including reserve requirements, reporting, audits, and supervisory oversight. The Bank is evaluating potential strategic and compliance implications under this framework as part of its digital asset initiatives. Regulatory agencies have until 2027 to finalize implementing rules.

Bank Secrecy Act / Anti-Money Laundering and Sanctions Compliance. Federal banking agencies and FinCEN have continued rulemaking and guidance activity related to anti-money laundering, countering the financing of terrorism, sanctions compliance, customer identification, and customer due diligence expectations, including proposed changes to AML/CFT program requirements that would require financial institutions to maintain effective, risk-based, and reasonably designed AML/CFT programs. These developments may require updates to policies, procedures, risk assessments, customer due diligence processes, monitoring systems, training, and governance practices. The Bank continues to monitor these developments and evaluate potential implications for its BSA/AML and sanctions compliance program.

Credit Risk and Loan Portfolio Risk Management. The FDIC continues to emphasize safe and sound lending and loan portfolio risk-management practices through its Risk Management Manual of Examination Policies, including Section 3.2, Loans, which was updated in March 2026, and related examination documentation modules for loan portfolio review. These materials address lending policies, loan administration, credit risk rating or grading systems, loan review systems, underwriting, portfolio composition, problem credit management, allowance for credit losses considerations, and board and management responsibilities. In addition, the interagency guidance on credit risk review systems, which applies to FDIC-supervised depository institutions, emphasizes independent, ongoing credit review and appropriate communication to management and the board regarding loan portfolio performance. These supervisory expectations may affect the Bank’s credit policies, internal controls, loan review practices, allowance for credit losses processes, and documentation of credit risk management activities. The Bank continues to evaluate FDIC and interagency guidance in light of its loan portfolio composition and credit risk profile.

Executive Order on Fair Banking. An Executive Order issued in August 2025 prohibits denial of financial services based on constitutionally or statutorily protected beliefs, affiliations, or political views, and prohibits politicized or unlawful “debanking.” Banking decisions must be based on individualized, objective, and risk-based analysis. The Bank continues to review and evaluate policies and practices to ensure it does not inadvertently deny financial services based on beliefs, affiliations, or political views.

Ongoing Commitment. The Company and the Bank continue to make good faith efforts to comply with applicable laws, rules, regulations, and guidance from federal agencies and remain attentive to developments that could affect operations, capital, or strategic initiatives. Changes to the laws and regulations, both at the federal and state levels, can affect the operating environment of the Company and its subsidiaries in substantial and unpredictable ways.

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 $12.6 million and $11.7 million at June 30, 2026 and December 31, 2025, respectively, and was reported in Other Assets on the condensed consolidated balance sheets and is excluded from the estimate of credit losses.

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 $211 thousand at June 30, 2026 and $145 thousand at December 31, 2025.

Refer to Note 1 in the Company's Annual Report on Form 10-K for the year ended December 31, 2025 for further information related to loans and the ACL.

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

The Company continues to focus on deposit growth in both its legacy and newer markets. Core deposits may provide opportunities for additional noninterest income for the Company through the opportunity to cross-sell additional services such as treasury management services. Noninterest bearing deposits increased $8.3 million from June 30, 2025 to June 30, 2026. Interest bearing deposits also increased by $150.8 million over the same time period. This was comprised of an increase in savings accounts of $79.9 million, an increase in time deposits of $71.6 million and a decrease in NOW accounts of $700 thousand.

Deposits have increased $138.7 million as of June 30, 2026 since December 31, 2025 and $59.7 million since March 2026. Both comparisons had increases in savings accounts and time deposits with decreases in noninterest bearing accounts. Cash and cash equivalents also increased $58.7 million since December 31, 2025; however, decreased $17.1 million since March 31, 2026. Although cash balances were used to reduce FHLB borrowings and federal funds purchased as well as fund security purchases, cash balances increased due to loan payoffs and paydowns as well as deposit growth.

In addition to cash and cash equivalent balance increases, the Bank has access to $213 million in unsecured Federal Funds lines for overnight funds from our correspondent banking relationships, which includes a $50 million line of credit that was added in the fourth quarter of 2025. The Company also has a $15 million line of credit. The Bank has established four market sources for brokered CDs as additional contingent funding resources. Lastly, the Bank’s secured borrowing capacity limits at the FHLB Cincinnati is $157.7 million based on current collateral pledging. Any additional borrowing over $7.9 million may require additional stock purchases. Pledged collateral included eligible 1-4 family, home equity, and specific commercial and multi-family real estate loans.

At June 30, 2026, the investment portfolio of the Bank had $277.2 million of pledged securities with $161.4 million available in unpledged securities for future borrowings. Currently, securities may be pledged to offset public deposits, our repurchase agreement portfolio or at the Federal Discount Window.

The Company continues to hold bi-weekly, what is termed “sub-ALCO”, meetings along with continuing the use of a liquidity dashboard and cashflow projection. The liquidity dashboard and the five month forward looking cashflow projection are actively managed documents which continue to be enhanced to provide the most accurate forecast of liquidity positions. The cashflow projection includes loan pipeline expectations and runoffs, and maturities of both sources and uses of funds. The Company has the tools to monitor liquidity and continues to manage the risks to ensure adequate liquidity is maintained.

In comparing to the same period in 2025, the June 30, 2026 (at amortized cost) loan balances of $2.7 billion accounted for $79.5 million or a 3.0% increase. Commercial and industrial loans increased 14.8% while commercial real estate loans saw a decrease of 2.8% as compared to 2025. Agricultural related loans increased 19.5% year over year. Individual growth was comprised of 54.8% in non-real estate agricultural loans while agricultural real estate loans decreased by 5.8%. Within the non-real estate agricultural loan group, approximately half of the growth was related to new originations of loans while the other half was attributable to higher utilization of lines of credit. Consumer real estate loans increased by 1.9% while consumer loans decreased by 14.1%. Other loans decreased by 8.4%. 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)

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 48.36% of the Company's total gross loan portfolio as of June 30, 2026. The tables below present the commercial real estate (CRE) portfolio segment by category, location and loan grade.

55

The following is a contractual maturity schedule by portfolio segment at amortized cost excluding fair value adjustments related to acquisitions as of June 30, 2026.

(In Thousands)

Management feels confident that anticipated liquidity needs can be met through additional maturities from the security portfolio, increased deposit generating efforts and additional borrowings. While the security portfolio has been utilized to fund loan growth in previous periods, additional sources have been cultivated. The security portfolio increased in the first six months of 2026 from year end 2025 due to purchases of $72.4 million which were partially offset by sales of $5.4 million, maturities and paydowns of $45.1 million, net accretion of $207 thousand and a $2.6 million increase in unrealized losses. In the first quarter 2026, sales of odd lot mortgage-backed securities were executed and generated a realized loss of $347 thousand which were replaced with purchases of higher yielding securities. During the current quarter, the security portfolio increased $11.6 million with purchases of approximately $37.6 million partially offset by maturities and paydowns of $25.5 million, net accretion of $129 thousand and a $545 thousand increase in unrealized losses. The amount of pledged investment securities increased by $10.7 million as compared to year end and $9 million as compared to June 30, 2025. As of June 30, 2026, pledged investment securities totaled $277.2 million. The Company plans to make additional purchases of securities the remainder of the year for the purposes of increasing our investment holdings, liquidity and contingency planning and as a means of balance sheet gap management.

As mentioned previously, an additional $157.7 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 more than $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 increased 2.0% or $67.7 million since year end 2025 and $16.5 million or 0.47% since March 31, 2026. The largest areas of growth since December 2025 occurred in the cash and due from banks and the security portfolio of $58.7 million and $19.2 million, respectively, offset by decreases in the loan portfolio of $8.9 million. Although the loan portfolio did decrease, the Bank continues to pursue loan growth with total new money funded in the six months ended June 30, 2026 of $445.6 million and $267.8 million in the quarter ended June 30, 2026. Since March 31, 2026, the largest areas of growth have occurred in the loan portfolio of $22.9 million and the security portfolio of $11.6 million offset by a decrease of $17.1 million in cash and due from banks.

Total liabilities increased $53.9 million since year end 2025 and $7.8 million since March 31, 2026. The largest increase was in the total deposits of $138.7 million. The mix of deposits saw increases in interest-bearing NOW accounts, savings and money market deposit accounts and time deposit accounts offset by decreases in noninterest-bearing accounts since December 31, 2025. During the first six months of 2026, FHLB advances of $58.9 million and federal funds purchased of $15 million have been repaid. Since March 31, 2026, deposit increases totaling $59.7 million have been offset with the repayment of FHLB advances of $50.5 million.

Shareholders’ equity increased by $13.9 million as of June 30, 2026 compared to year end 2025 and $8.8 million since March 31, 2026. Accumulated other comprehensive loss increased in unrealized loss position by $2.1 million from December 2025 to an unrealized loss of approximately $14 million on June 30, 2026. Dividends declared remained unchanged from the prior quarter at $0.23 per share and were 4.0% over second quarter 2025’s $0.22125 per share. Compared to June 30, 2025, shareholders’ equity increased 9.7% or $33.9 million with $5.3 million attributed to an improvement in accumulated other comprehensive loss. Net income was higher for the six months ended June 2026 compared to June 2025 by 45.8% or $6.7 million.

Basel III regulatory capital requirements include a capital conservation buffer of 2.5%. As of June 30, 2026, 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 $6 million dividend during the second quarter of 2026. The excess of the upstreamed funds are being considered for potential sub-debt paydowns or for the repurchase of shares.

The Bank continues to be well-capitalized at June 30, 2026 in accordance with Federal regulatory capital requirements as the capital ratios below show:

MATERIAL CHANGES IN RESULTS OF OPERATIONS

Comparison of Results of Interest Earnings and Expenses for three month periods ended June 30, 2026 and 2025

Interest Income

When comparing second quarter 2026 to second quarter 2025, average loan balances grew $73.7 million, which represented a 2.8% increase. Interest income on loans increased $1.3 million or 3.3% as compared to the quarter ended June 30, 2025. The Company's loan portfolio is 49.8% variable rate with 32.7% of total loans subject to repricing within the next three months and 36.1% of total loans subject to repricing during the remainder of 2026.

The available-for-sale securities portfolio decreased in average balances by $5.1 million or 1.1% when comparing to the same quarter in 2025 with the income associated with the security portfolio increasing $387 thousand over second quarter 2025. During the current quarter, maturities and paydowns of securities were $25.5 million, purchases were $37.6 million and unrealized loss increased $430 thousand. The additional income from the security portfolio can be attributed to the increased book yield of 2.75% as of June 30, 2026 from 2.26% as of June 30, 2025. Federal funds sold and interest-bearing deposits increased in average balances by $70.5 million as compared to the same quarter in 2025 with increased income of $459 thousand for the current quarter. The increased balances are primarily the result of the focus on liquidity and deposit generation offset by funding loans and repayment of other borrowed money.

The overall total average balance of the Bank’s earning assets increased by $139.1 million and interest income for the quarter comparisons was higher for second quarter 2026 by 5.0% or approximately $2.2 million as compared to second quarter 2025. Rate changes between periods have contributed to approximately 15.3% of the growth.

Annualized yield, for the quarter ended June 30, 2026, was 5.48% as compared to 5.45% for the quarter ended June 30, 2025. The following charts demonstrate loan rate increases accounted for 15.0% of the increased loan interest income while increased loan balances accounted for the remaining 85.0%. The yields on tax-exempt securities and the portion of the tax-exempt IDB and agricultural loans included in loans have been tax adjusted based on a 21% tax rate in the charts that follow. The tax-exempt interest income was $524 and $134 thousand for second quarter 2026 and 2025, respectively, which resulted in a federal tax savings of $110 and $28 thousand, respectively, less the TEFRA adjustments of $10 and $4 thousand, respectively.

(In Thousands)

Change in Interest Income Quarter to Date June 30, 2026 Compared to June 30, 2025

(In Thousands)

Interest Expense

Contributing to the increased net interest income for the quarter was a decrease in interest expense of approximately $1.1 million or 5.9% compared to second quarter 2025. Since June 30, 2025, average interest-bearing deposit balances have increased $150.1 million or 6.7% while the Company recognized $381 thousand less in interest expense for the most recent quarter. In September 2025, the Federal Reserve made its first rate change to the federal funds rate for 2025 with a reduction of 25 basis points followed by reductions of 25 basis points in both October and December. There have been no changes to the federal funds rate in 2026. Deposit rates continue to be reviewed and adjusted with the rate changes. The following charts demonstrate increased average interest-bearing deposit balances accounted for $994 thousand of additional interest-bearing deposit expense while rate decreases accounted for decreased interest-bearing deposit expense of $1.4 million. Noninterest-bearing deposits balances increased $20.5 million compared to second quarter 2025. The Bank continues to focus on capturing the full customer relationship; however, it has sometimes resulted in more expensive deposits being brought in.

Interest expense on borrowed funds decreased $517 thousand in the second quarter 2026 over the same time frame in 2025 due to the repayment of FHLB advances. During the current quarter, FHLB borrowings of $50.5 million were repaid, furthering the FHLB borrowing repayment strategy from second quarter 2025 at which time $57 million were repaid. Interest expense on federal funds purchased and securities sold under agreement to repurchase decreased $154 thousand compared to second quarter 2025 due to the decrease of $12.5 million in average balances. Cost of funds decreased even with growth in interest-bearing deposit balances offset by decreased borrowings and securities sold under agreement to repurchase compared to second quarter 2025. The average cost of funds decreased to 2.56% in second quarter 2026 compared to 2.83% in second quarter 2025. Interest expense due to subordinated notes was unchanged during the quarter comparisons. Refer to Note 11 for additional information on subordinated notes.

(In Thousands)

Change in Interest Expense Quarter to Date June 30, 2026 Compared to June 30, 2025

(In Thousands)

As the following chart indicates, the improvement in yields on interest earning assets of 3 basis points combined with the decreased cost of funds of 27 basis points equated to a 30 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.

Net Interest Income

Net interest income increased $3.2 million for the second quarter 2026 over the same time frame in 2025 due to the increase in interest income of approximately $2.2 million combined with the interest expense decrease of approximately $1.1 million as previously mentioned. As the new loans added in 2025 and 2026 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. The Company has some opportunity for improved asset yield with loans repricing in 2026 and a greater opportunity beginning in 2027 and 2028. Loans as a percentage of earning assets decreased to 80.8% in second quarter 2026 compared to 82.0% in second quarter 2025. Loans to total assets decreased to 76.3% in second quarter 2026 compared to 77.7% for the same period 2025. The percentage of earning assets to total assets decreased slightly to 94.5% for the three months ended June 30, 2026 compared to 94.8% for the three months ended June 30, 2025. In terms of net interest margin, the Bank recognizes competition for deposits will continue; however, there is a greater opportunity for gradual improvement with repricing loans upwards in the next year.

Comparison of Noninterest Results of Operations for three month periods ended June 30, 2026 and 2025

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 decreased $367 thousand for the three months ended June 30, 2026 as compared to the same period in 2025. Management continues to monitor asset quality, making adjustments to the provision as necessary, in accordance with the Bank's chosen CECL methodology. The impact of higher interest rates and inflation are taken into consideration when reviewing qualitative factors. Loan charge-offs were $41 thousand higher during the three months ended June 30, 2026 than the same period in 2025. Loan charge-offs for the current quarter were in the consumer portfolio and commercial and industrial portfolio segments while all charge-offs for the same period in 2025 were in the consumer portfolio. Of the total consumer charge-offs, $80 and $54 thousand were for automobiles and trucks for the three months ended June 30, 2026 and 2025, respectively. 2025 consumer charge-offs also included $26 thousand for recreational vehicles. Recoveries were $15 thousand higher during the three months ended June 30, 2026 as compared to same period in 2025 with 95.5% of total current quarter recoveries in the consumer portfolio and agricultural portfolio segments. Of the total consumer recoveries, $11 thousand were for automobiles and trucks and $4 thousand were for recreational vehicles for the three months ended June 30, 2026 compared to $4 thousand for automobiles and trucks and $49 thousand for recreational vehicles for the same period in 2025. Combined net charge-offs were $26 thousand higher in the three months ended June 30, 2026 than the same time period in 2025. All of the time periods in 2025 and 2026 had net charge-offs to total loans ratios lower than 0.1% attesting to the strong asset quality of the Bank's loan portfolio.

The provision for credit losses on loans decreased by $488 thousand or 73.8% in the second quarter of 2026 compared to the second quarter of 2025 due to gross loan portfolio growth of only $23.6 million or 0.9% in the second quarter of 2026 compared to gross loan portfolio growth of $44.5 million or 1.7% in the second quarter of 2025. Moreover, gross commercial real estate loan balances declined by $6.9 million or 0.5% in the second quarter of 2026 compared to gross commercial real estate loan balance growth of $20.2 million or 1.5% in the second quarter of 2025, and commercial real estate loans tend to have higher reserves. Likewise, the Bank has experienced reductions in consumer loans which tend to have higher reserves, and an increase in agricultural loans which tend to have a lower reserve based on loss history. Lastly, the specific reserve portion of the ACL for collateral dependent loans decreased in the second quarter of 2026 by $286 thousand due to some principal paydowns on individually evaluated loans, compared to a reduction in specific reserves of $68 thousand in the second quarter of 2025.

Loans past due 30 or more days increased $4.7 million at June 30, 2026 as compared to June 30, 2025. The largest changes were attributed to the agricultural real estate portfolio segment which increased $4.7 million for the same time period, of which $3.8 million is attributed to one loan. The commercial and industrial portfolio segment also increased $420 thousand while the consumer real estate portfolio segment decreased $631 thousand as compared to June 30, 2025.

The following table presents 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, 2026, 2025, and 2024.

(In Thousands)

*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, 2026, June 30, 2025 and June 30, 2024 within this chart does not include a fair value basis adjustment for derivatives of $546 thousand, $1.9 million and $612 thousand, respectively, or a daily average outstanding balance of $926 thousand, $1.9 million or $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, 2026 at $7.4 million as compared to $3.7 million as of June 30, 2025. The agricultural real estate portfolio segment increased $4.1 million as compared to June 30, 2025 with $3.8 million attributed to one loan with a specific allocation of $174 thousand. The consumer real estate portfolio and commercial real estate portfolio segments decreased $397 and $141 thousand, respectively, as compared to June 30, 2025. Nonaccrual loans in the agricultural portfolio and consumer portfolio segments increased $56 and $54 thousand, respectively, as compared to June 30, 2025.

The consumer portfolio segment accounted for the largest components of charge-offs and recoveries for both the three months ended June 30, 2026 and for the three months ended June 30, 2025. Management has factored in the continuing impact of high interest rates and inflationary pressures on borrowers' ability to make payments.

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, 2026 and June 30, 2025.

Noninterest Income

Noninterest income was up $1.5 million, or 38.0%, for the three months ended June 30, 2026 over the same time frame in 2025. Customer service fees increased by $214 thousand as compared to the three months ended June 30, 2025 which was due primarily to increases of mortgage release fees of $64 thousand, miscellaneous customer service fees of $55 thousand and merchant service referral fees of $50 thousand. Other service fees increased by $95 thousand compared to the same period in 2025, which includes overdraft and returned check fees of $60 thousand and combined service charges on DDA, savings accounts, ATM and miscellaneous of $31 thousand. Interchange income increased $88 thousand for the current quarter. Loan servicing income increased $217 thousand which included increases in servicing rights income for both 1-4 family real estate loans and agricultural real estate loans of $124 and $78 thousand, respectively, as compared to the same period in 2025.

The volume of total originations of loans held for sale increased and the associated gain on the sale of these loans was $426 thousand higher for the three months ended June 30, 2026 over the same period in 2025. Total originations of loans held for sale for the three months ended June 30, 2026 were $25.6 million with proceeds from sale at $28.9 million for 2026 compared to 2025’s activity of $17.2 million in originations and $13.4 million in sales. The mortgages sold were both 1-4 family real estate and agricultural real estate loans originated for sale.

The cash surrender value of bank owned life insurance increased $442 thousand from the same three months ended June 30, 2025. The increase in BOLI revenue was due to more investment dollars and higher earnings due to the Bank repositioning its holdings.

The gain on sale of other assets owned for the three months ended June 30, 2026 included a $139 thousand gain on the sale of the Ossian branch which the Bank is leasing back and a loss of $111 thousand on the sale of the two other real estate owned properties.

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, 2026 and 2025, loan servicing rights caused a net $205 thousand and $44 thousand in income, respectively. Impairment of $92 thousand and $38 thousand was recognized during the three months ended June 30, 2026 and 2025, respectively. Capitalized additions of agricultural real estate loan servicing rights were $155 thousand for the three months ended June 30, 2026 compared to $76 thousand in capitalized additions for the three months ended June 30, 2025. Amortization of agricultural real estate loan servicing rights were $85 thousand and $74 thousand for the three months ended June 30, 2026 and 2025, respectively. The valuation allowance of agricultural real estate loan servicing rights was $1.3 million at June 30, 2026 compared to $84 thousand at June 30, 2025. For 1-4 family real estate loans of 15 years and less, the market value of the loan servicing rights was 1.378% in the second quarter 2026 versus 1.354% in second quarter 2025. For 1-4 family real estate loans over 15 years, the value was 1.744% versus 1.561% for the same periods, respectively. At June 30, 2026 and 2025, the carrying value of certain strata were slightly below the market value thus requiring the establishment of a $5 and $3 thousand valuation allowance, respectively, for 1-4 family real estate servicing rights.

(In Thousands)

(In Thousands)

Noninterest Expense

For the three months ended June 30, 2026, noninterest expenses remained relatively flat as compared to the same period in 2025. Salaries and wages, including normal merit increases, restricted stock expense and incentive payouts, increased $814 thousand in total. Of the total, base wages increased $337 thousand and incentive expense increased $492 thousand compared to 2025. Benefits increased from 2025 by $73 thousand due to increased pension expense of $84 thousand and combined taxes and workmen's compensation of $22 thousand offset with decreased medical expense of $20 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.

Net occupancy expense decreased $144 thousand for the three months ended June 30, 2026 as compared to the same three months in 2025. One factor that can offset occupancy expense is the receipt by the Company of building rent as it is netted out of occupancy expense. The greatest contributor to building rent comes from the division of FM Investments within the Bank. Building rent as generated from FM Investments increased by $38 thousand in 2026 as compared to 2025. Rent is received in lieu of commissions. This revenue was able to partially offset increased lease expense of $47 thousand, utilities of $17 thousand, building repair and maintenance expenses of $21 thousand and building depreciation of $13 thousand. With the sale of the Ossian branch, the remaining building fair value of $212 thousand from the acquisition was accreted into income.

Furniture and fixture expense increased $180 thousand for the three months ended June 30, 2026 as compared to 2025 with increased maintenance contracts of $188 thousand. Data processing expenses and ATM expense decreased a combined $479 thousand. Second quarter 2026 included a larger amount of flex credits utilized as compared to second quarter 2025.

FDIC assessments decreased $59 thousand in 2026 from 2025 due to a decrease in the quarterly assessment multiplier. Servicing rights amortization included $92 thousand for impairment of agricultural loan servicing rights in the three months ended June 30, 2026. Loan expense included a one-time payment of $169 thousand related to an acquired loan during the second quarter of 2026. Consulting fees decreased $169 thousand over the same period in 2025 attributable to $227 thousand for time spent on additional ancillary products related to our core banking operating system in the second quarter of 2025. Of the $77 thousand decrease in professional fees, $53 thousand was attributed to reduced auditing and exam expenses in the three months ended June 30, 2026 as compared to 2025. The decrease of $140 thousand in intangible asset amortization was due to the Bank of Geneva core deposit intangible being fully amortized at the end of 2025. General and administrative expense decreased $344 thousand. The items on this line of significance include a decrease of miscellaneous expenses of $204 thousand, an increase in postage of $42 thousand and increased CDARS/ICS fees of $19 thousand. Travel and entertainment both increased $17 thousand in the current quarter as compared to the same quarter in 2025. Debit card losses and NSF check losses and fraud decreased $104 and $17 thousand, respectively, as compared to same quarter 2025.

Income Taxes

Income tax expense was $980 thousand higher for the three months ended June 30, 2026 compared to the same period in 2025 based mainly on pretax higher earnings of $5.1 million. Amortization of qualified affordable housing projects caused income tax expense to increase $112 thousand for both the three months ended June 30, 2026 and 2025, as presented in Note 8. Effective tax rates were 20.10% and 20.50% for 2026 and 2025, respectively. Excluding the additional $112 thousand of income tax expense for both periods, the effective tax rates would have been 19.34% for both three months ended June 30, 2026 and 2025.

Net Income

Overall, net income in the three months ended June 30, 2026 was up $4.1 million or 53.0% to $11.8 million as compared to last year's $7.7 million. The biggest contributor to the improvement was net interest income. Net interest income was up $3.2 million or 12.5% due to both increased interest income of approximately $2.2 million and decreased interest expense of approximately $1.1 million. Provision for credit losses for loans and unfunded commitments decreased $367 thousand compared to 2025. Noninterest income increased $1.5 million while noninterest expense was basically flat 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, 2026 and 2025

Interest Income

When comparing the six months ended June 30, 2026 and 2025, average loan balances grew $97.3 million, which represented a 3.7% increase in a one-year time period. Interest income on loans increased $4.1 million or 5.3% as compared to the six months ended June 30, 2025. The Company's loan portfolio is 49.8% variable rate with 36.1% of total loans subject to repricing during the remainder of 2026 and 45.0% of total loans subject to repricing within the next twelve months.

The available-for-sale securities portfolio decreased in average balances by $14.9 million or 3.1% when comparing to the same period in 2025 with the income associated with the security portfolio increasing $469 thousand over the six months ended June 30, 2025. During first quarter 2026, security sales of $5.4 million generated a realized loss of $347 thousand which is projected to be recouped from security purchases with a higher yield over 30.55 months. The additional income from the security portfolio can be attributed to the increased book yield of 2.75% as of June 30, 2026 from 2.26% as of June 30, 2025. Federal funds sold and interest-bearing deposits increased in average balances by $16 million as compared to the same six month period ended June 30, 2025 with decreased income of approximately $82 thousand for the current period. The increased balances are primarily the result of deposit generation offset by funding loans and repayment of other borrowed money.

The overall total average balance of the Bank’s earning assets increased by $98.4 million and interest income for the period comparisons was higher for the six months ended June 30, 2026 by 5.3% or approximately $4.5 million as compared to the six month period ended June 30, 2025. Rate changes between periods have contributed to approximately 31.9% of the growth.

Annualized yield, for the six months ended June 30, 2026, was 5.44% as compared to 5.32% for the comparable period ended June 30, 2025. The following charts demonstrate loan rate increases accounted for 29.4% of the increased loan interest income while increased loan balances accounted for the remaining 70.6%. The yields on tax-exempt securities and the portion of the tax-exempt IDB and agricultural loans included in loans have been tax adjusted based on a 21% tax rate in the charts that follow. The tax-exempt interest income was $906 and $269 thousand for the six months ended June 30, 2026 and 2025, respectively, which resulted in a federal tax savings of $190 and $56 thousand, respectively, less the TEFRA adjustments of $17 and $8 thousand, respectively.

(In Thousands)

Change in Interest Income Year to Date June 30, 2026 Compared to June 30, 2025

(In Thousands)

Interest Expense

Contributing to the increased net interest income for the first six months of 2026 was a decrease in interest expense of $2.3 million or 6.6% compared to the same period in 2025. Since 2025, average interest-bearing deposit balances have increased $149.9 million or 7.0% while the Company recognized $1.1 million less in interest expense for the most recent six months. In September 2025, the Federal Reserve made its first rate change to the federal funds rate for 2025 with a reduction of 25 basis points followed by reductions of 25 basis points in both October and December. There have been no changes to the federal funds rate in 2026. Deposit rates continue to be reviewed and adjusted with the rate changes. The following charts demonstrate increased average interest-bearing deposit balances accounted for $1.8 million of additional interest-bearing deposit expense while rate decreases accounted for decreased interest-bearing deposit expense of $2.9 million. Noninterest-bearing deposits balances decreased $26.1 million compared to the first six months of 2025. The Bank continues to focus on capturing the full customer relationship; however, it has sometimes resulted in more expensive deposits being brought in.

Interest expense on borrowed funds decreased $891 thousand in the six months ended June 30, 2026 over the same time frame in 2025 due to the repayment of FHLB advances. During the current six months, FHLB borrowings of $91.1 million were repaid and proceeds from new borrowings were $32.2 million compared to repayment of borrowings of $57.6 million in 2025. Interest expense on federal funds purchased and securities sold under agreement to repurchase decreased $280 thousand compared to the first six months of 2025 due to the decrease of $11.3 million in average balances. Cost of funds decreased even with growth in interest-bearing deposit balances offset by decreased borrowings and securities sold under agreement to repurchase compared to 2025. The average cost of funds decreased to 2.55% for the six months ended June 30, 2026 compared to 2.84% for the six months ended June 30, 2025. Interest expense due to subordinated notes was unchanged during the year to date comparisons. Refer to Note 11 for additional information on subordinated notes.

(In Thousands)

65

Change in Interest Expense Year to Date June 30, 2026 Compared to June 30, 2025

(In Thousands)

As the following chart indicates, the improvement in yields on interest earning assets of 12 basis points combined with the decreased cost of funds of 29 basis points equated to a 41 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.

Net Interest Income

Net interest income increased $7.6 million for the six months ended June 30, 2026 over the same time frame in 2025 due to the increase in interest income of approximately $4.5 million combined with the interest expense decrease of $2.6 million as previously mentioned. As the new loans added in 2025 and 2026 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. The Company has some opportunity for improved asset yield with loans repricing in 2026 with a greater opportunity beginning in 2027 and 2028. Loans as a percentage of earning assets increased to 82.3% for the six months ended June 2026 compared to 81.8% for the six months ended June 2025. Loans to total assets increased slightly to 77.7% for the six months ended June 2026 compared to 77.6% for the same period 2025. The percentage of earning assets to total assets decreased to 94.4% for the six months ended June 2026 compared to 94.9% for the six months ended June 2025. 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.

Comparison of Noninterest Results of Operations for six month periods ended June 30, 2026 and 2025

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 decreased $610 thousand for the six months ended June 30, 2026 as compared to the same period in 2025. Management continues to monitor asset quality, making adjustments to the provision as necessary, in accordance with the Bank's chosen CECL methodology. The impact of higher interest rates and inflation are taken into consideration when reviewing qualitative factors. Loan charge-offs were $60 thousand lower during the six months ended June 30, 2026 than the same period in 2025. For the current six month period, 99.3% of all charge-offs were in the consumer portfolio and commercial and industrial portfolio segments while all charge-offs for the same period in 2025 were in the consumer portfolio and commercial and industrial portfolio segments. Of the total consumer charge-offs, $204 and $180 thousand were for automobiles and trucks for the six months ended June 30, 2026 and 2025, respectively. 2025 consumer charge-offs also included $148 thousand for recreational vehicles. Recoveries were $39 thousand higher during the six months ended June 30, 2026 as compared to same period in 2025 with 93.5% of total current quarter recoveries in the consumer portfolio and agricultural portfolio segments. Of the total consumer recoveries, $51 thousand were for automobiles and trucks and $4 thousand were for recreational vehicles for the six months ended June 30, 2026 compared to $7 thousand for automobiles and trucks and $50 thousand for recreational vehicles for the same period in 2025. All of the time periods in 2025 and 2026 had net charge-offs to total loans ratios lower than 0.1% attesting to the strong asset quality of the Bank's loan portfolio.

The provision for credit losses on loans decreased by $997 thousand or 67.7% in the first six months of 2026 compared to the first six months of 2025 due to gross loan portfolio reduction of $7.6 million or 0.3% in the first six months of 2026 compared to gross loan portfolio growth of $63.9 million or 2.5% in the first six months of 2025. Moreover, gross commercial real estate loan balances declined by $47 million or 3.5% in the first six months of 2026 compared to gross commercial real estate loan balance growth of $35.1 million or 2.7% in the first six months of 2025, and commercial real estate loans tend to have higher reserves. Likewise, the Bank has experienced reductions in consumer loans which tend to have higher reserves, and an increase in agricultural loans which tend to have a lower reserve based on loss history. Lastly, net charge-offs in the first six months of 2026 are also down $99 thousand or 30.8% compared to net charge-offs in the first six months of 2025, which contributes to a lower provision for credit losses on loans.

Loans past due 30 or more days increased $4.7 million at June 30, 2026 as compared to June 30, 2025. The largest changes were attributed to the agricultural real estate portfolio segment which increased $4.7 million for the same time period, of which $3.8 million is attributed to one loan. The commercial and industrial portfolio segment also increased $420 thousand while the consumer real estate portfolio segment decreased $631 thousand as compared to June 30, 2025.

The following table presents 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, 2026, 2025, and 2024.

(In Thousands)

*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, 2026, June 30, 2025 and June 30, 2024 within this chart does not include a fair value basis adjustment for derivatives of $546 thousand, $1.9 million and $612 thousand, respectively, or a daily average outstanding balance of $1.3 million, $1.6 million or $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, 2026 at $7.4 million as compared to $3.7 million as of June 30, 2025. The agricultural real estate portfolio segment increased $4.1 million or 882.0% as compared to June 30, 2025 with $3.8 million attributed to one loan with a specific allocation of $174 thousand. The consumer real estate portfolio and commercial real estate portfolio segments decreased $397 and $141 thousand, respectively, as compared to June 30, 2025. Nonaccrual loans in the agricultural portfolio and consumer portfolio segments increased $56 and $54 thousand, respectively, compared to June 30, 2025.

The consumer portfolio segment accounted for the largest components of charge-offs and recoveries for both the six months ended June 30, 2026 and for the six months ended June 30, 2025. Management has factored in the continuing impact of high interest rates and inflationary pressures on borrowers' ability to make payments.

Noninterest Income

Noninterest income was up $2.3 million, or 28.8%, for the six months ended June 30, 2026 over the same time frame in 2025. Customer service fees increased by $316 thousand as compared to the six months ended June 30, 2025 which was due primarily to increases of $102 thousand in both miscellaneous customer service fees and mortgage release fees and $49 thousand in merchant service referral fees. Other service fees increased by $254 thousand compared to the same period in 2025, which includes overdraft and returned check fees of $138 thousand and combined service charges on DDA, savings accounts, ATM and miscellaneous of $107 thousand. Interchange income increased $180 thousand, which included an additional $58 thousand received for support fees from Mastercard. Loan servicing income increased $293 thousand which included increased servicing rights income for 1-4 family real estate loans of $201 thousand and $45 thousand for those associated with agricultural real estate loans as compared to the same period in 2025.

The volume of total originations of loans held for sale increased and the associated gain on the sale of these loans was $717 thousand higher for the six months ended June 30, 2026 over the same period in 2025. Total originations of loans held for sale for the six months ended June 30, 2026 were $49.4 million with proceeds from sale at $51.6 million for 2026 compared to 2025’s activity of $30.2 million in originations and $27.3 million in sales. The mortgages sold were both 1-4 family real estate and agricultural real estate loans originated for sale.

The cash surrender value of bank owned life insurance increased $853 thousand from the same six months ended June 30, 2025. The increase in BOLI revenue was due to more investment dollars in addition to higher earnings due to the Bank repositioning its holdings.

The gain on sale of other assets owned for the three months ended June 30, 2026 included a $139 thousand gain on the sale of the Ossian branch which the Bank is leasing back and a loss of $111 thousand on the sale of other real estate owned properties.

The loss on available for sale securities was $347 thousand for the quarter ended March 31, 2026. Management estimates that this loss is expected to be recouped over the next 30.55 months, as the sale proceeds were redeployed into purchases of higher yielding securities.

Noninterest Expense

For the six months ended June 30, 2026, noninterest expenses were $1 million or 2.7% higher than for the same period in 2025. Salaries and wages, including normal merit increases, restricted stock expense and higher incentive payouts, increased $1.2 million in total. Of the total, base wages and incentive expense increased $632 and $625 thousand, respectively, and was offset with increased deferred salary loans costs of $24 thousand and decreased restricted stock expense of $30 thousand as compared to 2025. Benefits increased from 2025 by $48 thousand due to increased combined taxes and workmen's compensation of $83 thousand and additional pension expense of $67 thousand offset with a reduction in medical expense of $85 thousand.

Net occupancy expense decreased $174 thousand for the first six months of 2026 as compared to 2025. One factor that can offset occupancy expense is the receipt by the Company of building rent as it is netted out of occupancy expense. The greatest contributor to building rent comes from the division of FM Investments within the Bank. Building rent as generated from FM Investments increased by $81 thousand in 2026 as compared to 2025. Rent is received in lieu of commissions. This revenue was able to partially offset increased lease expense of $40 thousand due to the opening of a new branch in third quarter 2025, utilities of $33 thousand and building depreciation of $27 thousand. With the sale of the Ossian branch, the remaining building fair value of $212 thousand from the acquisition was accreted into income.

Furniture and fixture expense increased $468 thousand for the six months ended June 30, 2026 as compared to 2025 with increased maintenance contracts of $466 thousand. Data processing expenses and ATM expense increased a combined $43 thousand. The first six months of 2026 included a smaller amount of flex credits utilized as compared to the first six months of 2025.

FDIC assessments decreased $128 thousand in 2026 from 2025 due to a decrease in the quarterly assessment multiplier. Servicing rights amortization included $396 thousand for impairment of agricultural loan servicing rights in the six months ended June 30,2026. Loan expense included a one-time payment of $169 thousand related to an acquired loan during the second quarter of 2026. Consulting fees decreased $660 thousand over the same period in 2025 and is primarily attributable to lower non-recurring fees related to assistance with negotiations for the data processing contract and time spent on additional ancillary products related to our core banking operating system. Of the $136 thousand decrease in professional fees, $96 thousand was attributed to reduced auditing and exam expenses in 2026 as compared to 2025. The decrease of $280 thousand in intangible asset amortization was due to the Bank of Geneva core deposit intangible being fully amortized at the end of 2025. General and administrative expense decreased $137 thousand. The items on this line of significance include an increase in charitable contributions of $72 thousand, a decrease of miscellaneous expenses of $74 thousand which included $126 thousand for the Modified Endowment Contract (MEC) penalty owed on the gain on cash surrender of bank owned life insurance policies in first quarter 2026, an increase in postage of $76 thousand and increased CDARS/ICS fees of $42 thousand. Travel and entertainment increased $39 and $28 thousand, respectively, in the first six months of 2026 as compared to the same period in 2025. Debit card losses and NSF check losses and fraud decreased $96 and $82 thousand, respectively, from 2025.

Income Taxes

Income tax expense was $1.9 million higher for the six months ended June 30, 2026 compared to the same period in 2025 based mainly on pretax higher earnings of $8.6 million in addition to a taxable $1.3 million gain on cash surrender value of bank owned life insurance policies. Amortization of qualified affordable housing projects caused income tax expense to increase $224 thousand for both the six months ended June 30, 2026 and 2025, as presented in Note 8. Effective tax rates were 21.13% and 20.57% for 2026 and 2025, respectively. Excluding the additional $224 thousand of income tax expense for both periods, the effective tax rates would have been 20.30% and 19.35% for the six months ended June 30, 2026 and 2025, respectively.

Net Income

Overall, net income in the six months ended June 30, 2026 was up $6.7 million or 45.8% to $21.4 million as compared to last year's $14.7 million. The largest contributor to the improvement was net interest income. Net interest income was up $6.7 million or 13.6% due to both increased interest income of approximately $4.5 million and decreased interest expense of $2.3 million. Provision for credit losses for loans and unfunded commitments decreased $610 thousand compared to 2025. Noninterest income increased $2.3 million and noninterest expense increased $1.0 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

This report, including the sections entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations, may contain “forward‑looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward‑looking statements are not historical facts and can be identified by words such as “anticipate,” “believe,” “could,” “expect,” “forecast,” “goal,” “guidance,” “intend,” “likely,” “may,” “objective,” “outlook,” “plan,” “project,” “seeks,” “should,” “target,” “will,” “would,” and similar expressions, as well as their negatives. These statements include, among other things, statements regarding our strategy, future operations, financial condition, results of operations, capital and liquidity levels, margins, asset quality, loan and deposit growth, noninterest income, expense trends, capital management, dividends, share repurchases, and the timing and effects of regulatory or accounting developments and are based on current expectations and assumptions of management.

Forward‑looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied. Factors that could cause actual results to differ materially include, but are not limited to, the following:

• Changes in interest rates, yield curves, deposit betas, and funding availability and costs; the mix and level of deposits (including the risk of outflows), wholesale funding, and other sources of liquidity; and the impact on net interest income and margin.
• Economic conditions nationally and in our markets, including in our Midwest footprint; inflation, employment trends, business and consumer confidence, and housing conditions.
• Credit risks of lending activities, including concentrations (such as commercial real estate), borrower performance, collateral values, and the level and volatility of the allowance for credit losses under CECL.
• Market risks related to our investment securities and hedging activities, including fair value changes, other‑than‑temporary or credit‑related impairments, and accumulated other comprehensive income (AOCI) volatility.
• Competition from banks and nonbanks (including fintechs) for loans, deposits, and fee‑based products and services.
• Operational, technology, and information security risks, including cybersecurity threats, fraud, ransomware, data breaches, business interruption, and risks related to third‑party and vendor relationships (including core and cloud service providers).
• Legal, compliance, supervisory, and regulatory risks, including the nature, timing, and effect of changes in banking laws and regulations and of examination findings and enforcement actions; potential changes to regulatory capital requirements (including U.S. implementation of the “Basel III Endgame” framework); developments related to small business lending data collection under Section 1071; Community Reinvestment Act developments; and other rulemakings or guidance applicable to community and regional banking organizations.
• Changes in accounting principles and interpretations, tax laws, and related guidance.
• Our ability to attract and retain key personnel and to execute on business strategies and initiatives, including technology and digital payments initiatives and any activities relating to stablecoin or other digital asset/payment innovations under applicable law and regulation.
• Natural disasters, severe weather, public health events, geopolitical conflicts, or other external events.
• Other risks and uncertainties described in the Company’s filings with the Securities and Exchange Commission, including the Risk Factors in our most recent Annual Report on Form 10‑K and any updates in this Form 10‑Q.

The foregoing list of factors is not exclusive. Additional risks and uncertainties not presently known to the Company or that the Company currently deems immaterial also may adversely affect the Company’s business, financial condition, results of operations, or cash flows.

Any forward‑looking statement speaks only as of the date it is made. The Company undertakes no obligation to update any forward‑looking statements, whether written or oral, to reflect events or circumstances after the date of this report, except as required by law. Readers should not place undue reliance on forward‑looking statements, which are not guarantees of future performance and involve risks, uncertainties, and assumptions.

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, 2026, the shocks presented assume an immediate change of rate in the percentages and directions shown:

The Bank’s balance sheet is asset-sensitive based on a static balance sheet and parallel rate shocks. The net interest margin represents the forecasted twelve-month margin. The Company also reviews shocks up to a 5.00% fluctuation and over a 24-month time frame, as well as alternate yield curve scenarios. The goal of the Company is to gather more core deposits, such as checking and savings accounts. Checking accounts are preferable for the lower cost of funds and the opportunity to garner noninterest revenue from services provided. Savings and money market accounts are beneficial due to the variability of the interest in both rate and immediate option to reprice.

The Bank’s monthly cost of funds dropped from 2.58% on March 31, 2026, to 2.54% on June 30, 2026. This decrease was led by the Bank paying off $50 million in higher-cost borrowings during the second quarter of 2026, as well as dropping some of our deposit rates. Older loans and investments will continue to reprice higher, in aggregate, in the next six months with greater opportunity in 2027 and 2028 based on current rates. The Bank reviewed and adjusted its assumptions concerning deposit betas, key rate ties, and loan prepayment speeds during the second quarter. These model assumption changes, combined with a steeper yield curve, moved us from slightly liability-sensitive to asset-sensitive. This shock horizon now captures material volumes of adjustable loans that are scheduled to reset higher in the second quarter of 2027, based on current rates. 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 modeled results.

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.

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, 2025.

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.

Global Economic and Geopolitical Instability, Trade Policy and Inflationary Risks

Geopolitical instability, terrorist attacks, military conflicts, natural disasters, severe weather, widespread health emergencies and other catastrophic events could materially adversely affect our business. Tensions between China and the United States, the conflicts involving Russia and Ukraine and Israel and Hamas, the conflict involving Iran, and actual or threatened disruptions to shipping through the Strait of Hormuz could escalate or result in broader regional or global conflicts.

These conditions, together with fiscal and monetary policies, tariffs, retaliatory trade measures, economic sanctions and other restrictions on international trade, could disrupt energy, commodity and supply chains; increase the costs of fuel, transportation, raw materials and other goods; contribute to inflation and interest-rate volatility; and reduce consumer spending, business investment and demand for credit. These effects could be particularly significant for our borrowers operating in agriculture, food processing and manufacturing. If these developments place financial strain on our borrowers, we could experience reduced loan demand, increased credit risk, higher loan delinquencies and additional provisions for credit losses. Although we monitor these developments, we may not be able to anticipate or fully mitigate their effects on our business, financial condition and results of operations.

Adverse Conditions in the Agricultural Economy Could Adversely Affect Our Agricultural Borrowers and Our Credit Quality

A meaningful portion of our lending activities consists of agricultural real estate and operating loans to crop and livestock producers and businesses that depend upon the agricultural sector. Repayment of these loans depends largely on the successful operation and cash flow of the borrower’s agricultural business, which may be affected by commodity prices, weather conditions, foreign demand for United States agricultural products, competition from foreign producers, tariffs and trade restrictions, government agricultural programs, interest rates and the costs and availability of fertilizer, fuel, seed, feed, equipment and labor.

Agricultural operating loans may be unsecured or secured by farm equipment, livestock, crops or other collateral that may depreciate rapidly, fluctuate in value or be subject to damage or loss. As a result, the value of collateral available following a borrower default may be insufficient to repay the outstanding loan balance.

Reduced or volatile foreign demand, including demand from China for United States soybeans and other agricultural products, and increased competition from producers in other countries could place downward pressure on commodity prices and reduce the revenues and cash flows of borrowers in our markets. In addition, disruptions or threatened disruptions to shipping through the Strait of Hormuz could increase the cost or reduce the availability of fuel, fertilizer and fertilizer-production inputs, including sulfur. Lower commodity prices combined with elevated fertilizer, fuel and other input costs could compress agricultural borrowers’ operating margins, increase their need for operating credit and reduce their ability to repay existing indebtedness. These conditions could result in increased loan modifications or restructurings; higher levels of past-due, criticized, classified or nonaccrual loans; reduced agricultural collateral values; and increased provisions for credit losses and charge-offs.

Many of our agricultural borrowers use crop insurance, which may provide protection based on reduced crop yields, reduced revenues or both, and may use hedging strategies to manage commodity-price and input-cost risks. However, the availability, scope and amount of such protection may vary and may not fully protect our borrowers or us from losses arising from adverse agricultural conditions.