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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the Quarterly period ended September 30, 2023

Commission file number 001-35296

FARMERS NATIONAL BANC CORP.

(Exact name of registrant as specified in its charter)

Ohio |  | 34-1371693
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No)
20 South Broad Street Canfield, OH |  | 44406
(Address of principal executive offices) |  | (Zip Code)

(330) 533-3341

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act.

Title of each class | Trading Symbol | Name of each exchange on which registered
Common Stock, No Par Value | FMNB | The NASDAQ Stock Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer |  | ☐ |  | Accelerated filer |  | ☒
Non-accelerated filer |  | ☐ |  | Small reporting company |  | ☐
Emerging growth company |  | ☐ |  |  |  |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class |  | Outstanding at October 31, 2023
Common Stock, No Par Value |  | 37,489,476 shares

| Page Number
PART I - FINANCIAL INFORMATION |
Item 1 | Financial Statements (Unaudited) |
| Included in Part I of this report: |
| Farmers National Banc Corp. and Subsidiaries |
| Consolidated Condensed Balance Sheets (Unaudited) | 2
| Consolidated Condensed Statements of Income (Unaudited) | 3
| Consolidated Condensed Statements of Comprehensive Income (Loss) (Unaudited) | 4
| Consolidated Condensed Statements of Stockholders’ Equity (Unaudited) | 5
| Consolidated Condensed Statements of Cash Flows (Unaudited) | 6
| Notes to Unaudited Condensed Consolidated Financial Statements | 7
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 38
Item 3 | Quantitative and Qualitative Disclosures About Market Risk | 47
Item 4 | Controls and Procedures | 48
PART II - OTHER INFORMATION | 48
Item 1 | Legal Proceedings | 48
Item 1A | Risk Factors | 48
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 49
Item 3 | Defaults Upon Senior Securities | 49
Item 4 | Mine Safety Disclosures | 49
Item 5 | Other Information | 49
Item 6 | Exhibits | 50
SIGNATURES | 51
10-Q Certifications |
Section 906 Certifications |

1

CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

|  | (In Thousands of Dollars) |
|  | September 30, 2023 |  |  | December 31, 2022 |
ASSETS |  |  |  |  |  |
Cash and due from banks |  | $ | 25,341 |  |  | $ | 21,395 |
Federal funds sold and other |  |  | 68,582 |  |  |  | 54,156 |
TOTAL CASH AND CASH EQUIVALENTS |  |  | 93,923 |  |  |  | 75,551 |
Securities available for sale (Amortized cost $1,530,768 in 2023 and $1,534,512 in 2022) |  |  | 1,210,736 |  |  |  | 1,268,025 |
Other investments |  |  | 35,342 |  |  |  | 33,444 |
Loans held for sale, at fair value |  |  | 1,910 |  |  |  | 858 |
Loans |  |  | 3,168,554 |  |  |  | 2,404,750 |
Less allowance for credit losses |  |  | 34,753 |  |  |  | 26,978 |
NET LOANS |  |  | 3,133,801 |  |  |  | 2,377,772 |
Premises and equipment, net |  |  | 44,844 |  |  |  | 30,763 |
Goodwill |  |  | 167,907 |  |  |  | 94,640 |
Other intangibles, net |  |  | 23,419 |  |  |  | 7,026 |
Bank owned life insurance |  |  | 98,865 |  |  |  | 74,972 |
Other assets |  |  | 160,416 |  |  |  | 119,149 |
TOTAL ASSETS |  | $ | 4,971,163 |  |  | $ | 4,082,200 |
LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |  |  |  |
Deposits: |  |  |  |  |  |
Noninterest-bearing |  | $ | 1,039,524 |  |  | $ | 896,957 |
Interest-bearing |  |  | 3,217,869 |  |  |  | 2,526,760 |
Brokered time deposits |  |  | 254,257 |  |  |  | 138,051 |
TOTAL DEPOSITS |  |  | 4,511,650 |  |  |  | 3,561,768 |
Short-term borrowings |  |  | 0 |  |  |  | 95,000 |
Long-term borrowings |  |  | 88,550 |  |  |  | 88,211 |
Other liabilities |  |  | 54,981 |  |  |  | 44,926 |
TOTAL LIABILITIES |  |  | 4,655,181 |  |  |  | 3,789,905 |
Commitments and contingent liabilities |  |  |  |  |  |
Stockholders' Equity: |  |  |  |  |  |
Common Stock - Authorized 50,000,000 shares in 2023 and 2022; 39,321,709 shares issued in 2023 and 35,128,962 in 2022; 37,489,476 and 34,055,125 shares outstanding, respectively |  |  | 364,929 |  |  |  | 305,340 |
Retained earnings |  |  | 228,553 |  |  |  | 212,375 |
Accumulated other comprehensive (loss) |  |  | (252,213 | ) |  |  | (210,490 | )
Treasury stock, at cost; 1,832,233 and 1,073,837 shares in 2023 and 2022, respectively |  |  | (25,287 | ) |  |  | (14,930 | )
TOTAL STOCKHOLDERS' EQUITY |  |  | 315,982 |  |  |  | 292,295 |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |  | $ | 4,971,163 |  |  | $ | 4,082,200 |

See accompanying notes

2

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

|  | (In Thousands except Per Share Data) |
|  | For the Three Months Ended |  |  | For the Nine Months Ended |
|  | September 30, 2023 |  |  | September 30, 2022 |  |  | September 30, 2023 |  |  | September 30, 2022 |
INTEREST AND DIVIDEND INCOME |  |  |  |  |  |  |  |  |  |  |  |
Loans, including fees |  | $ | 43,838 |  |  | $ | 27,494 |  |  | $ | 127,025 |  |  | $ | 78,770 |
Taxable securities |  |  | 6,493 |  |  |  | 5,477 |  |  |  | 19,697 |  |  |  | 15,287 |
Tax exempt securities |  |  | 2,661 |  |  |  | 3,035 |  |  |  | 8,176 |  |  |  | 9,025 |
Dividends |  |  | 487 |  |  |  | 199 |  |  |  | 1,457 |  |  |  | 545 |
Federal funds sold and other interest income |  |  | 750 |  |  |  | 205 |  |  |  | 1,911 |  |  |  | 348 |
TOTAL INTEREST AND DIVIDEND INCOME |  |  | 54,229 |  |  |  | 36,410 |  |  |  | 158,266 |  |  |  | 103,975 |
INTEREST EXPENSE |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 17,462 |  |  |  | 3,210 |  |  |  | 44,660 |  |  |  | 6,105 |
Short-term borrowings |  |  | 1,960 |  |  |  | 533 |  |  |  | 5,608 |  |  |  | 631 |
Long-term borrowings |  |  | 1,039 |  |  |  | 886 |  |  |  | 3,042 |  |  |  | 2,505 |
TOTAL INTEREST EXPENSE |  |  | 20,461 |  |  |  | 4,629 |  |  |  | 53,310 |  |  |  | 9,241 |
NET INTEREST INCOME |  |  | 33,768 |  |  |  | 31,781 |  |  |  | 104,956 |  |  |  | 94,734 |
Provision (credit) for credit losses |  |  | 182 |  |  |  | 433 |  |  |  | 8,232 |  |  |  | (15 | )
Provision for unfunded loans |  |  | 61 |  |  |  | 15 |  |  |  | 635 |  |  |  | 721 |
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES |  |  | 33,525 |  |  |  | 31,333 |  |  |  | 96,089 |  |  |  | 94,028 |
NONINTEREST INCOME |  |  |  |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  |  | 1,712 |  |  |  | 1,229 |  |  |  | 4,646 |  |  |  | 3,513 |
Bank owned life insurance income |  |  | 694 |  |  |  | 406 |  |  |  | 1,825 |  |  |  | 1,220 |
Trust fees |  |  | 2,617 |  |  |  | 2,370 |  |  |  | 7,453 |  |  |  | 7,265 |
Insurance agency commissions |  |  | 1,116 |  |  |  | 1,136 |  |  |  | 3,904 |  |  |  | 3,269 |
Security gains (losses), including fair value changes for equity securities |  |  | (624 | ) |  |  | (17 | ) |  |  | (490 | ) |  |  | (88 | )
Retirement plan consulting fees |  |  | 360 |  |  |  | 332 |  |  |  | 1,049 |  |  |  | 1,052 |
Investment commissions |  |  | 520 |  |  |  | 424 |  |  |  | 1,389 |  |  |  | 1,675 |
Net gains on sale of loans |  |  | 395 |  |  |  | 326 |  |  |  | 1,111 |  |  |  | 1,820 |
Other mortgage banking income, net |  |  | 185 |  |  |  | 94 |  |  |  | 571 |  |  |  | 193 |
Debit card and EFT fees |  |  | 1,763 |  |  |  | 1,463 |  |  |  | 5,362 |  |  |  | 4,407 |
Legal settlement |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 8,375 |
Other operating income |  |  | 1,093 |  |  |  | 1,064 |  |  |  | 2,885 |  |  |  | 3,301 |
TOTAL NONINTEREST INCOME |  |  | 9,831 |  |  |  | 8,827 |  |  |  | 29,705 |  |  |  | 36,002 |
NONINTEREST EXPENSES |  |  |  |  |  |  |  |  |  |  |  |
Salaries and employee benefits |  |  | 14,233 |  |  |  | 10,724 |  |  |  | 42,503 |  |  |  | 33,628 |
Occupancy and equipment |  |  | 3,810 |  |  |  | 3,028 |  |  |  | 11,538 |  |  |  | 8,626 |
FDIC insurance and state and local taxes |  |  | 1,648 |  |  |  | 1,017 |  |  |  | 4,365 |  |  |  | 2,942 |
Professional fees |  |  | 1,043 |  |  |  | 985 |  |  |  | 3,347 |  |  |  | 5,176 |
Merger related costs |  |  | 268 |  |  |  | 872 |  |  |  | 5,022 |  |  |  | 3,486 |
Advertising |  |  | 492 |  |  |  | 596 |  |  |  | 1,379 |  |  |  | 1,474 |
Intangible amortization |  |  | 725 |  |  |  | 432 |  |  |  | 2,856 |  |  |  | 1,271 |
Core processing charges |  |  | 1,274 |  |  |  | 738 |  |  |  | 3,582 |  |  |  | 2,606 |
Charitable donation |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 6,000 |
Other operating expenses |  |  | 4,223 |  |  |  | 3,007 |  |  |  | 10,232 |  |  |  | 8,107 |
TOTAL NONINTEREST EXPENSES |  |  | 27,716 |  |  |  | 21,399 |  |  |  | 84,824 |  |  |  | 73,316 |
INCOME BEFORE INCOME TAXES |  |  | 15,640 |  |  |  | 18,761 |  |  |  | 40,970 |  |  |  | 56,714 |
INCOME TAXES |  |  | 2,326 |  |  |  | 3,315 |  |  |  | 5,614 |  |  |  | 9,473 |
NET INCOME |  | $ | 13,314 |  |  | $ | 15,446 |  |  | $ | 35,356 |  |  | $ | 47,241 |
EARNINGS PER SHARE - basic |  | $ | 0.36 |  |  | $ | 0.46 |  |  | $ | 0.94 |  |  | $ | 1.40 |
EARNINGS PER SHARE - diluted |  | $ | 0.36 |  |  | $ | 0.46 |  |  | $ | 0.94 |  |  | $ | 1.39 |

See accompanying notes

3

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

|  | (In Thousands of Dollars) |
|  | For the Three Months Ended |  |  | For the Nine Months Ended |
|  | September 30, 2023 |  |  | September 30, 2022 |  |  | September 30, 2023 |  |  | September 30, 2022 |
NET INCOME |  | $ | 13,314 |  |  | $ | 15,446 |  |  | $ | 35,356 |  |  | $ | 47,241 |
Other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |  |  |
Net unrealized holding (losses) on available for sale securities |  |  | (75,679 | ) |  |  | (83,980 | ) |  |  | (54,088 | ) |  |  | (301,874 | )
Reclassification adjustment for losses realized in income on sales |  |  | 618 |  |  |  | 5 |  |  |  | 498 |  |  |  | 36 |
Reclassification adjustment for gain realized in income on fair value hedge |  |  | 776 |  |  |  | 0 |  |  |  | 776 |  |  |  | 0 |
Net unrealized holding (losses) |  |  | (74,285 | ) |  |  | (83,975 | ) |  |  | (52,814 | ) |  |  | (301,838 | )
Income tax effect |  |  | 15,600 |  |  |  | 17,635 |  |  |  | 11,091 |  |  |  | 63,386 |
Unrealized holding (losses), net of reclassification and tax |  |  | (58,685 | ) |  |  | (66,340 | ) |  |  | (41,723 | ) |  |  | (238,452 | )
Change in funded status of post-retirement plan, net of tax |  |  | 0 |  |  |  | (2 | ) |  |  | 0 |  |  |  | (5 | )
Other comprehensive (loss), net of tax |  |  | (58,685 | ) |  |  | (66,342 | ) |  |  | (41,723 | ) |  |  | (238,457 | )
TOTAL COMPREHENSIVE (LOSS) |  | $ | (45,371 | ) |  | $ | (50,896 | ) |  | $ | (6,367 | ) |  | $ | (191,216 | )

See accompanying notes

4

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

(Table Dollar Amounts in Thousands except Per Share Data)

|  |  |  |  |  |  | Accumulated |  |  |  |  |  |  |
|  |  |  |  |  |  | Other |  |  |  |  |  |  |
| Common |  |  | Retained |  |  | Comprehensive |  |  | Treasury |  |  |  |
| Stock |  |  | Earnings |  |  | Income (Loss) |  |  | Stock |  |  | Total |
Balance December 31, 2022 | $ | 305,340 |  |  | $ | 212,375 |  |  | $ | (210,490 | ) |  | $ | (14,930 | ) |  | $ | 292,295 |
Net income |  |  |  |  | 7,075 |  |  |  |  |  |  |  |  |  | 7,075 |
Other comprehensive income |  |  |  |  |  |  |  | 33,796 |  |  |  |  |  |  | 33,796 |
Share issuance as part of a business combination |  | 59,202 |  |  |  |  |  |  |  |  |  |  |  |  | 59,202 |
Restricted share issuance |  | (432 | ) |  |  |  |  |  |  |  |  | 437 |  |  |  | 5 |
Restricted share forfeitures |  | 21 |  |  |  |  |  |  |  |  |  | (21 | ) |  |  | 0 |
Stock based compensation expense |  | 615 |  |  |  |  |  |  |  |  |  |  |  |  | 615 |
Vesting of Long Term Incentive Plan |  | (428 | ) |  |  |  |  |  |  |  |  | 431 |  |  |  | 3 |
Share forfeitures for taxes |  |  |  |  |  |  |  |  |  |  | (252 | ) |  |  | (252 | )
Treasury share purchases |  |  |  |  |  |  |  |  |  |  | (11,660 | ) |  |  | (11,660 | )
Dividends paid at $0.17 per share |  |  |  |  | (6,437 | ) |  |  |  |  |  |  |  |  | (6,437 | )
Balance March 31, 2023 | $ | 364,318 |  |  | $ | 213,013 |  |  | $ | (176,694 | ) |  | $ | (25,995 | ) |  | $ | 374,642 |
Net income |  |  |  |  | 14,966 |  |  |  |  |  |  |  |  |  | 14,966 |
Other comprehensive (loss) |  |  |  |  |  |  |  | (16,834 | ) |  |  |  |  |  | (16,834 | )
Restricted share issuance |  | (323 | ) |  |  |  |  |  |  |  |  | 326 |  |  |  | 3 |
Stock based compensation expense |  | 649 |  |  |  |  |  |  |  |  |  |  |  |  | 649 |
Share forfeitures for taxes |  |  |  |  |  |  |  |  |  |  | (68 | ) |  |  | (68 | )
Dividends paid at $0.17 per share |  |  |  |  | (6,367 | ) |  |  |  |  |  |  |  |  | (6,367 | )
Balance June 30, 2023 | $ | 364,644 |  |  | $ | 221,612 |  |  | $ | (193,528 | ) |  | $ | (25,737 | ) |  | $ | 366,991 |
Net income |  |  |  |  | 13,314 |  |  |  |  |  |  |  |  |  | 13,314 |
Other comprehensive (loss) |  |  |  |  |  |  |  | (58,685 | ) |  |  |  |  |  | (58,685 | )
Restricted share issuance |  | (459 | ) |  |  |  |  |  |  |  |  | 464 |  |  |  | 5 |
Stock based compensation expense |  | 744 |  |  |  |  |  |  |  |  |  |  |  |  | 744 |
Share forfeitures for taxes |  |  |  |  |  |  |  |  |  |  | (14 | ) |  |  | (14 | )
Dividends paid at $0.17 per share |  |  |  |  | (6,373 | ) |  |  |  |  |  |  |  |  | (6,373 | )
Balance September 30, 2023 | $ | 364,929 |  |  | $ | 228,553 |  |  | $ | (252,213 | ) |  | $ | (25,287 | ) |  | $ | 315,982 |
|  |  |  |  |  |  | Accumulated |  |  |  |  |  |  |
|  |  |  |  |  |  | Other |  |  |  |  |  |  |
| Common |  |  | Retained |  |  | Comprehensive |  |  | Treasury |  |  |  |
| Stock |  |  | Earnings |  |  | Income (Loss) |  |  | Stock |  |  | Total |
Balance December 31, 2021 | $ | 306,123 |  |  | $ | 173,896 |  |  | $ | 9,295 |  |  | $ | (16,882 | ) |  | $ | 472,432 |
Net income |  |  |  |  | 15,844 |  |  |  |  |  |  |  |  |  | 15,844 |
Other comprehensive (loss) |  |  |  |  |  |  |  | (88,795 | ) |  |  |  |  |  | (88,795 | )
Restricted share issuance |  | (1,030 | ) |  |  |  |  |  |  |  |  | 1,030 |  |  |  | 0 |
Stock based compensation expense |  | 365 |  |  |  |  |  |  |  |  |  |  |  |  | 365 |
Vesting of Long Term Incentive Plan |  | (788 | ) |  |  |  |  |  |  |  |  | 368 |  |  |  | (420 | )
Share forfeitures for taxes |  |  |  |  |  |  |  |  |  |  | (102 | ) |  |  | (102 | )
Dividends paid at $0.16 per share |  |  |  |  | (5,438 | ) |  |  |  |  |  |  |  |  | (5,438 | )
Balance March 31, 2022 | $ | 304,670 |  |  | $ | 184,302 |  |  | $ | (79,500 | ) |  | $ | (15,586 | ) |  | $ | 393,886 |
Net income |  |  |  |  | 15,951 |  |  |  |  |  |  |  |  |  | 15,951 |
Other comprehensive (loss) |  |  |  |  |  |  |  | (83,320 | ) |  |  |  |  |  | (83,320 | )
Restricted share issuance |  | (362 | ) |  |  |  |  |  |  |  |  | 362 |  |  |  | 0 |
Stock based compensation expense |  | 438 |  |  |  |  |  |  |  |  |  |  |  |  | 438 |
Vesting of Long Term Incentive Plan |  | (39 | ) |  |  |  |  |  |  |  |  |  |  |  | (39 | )
Share forfeitures for taxes |  |  |  |  |  |  |  |  |  |  | (23 | ) |  |  | (23 | )
Dividends paid at $0.16 per share |  |  |  |  | (5,444 | ) |  |  |  |  |  |  |  |  | (5,444 | )
Balance June 30, 2022 | $ | 304,707 |  |  | $ | 194,809 |  |  | $ | (162,820 | ) |  | $ | (15,247 | ) |  | $ | 321,449 |
Net income |  |  |  |  | 15,446 |  |  |  |  |  |  |  |  |  | 15,446 |
Other comprehensive (loss) |  |  |  |  |  |  |  | (66,342 | ) |  |  |  |  |  | (66,342 | )
Restricted share issuance |  | (424 | ) |  |  |  |  |  |  |  |  | 424 |  |  |  | 0 |
Restricted share forfeitures |  | 42 |  |  |  |  |  |  |  |  |  | (42 | ) |  |  | 0 |
Stock based compensation expense |  | 513 |  |  |  |  |  |  |  |  |  |  |  |  | 513 |
Dividends paid at $0.16 per share |  |  |  |  | (5,447 | ) |  |  |  |  |  |  |  |  | (5,447 | )
Balance September 30, 2022 | $ | 304,838 |  |  | $ | 204,808 |  |  | $ | (229,162 | ) |  | $ | (14,865 | ) |  | $ | 265,619 |

See accompanying notes.

5

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

|  | (In Thousands of Dollars) |
|  | Nine Months Ended |
|  | September 30, 2023 |  |  | September 30, 2022 |
CASH FLOWS FROM OPERATING ACTIVITIES |  |  |  |  |  |
Net income |  | $ | 35,356 |  |  | $ | 47,241 |
Adjustments to reconcile net income to net cash from operating activities: |  |  |  |  |  |
Provision (credit) for credit losses |  |  | 8,232 |  |  |  | (15 | )
Provision for unfunded loans |  |  | 635 |  |  |  | 721 |
Depreciation and amortization |  |  | 5,779 |  |  |  | 3,475 |
Net amortization of securities |  |  | 690 |  |  |  | 3,846 |
Available for sale security (gains) losses |  |  | 498 |  |  |  | 36 |
Realized (gains) losses on equity securities |  |  | (8 | ) |  |  | 52 |
Loss on premises and equipment sales and disposals, net |  |  | 149 |  |  |  | 20 |
Stock compensation expense |  |  | 2,008 |  |  |  | 1,316 |
Earnings on bank owned life insurance |  |  | (1,720 | ) |  |  | (1,220 | )
Income recognized from death benefit on bank owned life insurance |  |  | (105 | ) |  |  | 0 |
Origination of loans held for sale |  |  | (52,342 | ) |  |  | (86,710 | )
Proceeds from loans held for sale |  |  | 52,401 |  |  |  | 90,794 |
Net gains on sale of loans |  |  | (1,111 | ) |  |  | (1,820 | )
Net change in other assets and liabilities |  |  | (2,012 | ) |  |  | 1,441 |
NET CASH FROM OPERATING ACTIVITIES |  |  | 48,450 |  |  |  | 59,177 |
CASH FLOWS FROM INVESTING ACTIVITIES |  |  |  |  |  |
Proceeds from maturities and repayments of securities available for sale |  |  | 44,870 |  |  |  | 63,340 |
Proceeds from sales of securities available for sale |  |  | 85,306 |  |  |  | 2,624 |
Purchases of securities available for sale |  |  | (650 | ) |  |  | (239,140 | )
Proceeds from sales of equity securities |  |  | 46 |  |  |  | 60 |
Purchase of equity securities |  |  | (52 | ) |  |  | (65 | )
Proceeds from maturities and repayments of SBIC funds |  |  | 754 |  |  |  | 2,052 |
Purchases of SBIC funds |  |  | (749 | ) |  |  | (1,911 | )
Proceeds from redemption of regulatory stock |  |  | 26,076 |  |  |  | 1,705 |
Purchase of regulatory stock |  |  | (20,170 | ) |  |  | (5,833 | )
Loan originations and payments, net |  |  | (24,237 | ) |  |  | (71,709 | )
Proceeds from BOLI death benefit |  |  | 419 |  |  |  | 0 |
Proceeds from land and building sales |  |  | 0 |  |  |  | 1,067 |
Additions to premises and equipment |  |  | (1,977 | ) |  |  | (1,811 | )
Net cash paid in business combinations |  |  | (13,175 | ) |  |  | (1,033 | )
NET CASH FROM INVESTING ACTIVITIES |  |  | 96,461 |  |  |  | (250,654 | )
CASH FLOWS FROM FINANCING ACTIVITIES |  |  |  |  |  |
Net change in deposits |  |  | 74,069 |  |  |  | 19,916 |
Net change in short-term borrowings |  |  | (170,000 | ) |  |  | 155,000 |
Cash dividends paid |  |  | (19,064 | ) |  |  | (16,248 | )
Repurchase of common shares |  |  | (11,544 | ) |  |  | 0 |
NET CASH FROM FINANCING ACTIVITIES |  |  | (126,539 | ) |  |  | 158,668 |
NET CHANGE IN CASH AND CASH EQUIVALENTS |  |  | 18,372 |  |  |  | (32,809 | )
Beginning cash and cash equivalents |  |  | 75,551 |  |  |  | 112,790 |
Ending cash and cash equivalents |  | $ | 93,923 |  |  | $ | 79,981 |
Supplemental cash flow information: |  |  |  |  |  |
Interest paid |  | $ | 57,384 |  |  | $ | 8,799 |
Supplemental noncash disclosures: |  |  |  |  |  |
Issuance of stock awards |  | $ | 1,658 |  |  | $ | 2,184 |
Issuance of stock for business combinations |  | $ | 59,202 |  |  | $ | 0 |
Lease liabilities arising from obtaining right-of-use assets |  | $ | 1,289 |  |  | $ | 2,946 |

See accompanying notes

6

NOTES TO UNAUDITED CONSOL IDATED CONDENSED FINANCIAL STATEMENTS

Principles of Consolidation:

Farmers National Banc Corp. (“Company” or "Farmers") is a Financial Holding Company registered under the Bank Holding Company Act of 1956, as amended. The Company provides full banking services through its nationally chartered subsidiary, The Farmers National Bank of Canfield (“Bank”). The consolidated financial statements also include the accounts of the Bank’s subsidiaries; Farmers National Insurance, LLC (“Insurance”) and Farmers of Canfield Investment Co. (“Investments”). The Company provides trust and retirement consulting services through its subsidiary, Farmers Trust Company (“Trust”), and insurance services through the Bank’s subsidiary, Insurance. Farmers National Captive, Inc. (“Captive”) is a wholly-owned insurance subsidiary of the Company that provides property and casualty insurance coverage to the Company and its subsidiaries. The Captive pools resources with eleven similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves and to provide insurance where not currently available or economically feasible in today’s insurance market place. The consolidated financial statements include the accounts of the Company, the Bank and its subsidiaries, along with the Trust and Captive. All significant intercompany balances and transactions have been eliminated in the consolidation.

Basis of Presentation:

The unaudited consolidated condensed financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2022 Annual Report to Shareholders included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”). The interim consolidated financial statements include all adjustments (consisting of only normal recurring items) that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year. Certain items included in the prior period financial statements were reclassified to conform to the current period presentation. There was no effect on net income or total stockholders’ equity.

Estimates:

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Segments:

The Company provides a broad range of financial services to individuals and companies in northeastern Ohio and western Pennsylvania. Operations are managed and financial performance is primarily aggregated and reported in two lines of business, the Bank segment and the Trust segment.

Equity:

There are 50,000,000 shares authorized and available for issuance as of September 30, 2023. Outstanding shares at September 30, 2023 were 37,489,476.

Comprehensive Income:

Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) consists of unrealized gains and losses on securities available for sale and changes in the funded status of the post-retirement plan, which are recognized as components of stockholders’ equity, net of tax effect.

7

Updates to Significant Accounting Policies:

New Accounting Standard:

On March 31, 2022, FASB issued ASU 2022-02, which eliminates the troubled debt restructuring (“TDR”), accounting model for creditors that have adopted Topic 326, Financial Instruments – Credit Losses. Due to the removal of the TDR accounting model, all loan modifications now will be accounted for under the general loan modification guidance in Subtopic 310-20. In addition, on a prospective basis, entities will be subject to new disclosure requirements covering modifications of receivables to borrowers experiencing financial difficulty. Public business entities within the scope of the Topic 326 vintage disclosure requirements also will be required to prospectively disclose current-period gross write-off information by vintage, or year of origination. The Company adopted ASU 2022-02 on January 1, 2023. The adoption of this standard did not have a material effect on the Company’s operating results or financial condition.

On October 28, 2021, FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU requires contract assets and contract liabilities to be accounted for as if they (the acquirer) entered into the original contract at the same time and same date as the acquiree. This is a shift from existing guidance, which required the acquirer to recognize contract assets and contract liabilities at their fair value as of the acquisition date. The amendments in this Update were effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The adoption of this standard did not have a material effect on the Company’s operating results or financial condition. Management determined that Emclaire had an immaterial amount of contracts with customers.

On March 12, 2020, the FASB issued ASU 2020-04 and amended by ASU 2021-01, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, to ease the burden of accounting for contract modifications related to reference rate reform. The amendments in ASU 2020-04 create a new Topic in the Codification, ASC 848, Reference Rate Reform, which contains guidance that is designed to simplify how entities account for contracts that are modified to replace LIBOR or other benchmark interest rates with new rates. The amendments in ASU 2020-04 give entities the option to apply expedients and exceptions to contract modifications that are made until December 31, 2022, if certain criteria are met. If adopted, these amendments and exceptions should be applied to all eligible modifications to contracts that are accounted for under an ASC Topic or industry Subtopic. The guidance in ASC 848 does not apply to any contract modifications that were made after December 31, 2022. In December 2022, the FASB issued ASU 2022-06 that defers the sunset date from December 31, 2022 to December 31, 2024. The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.

Business Combinations:

On January 1, 2023, the Company completed its previously announced merger with Emclaire Financial Corp., a Pennsylvania corporation and registered financial holding company (“Emclaire”), pursuant to the Agreement and Plan of Merger dated as of March 23, 2022. The Farmers National Bank of Emlenton, the banking subsidiary of Emclaire, merged with and into The Farmers National Bank of Canfield, the national banking subsidiary of the Company, with Farmers Bank as the surviving bank. Pursuant to the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”) Emclaire merged with and into Merger Sub (the “Merger”), with Merger Sub as the surviving entity in the Merger. Promptly following the consummation of the Merger, Merger Sub was dissolved and liquidated and The Farmers National Bank of Emlenton, the banking subsidiary of Emclaire, merged with and into The Farmers National Bank of Canfield, the national banking subsidiary of the Company, with Farmers Bank as the surviving bank. Pursuant to the terms of the Merger Agreement, at the effective time of the merger, each common share, without par value, of Emclaire common shares issued and outstanding was converted into the right to receive, without interest, $40.00 in cash or 2.15 common shares, without par value, of the Company's common shares, subject to an overall limitation of 70% of the Emclaire common shares being exchanged and the remaining 30% of Emclaire common shares being exchanged for the cash. The transaction created expansion for the Company in Pennsylvania and into the Pittsburgh market. The Company issued 4.2 million shares of its common stock along with cash of $33.4 million, which represented a transaction value of approximately $92.6 million based on its closing stock price of $14.12 on December 31, 2022.

In accordance with ASC 805, the Company expensed approximately $5.0 million of merger related costs, for the Emclaire acquisition, during the nine month period ended September 30, 2023, in addition to $2.0 million expensed for the entire year of 2022. The Company recorded goodwill of $73.4 million as a result of the combination. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies, including the reduction of personnel and overlapping contracts, expected to be derived from the Company’s strategy to enhance and expand its presence in Pennsylvania. The merger offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded market area. The goodwill was determined not to be deductible for income tax purposes. The fair value estimates included in these financial statements are based on preliminary valuations; certain loan, deferred tax, and premises and equipment measurements have not been finalized and are subject to change. The Company does not expect material variances from these estimates and expects that final valuation estimates will be completed prior to December 31, 2023.

8

The following table summarizes the consideration paid for Emclaire and the amounts of the assets acquired and liabilities assumed on the closing date of the acquisition.

(In Thousands of Dollars) |  |
Consideration |  |
Cash | $ | 33,440 |
Stock |  | 59,202 |
Fair value of total consideration transferred | $ | 92,642 |
Fair value of assets acquired |  |
Cash and cash equivalents | $ | 20,265 |
Securities available for sale |  | 126,970 |
Other investments |  | 7,795 |
Loans, net |  | 740,659 |
Premises and equipment |  | 16,103 |
Bank owned life insurance |  | 22,485 |
Core deposit intangible |  | 19,249 |
Current and deferred taxes |  | 17,246 |
Other assets |  | 6,387 |
Total assets acquired |  | 977,159 |
Fair value of liabilities assumed |  |
Deposits |  | 875,813 |
Short-term borrowings |  | 75,000 |
Accrued interest payable and other liabilities |  | 7,104 |
Total liabilities |  | 957,917 |
Net assets acquired | $ | 19,242 |
Goodwill created |  | 73,400 |
Total net assets acquired | $ | 92,642 |

The fair value of net assets acquired includes fair value adjustments to certain receivables that were considered performing as of the acquisition date. The fair value adjustments were determined using the income method, discounted cash flow approach. However, the Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered purchase credit deteriorated ("PCD") at the acquisition date and were not subject to the guidance relating to PCD loans. Receivables acquired that were not subject to these requirements had a fair value and gross contractual amounts receivable of $714.4 million and $764.8 million on the date of acquisition.

The fair value of purchased financial assets that were classified as PCD loans are discussed in the loan footnote.

The following table presents unaudited pro forma information as if the Emclaire acquisition that occurred on January 1, 2023 actually took place on January 1, 2022. The unaudited pro forma information for the period ended September 30, 2022 includes adjustments of interest income on loans, amortization of core deposit intangibles arising from the transaction, interest expense on deposits and borrowings acquired. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effective on the assumed date.

(In thousands of dollars except per share results) | For Three Months Ended September 30, 2022 |  |  | For Nine Months Ended September 30, 2022 |
Net interest income | $ | 43,770 |  |  | $ | 128,897 |
Provision for credit losses |  | 588 |  |  |  | 8,834 |
Noninterest income |  | 9,710 |  |  |  | 38,844 |
Noninterest expense |  | 27,804 |  |  |  | 97,337 |
Income before income taxes |  | 25,088 |  |  |  | 61,570 |
Income tax expense |  | 4,547 |  |  |  | 10,322 |
Net income | $ | 20,541 |  |  | $ | 51,248 |
Basic earnings per share | $ | 0.54 |  |  | $ | 1.35 |
Diluted earnings per share | $ | 0.54 |  |  | $ | 1.35 |

On July 1, 2022, Farmers National Insurance, LLC acquired substantially all of the assets of Randy L. Jones Agency, Inc., doing business as Champion Insurance for $900 thousand. Intangible assets of $633 thousand were recorded along with goodwill of $267 thousand.

9

Securities:

The following table summarizes the amortized cost and fair value of the available for sale investment securities portfolio at September 30, 2023 and December 31, 2022 and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income (loss):

|  |  |  | Gross |  |  | Gross |  |  |  |
| Amortized |  |  | Unrealized |  |  | Unrealized |  |  |  |
(In Thousands of Dollars) | Cost |  |  | Gains |  |  | Losses |  |  | Fair Value |
September 30, 2023 |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and U.S. government sponsored entities | $ | 145,395 |  |  | $ | 0 |  |  | $ | (24,084 | ) |  | $ | 121,311 |
State and political subdivisions |  | 645,407 |  |  |  | 134 |  |  |  | (147,405 | ) |  |  | 498,136 |
Corporate bonds |  | 18,439 |  |  |  | 5 |  |  |  | (693 | ) |  |  | 17,751 |
Mortgage-backed securities |  | 636,646 |  |  |  | 0 |  |  |  | (141,605 | ) |  |  | 495,041 |
Collateralized mortgage obligations |  | 81,567 |  |  |  | 261 |  |  |  | (6,276 | ) |  |  | 75,552 |
Small Business Administration |  | 3,314 |  |  |  | 0 |  |  |  | (369 | ) |  |  | 2,945 |
Totals | $ | 1,530,768 |  |  | $ | 400 |  |  | $ | (320,432 | ) |  | $ | 1,210,736 |

|  |  |  | Gross |  |  | Gross |  |  |  |
| Amortized |  |  | Unrealized |  |  | Unrealized |  |  |  |
(In Thousands of Dollars) | Cost |  |  | Gains |  |  | Losses |  |  | Fair Value |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and U.S. government sponsored entities | $ | 149,712 |  |  | $ | 0 |  |  | $ | (21,616 | ) |  | $ | 128,096 |
State and political subdivisions |  | 651,705 |  |  |  | 266 |  |  |  | (121,891 | ) |  |  | 530,080 |
Corporate bonds |  | 4,181 |  |  |  | 0 |  |  |  | (302 | ) |  |  | 3,879 |
Mortgage-backed securities - residential |  | 672,784 |  |  |  | 12 |  |  |  | (117,654 | ) |  |  | 555,142 |
Collateralized mortgage obligations |  | 52,291 |  |  |  | 0 |  |  |  | (4,937 | ) |  |  | 47,354 |
Small Business Administration |  | 3,839 |  |  |  | 0 |  |  |  | (365 | ) |  |  | 3,474 |
Totals | $ | 1,534,512 |  |  | $ | 278 |  |  | $ | (266,765 | ) |  | $ | 1,268,025 |

Proceeds from the sale of available for sale securities for the three month and nine month periods ended September 30, 2023 were $15.4 million and $85.3 million, respectively. Gross losses of $619 thousand were realized on these sales for the three month period ended September 30, 2023 and gross gains of $441 thousand and gross losses of $939 thousand were realized on these sales for the nine month period ended September 30, 2023. In addition, net realized losses on equity securities of $5 thousand and net realized gains of $8 thousand were recognized in the income statement during the three and nine month periods ended September 30, 2023, respectively.

Proceeds from the sale of available for sale securities were $1.0 million and $2.6 million for both the three and nine month periods ended September 30, 2022. Gross losses of $5 thousand and $36 thousand, respectively, were realized on these sales for both the three and nine month periods ended September 30, 2022. Realized losses on equity securities of $12 thousand and $52 thousand were recognized in the income statement during the three and nine month periods as of September 30, 2022, respectively.

The amortized cost and fair value of the debt securities portfolio are shown in the table below by expected maturity. Expected maturities may differ from contractual maturities if issuers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

|  | September 30, 2023 |
(In Thousands of Dollars) |  | Amortized Cost |  |  | Fair Value |
Maturity |  |  |  |  |  |
Within one year |  | $ | 399 |  |  | $ | 392 |
One to five years |  |  | 28,868 |  |  |  | 26,075 |
Five to ten years |  |  | 185,929 |  |  |  | 158,979 |
Beyond ten years |  |  | 594,045 |  |  |  | 451,752 |
Mortgage-backed, collateralized mortgage obligations and Small Business Administration securities |  |  | 721,527 |  |  |  | 573,538 |
Total |  | $ | 1,530,768 |  |  | $ | 1,210,736 |

10

The following table summarizes the available for sale investment securities with unrealized losses at September 30, 2023 and December 31, 2022, aggregated by major security type and length of time in a continuous unrealized loss position.

|  | Less than 12 Months |  |  | 12 Months or Longer |  |  | Total |
|  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |
(In Thousands of Dollars) |  | Value |  |  | Loss |  |  | Value |  |  | Loss |  |  | Value |  |  | Loss |
September 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and U.S. government sponsored entities |  | $ | 5,381 |  |  | $ | (174 | ) |  | $ | 115,930 |  |  | $ | (23,910 | ) |  | $ | 121,311 |  |  | $ | (24,084 | )
State and political subdivisions |  |  | 94,185 |  |  |  | (7,325 | ) |  |  | 396,362 |  |  |  | (140,080 | ) |  |  | 490,547 |  |  |  | (147,405 | )
Corporate bonds |  |  | 11,962 |  |  |  | (429 | ) |  |  | 3,804 |  |  |  | (264 | ) |  |  | 15,766 |  |  |  | (693 | )
Mortgage-backed securities |  |  | 5,170 |  |  |  | (179 | ) |  |  | 489,871 |  |  |  | (141,426 | ) |  |  | 495,041 |  |  |  | (141,605 | )
Collateralized mortgage obligations |  |  | 23,580 |  |  |  | (802 | ) |  |  | 44,524 |  |  |  | (5,474 | ) |  |  | 68,104 |  |  |  | (6,276 | )
Small Business Administration |  |  | 0 |  |  |  | 0 |  |  |  | 2,945 |  |  |  | (369 | ) |  |  | 2,945 |  |  |  | (369 | )
Total temporarily impaired |  | $ | 140,278 |  |  | $ | (8,909 | ) |  | $ | 1,053,436 |  |  | $ | (311,523 | ) |  | $ | 1,193,714 |  |  | $ | (320,432 | )

|  | Less than 12 Months |  |  | 12 Months or Longer |  |  | Total |
|  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |
(In Thousands of Dollars) |  | Value |  |  | Loss |  |  | Value |  |  | Loss |  |  | Value |  |  | Loss |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and U.S. government sponsored entities |  | $ | 52,311 |  |  | $ | (5,835 | ) |  | $ | 75,685 |  |  | $ | (15,781 | ) |  | $ | 127,996 |  |  | $ | (21,616 | )
State and political subdivisions |  |  | 306,709 |  |  |  | (56,650 | ) |  |  | 191,584 |  |  |  | (65,241 | ) |  |  | 498,293 |  |  |  | (121,891 | )
Corporate bonds |  |  | 2,893 |  |  |  | (122 | ) |  |  | 986 |  |  |  | (180 | ) |  |  | 3,879 |  |  |  | (302 | )
Mortgage-backed securities - residential |  |  | 101,476 |  |  |  | (13,545 | ) |  |  | 453,233 |  |  |  | (104,109 | ) |  |  | 554,709 |  |  |  | (117,654 | )
Collateralized mortgage obligations |  |  | 42,140 |  |  |  | (4,137 | ) |  |  | 5,214 |  |  |  | (800 | ) |  |  | 47,354 |  |  |  | (4,937 | )
Small Business Administration |  |  | 1,295 |  |  |  | (122 | ) |  |  | 2,179 |  |  |  | (243 | ) |  |  | 3,474 |  |  |  | (365 | )
Total temporarily impaired |  | $ | 506,824 |  |  | $ | (80,411 | ) |  | $ | 728,881 |  |  | $ | (186,354 | ) |  | $ | 1,235,705 |  |  | $ | (266,765 | )

Allowance for Credit Losses

Management evaluates securities available for sale for credit losses. During the evaluation process, management considers the extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

11

If the Company determines that a credit loss exists, the credit portion of the allowance will be measured using a discounted cash flow analysis using the effective interest rate as of the security’s purchase date. As of September 30, 2023, the Company’s security portfolio consisted of 980 securities, 951 of which were in an unrealized loss position. The majority of the unrealized losses on the Company’s securities are related to its holdings of mortgage-backed securities and state and political subdivisions. The Company does not consider its available for sale ("AFS") securities with unrealized losses to be attributable to credit-related factors, as the unrealized losses have occurred as a result of changes in noncredit related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration. In addition, management has the ability and the intent to hold the securities for a period of time sufficient to allow for any recovery in fair value. As of September 30, 2023 the Company has no t recorded an allowance for credit losses on AFS securities.

Loans:

Loan balances were as follows:

(In Thousands of Dollars) |  | September 30, 2023 |  |  | December 31, 2022 |
Commercial real estate |  |  |  |  |  |
Owner occupied |  | $ | 371,356 |  |  | $ | 330,768 |
Non-owner occupied |  |  | 711,391 |  |  |  | 563,652 |
Farmland |  |  | 200,148 |  |  |  | 188,850 |
Other |  |  | 213,100 |  |  |  | 133,630 |
Commercial |  |  |  |  |  |
Commercial and industrial |  |  | 357,691 |  |  |  | 293,643 |
Agricultural |  |  | 61,590 |  |  |  | 58,087 |
Residential real estate |  |  |  |  |  |
1-4 family residential |  |  | 842,729 |  |  |  | 475,791 |
Home equity lines of credit |  |  | 140,772 |  |  |  | 132,179 |
Consumer |  |  |  |  |  |
Indirect |  |  | 228,377 |  |  |  | 197,125 |
Direct |  |  | 24,900 |  |  |  | 16,421 |
Other |  |  | 7,859 |  |  |  | 7,714 |
Total loans |  | $ | 3,159,913 |  |  | $ | 2,397,860 |
Net deferred loan costs |  |  | 8,641 |  |  |  | 6,890 |
Allowance for credit losses |  |  | (34,753 | ) |  |  | (26,978 | )
Net loans |  | $ | 3,133,801 |  |  | $ | 2,377,772 |

Allowance for credit loss activity

The following tables present the activity in the allowance for credit losses by portfolio segment for the three and nine month periods ended September 30, 2023 and 2022:

Three Months Ended September 30, 2023

(In Thousands of Dollars) |  | Commercial Real Estate |  |  | Commercial |  |  | Residential Real Estate |  |  | Consumer |  |  | Total |
Allowance for credit losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 18,537 |  |  | $ | 5,295 |  |  | $ | 6,866 |  |  | $ | 4,259 |  |  | $ | 34,957 |
PCD ACL on loans acquired |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
(Credit) Provision for credit losses |  |  | 182 |  |  |  | (45 | ) |  |  | 13 |  |  |  | 32 |  |  |  | 182 |
Loans charged off |  |  | (3 | ) |  |  | (154 | ) |  |  | (157 | ) |  |  | (211 | ) |  |  | (525 | )
Recoveries |  |  | 0 |  |  |  | 6 |  |  |  | 12 |  |  |  | 121 |  |  |  | 139 |
Total ending allowance balance |  | $ | 18,716 |  |  | $ | 5,102 |  |  | $ | 6,734 |  |  | $ | 4,201 |  |  | $ | 34,753 |

12

Nine Months Ended September 30, 2023

(In Thousands of Dollars) |  | Commercial Real Estate |  |  | Commercial |  |  | Residential Real Estate |  |  | Consumer |  |  | Total |
Allowance for credit losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 14,840 |  |  | $ | 4,186 |  |  | $ | 4,374 |  |  | $ | 3,578 |  |  | $ | 26,978 |
PCD ACL on loans acquired |  |  | 850 |  |  |  | 138 |  |  |  | 11 |  |  |  | 0 |  |  |  | 999 |
Provision for credit losses |  |  | 3,185 |  |  |  | 1,638 |  |  |  | 2,542 |  |  |  | 867 |  |  |  | 8,232 |
Loans charged off |  |  | (160 | ) |  |  | (888 | ) |  |  | (251 | ) |  |  | (666 | ) |  |  | (1,965 | )
Recoveries |  |  | 1 |  |  |  | 28 |  |  |  | 58 |  |  |  | 422 |  |  |  | 509 |
Total ending allowance balance |  | $ | 18,716 |  |  | $ | 5,102 |  |  | $ | 6,734 |  |  | $ | 4,201 |  |  | $ | 34,753 |

Three Months Ended September 30, 2022

(In Thousands of Dollars) |  | Commercial Real Estate |  |  | Commercial |  |  | Residential Real Estate |  |  | Consumer |  |  | Total |
Allowance for credit losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 14,859 |  |  | $ | 3,893 |  |  | $ | 4,915 |  |  | $ | 3,787 |  |  | $ | 27,454 |
(Credit) Provision for credit losses |  |  | (47 | ) |  |  | 260 |  |  |  | 2 |  |  |  | 218 |  |  |  | 433 |
Loans charged off |  |  | 0 |  |  |  | (473 | ) |  |  | (9 | ) |  |  | (301 | ) |  |  | (783 | )
Recoveries |  |  | 1 |  |  |  | 2 |  |  |  | 41 |  |  |  | 134 |  |  |  | 178 |
Total ending allowance balance |  | $ | 14,813 |  |  | $ | 3,682 |  |  | $ | 4,949 |  |  | $ | 3,838 |  |  | $ | 27,282 |

Nine Months Ended September 30, 2022

(In Thousands of Dollars) |  | Commercial Real Estate |  |  | Commercial |  |  | Residential Real Estate |  |  | Consumer |  |  | Total |
Allowance for credit losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 15,879 |  |  | $ | 4,949 |  |  | $ | 4,870 |  |  | $ | 3,688 |  |  | $ | 29,386 |
(Credit) Provision for credit losses |  |  | (1,068 | ) |  |  | 601 |  |  |  | 53 |  |  |  | 399 |  |  |  | (15 | )
Loans charged off |  |  | 0 |  |  |  | (1,878 | ) |  |  | (43 | ) |  |  | (630 | ) |  |  | (2,551 | )
Recoveries |  |  | 2 |  |  |  | 10 |  |  |  | 69 |  |  |  | 381 |  |  |  | 462 |
Total ending allowance balance |  | $ | 14,813 |  |  | $ | 3,682 |  |  | $ | 4,949 |  |  | $ | 3,838 |  |  | $ | 27,282 |

The cumulative loss rate used as the basis for the estimate of credit losses is comprised of the Company's historical loss experience from December 31, 2011 to September 30, 2023. As of September 30, 2023, the Company expects that the markets in which it operates will experience minimal changes to economic conditions, stable trend in unemployment rate, and a level trend of delinquencies. Management adjusted historical loss experience for these expectations. No reversion adjustments were necessary, as the starting point for the Company's estimate was a cumulative loss rate covering the expected contractual term of the portfolio. While there are many factors that go into the calculation of the allowance for credit losses, the change in the balances from September 30, 2022 to September 30, 2023 is largely attributed to the Emlenton merger.

13

The following tables present the amortized cost basis of loans on nonaccrual status and loans past due over 89 days still accruing as of September 30, 2023:

(In Thousands of Dollars) |  | Nonaccrual with no allowance for credit loss |  |  | Nonaccrual with an allowance for credit loss |  |  | Loans past due over 89 days still accruing |
September 30, 2023 |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |
Owner occupied |  | $ | 671 |  |  | $ | 460 |  |  | $ | 0 |
Non-owner occupied |  |  | 1,848 |  |  |  | 4,876 |  |  |  | 0 |
Farmland |  |  | 2,006 |  |  |  | 11 |  |  |  | 0 |
Other |  |  | 0 |  |  |  | 90 |  |  |  | 0 |
Commercial |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 321 |  |  |  | 1,472 |  |  |  | 0 |
Agricultural |  |  | 213 |  |  |  | 272 |  |  |  | 0 |
Residential real estate |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 382 |  |  |  | 3,526 |  |  |  | 1,020 |
Home equity lines of credit |  |  | 264 |  |  |  | 228 |  |  |  | 188 |
Consumer |  |  |  |  |  |  |  |  |
Indirect |  |  | 25 |  |  |  | 225 |  |  |  | 117 |
Direct |  |  | 65 |  |  |  | 66 |  |  |  | 17 |
Other |  |  | 0 |  |  |  | 5 |  |  |  | 0 |
Total loans |  | $ | 5,795 |  |  | $ | 11,231 |  |  | $ | 1,342 |

The following table presents the recorded investment in nonaccrual and loans past due 90 days or more still on accrual by class of loans as of December 31, 2022:

|  | December 31, 2022 |
(In Thousands of Dollars) |  | Nonaccrual |  |  | Loans Past Due 90 Days or More Still Accruing |
Commercial real estate |  |  |  |  |  |
Owner occupied |  | $ | 993 |  |  | $ | 0 |
Non-owner occupied |  |  | 3,031 |  |  |  | 0 |
Farmland |  |  | 2,183 |  |  |  | 0 |
Other |  |  | 33 |  |  |  | 0 |
Commercial |  |  |  |  |  |
Commercial and industrial |  |  | 3,840 |  |  |  | 50 |
Agricultural |  |  | 299 |  |  |  | 0 |
Residential real estate |  |  |  |  |  |
1-4 family residential |  |  | 2,703 |  |  |  | 310 |
Home equity lines of credit |  |  | 735 |  |  |  | 58 |
Consumer |  |  |  |  |  |
Indirect |  |  | 313 |  |  |  | 62 |
Direct |  |  | 179 |  |  |  | 12 |
Other |  |  | 2 |  |  |  | 0 |
Total loans |  | $ | 14,311 |  |  | $ | 492 |

14

The following tables present the amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2023:

(In Thousands of Dollars) |  | Real Estate |  |  | Business Assets |  |  | Vehicles |  |  | Cash |
September 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  | $ | 793 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |
Non-owner occupied |  |  | 4,956 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Farmland |  |  | 2,006 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Other |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 0 |  |  |  | 1,144 |  |  |  | 0 |  |  |  | 0 |
Agricultural |  |  | 0 |  |  |  | 213 |  |  |  | 0 |  |  |  | 0 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 3,288 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Home equity lines of credit |  |  | 397 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |
Indirect |  |  | 0 |  |  |  | 0 |  |  |  | 59 |  |  |  | 0 |
Direct |  |  | 0 |  |  |  | 0 |  |  |  | 22 |  |  |  | 66 |
Other |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Total loans |  | $ | 11,440 |  |  | $ | 1,357 |  |  | $ | 81 |  |  | $ | 66 |

The following tables present the aging of the recorded investment in past due loans as of September 30, 2023 and December 31, 2022 by class of loans.

(In Thousands of Dollars) |  | 30-59 Days Past Due |  |  | 60-89 Days Past Due |  |  | 90 Days or More Past Due and Nonaccrual |  |  | Total Past Due |  |  | Loans Not Past Due |  |  | Total |
September 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  | $ | 475 |  |  | $ | 294 |  |  | $ | 1,131 |  |  | $ | 1,900 |  |  | $ | 369,200 |  |  | $ | 371,100 |
Non-owner occupied |  |  | 0 |  |  |  | 0 |  |  |  | 6,724 |  |  |  | 6,724 |  |  |  | 704,160 |  |  |  | 710,884 |
Farmland |  |  | 900 |  |  |  | 0 |  |  |  | 2,017 |  |  |  | 2,917 |  |  |  | 197,009 |  |  |  | 199,926 |
Other |  |  | 0 |  |  |  | 0 |  |  |  | 90 |  |  |  | 90 |  |  |  | 212,572 |  |  |  | 212,662 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 660 |  |  |  | 289 |  |  |  | 1,793 |  |  |  | 2,742 |  |  |  | 356,323 |  |  |  | 359,065 |
Agricultural |  |  | 328 |  |  |  | 10 |  |  |  | 485 |  |  |  | 823 |  |  |  | 61,501 |  |  |  | 62,324 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 7,204 |  |  |  | 875 |  |  |  | 4,928 |  |  |  | 13,007 |  |  |  | 829,480 |  |  |  | 842,487 |
Home equity lines of credit |  |  | 373 |  |  |  | 0 |  |  |  | 680 |  |  |  | 1,053 |  |  |  | 139,751 |  |  |  | 140,804 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Indirect |  |  | 1,471 |  |  |  | 267 |  |  |  | 367 |  |  |  | 2,105 |  |  |  | 234,415 |  |  |  | 236,520 |
Direct |  |  | 126 |  |  |  | 34 |  |  |  | 148 |  |  |  | 308 |  |  |  | 24,616 |  |  |  | 24,924 |
Other |  |  | 7 |  |  |  | 1 |  |  |  | 5 |  |  |  | 13 |  |  |  | 7,845 |  |  |  | 7,858 |
Total loans |  | $ | 11,544 |  |  | $ | 1,770 |  |  | $ | 18,368 |  |  | $ | 31,682 |  |  | $ | 3,136,872 |  |  | $ | 3,168,554 |

15

(In Thousands of Dollars) |  | 30-59 Days Past Due |  |  | 60-89 Days Past Due |  |  | 90 Days or More Past Due and Nonaccrual |  |  | Total Past Due |  |  | Loans Not Past Due |  |  | Total |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  | $ | 159 |  |  | $ | 0 |  |  | $ | 993 |  |  | $ | 1,152 |  |  | $ | 329,305 |  |  | $ | 330,457 |
Non-owner occupied |  |  | 0 |  |  |  | 0 |  |  |  | 3,031 |  |  |  | 3,031 |  |  |  | 560,013 |  |  |  | 563,044 |
Farmland |  |  | 0 |  |  |  | 0 |  |  |  | 2,183 |  |  |  | 2,183 |  |  |  | 186,399 |  |  |  | 188,582 |
Other |  |  | 0 |  |  |  | 0 |  |  |  | 33 |  |  |  | 33 |  |  |  | 133,288 |  |  |  | 133,321 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 1,034 |  |  |  | 185 |  |  |  | 3,890 |  |  |  | 5,109 |  |  |  | 289,297 |  |  |  | 294,406 |
Agricultural |  |  | 104 |  |  |  | 20 |  |  |  | 299 |  |  |  | 423 |  |  |  | 58,166 |  |  |  | 58,589 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 4,247 |  |  |  | 1,775 |  |  |  | 3,013 |  |  |  | 9,035 |  |  |  | 466,313 |  |  |  | 475,348 |
Home equity lines of credit |  |  | 115 |  |  |  | 92 |  |  |  | 793 |  |  |  | 1,000 |  |  |  | 131,209 |  |  |  | 132,209 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Indirect |  |  | 1,267 |  |  |  | 298 |  |  |  | 375 |  |  |  | 1,940 |  |  |  | 202,683 |  |  |  | 204,623 |
Direct |  |  | 234 |  |  |  | 70 |  |  |  | 191 |  |  |  | 495 |  |  |  | 15,962 |  |  |  | 16,457 |
Other |  |  | 0 |  |  |  | 5 |  |  |  | 2 |  |  |  | 7 |  |  |  | 7,707 |  |  |  | 7,714 |
Total loans |  | $ | 7,160 |  |  | $ | 2,445 |  |  | $ | 14,803 |  |  | $ | 24,408 |  |  | $ | 2,380,342 |  |  | $ | 2,404,750 |

Loan Restructurings

The Company adopted the accounting guidance in ASU No. 2022-02, effective as of January 1, 2023, which eliminates the recognition and measurement of troubled debt restructurings ("TDRs"). Due to the removal of the TDR designation, the Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. Therefore, the disclosures related to loan restructurings are only for modifications that directly affect cash flows.

Any restructuring of a loan in which the borrower has experienced financial difficulty and the terms of the loan are more favorable than would generally be considered for borrowers with the same credit characteristics would be individually evaluated. Otherwise, the restructured loan remains in the appropriate segment in the ACL model.

16

The following table presents the amortized cost basis of loans that were both experiencing financial difficulty and modified during the three and nine months ended September 30, 2023, by class and type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below:

Three Months Ended September 30, 2023 |  | Amortized Cost |  |  |  |
(In Thousands of Dollars) |  | Payment Deferral |  |  | Interest Rate Reduction |  |  | Combination Term Extension and Interest Rate Reduction |  |  | Total |  |  | % of Total Class of Financing Receivable |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  |  | 0.00 | %
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 0 |  |  |  | 31 |  |  |  | 133 |  |  | $ | 164 |  |  |  | 0.02 | %
Total modifications to borrowers experiencing financial difficulty |  | $ | 0 |  |  | $ | 31 |  |  | $ | 133 |  |  | $ | 164 |  |  |  | 0.01 | %
Nine Months Ended September 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 50 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 50 |  |  |  | 0.01 | %
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 0 |  |  |  | 31 |  |  |  | 133 |  |  | $ | 164 |  |  |  | 0.02 | %
Total modifications to borrowers experiencing financial difficulty |  | $ | 50 |  |  | $ | 31 |  |  | $ | 133 |  |  | $ | 214 |  |  |  | 0.01 | %

The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2023:

|  | Payment Deferral |  |  | Interest Rate Reduction |  |  | Term Extension |
|  | Weighted-Average Years Added to the Life |  |  | Weighted-Average Contractual Interest Rate |  |  | Weighted-Average Years Added to the Life |
Three Months Ended September 30, 2023 |  |  |  |  | From |  |  | To |  |  |  |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  |  |  |  |  |  | 4.77 | % |  |  | 3.38 | % |  |  |  |  | 5.0 |
Nine Months Ended September 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  |  |  | 0.5 |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential |  |  |  |  |  |  |  | 4.77 | % |  |  | 3.38 | % |  |  |  |  | 5.0 |

17

The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table presents the performance of such loans that have been modified in the three and nine months ended September 30, 2023:

Three Months Ended September 30, 2023 |  | Payment status (Amortized cost Basis) |
(In Thousands of Dollars) |  | Current |  |  | 30-89 Days past due |  |  | 90+ Days past due |
Accrual restructured loans |  |  |  |  |  |  |  |  |
Commercial |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |
Residential real estate |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 164 |  |  |  | 0 |  |  |  | 0 |
Total accruing restructured loans |  | $ | 164 |  |  | $ | 0 |  |  | $ | 0 |
Nonaccrual restructured loans |  |  |  |  |  |  |  |  |
Total nonaccrual restructured loans |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |
Total restructured loans |  | $ | 164 |  |  | $ | 0 |  |  | $ | 0 |

Nine Months Ended September 30, 2023 |  | Payment status (Amortized cost Basis) |
(In Thousands of Dollars) |  | Current |  |  | 30-89 Days past due |  |  | 90+ Days past due |
Commercial |  |  |  |  |  |  |  |  |
Commercial and industrial |  | $ | 50 |  |  | $ | 0 |  |  | $ | 0 |
Residential real estate |  |  |  |  |  |  |  |  |
1-4 family residential |  |  | 164 |  |  |  | 0 |  |  |  | 0 |
Total accruing restructured loans |  | $ | 214 |  |  | $ | 0 |  |  | $ | 0 |
Nonaccrual restructured loans |  |  |  |  |  |  |  |  |
Total nonaccrual restructured loans |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |
Total restructured loans |  | $ | 214 |  |  | $ | 0 |  |  | $ | 0 |

As of September 30, 2023, the Company had no commitments to lend any additional funds on restructured loans. As of September 30, 2023, the Company had no loans that defaulted during the period and had been modified preceding the payment default when the borrower was experiencing financially difficulty at the time of modification. For purposes of this disclosure a default occurs when, within 12 months of the original modification, a loan is 30 days contractually past due under the modified terms.

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company establishes a risk rating at origination for all commercial loan and commercial real estate relationships. For relationships over $1 million, management monitors the loans on an ongoing basis for any changes in the borrower’s ability to service their debt. Management also affirms the risk ratings for the loans in their respective portfolios on an annual basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

18

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

As of September 30, 2023 and December 31, 2022, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

(In Thousands of Dollars) |  | Pass |  |  | Special Mention |  |  | Sub standard |  |  | Total |
September 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  | $ | 361,829 |  |  | $ | 5,162 |  |  | $ | 4,109 |  |  | $ | 371,100 |
Non-owner occupied |  |  | 654,469 |  |  |  | 29,884 |  |  |  | 26,531 |  |  |  | 710,884 |
Farmland |  |  | 197,379 |  |  |  | 0 |  |  |  | 2,547 |  |  |  | 199,926 |
Other |  |  | 212,514 |  |  |  | 0 |  |  |  | 148 |  |  |  | 212,662 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 343,803 |  |  |  | 6,710 |  |  |  | 8,552 |  |  |  | 359,065 |
Agricultural |  |  | 61,786 |  |  |  | 19 |  |  |  | 519 |  |  |  | 62,324 |
Total loans |  | $ | 1,831,780 |  |  | $ | 41,775 |  |  | $ | 42,406 |  |  | $ | 1,915,961 |

(In Thousands of Dollars) |  | Pass |  |  | Special Mention |  |  | Sub standard |  |  | Total |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  | $ | 324,979 |  |  | $ | 1,193 |  |  | $ | 4,285 |  |  | $ | 330,457 |
Non-owner occupied |  |  | 527,267 |  |  |  | 25,541 |  |  |  | 10,236 |  |  |  | 563,044 |
Farmland |  |  | 186,057 |  |  |  | 0 |  |  |  | 2,525 |  |  |  | 188,582 |
Other |  |  | 133,218 |  |  |  | 0 |  |  |  | 103 |  |  |  | 133,321 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial |  |  | 282,412 |  |  |  | 777 |  |  |  | 11,217 |  |  |  | 294,406 |
Agricultural |  |  | 58,002 |  |  |  | 250 |  |  |  | 337 |  |  |  | 58,589 |
Total loans |  | $ | 1,511,935 |  |  | $ | 27,761 |  |  | $ | 28,703 |  |  | $ | 1,568,399 |

The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses. For residential, consumer indirect and direct loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. In the 1-4 family residential real estate portfolio at September 30, 2023, other real estate owned and foreclosure properties were $34 thousand and $194 thousand, respectively. At December 31, 2022, other real estate owned and foreclosure properties were $0 and $129 thousand, respectively.

The following tables present the recorded investment in residential, consumer indirect and direct auto loans based on payment activity as of September 30, 2023 and December 31, 2022. Nonperforming loans are loans past due 90 days or more and still accruing interest and nonaccrual loans.

|  | Residential Real Estate |  |  | Consumer |
(In Thousands of Dollars) |  | 1-4 Family Residential |  |  | Home Equity Lines of Credit |  |  | Indirect |  |  | Direct |  |  | Other |
September 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing |  | $ | 837,559 |  |  | $ | 140,124 |  |  | $ | 236,153 |  |  | $ | 24,776 |  |  | $ | 7,853 |
Nonperforming |  |  | 4,928 |  |  |  | 680 |  |  |  | 367 |  |  |  | 148 |  |  |  | 5 |
Total loans |  | $ | 842,487 |  |  | $ | 140,804 |  |  | $ | 236,520 |  |  | $ | 24,924 |  |  | $ | 7,858 |

|  | Residential Real Estate |  |  | Consumer |
(In Thousands of Dollars) |  | 1-4 Family Residential |  |  | Home Equity Lines of Credit |  |  | Indirect |  |  | Direct |  |  | Other |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing |  | $ | 472,335 |  |  | $ | 131,416 |  |  | $ | 204,248 |  |  | $ | 16,266 |  |  | $ | 7,712 |
Nonperforming |  |  | 3,013 |  |  |  | 793 |  |  |  | 375 |  |  |  | 191 |  |  |  | 2 |
Total loans |  | $ | 475,348 |  |  | $ | 132,209 |  |  | $ | 204,623 |  |  | $ | 16,457 |  |  | $ | 7,714 |

19

The following table presents total loans by risk categories and year of origination.

|  | Term Loans Amortized Cost Basis by Origination Year |
As of September 30, 2023 |  | 2023 |  |  | 2022 |  |  | 2021 |  |  | 2020 |  |  | 2019 |  |  | Prior |  |  | Revolving Loans |  |  | Total |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 87,056 |  |  | $ | 253,341 |  |  | $ | 222,515 |  |  | $ | 140,858 |  |  | $ | 149,353 |  |  | $ | 359,884 |  |  | $ | 15,805 |  |  | $ | 1,228,812 |
Special mention |  |  | 0 |  |  |  | 0 |  |  |  | 3,975 |  |  |  | 12,986 |  |  |  | 7,597 |  |  |  | 10,488 |  |  |  | 0 |  |  |  | 35,046 |
Substandard |  |  | 0 |  |  |  | 0 |  |  |  | 1,562 |  |  |  | 3,815 |  |  |  | 2,019 |  |  |  | 22,288 |  |  |  | 1,104 |  |  |  | 30,788 |
Total commercial real estate loans |  | $ | 87,056 |  |  | $ | 253,341 |  |  | $ | 228,052 |  |  | $ | 157,659 |  |  | $ | 158,969 |  |  | $ | 392,660 |  |  | $ | 16,909 |  |  | $ | 1,294,646 |
Commercial real estate current period gross write-offs |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 1 |  |  | $ | 156 |  |  | $ | 0 |  |  | $ | 157 |
Commercial and industrial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 78,583 |  |  | $ | 90,418 |  |  | $ | 45,021 |  |  | $ | 23,670 |  |  | $ | 11,728 |  |  | $ | 26,726 |  |  | $ | 67,657 |  |  | $ | 343,803 |
Special mention |  |  | 0 |  |  |  | 562 |  |  |  | 405 |  |  |  | 23 |  |  |  | 1,012 |  |  |  | 0 |  |  |  | 4,708 |  |  |  | 6,710 |
Substandard |  |  | 73 |  |  |  | 3,417 |  |  |  | 393 |  |  |  | 548 |  |  |  | 134 |  |  |  | 1,034 |  |  |  | 2,953 |  |  |  | 8,552 |
Total commercial loans |  | $ | 78,656 |  |  | $ | 94,397 |  |  | $ | 45,819 |  |  | $ | 24,241 |  |  | $ | 12,874 |  |  | $ | 27,760 |  |  | $ | 75,318 |  |  | $ | 359,065 |
Commercial and industrial current period gross write-offs |  | $ | 0 |  |  | $ | 100 |  |  | $ | 385 |  |  | $ | 11 |  |  | $ | 16 |  |  | $ | 311 |  |  | $ | 0 |  |  | $ | 823 |
Agricultural |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 28,887 |  |  | $ | 58,199 |  |  | $ | 31,172 |  |  | $ | 39,012 |  |  | $ | 20,733 |  |  | $ | 62,591 |  |  | $ | 18,571 |  |  | $ | 259,165 |
Special mention |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 19 |  |  |  | 19 |
Substandard |  |  | 0 |  |  |  | 33 |  |  |  | 407 |  |  |  | 236 |  |  |  | 55 |  |  |  | 2,335 |  |  |  | 0 |  |  |  | 3,066 |
Total agricultural loans |  | $ | 28,887 |  |  | $ | 58,232 |  |  | $ | 31,579 |  |  | $ | 39,248 |  |  | $ | 20,788 |  |  | $ | 64,926 |  |  | $ | 18,590 |  |  | $ | 262,250 |
Agricultural current period gross write-offs |  | $ | 0 |  |  | $ | 15 |  |  | $ | 44 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 9 |  |  | $ | 0 |  |  | $ | 68 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 43,418 |  |  | $ | 174,241 |  |  | $ | 167,016 |  |  | $ | 135,261 |  |  | $ | 50,313 |  |  | $ | 255,817 |  |  | $ | 3,626 |  |  | $ | 829,692 |
Special mention |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 67 |  |  |  | 111 |  |  |  | 317 |  |  |  | 0 |  |  |  | 495 |
Substandard |  |  | 0 |  |  |  | 47 |  |  |  | 497 |  |  |  | 2,430 |  |  |  | 372 |  |  |  | 8,954 |  |  |  | 0 |  |  |  | 12,300 |
Total residential real estate loans |  | $ | 43,418 |  |  | $ | 174,288 |  |  | $ | 167,513 |  |  | $ | 137,758 |  |  | $ | 50,796 |  |  | $ | 265,088 |  |  | $ | 3,626 |  |  | $ | 842,487 |
Residential real estate current period gross write-offs |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 130 |  |  | $ | 0 |  |  | $ | 109 |  |  | $ | 0 |  |  | $ | 239 |
Home equity lines of credit |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 0 |  |  | $ | 0 |  |  | $ | 10 |  |  | $ | 46 |  |  | $ | 7 |  |  | $ | 1,969 |  |  | $ | 136,289 |  |  | $ | 138,321 |
Special mention |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Substandard |  |  | 0 |  |  |  | 26 |  |  |  | 50 |  |  |  | 82 |  |  |  | 67 |  |  |  | 2,159 |  |  |  | 99 |  |  |  | 2,483 |
Total home equity lines of credit |  | $ | 0 |  |  | $ | 26 |  |  | $ | 60 |  |  | $ | 128 |  |  | $ | 74 |  |  | $ | 4,128 |  |  | $ | 136,388 |  |  | $ | 140,804 |
Home equity lines of credit current period gross write-offs |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 8 |  |  | $ | 0 |  |  | $ | 4 |  |  | $ | 0 |  |  | $ | 12 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 64,301 |  |  | $ | 81,221 |  |  | $ | 37,731 |  |  | $ | 24,586 |  |  | $ | 14,156 |  |  | $ | 38,723 |  |  | $ | 7,669 |  |  | $ | 268,387 |
Substandard |  |  | 0 |  |  |  | 157 |  |  |  | 170 |  |  |  | 213 |  |  |  | 153 |  |  |  | 221 |  |  |  | 1 |  |  |  | 915 |
Total consumer loans |  | $ | 64,301 |  |  | $ | 81,378 |  |  | $ | 37,901 |  |  | $ | 24,799 |  |  | $ | 14,309 |  |  | $ | 38,944 |  |  | $ | 7,670 |  |  | $ | 269,302 |
Consumer current period gross write-offs |  | $ | 0 |  |  | $ | 121 |  |  | $ | 68 |  |  | $ | 82 |  |  | $ | 31 |  |  | $ | 276 |  |  | $ | 88 |  |  | $ | 666 |

20

|  | Term Loans Amortized Cost Basis by Origination Year |
As of December 31, 2022 |  | 2022 |  |  | 2021 |  |  | 2020 |  |  | 2019 |  |  | 2018 |  |  | Prior |  |  | Revolving Loans |  |  | Total |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 188,240 |  |  | $ | 174,841 |  |  | $ | 120,883 |  |  | $ | 138,342 |  |  | $ | 89,769 |  |  | $ | 256,103 |  |  | $ | 17,286 |  |  | $ | 985,464 |
Special mention |  |  | 0 |  |  |  | 711 |  |  |  | 1,861 |  |  |  | 5,286 |  |  |  | 624 |  |  |  | 18,252 |  |  |  | 0 |  |  |  | 26,734 |
Substandard |  |  | 0 |  |  |  | 18 |  |  |  | 256 |  |  |  | 1,968 |  |  |  | 267 |  |  |  | 10,952 |  |  |  | 1,163 |  |  |  | 14,624 |
Total commercial real estate loans |  | $ | 188,240 |  |  | $ | 175,570 |  |  | $ | 123,000 |  |  | $ | 145,596 |  |  | $ | 90,660 |  |  | $ | 285,307 |  |  | $ | 18,449 |  |  | $ | 1,026,822 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 100,368 |  |  | $ | 45,872 |  |  | $ | 34,110 |  |  | $ | 16,854 |  |  | $ | 13,574 |  |  | $ | 14,664 |  |  | $ | 56,970 |  |  | $ | 282,412 |
Special mention |  |  | 0 |  |  |  | 197 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 580 |  |  |  | 777 |
Substandard |  |  | 3,642 |  |  |  | 1,331 |  |  |  | 356 |  |  |  | 152 |  |  |  | 110 |  |  |  | 1,761 |  |  |  | 3,865 |  |  |  | 11,217 |
Total commercial loans |  | $ | 104,010 |  |  | $ | 47,400 |  |  | $ | 34,466 |  |  | $ | 17,006 |  |  | $ | 13,684 |  |  | $ | 16,425 |  |  | $ | 61,415 |  |  | $ | 294,406 |
Agricultural |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 51,096 |  |  | $ | 36,376 |  |  | $ | 44,133 |  |  | $ | 23,661 |  |  | $ | 24,003 |  |  | $ | 45,490 |  |  | $ | 19,300 |  |  | $ | 244,059 |
Special mention |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 250 |  |  |  | 250 |
Substandard |  |  | 0 |  |  |  | 379 |  |  |  | 235 |  |  |  | 72 |  |  |  | 0 |  |  |  | 2,146 |  |  |  | 30 |  |  |  | 2,862 |
Total agricultural loans |  | $ | 51,096 |  |  | $ | 36,755 |  |  | $ | 44,368 |  |  | $ | 23,733 |  |  | $ | 24,003 |  |  | $ | 47,636 |  |  | $ | 19,580 |  |  | $ | 247,171 |
Residential real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 83,951 |  |  | $ | 112,463 |  |  | $ | 76,095 |  |  | $ | 31,404 |  |  | $ | 22,918 |  |  | $ | 135,757 |  |  | $ | 3,956 |  |  | $ | 466,544 |
Special mention |  |  | 0 |  |  |  | 0 |  |  |  | 70 |  |  |  | 118 |  |  |  | 76 |  |  |  | 93 |  |  |  | 0 |  |  |  | 357 |
Substandard |  |  | 0 |  |  |  | 136 |  |  |  | 249 |  |  |  | 121 |  |  |  | 9 |  |  |  | 7,932 |  |  |  | 0 |  |  |  | 8,447 |
Total residential real estate loans |  | $ | 83,951 |  |  | $ | 112,599 |  |  | $ | 76,414 |  |  | $ | 31,643 |  |  | $ | 23,003 |  |  | $ | 143,782 |  |  | $ | 3,956 |  |  | $ | 475,348 |
Home equity lines of credit |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 0 |  |  | $ | 10 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 16 |  |  | $ | 1,394 |  |  | $ | 128,622 |  |  | $ | 130,042 |
Special mention |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 49 |  |  |  | 49 |
Substandard |  |  | 0 |  |  |  | 13 |  |  |  | 137 |  |  |  | 20 |  |  |  | 0 |  |  |  | 1,848 |  |  |  | 100 |  |  |  | 2,118 |
Total home equity lines of credit |  | $ | 0 |  |  | $ | 23 |  |  | $ | 137 |  |  | $ | 20 |  |  | $ | 16 |  |  | $ | 3,242 |  |  | $ | 128,771 |  |  | $ | 132,209 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 98,530 |  |  | $ | 46,945 |  |  | $ | 32,284 |  |  | $ | 20,849 |  |  | $ | 10,918 |  |  | $ | 10,942 |  |  | $ | 7,302 |  |  | $ | 227,770 |
Special mention |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Substandard |  |  | 102 |  |  |  | 113 |  |  |  | 267 |  |  |  | 230 |  |  |  | 109 |  |  |  | 202 |  |  |  | 1 |  |  |  | 1,024 |
Total consumer loans |  | $ | 98,632 |  |  | $ | 47,058 |  |  | $ | 32,551 |  |  | $ | 21,079 |  |  | $ | 11,027 |  |  | $ | 11,144 |  |  | $ | 7,303 |  |  | $ | 228,794 |

The Company follows ASU 2016-13 to calculate the allowance for credit losses which requires projecting credit losses over the lifetime of the credits. The ACL is adjusted through the provision for credit losses and reduced by net charge offs of loans. Although the Company has a diversified loan portfolio, the credit risk in the loan portfolio is largely influenced by general economic conditions and trends of the counties and markets in which the debtors operate, and the resulting impact on the operations of borrowers or on the value of any underlying collateral.

The credit loss estimation process involves procedures that consider the unique characteristics of the Company’s loan portfolio segments. These segments are disaggregated into the loan pools for monitoring. A model of risk characteristics, such as loss history and delinquency experience, trends in past due and non-performing loans, as well as existing economic conditions and supportable forecasts are used to determine credit loss assumptions.

The Company uses two methodologies to analyze loan pools. The cohort method and the PD/LGD. Cohort relies on the creation of cohorts to capture loans that qualify for a particular segment, as of a point in time. Those loans are then tracked over their remaining lives to determine their loss experience. The Company aggregates financial assets on the basis of similar risk characteristics when evaluating loans on a collective basis. Those characteristics include, but are not limited to, internal or external credit score, risk ratings, financial asset, loan type, collateral type, size, effective interest rate, term, or geographical location. The Company uses cohort primarily for consumer loan portfolios.

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The probability of default portion of PD/LGD is defined by the Company as 90 days past due, placed on non-accrual, loan restructuring for borrowers experiencing financial difficulty or is partially, or wholly, charged-off. Typically, a one-year time period is used to asses PD. PD can be measured and applied using various risk criteria. Risk rating is one common way to apply PDs. Loss given default LGD is to determine the percentage of loss by facility or collateral type. LGD estimates can sometimes be driven, or influenced, by product type, industry or geography. The Company uses PD/LGD primarily for commercial loan portfolios.

The following table presents the loan pools and the associated methodology used during the calculation of the allowance for credit losses in 2023.

Portfolio Segments |  | Loan Pool |  | Methodology |  | Loss Drivers
Residential real estate |  | 1-4 Family Residential Real Estate - 1st Liens |  | Cohort |  | Credit Loss History
|  | 1-4 Family Residential Real Estate - 2nd Liens |  | Cohort |  | Credit Loss History
Home Equity Lines of Credit |  | Home Equity Lines of Credit |  | Cohort |  | Credit Loss History
Consumer Finance |  | Cash Reserves |  | Cohort |  | Credit Loss History
|  | Direct |  | Cohort |  | Credit Loss History
|  | Indirect |  | Cohort |  | Credit Loss History
Commercial |  | Commercial and Industrial |  | PD/LGD |  | Credit Loss History
|  | Agricultural |  | PD/LGD |  | Credit Loss History
|  | Municipal |  | PD/LGD |  | Credit Loss History
Commercial real estate |  | Owner Occupied |  | PD/LGD |  | Credit Loss History
|  | Non-Owner Occupied |  | PD/LGD |  | Credit Loss History
|  | Multifamily |  | PD/LGD |  | Credit Loss History
|  | Farmland |  | PD/LGD |  | Credit Loss History
|  | Construction |  | PD/LGD |  | Credit Loss History

According to the accounting standard, an entity may make an accounting policy election not to measure an allowance for credit losses for accrued interest receivable if the entity writes off the applicable accrued interest receivable balance in a timely manner. The Company has made the accounting policy election not to measure an allowance for credit losses for accrued interest receivables for all loan segments. Current policy dictates that a loan will be placed on nonaccrual status, with the current accrued interest receivable balance being written off, upon the loan being 90 days delinquent or when the loan is deemed to be collateral dependent and the collateral analysis shows insufficient collateral coverage based on a current assessment of the value of the collateral.

In addition, ASC Topic 326 requires the Company to establish a liability for anticipated credit losses for unfunded commitments. To accomplish this, the Company must first establish a loss expectation for extended (funded) commitments. This loss expectation, expressed as a ratio to the amortized cost basis, is then applied to the portion of unfunded commitments not considered unilaterally cancelable, and considered by the company’s management as likely to fund over the life of the instrument. At September 30, 2023, the Company had $756 million in unfunded commitments and set aside $2.04 million in anticipated credit losses. This reserve is recorded in other liabilities as opposed to the ACL.

The determination of the ACL is complex and the Company makes decisions on the effects of factors that are inherently uncertain. Evaluations of the loan portfolio and individual credits require certain estimates, assumptions and judgments as to the facts and circumstances related to particular situations or credits. The ACL was $34.8 million at September 30, 2023 and $35.0 million at June 30, 2023. The decrease of $197 thousand was due to the adjustments made to the Commercial Staffing qualitative factor and the conversion of construction loan balances into their permanent loan pool. These factors were partially offset by increases to specific reserves due to updated valuations and new individually evaluated loan relationships.

Purchased Loans

As a result of the Emlenton Merger, the Company acquired $740.7 million in loans.

|  | 2023 |
Par value of acquired loans at acquisition |  | $ | 797,616 |
Net purchase discount |  |  | (55,958 | )
Allowance for credit losses of PCD loans |  |  | (999 | )
Purchase price of loans at acquisition |  | $ | 740,659 |

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Under ASU Topic 326, when loans are purchased with evidence of more than significant deterioration of credit, they are accounted for as purchase credit deteriorated (“PCD”). PCD loans acquired in a transaction are marked to fair value and a mark on yield is recorded. In addition, an adjustment is made to the ACL for the expected loss on the acquisition date. These loans are assessed on a regular basis and subsequent adjustments to the ACL are recorded on the income statement. During 2023, the Company acquired PCD loans with a fair value of $25.9 million, credit discount of $999 thousand and a noncredit discount of $5.5 million. The outstanding balance at September 30, 2023 and related allowance on PCD loans is as follows:

|  | Loan Balance |  |  | ACL Balance |
Commercial real estate |  |  |  |  |  |
Owner Occupied |  | $ | 1,027 |  |  | $ | 20 |
Non-owner Occupied |  |  | 35,522 |  |  |  | 1,167 |
Farmland |  |  | 11 |  |  |  | 0 |
Commercial |  |  |  |  |  |
Commercial and industrial |  |  | 2,301 |  |  |  | 130 |
Agricultural |  |  | 149 |  |  |  | 8 |
Residential real estate |  |  |  |  |  |
1-4 family residential |  |  | 3,475 |  |  |  | 20 |
Home equity lines of credit |  |  | 3 |  |  |  | 0 |
Total |  | $ | 42,488 |  |  | $ | 1,345 |

Revenue from Contracts with Customers:

All material revenue from contracts with customers in the scope of ASC 606 is recognized within noninterest income. The following table presents the Company’s noninterest income by revenue stream and reportable segment, net of eliminations, for the three and nine months ended September 30, 2023 and 2022.

(In Thousands of Dollars) |  | Trust Segment |  |  | Bank Segment |  |  | Totals |
For Three Months Ended September 30, 2023 |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  | $ | 0 |  |  | $ | 1,712 |  |  | $ | 1,712 |
Debit card and EFT fees |  |  | 0 |  |  |  | 1,763 |  |  |  | 1,763 |
Trust fees |  |  | 2,617 |  |  |  | 0 |  |  |  | 2,617 |
Insurance agency commissions |  |  | 0 |  |  |  | 1,116 |  |  |  | 1,116 |
Retirement plan consulting fees |  |  | 360 |  |  |  | 0 |  |  |  | 360 |
Investment commissions |  |  | 0 |  |  |  | 520 |  |  |  | 520 |
Other (outside the scope of ASC 606) |  |  | 0 |  |  |  | 1,743 |  |  |  | 1,743 |
Total noninterest income |  | $ | 2,977 |  |  | $ | 6,854 |  |  | $ | 9,831 |

(In Thousands of Dollars) |  | Trust Segment |  |  | Bank Segment |  |  | Totals |
For Three Months Ended September 30, 2022 |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  | $ | 0 |  |  | $ | 1,229 |  |  | $ | 1,229 |
Debit card and EFT fees |  |  | 0 |  |  |  | 1,463 |  |  |  | 1,463 |
Trust fees |  |  | 2,370 |  |  |  | 0 |  |  |  | 2,370 |
Insurance agency commissions |  |  | 0 |  |  |  | 1,136 |  |  |  | 1,136 |
Retirement plan consulting fees |  |  | 332 |  |  |  | 0 |  |  |  | 332 |
Investment commissions |  |  | 0 |  |  |  | 424 |  |  |  | 424 |
Other (outside the scope of ASC 606) |  |  | 0 |  |  |  | 1,873 |  |  |  | 1,873 |
Total noninterest income |  | $ | 2,702 |  |  | $ | 6,125 |  |  | $ | 8,827 |

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(In Thousands of Dollars) |  | Trust Segment |  |  | Bank Segment |  |  | Totals |
For Nine Months Ended September 30, 2023 |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  | $ | 0 |  |  | $ | 4,646 |  |  | $ | 4,646 |
Debit card and EFT fees |  |  | 0 |  |  |  | 5,362 |  |  |  | 5,362 |
Trust fees |  |  | 7,453 |  |  |  | 0 |  |  |  | 7,453 |
Insurance agency commissions |  |  | 0 |  |  |  | 3,904 |  |  |  | 3,904 |
Retirement plan consulting fees |  |  | 1,049 |  |  |  | 0 |  |  |  | 1,049 |
Investment commissions |  |  | 0 |  |  |  | 1,389 |  |  |  | 1,389 |
Other (outside the scope of ASC 606) |  |  | 0 |  |  |  | 5,902 |  |  |  | 5,902 |
Total noninterest income |  | $ | 8,502 |  |  | $ | 21,203 |  |  | $ | 29,705 |

(In Thousands of Dollars) |  | Trust Segment |  |  | Bank Segment |  |  | Totals |
For Nine Months Ended September 30, 2022 |  |  |  |  |  |  |  |  |
Service charges on deposit accounts |  | $ | 0 |  |  | $ | 3,513 |  |  | $ | 3,513 |
Debit card and EFT fees |  |  | 0 |  |  |  | 4,407 |  |  |  | 4,407 |
Trust fees |  |  | 7,265 |  |  |  | 0 |  |  |  | 7,265 |
Insurance agency commissions |  |  | 0 |  |  |  | 3,269 |  |  |  | 3,269 |
Retirement plan consulting fees |  |  | 1,052 |  |  |  | 0 |  |  |  | 1,052 |
Investment commissions |  |  | 0 |  |  |  | 1,675 |  |  |  | 1,675 |
Other (outside the scope of ASC 606) |  |  | 8,375 |  |  |  | 6,446 |  |  |  | 14,821 |
Total noninterest income |  | $ | 16,692 |  |  | $ | 19,310 |  |  | $ | 36,002 |

A description of the Company’s revenue streams under ASC 606 follows:

Service charges on deposit accounts – The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Management reviewed the deposit account agreements, and determined that the agreements can be terminated at any time by either the Bank or the account holder. Transaction fees, such as balance transfers, wires and overdraft charges are settled the day the performance obligation is satisfied. The Bank’s monthly service charges and maintenance fees are for services provided to the customer on a monthly basis and are considered a series of services that have the same pattern of transfer each month. The review of service charges assessed on deposit accounts included the amount of variable consideration that is a part of the monthly charges. It was found that the waiver of service charges due to insufficient funds and dormant account fees is immaterial and would not require a change in the accounting treatment for these fees under the revenue standards.

Debit Card Interchange Fees – Customers and the Bank have an account agreement and maintain deposit balances with the Bank. Customers use a bank issued debit card to purchase goods and services, and the Bank earns interchange fees on those transactions, typically a percentage of the sale amount of the transaction. The Bank records the amount due when it receives the settlement from the payment network. Payments from the payment network are received and recorded into income on a daily basis. There are no contingent debit card interchange fees recorded by the Company that could be subject to a clawback in future periods.

Trust fees – Services provided to Trust customers are a series of distinct services that have the same pattern of transfer each month. Fees for trust accounts are billed and drafted from trust accounts monthly. The Company records these fees on the income statement on a monthly basis. Fees are assessed based on the total investable assets of the customer’s trust account. A signed contract between the Company and the customer is maintained for all customer trust accounts with payment terms identified. It is probable that the fees will be collectible as funds being managed are accessible by the asset manager. Past history of trust fee income recorded by the Company indicates that it is highly unlikely that a significant reversal could occur. There are no contingent incentive fees recorded by the Company that could be subject to a clawback in future periods.

Insurance Agency Commissions – Insurance agency commissions are received from insurance carriers for the agency’s share of commissions from customer premium payments. These commissions are recorded into income when checks are received from the insurance carriers, and there is no contingent portion associated with these commission checks. There may be a short time-lag in recording revenue when cash is received instead of recording the revenue when the policy is signed by the customer, but the time lag is insignificant and does not impact the revenue recognition process.

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Insurance also receives incentive checks from the insurance carriers for achieving specified levels of production with particular carriers. These amounts are recorded into income when a check is received, and there are no contingent amounts associated with these payments that may be clawed back by the carrier in the future. Similar to the monthly commissions explained in the preceding paragraph, there may be a short time-lag in recording incentive revenue on a cash basis as opposed to estimating the amount of incentive revenue expected to be earned, this does not materially impact the recognition of Insurance revenue. If there were any amounts that would need to be refunded for one specific Insurance customer, management believes the reversal would not be significant.

Other potential situations surrounding the recognition of Insurance revenue include estimating potential refunds due to the likely cancellation of a percentage of customers canceling their policies and recording revenue at the time of policy renewals. Management concluded that since Insurance agency commissions represent only 2.1% of the Company’s total revenue, adjusting the current practice of recording insurance revenue for these situations would not have a material impact on the reporting of total revenue.

Retirement Plan Consulting Fees – Revenue is recognized based on the level of work performed for the client. Any payments that are received for work to be performed in the future are recorded in a deferred revenue account, and recorded into income when the fees are earned. Retirement plan consulting fees represent only 0.6% of the Company’s total revenue, and therefore management has concluded that any adjustment of revenue for one particular customer for a refund or any other reason would be insignificant and would not materially impact the Company’s total revenue.

Investment Commissions – Investment commissions are earned through the sales of non-deposit investment products to customers of the Company. The sales are conducted through a third-party broker-dealer. When the commissions are received and recorded into income on the Bank’s income statement, there is no contingent portion that may need to be refunded back to the third party broker dealer. Investment commissions represent only 0.7% of the Company’s total revenue, and therefore management has concluded that any adjustment of revenue for a particular customer for a refund or any other reason would be insignificant and would not materially impact the Company’s total revenue.

Other – Income items included in “Other” are Bank owned life insurance income, security gains, net gains on the sale of loans and other operating income. There is also a one-time legal settlement of $8.4 million for the nine month period ended September 30, 2022. Any amounts within the scope of ASC 606 are deemed immaterial.

Fair Value:

Fair value is the exchange price that would be received for an asset, or paid to transfer a liability (exit price), in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment Securities: The Company uses a third party service to estimate fair value on available for sale securities on a monthly basis. The Company’s service provider uses a leading evaluation pricing service for U.S. domestic fixed income securities and values securities using exit pricing requirements. The Company independently corroborates the fair value received through this pricing service by obtaining the pricing through a second source. The fair values for investment securities, which consist of equity securities that are recorded at fair market value to comply with exit pricing, are determined by quoted market prices in active markets, if available (Level 1). The equity securities change in fair market value is recorded in the income statements. For securities where quoted prices are not available, fair values are calculated based on quoted prices for similar assets in active markets, quoted prices for similar assets in markets that are not active or inputs other than quoted prices, which provide a reasonable basis for fair value determination. Such inputs may include interest rates and yield curves, prepayment speeds, credit risks and default rates. Inputs used are derived principally from observable market data (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). The fair values of Level 3 investment securities are determined by using unobservable inputs to measure fair value of assets for which there is little, if any, market activity at the measurement date, using reasonable inputs and assumptions based on the best information at the time, to the extent that inputs are available without undue cost and effort.

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Mortgage Banking Derivatives: The fair value of mortgage banking derivatives are calculated using derivative valuation models that utilize quoted prices for similar assets adjusted for the specific attributes of the commitments and other observable market data at the valuation date. (Level 2).

Interest Rate Swaps: The Company periodically enters into interest rate swap agreements with its commercial customers who desire a fixed rate loan term that is longer than the Company is willing to extend. The Company enters into a reciprocal swap agreement with a third party that offsets the interest rate risk from the interest rate extended to the customer. The fair value of these interest rate swap derivative instruments are based on valuation models using observable market data as of the measurement date. The loan agreement containing a two-way yield maintenance provision, if invoked, is expected to exactly offset the fair value of unwinding the swap. The yield maintenance provision represents an embedded derivative which is bifurcated from the host loan contract and, as such, the swaps and embedded derivatives are not designated as hedges (Level 2).

The Company also entered into a fair value hedge to mitigate the risk of further interest rate increases and the subsequent impact on the valuation of the company’s state and political subdivision municipal bond portfolio. The Company uses an independent third party to perform a market valuation analysis for this derivative (Level 2).

Loans Held for Sale: The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

Collateral Dependent Loans: Fair value estimates of collateral dependent loans that are individually reviewed are based on the fair value of the collateral, less estimated costs to sell. Loans carried at fair value generally receive specific allocations of the allowance for credit losses in the current period, 2023 and 2022. For collateral dependent loans, fair value is commonly based on recent real estate appraisals or in quoted sales prices in certain instances. Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Adjustments to quoted price are routinely made to factor in data that affect the marketability of the collateral. Such adjustments, in both instances, are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. These loans are evaluated on a quarterly basis and adjusted accordingly.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair values are commonly based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent loans and other real estate owned are performed by certified general appraisers (for commercial and commercial real estate properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Appraisal Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what adjustments should be made to appraisals to arrive at fair value.

26

Assets measured at fair value on a recurring basis are summarized below:

|  |  |  |  | Fair Value Measurements at September 30, 2023 Using: |
(In Thousands of Dollars) |  | Carrying Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for sale |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and U.S. government sponsored entities |  | $ | 121,311 |  |  | $ | 0 |  |  | $ | 121,311 |  |  | $ | 0 |
State and political subdivisions |  |  | 498,136 |  |  |  | 0 |  |  |  | 498,136 |  |  |  | 0 |
Corporate bonds |  |  | 17,751 |  |  |  | 0 |  |  |  | 16,516 |  |  |  | 1,235 |
Mortgage-backed securities-residential |  |  | 495,041 |  |  |  | 0 |  |  |  | 495,040 |  |  |  | 1 |
Collateralized mortgage obligations |  |  | 75,552 |  |  |  | 0 |  |  |  | 75,552 |  |  |  | 0 |
Small Business Administration |  |  | 2,945 |  |  |  | 0 |  |  |  | 2,945 |  |  |  | 0 |
Equity securities |  |  |  |  |  |  |  |  |  |  |  |
Equity securities at fair value |  |  | 212 |  |  |  | 212 |  |  |  | 0 |  |  |  | 0 |
Other investments measured at net asset value |  |  | 15,043 |  |  | n/a |  |  | n/a |  |  | n/a |
Total investment securities |  | $ | 1,225,991 |  |  | $ | 212 |  |  | $ | 1,209,500 |  |  | $ | 1,236 |
Loans held for sale |  | $ | 1,910 |  |  | $ | 0 |  |  | $ | 1,910 |  |  | $ | 0 |
Interest rate swaps |  |  | 6,234 |  |  | $ | 0 |  |  |  | 6,234 |  |  |  | 0 |
Fair value hedge derivative |  |  | 920 |  |  |  | 0 |  |  |  | 920 |  |  |  | 0 |
Mortgage banking derivative |  |  | 37 |  |  | $ | 0 |  |  |  | 37 |  |  |  | 0 |
Financial Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | 6,234 |  |  | $ | 0 |  |  | $ | 6,234 |  |  | $ | 0 |

|  |  |  |  | Fair Value Measurements at December 31, 2022 Using: |
(In Thousands of Dollars) |  | Carrying Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for sale |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and U.S. government sponsored entities |  | $ | 128,096 |  |  | $ | 0 |  |  | $ | 128,096 |  |  | $ | 0 |
State and political subdivisions |  |  | 530,080 |  |  |  | 0 |  |  |  | 530,080 |  |  |  | 0 |
Corporate bonds |  |  | 3,879 |  |  |  | 0 |  |  |  | 3,879 |  |  |  | 0 |
Mortgage-backed securities-residential |  |  | 555,142 |  |  |  | 0 |  |  |  | 555,141 |  |  |  | 1 |
Collateralized mortgage obligations |  |  | 47,354 |  |  |  | 0 |  |  |  | 47,354 |  |  |  | 0 |
Small Business Administration |  |  | 3,474 |  |  |  | 0 |  |  |  | 3,474 |  |  |  | 0 |
Equity securities |  |  |  |  |  |  |  |  |  |  |  |
Equity securities at fair value |  |  | 196 |  |  |  | 196 |  |  |  | 0 |  |  |  | 0 |
Other investments measured at net asset value |  |  | 15,048 |  |  | n/a |  |  | n/a |  |  | n/a |
Total investment securities |  | $ | 1,283,269 |  |  | $ | 196 |  |  | $ | 1,268,024 |  |  | $ | 1 |
Loans held for sale |  | $ | 858 |  |  | $ | 0 |  |  | $ | 858 |  |  | $ | 0 |
Interest rate swaps |  |  | 5,503 |  |  |  | 0 |  |  |  | 5,503 |  |  |  | 0 |
Mortgage banking derivative -asset |  |  | 31 |  |  |  | 0 |  |  |  | 31 |  |  |  | 0 |
Financial Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | $ | 5,503 |  |  | $ | 0 |  |  | $ | 5,503 |  |  | $ | 0 |

There were no significant transfers between Level 1 and Level 2 during the periods presented above.

27

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

|  | Three Months ended September 30, |  |  | Nine Months ended September 30, |
(In Thousands of Dollars) |  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Beginning Balance |  | $ | 1,224 |  |  | $ | 2 |  |  | $ | 1 |  |  | $ | 3 |
Transfers between levels |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Acquired and/or purchased |  |  | 0 |  |  |  | 0 |  |  |  | 1,615 |  |  |  | 0 |
Discount accretion (premium amortization) |  |  | 12 |  |  |  | 0 |  |  |  | 120 |  |  |  | 0 |
Repayments, calls and maturities |  |  | 0 |  |  |  | 0 |  |  |  | (500 | ) |  |  | (1 | )
Ending Balance |  | $ | 1,236 |  |  | $ | 2 |  |  | $ | 1,236 |  |  | $ | 2 |

Assets measured at fair value on a non-recurring basis are summarized below:

|  |  |  |  | Fair Value Measurements at September 30, 2023 Using: |
(In Thousands of Dollars) |  | Carrying Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated loans |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Non-owner occupied |  | $ | 2,205 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 2,205 |
Commercial and industrial |  |  | 267 |  |  |  | 0 |  |  |  | 0 |  |  |  | 267 |
1–4 family residential |  |  | 1,517 |  |  |  | 0 |  |  |  | 0 |  |  |  | 1,517 |

|  |  |  |  | Fair Value Measurements at December 31, 2022 Using: |
(In Thousands of Dollars) |  | Carrying Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |
Individually Evaluated loans |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  |  |  |  |  |  |  |  |  |  |  |
Non-owner occupied |  | $ | 746 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 746 |
Commercial |  |  | 395 |  |  |  | 0 |  |  |  | 0 |  |  |  | 395 |
1–4 family residential |  |  | 74 |  |  |  | 0 |  |  |  | 0 |  |  |  | 74 |

Collateral dependent loans were individually evaluated under ASC 326 for the periods ending September 30, 2023 and December 31, 2022. Collateral dependent loans had a principal balance of $5.7 million with a valuation allowance of $1.7 million at September 30, 2023. Collateral dependent loans had a principal balance of $1.6 million with a valuation allowance of $372 thousand at December 31, 2022.

For the period ending September 30, 2023, the fair value of the collateral dependent commercial and residential real estate relationships are valued by independent external appraisals. These external appraisals are prepared using the sales comparison approach and income approach valuation techniques. The commercial relationships are valued by the quoted price of the collateral. Management makes subsequent unobservable adjustments on the appraisals for the real estate and the quoted price for the commercial collateral dependent loans. For the year ending December 31, 2022, the fair value of the collateral dependent commercial real estate and commercial relationships are valued by the quoted price of the collateral. Management makes subsequent unobservable adjustments on the quoted price of collateral dependent loans. Collateral dependent loans other than commercial real estate and other real estate owned are not considered material.

28

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the periods ended September 30, 2023 and December 31, 2022:

September 30, 2023 | Fair value |  |  | Valuation Technique(s) |  | Unobservable Input(s) |  | Range (Weighted Average)
Individually evaluated loans |  |  |  |  |  |  |  |
Commercial real estate | $ | 2,205 |  |  | Sales Comparison |  | Adjustment for differences between comparable sales |  | (10.67%) - 15.37% (7.28%)
Commercial |  | 267 |  |  | Quoted price for collateral |  | Offer Price |  | 65.47%
Residential |  | 1,517 |  |  | Sales comparison |  | Adjustment for differences between comparable sales |  | (5.39%) - 2.11% (2.67%)

December 31, 2022 | Fair value |  |  | Valuation Technique(s) |  | Unobservable Input(s) |  | Range (Weighted Average)
Individually evaluated loans |  |  |  |  |  |  |  |
Commercial real estate | $ | 746 |  |  | Quoted price for collateral |  | Offer Price |  | 7.45%
Commercial |  | 395 |  |  | Quoted price for collateral |  | Offer Price |  | 43.00%
Residential |  | 74 |  |  | Sales comparison |  | Adjustment for differences between comparable sales |  | (13.77%) - (5.68%) (13.77%)

The carrying amounts and estimated fair values of financial instruments not previously disclosed at September 30, 2023 and December 31, 2022 are as follows:

|  |  |  |  | Fair Value Measurements at September 30, 2023 Using: |
(In Thousands of Dollars) |  | Carrying Amount |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Financial assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 93,923 |  |  | $ | 25,341 |  |  | $ | 68,582 |  |  | $ | 0 |  |  | $ | 93,923 |
Regulatory stock |  |  | 20,087 |  |  | n/a |  |  | n/a |  |  | n/a |  |  | n/a |
Loans, net |  |  | 3,133,801 |  |  |  | 0 |  |  |  | 0 |  |  |  | 2,941,885 |  |  |  | 2,941,885 |
Financial liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 4,511,650 |  |  |  | 3,542,907 |  |  |  | 965,388 |  |  |  | 0 |  |  |  | 4,508,295 |
Long-term borrowings |  |  | 88,550 |  |  |  | 0 |  |  |  | 71,561 |  |  |  | 0 |  |  |  | 71,561 |

|  |  |  |  | Fair Value Measurements at December 31, 2022 Using: |
(In Thousands of Dollars) |  | Carrying Amount |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Financial assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 75,551 |  |  | $ | 21,395 |  |  | $ | 54,156 |  |  | $ | 0 |  |  | $ | 75,551 |
Regulatory stock |  |  | 18,200 |  |  | n/a |  |  | n/a |  |  | n/a |  |  | n/a |
Loans, net |  |  | 2,377,772 |  |  |  | 0 |  |  |  | 0 |  |  |  | 2,330,164 |  |  |  | 2,330,164 |
Financial liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 3,561,768 |  |  |  | 2,999,188 |  |  |  | 561,292 |  |  |  | 0 |  |  |  | 3,560,480 |
Short-term borrowings |  |  | 95,000 |  |  |  | 0 |  |  |  | 95,000 |  |  |  | 0 |  |  |  | 95,000 |
Long-term borrowings |  |  | 88,211 |  |  |  | 0 |  |  |  | 73,566 |  |  |  | 0 |  |  |  | 73,566 |

Goodwill and Intangible Assets:

Goodwill associated with the Company’s purchases of Emlenton in January 2023, Champion Insurance in July 2022 and other past acquisitions totaled $167.9 million at September 30, 2023 and $94.6 million at December 31, 2022. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value, which is determined through an impairment test. Management performs goodwill impairment testing on an annual basis as of September 30. The fair value of the reporting units is determined using a combination of a discounted cash flow method and a market approach method. Results of the assessment as of September 30, 2022, indicated no goodwill impairment. The Company will continue to monitor its goodwill for possible impairment.

29

Acquired Intangible Assets

Acquired intangible assets were as follows:

| September 30, 2023 |  |  | December 31, 2022 |
(In Thousands of Dollars) | Gross Carrying Amount |  |  | Accumulated Amortization |  |  | Gross Carrying Amount |  |  | Accumulated Amortization |
Amortized intangible assets: |  |  |  |  |  |  |  |  |  |  |
Customer relationship intangibles | $ | 7,210 |  |  | $ | (6,913 | ) |  | $ | 7,210 |  |  | $ | (6,793 | )
Non-compete contracts |  | 457 |  |  |  | (410 | ) |  |  | 457 |  |  |  | (401 | )
Trade name |  | 1,126 |  |  |  | (433 | ) |  |  | 1,126 |  |  |  | (409 | )
Core deposit intangible |  | 32,115 |  |  |  | (9,733 | ) |  |  | 12,866 |  |  |  | (7,030 | )
Total | $ | 40,908 |  |  | $ | (17,489 | ) |  | $ | 21,659 |  |  | $ | (14,633 | )

Aggregate amortization expense was $725 thousand and $2.9 million for the three and nine month periods ended September 30, 2023. Amortization expense was $432 thousand and $1.3 million for the three and nine month periods ended September 30, 2022.

Estimated amortization expense for each of the next five periods and thereafter:

2023 (3 months) | $ | 725 |
2024 |  | 2,872 |
2025 |  | 2,806 |
2026 |  | 2,710 |
2027 |  | 2,596 |
Thereafter |  | 11,710 |
Total | $ | 23,419 |

Leases:

The Company has leases for branch office locations, vehicles, land and certain office equipment such as printers, copiers and faxes. These leases are all categorized as operating. The leases have remaining lease terms of up to 17.8 years, some of which include options to extend the lease for up to 15 years and some of which include options to terminate the lease in December of 2023.

The right of use asset and lease liability were $9.0 million and $9.3 million as of September 30, 2023, respectively, and $8.4 million and $8.8 million at December 31, 2022, respectively. The right of use asset is included in other assets and the lease liability is included in other liabilities on the balance sheet.

Lease payments made for the three and nine month periods ended September 30, 2023, were $405 thousand and $1.2 million, while lease payments made for the three and nine month periods ended September 30, 2022 were $312 thousand and $779 thousand, respectively. The weighted average remaining lease term for all leases was 11.1 years as of September 30, 2023. The weighted-average discount rate was 2.99% for all leases as of September 30, 2023.

On January 1, 2023, the Company performed a valuation of Emlenton's leases to determine an initial right of use asset (ROU asset) and lease liability in connection with the Merger. The Company recorded an initial ROU asset and lease liability of $1.3 million for these leases.

Maturities of lease liabilities are as follows as of September 30, 2023:

2023 (3 months) |  | $ | 344 |
2024 |  |  | 1,176 |
2025 |  |  | 1,092 |
2026 |  |  | 975 |
2027 |  |  | 898 |
Thereafter |  |  | 6,574 |
Total Payments |  |  | 11,059 |
Less: lease liability expense |  |  | (1,807 | )
Total |  | $ | 9,252 |

30

Derivative Financial Instruments:

Interest Rate Swaps

The Company maintains an interest rate protection program for commercial loan customers. Under this program, the Company provides a variable rate loan while creating a fixed rate loan for the customer by the customer entering into an interest rate swap with terms that match the loan. The Company offsets its risk exposure by entering into an offsetting interest rate swap with an unaffiliated institution. The Company had interest rate swaps associated with commercial loans with a notional value of $66.3 million and fair value of $6.2 million in other assets and $6.2 million in other liabilities at September 30, 2023. At December 31, 2022, the Company had interest rate swaps associated with commercial loans with and a notional value of $71.9 million and fair value of $5.5 million in other assets and $5.5 million in other liabilities. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC 815 and are not marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820.

There were no net gains or losses for interest rate swaps for the three and nine month period ended September 30, 2023 and 2022, respectively.

Interest Rate Swap Designated as a Fair Value Hedge

The Company has one interest rate swap with a notional amount of $100.0 million as of September 30, 2023 which was designated as a fair value hedge to mitigate the risk of further interest rate increases and the subsequent impact on the valuation of the company’s state and political subdivision municipal bond portfolio. The gross aggregate fair value of the swap of $920 thousand is recorded in other assets in the unaudited Consolidated Balance Sheets at September 30, 2023. The Company expects the hedge to remain in effect for the remaining term of the swap, which matures August 2026. A summary of the interest rate swap designated as a fair value hedge is presented below:

|  | September 30, 2023 |
Notional amount fair value hedge |  | $ | 100,000 |
Fixed pay rates |  |  | 4.35 | %
Variable SOFR receive rates |  |  | 5.31 | %
Remaining maturity (in years) |  |  | 2.9 |
Fair value |  | $ | 920 |

Mortgage Banking Derivatives

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third-party investors are considered derivatives. The Company had $5.0 million of interest rate lock commitments at September 30, 2023 and $4.9 million of interest rate lock commitments at December 31, 2022. Effective May 2022, the Company began the practice of entering into commitments to sell mortgage backed securities when the interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated as hedge instruments. There were $4.8 million of forward sales of mortgage backed securities at September 30, 2023 and $4.3 million of forward sales of mortgage backed securities at December 31, 2022. There were no t any forward commitments for the future delivery of residential mortgages at either September 30, 2023 or December 31, 2022.

The net gains and losses on derivative instruments not designated as hedging instruments are included in mortgage banking income. For the quarters ended September 30, 2023 and September 30, 2022, losses of $76 thousand and gains of $283 thousand, respectively, were included in mortgage banking income for the interest rate lock commitments. For the nine month periods ended September 30, 2023 and September 30, 2022, losses of $19 thousand and gains of $535 thousand, respectively, were included in mortgage banking income for the interest rate lock commitments. Gains of $22 thousand and gains of $6 thousand were included in mortgage banking income for the three and nine month periods ended September 30, 2023 for the forward sales of mortgage backed securities. Losses of $198 thousand and losses of $203 thousand were included in mortgage banking income for the three and nine month periods ended September 30, 2022 for the forward sales of mortgage backed securities.

31

Earnings Per Share:

The computation of basic and diluted earnings per share is shown in the following table:

| Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
| 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Basic EPS |  |  |  |  |  |  |  |  |  |  |
Net income (In thousands of dollars) | $ | 13,314 |  |  | $ | 15,446 |  |  | $ | 35,356 |  |  | $ | 47,241 |
Weighted average shares outstanding |  | 37,241,383 |  |  |  | 33,851,596 |  |  |  | 37,430,782 |  |  |  | 33,840,958 |
Basic earnings per share | $ | 0.36 |  |  | $ | 0.46 |  |  | $ | 0.94 |  |  | $ | 1.40 |
Diluted EPS |  |  |  |  |  |  |  |  |  |  |
Net income (In thousands of dollars) | $ | 13,314 |  |  | $ | 15,446 |  |  | $ | 35,356 |  |  | $ | 47,241 |
Weighted average shares outstanding for basic earnings per share |  | 37,241,383 |  |  |  | 33,851,596 |  |  |  | 37,430,782 |  |  |  | 33,840,958 |
Dilutive effect of restricted stock awards |  | 137,971 |  |  |  | 80,286 |  |  |  | 102,427 |  |  |  | 84,473 |
Weighted average shares for diluted earnings per share |  | 37,379,354 |  |  |  | 33,931,882 |  |  |  | 37,533,209 |  |  |  | 33,925,431 |
Diluted earnings per share | $ | 0.36 |  |  | $ | 0.46 |  |  | $ | 0.94 |  |  | $ | 1.39 |

There were 13,046 and 204,105 restricted stock awards that were considered anti-dilutive for the three and nine month periods ended September 30, 2023, respectively. There were 124,492 and 188,992 restricted stock awards that were considered anti-dilutive for the three and nine month periods ended September 30, 2022, respectively.

Stock Based Compensation:

In April of 2022, the Company, with the approval of shareholders, created the 2022 Equity Incentive Plan (the “2022 Plan”). The 2022 Plan permits the award of up to one million shares to the Company’s directors and employees to attract and retain exceptional personnel, motivate performance and, most importantly, to help align the interests of the Company’s executives with those of the Company’s shareholders. The 2022 Plan replaced the 2017 Plan. There were 87,391 service time based share awards and 102,750 performance based share awards granted under the 2022 Plan during the nine month period ended September 30, 2023, as shown in the table below. The actual number of performance based shares issued will depend on the relative performance of the Company’s average return on equity compared to a group of peer companies over a three year vesting period, ending December 31, 2025. As of September 30, 2023, 753,359 shares are still available to be awarded from the 2022 Plan. The 2017 Plan has been sunset.

The restricted stock awards were granted with a fair value price equal to the market price of the Company’s common stock at the date of the grant. Expense recognized was $744 thousand and $2.0 million for the three and nine month periods ended September 30, 2023, respectively. During the prior periods, the expense recognized was $513 thousand and $1.3 million for the three and nine month periods ended September 30, 2022, respectively. As of September 30, 2023, there was $3.7 million of total unrecognized compensation expense related to the nonvested shares granted under the Plan. The remaining cost is expected to be recognized over 2.4 years.

The following is the activity under the Plans during the nine month period ended September 30, 2023.

| Maximum Awarded Service Units |  |  | Weighted Average Grant Date Fair Value |  |  | Maximum Awarded Performance Units |  |  | Weighted Average Grant Date Fair Value |
Beginning balance - non-vested shares |  | 193,015 |  |  | $ | 16.69 |  |  |  | 137,369 |  |  | $ | 15.85 |
Granted |  | 87,391 |  |  |  | 12.88 |  |  |  | 102,750 |  |  |  | 14.16 |
Vested |  | (30,990 | ) |  |  | 12.92 |  |  |  | (30,635 | ) |  |  | 14.35 |
Forfeited |  | (1,541 | ) |  |  | 17.64 |  |  |  | 0 |  |  |  | 0.00 |
Ending balance - non-vested shares |  | 247,875 |  |  | $ | 15.40 |  |  |  | 209,484 |  |  | $ | 15.01 |

32

The following is the activity under the Plans during the nine month period ended September 30, 2022.

| Maximum Awarded Service Units |  |  | Weighted Average Grant Date Fair Value |  |  | Maximum Awarded Performance Units |  |  | Weighted Average Grant Date Fair Value |
Beginning balance - non-vested shares |  | 99,564 |  |  | $ | 16.13 |  |  |  | 158,988 |  |  | $ | 14.40 |
Granted |  | 132,268 |  |  |  | 16.63 |  |  |  | 56,724 |  |  |  | 17.25 |
Vested |  | (20,771 | ) |  |  | 16.81 |  |  |  | (65,481 | ) |  |  | 17.48 |
Forfeited |  | (3,000 | ) |  |  | 13.68 |  |  |  | (12,862 | ) |  |  | 14.74 |
Ending balance - non-vested shares |  | 208,061 |  |  | $ | 16.72 |  |  |  | 137,369 |  |  | $ | 15.85 |

The 61,625 shares that vested during the nine month period ended September 30, 2023 had a weighted average fair value of $13.63 per share.

The following tables represent the details of other comprehensive loss for the three and nine month periods ended September 30, 2023 and 2022.

Other Comprehensive Income (Loss):

| Three Months Ended September 30, 2023 |
(In Thousands of Dollars) | Pre-tax |  |  | Tax |  |  | After-Tax |
Unrealized holding losses on available-for-sale securities during the period | $ | (75,679 | ) |  | $ | 15,893 |  |  | $ | (59,786 | )
Reclassification adjustment for losses realized in income on sales (1) |  | 618 |  |  |  | (130 | ) |  |  | 488 |
Reclassification adjustment for gain realized in income on fair value hedge |  | 776 |  |  |  | (163 | ) |  |  | 613 |
Net other comprehensive (loss) | $ | (74,285 | ) |  | $ | 15,600 |  |  | $ | (58,685 | )
| Three Months Ended September 30, 2022 |
(In Thousands of Dollars) | Pre-tax |  |  | Tax |  |  | After-Tax |
Unrealized holding losses on available-for-sale securities during the period | $ | (83,980 | ) |  | $ | 17,636 |  |  | $ | (66,344 | )
Reclassification adjustment for gains included in net income (1) |  | 5 |  |  |  | (1 | ) |  |  | 4 |
Net unrealized losses on available-for-sale securities | $ | (83,975 | ) |  | $ | 17,635 |  |  | $ | (66,340 | )
Change in funded status of post-retirement health plan |  | (2 | ) |  |  | 0 |  |  |  | (2 | )
Net other comprehensive (loss) | $ | (83,977 | ) |  | $ | 17,635 |  |  | $ | (66,342 | )
| Nine Months Ended September 30, 2023 |
(In Thousands of Dollars) | Pre-tax |  |  | Tax |  |  | After-Tax |
Unrealized holding losses on available-for-sale securities during the period | $ | (54,088 | ) |  | $ | 11,359 |  |  | $ | (42,729 | )
Reclassification adjustment for losses realized in income on sales (1) |  | 498 |  |  | $ | (105 | ) |  |  | 393 |
Reclassification adjustment for gain realized in income on fair value hedge |  | 776 |  |  | $ | (163 | ) |  |  | 613 |
Net other comprehensive (loss) | $ | (52,814 | ) |  | $ | 11,091 |  |  | $ | (41,723 | )
| Nine Months Ended September 30, 2022 |
(In Thousands of Dollars) | Pre-tax |  |  | Tax |  |  | After-Tax |
Unrealized holding losses on available-for-sale securities during the period | $ | (301,874 | ) |  | $ | 63,394 |  |  | $ | (238,480 | )
Reclassification adjustment for gains included in net income (1) |  | 36 |  |  |  | (8 | ) |  |  | 28 |
Net unrealized losses on available-for-sale securities | $ | (301,838 | ) |  | $ | 63,386 |  |  | $ | (238,452 | )
Change in funded status of post-retirement health plan |  | (6 | ) |  |  | 1 |  |  |  | (5 | )
Net other comprehensive (loss) | $ | (301,844 | ) |  | $ | 63,387 |  |  | $ | (238,457 | )

(1)
Pre-tax reclassification adjustments relating to available-for-sale securities are reported in security gains and the tax impact is included in income tax expense on the consolidated statements of income.

Regulatory Capital Matters:

Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action by regulators that, if undertaken, could have a direct material effect on the financial statements. Management believes that as of September 30, 2023, the Company and the Bank meet all capital adequacy requirements to which they are subject.

33

The FDIC and other federal banking regulators revised the risk-based capital requirements applicable to financial holding companies and insured depository institutions, including the Company and the Bank, to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision (“Basel III”).

The common equity tier 1 capital, tier 1 capital and total capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets. The leverage ratio is calculated by dividing tier 1 capital by adjusted average total assets.

Basel III limits capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity tier 1 capital, tier 1 capital and total capital to risk-weighted assets in addition to the amount necessary to meet minimum risk-based capital requirements. Excluding the additional buffer, Basel III requires the Company and the Bank to maintain (i) a minimum ratio of common equity tier 1 capital to risk-weighted assets of at least 4.5%, (ii) a minimum ratio of tier 1 capital to risk-weighted assets of at least 6.0%, (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0% and (iv) a minimum leverage ratio of at least 4.0%.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At September 30, 2023 and December 31, 2022, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

Actual and required capital amounts and ratios, which do not include the capital conservation buffer, are presented below at September 30, 2023 and December 31, 2022:

| Actual |  |  | Requirement For Capital Adequacy Purposes: |  |  | To be Well Capitalized Under Prompt Corrective Action Provisions: |
| Amount |  | Ratio |  |  | Amount |  | Ratio |  |  | Amount |  | Ratio |
September 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Common equity tier 1 capital ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated | $ | 382,539 |  |  | 10.37 | % |  | $ | 166,023 |  |  | 4.5 | % |  | N/A |  | N/A |
Bank |  | 396,302 |  |  | 10.76 | % |  |  | 165,756 |  |  | 4.5 | % |  |  | 239,425 |  |  | 6.5 | %
Total risk based capital ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | 510,292 |  |  | 13.83 | % |  |  | 295,151 |  |  | 8.0 | % |  | N/A |  | N/A |
Bank |  | 431,055 |  |  | 11.70 | % |  |  | 294,677 |  |  | 8.0 | % |  |  | 368,347 |  |  | 10.0 | %
Tier 1 risk based capital ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | 400,539 |  |  | 10.86 | % |  |  | 221,364 |  |  | 6.0 | % |  | N/A |  | N/A |
Bank |  | 396,302 |  |  | 10.76 | % |  |  | 221,008 |  |  | 6.0 | % |  |  | 294,677 |  |  | 8.0 | %
Tier 1 leverage ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | 400,539 |  |  | 7.84 | % |  |  | 204,152 |  |  | 4.0 | % |  | N/A |  | N/A |
Bank |  | 396,302 |  |  | 7.80 | % |  |  | 203,317 |  |  | 4.0 | % |  |  | 254,147 |  |  | 5.0 | %
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Common equity tier 1 capital ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated | $ | 403,307 |  |  | 13.71 | % |  | $ | 132,349 |  |  | 4.5 | % |  | N/A |  | N/A |
Bank |  | 372,679 |  |  | 12.71 | % |  |  | 131,968 |  |  | 4.5 | % |  | $ | 190,620 |  |  | 6.5 | %
Total risk based capital ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | 523,285 |  |  | 17.79 | % |  |  | 235,288 |  |  | 8.0 | % |  | N/A |  | N/A |
Bank |  | 399,657 |  |  | 13.62 | % |  |  | 234,609 |  |  | 8.0 | % |  |  | 293,262 |  |  | 10.0 | %
Tier 1 risk based capital ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | 421,307 |  |  | 14.32 | % |  |  | 176,466 |  |  | 6.0 | % |  | N/A |  | N/A |
Bank |  | 372,679 |  |  | 12.71 | % |  |  | 175,957 |  |  | 6.0 | % |  |  | 234,609 |  |  | 8.0 | %
Tier 1 leverage ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | 421,307 |  |  | 9.84 | % |  |  | 171,233 |  |  | 4.0 | % |  | N/A |  | N/A |
Bank |  | 372,679 |  |  | 8.76 | % |  |  | 170,245 |  |  | 4.0 | % |  |  | 212,807 |  |  | 5.0 | %

34

Segment Information:

The reportable segments are determined by the products and services offered, primarily distinguished between banking and trust. These segments are also distinguished by the level of information provided to the chief operating decision makers in the Company, who use such information to review performance of various components of the business, which are then aggregated. Loans, investments, and deposits provide the revenues in the banking operation. All operations are domestic. Significant segment totals are reconciled to the financial statements as follows:

(In Thousands of Dollars) |  | Trust Segment |  |  | Bank Segment |  |  | Eliminations and Others |  |  | Consolidated Totals |
September 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |
Goodwill and other intangibles |  | $ | 5,694 |  |  | $ | 189,895 |  |  | $ | (4,263 | ) |  | $ | 191,326 |
Total assets |  | $ | 14,483 |  |  | $ | 4,954,518 |  |  | $ | 2,162 |  |  | $ | 4,971,163 |

(In Thousands of Dollars) |  | Trust Segment |  |  | Bank Segment |  |  | Eliminations and Others |  |  | Consolidated Totals |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |
Goodwill and other intangibles |  | $ | 5,739 |  |  | $ | 100,190 |  |  | $ | (4,263 | ) |  | $ | 101,666 |
Total assets |  | $ | 14,383 |  |  | $ | 4,064,112 |  |  | $ | 3,705 |  |  | $ | 4,082,200 |

(In Thousands of Dollars) |  | Trust Segment |  |  | Bank Segment |  |  | Eliminations and Others |  |  | Consolidated Totals |
For Three Months Ended September 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |
Net interest income |  | $ | 81 |  |  | $ | 34,679 |  |  | $ | (992 | ) |  | $ | 33,768 |
Provision for credit losses and unfunded loans |  |  | 0 |  |  |  | 243 |  |  |  | 0 |  |  |  | 243 |
Service fees, security gains and other noninterest income |  |  | 2,994 |  |  |  | 6,847 |  |  |  | (10 | ) |  |  | 9,831 |
Noninterest expense |  |  | 1,679 |  |  |  | 23,873 |  |  |  | 484 |  |  |  | 26,036 |
Amortization and depreciation expense |  |  | 22 |  |  |  | 1,544 |  |  |  | 114 |  |  |  | 1,680 |
Income before taxes |  |  | 1,374 |  |  |  | 15,866 |  |  |  | (1,600 | ) |  |  | 15,640 |
Income taxes |  |  | 289 |  |  |  | 2,416 |  |  |  | (379 | ) |  |  | 2,326 |
Net income |  | $ | 1,085 |  |  | $ | 13,450 |  |  | $ | (1,221 | ) |  | $ | 13,314 |

(In Thousands of Dollars) |  | Trust Segment |  |  | Bank Segment |  |  | Eliminations and Others |  |  | Consolidated Totals |
For Nine Months Ended September 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |
Net interest income |  | $ | 195 |  |  | $ | 107,663 |  |  | $ | (2,902 | ) |  | $ | 104,956 |
Provision for credit losses and unfunded loans |  |  | 0 |  |  |  | 8,867 |  |  |  | 0 |  |  |  | 8,867 |
Service fees, security gains and other noninterest income |  |  | 8,562 |  |  |  | 21,770 |  |  |  | (627 | ) |  |  | 29,705 |
Noninterest expense |  |  | 4,976 |  |  |  | 72,464 |  |  |  | 1,604 |  |  |  | 79,044 |
Amortization and depreciation expense |  |  | 68 |  |  |  | 5,372 |  |  |  | 340 |  |  |  | 5,780 |
Income before taxes |  |  | 3,713 |  |  |  | 42,730 |  |  |  | (5,473 | ) |  |  | 40,970 |
Income taxes |  |  | 781 |  |  |  | 6,122 |  |  |  | (1,289 | ) |  |  | 5,614 |
Net income |  | $ | 2,932 |  |  | $ | 36,608 |  |  | $ | (4,184 | ) |  | $ | 35,356 |

(In Thousands of Dollars) |  | Trust Segment |  |  | Bank Segment |  |  | Eliminations and Others |  |  | Consolidated Totals |
For Three Months Ended September 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |
Net interest income |  | $ | 54 |  |  | $ | 32,602 |  |  | $ | (875 | ) |  | $ | 31,781 |
Provision for credit losses and unfunded loans |  |  | 0 |  |  |  | 448 |  |  |  | 0 |  |  |  | 448 |
Service fees, security gains and other noninterest income |  |  | 2,731 |  |  |  | 6,248 |  |  |  | (152 | ) |  |  | 8,827 |
Noninterest expense |  |  | 1,666 |  |  |  | 17,942 |  |  |  | 657 |  |  |  | 20,265 |
Amortization and depreciation expense |  |  | 27 |  |  |  | 994 |  |  |  | 113 |  |  |  | 1,134 |
Income before taxes |  |  | 1,092 |  |  |  | 19,466 |  |  |  | (1,797 | ) |  |  | 18,761 |
Income taxes |  |  | 229 |  |  |  | 3,438 |  |  |  | (352 | ) |  |  | 3,315 |
Net income |  | $ | 863 |  |  | $ | 16,028 |  |  | $ | (1,445 | ) |  | $ | 15,446 |

35

(In Thousands of Dollars) |  | Trust Segment |  |  | Bank Segment |  |  | Eliminations and Others |  |  | Consolidated Totals |
For Nine Months Ended September 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |
Net interest income |  | $ | 126 |  |  | $ | 97,081 |  |  | $ | (2,473 | ) |  | $ | 94,734 |
Provision for credit losses and unfunded loans |  |  | 0 |  |  |  | 706 |  |  |  | 0 |  |  |  | 706 |
Service fees, security gains and other noninterest income |  |  | 16,768 |  |  |  | 19,595 |  |  |  | (361 | ) |  |  | 36,002 |
Noninterest expense |  |  | 7,049 |  |  |  | 61,558 |  |  |  | 1,234 |  |  |  | 69,841 |
Amortization and depreciation expense |  |  | 83 |  |  |  | 3,052 |  |  |  | 340 |  |  |  | 3,475 |
Income before taxes |  |  | 9,762 |  |  |  | 51,360 |  |  |  | (4,408 | ) |  |  | 56,714 |
Income taxes |  |  | 2,049 |  |  |  | 8,438 |  |  |  | (1,014 | ) |  |  | 9,473 |
Net income |  | $ | 7,713 |  |  | $ | 42,922 |  |  | $ | (3,394 | ) |  | $ | 47,241 |

The Bank segment includes Farmers National Insurance and Farmers of Canfield Investment Co.

Short-term borrowings:

The Bank had no short-term advances from the Federal Home Loan Bank ("FHLB") at September 30, 2023. The Bank had $95.0 million of short-term advances from the FHLB at December 31, 2022, and the interest rate on these borrowings was 4.38%.

The Bank has access to a line of credit of $25.0 million at a major domestic bank and the interest rate is below the prime rate. This line and its terms are periodically reviewed by the lending bank and it is generally subject to withdrawal at their discretion. There were no borrowings under this line at September 30, 2023. At December 31, 2022, the Bank had access to lines of credit amounting to $35 million at two major domestic banks that were both below the prime interest rate, however, there were no borrowings under these lines at December 31, 2022.

At September 30, 2023 Farmers has one unsecured revolving line of credit for $5.0 million and this line can be renewed annually. The line has an interest rate of prime and a floor of 3.5%. There were no outstanding balance on this line at September 30, 2023. At December 31, 2022, Farmers had two unsecured lines of credit for $6.5 million, with interest rates of prime and floors of 3.5% and 4.5%. There was no outstanding balance on either of these lines at December 31, 2022.

Long-term borrowings:

There were no long-term advances from the FHLB at September 30, 2023 or at December 31, 2022.

The Bank’s long-term and short-term FHLB advances are secured by a blanket pledge of residential mortgage, commercial real estate, and multi-family loans totaling $1.6 billion at September 30, 2023 and $1.2 billion at December 31, 2022, respectively. Based on this collateral, the Bank is eligible to borrow an additional $892.6 million at September 30, 2023.

In November 2021, the Company completed the issuance of $75.0 million aggregate principal amount, fixed-to-floating rate subordinated notes due December 15, 2031, in a private offering exempt from the registration requirements under the Securities Act of 1933, as amended. The notes carry a fixed rate of 3.125% for five years at which time they will convert to a floating rate based on the three-month term secured overnight funding rate ("SOFR"), plus a spread of 220 basis points. The Company may, at its option, beginning December 15, 2026, redeem the notes, in whole or in part, from time to time, subject to certain conditions. The net proceeds from the sale were approximately $73.8 million, after deducting the offering expenses. The Company’s intent was to use the proceeds from the sale for general corporate purposes, which may include, without limitation, providing capital to support its growth organically or through acquisitions, in financing investments, capital expenditures, repurchasing its common shares and for investments in the Bank as regulatory capital. The subordinated debentures are included in Total Capital under current regulatory guidelines and interpretations.

On November 1, 2021, the Company completed its acquisition of Cortland, which included the assumption of Floating Rate Junior Subordinated Debt Securities due in September 15, 2037 (the "junior subordinated debt securities") at an acquisition-date fair value of $4.3 million, held in a wholly-owned statutory trust whose common securities were wholly-owned by Cortland. The sole assets of the statutory trust are the junior subordinated debt securities and related payments. The junior subordinated debt securities and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee of the obligations of the statutory trust under the capital securities held by third-party investors. The securities bear interest at a rate of 1.45% over the 3-month term SOFR (Secured Overnight Financing Rate) . The transition to the 3-month term SOFR from the 3-month term LIBOR rate was effective September 15, 2023 with the cessation of the LIBOR rate. The rate at September 30, 2023 was 7.12% and at December 31, 2022 was 6.22%.

36

On January 7, 2020, the Company completed its acquisition of Maple Leaf, which included the assumption of Floating Rate Junior Subordinated Debt Securities due December 15, 2036 (the "junior subordinated debt securities") held in a wholly-owned statutory trust whose common securities were wholly-owned by Maple Leaf. The sole assets of the statutory trust are the junior subordinated debt securities and related payments. The junior subordinated debt securities and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee of the obligations of the statutory trust under the capital securities held by third-party investors. The securities bear interest at a rate of 1.80% over the 3-month term SOFR (Secured Overnight Financing Rate). The transition to the 3-month term SOFR from the 3-month term LIBOR rate was effective September 15, 2023 with the cessation of LIBOR rate. The rate at September 30, 2023 was 7.47% and at December 31, 2022 was 6.57%.

In 2015, the Company completed its acquisition of National Bancshares Corporation, which included the assumption of Floating Rate Junior Subordinated Debt Securities due June 15, 2035 (the "junior subordinated debt securities") held in a wholly-owned statutory trust, TSEO Statutory Trust I. The sole assets of the statutory trust are the junior subordinated debt securities and related payments. The junior subordinated debt securities and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee of the obligations of the statutory trust under the capital securities held by third-party investors. The securities bear interest at a rate of 1.70% over the 3-month term SOFR (Secured Overnight Financing Rate). The transition to the 3-month term SOFR from the 3-month term LIBOR rate was effective September 15, 2023 with the cessation of LIBOR rate. The rate at September 30, 2023 was 7.37% and at December 31, 2022 was 6.47%.

In all three instances, the Company may redeem the junior subordinated debentures at any quarter-end, in whole, or in part, at par. This type of subordinated debenture qualifies as Tier 1 capital for regulatory purposes in determining and evaluating the Company’s capital adequacy.

A summary of all junior subordinated debentures issued by the Company to affiliates and subordinated debentures follows. For the junior subordinated debentures, these amounts represent the par value of the obligations owed to these affiliates, including the Company’s equity interest in the trusts along with any unamortized fair value marks. For the subordinated debentures, these amounts represent the par value less the remaining deferred offering expense associated with the issuance of the debentures.

|  | September 30, 2023 |  |  | December 31, 2022 |
|  | Amount |  |  | Amount |
TSEO Statutory Trust I |  | $ | 2,509 |  |  | $ | 2,472 |
Maple Leaf Financial Statutory Trust II |  |  | 7,684 |  |  |  | 7,517 |
Cortland Statutory Trust I |  |  | 4,368 |  |  |  | 4,327 |
Total junior subordinated debentures owed to unconsolidated subsidiary trusts |  | $ | 14,561 |  |  | $ | 14,316 |
Subordinated Debentures |  | $ | 73,989 |  |  | $ | 73,895 |
Total long-term borrowings |  | $ | 88,550 |  |  | $ | 88,211 |

37

Item 2. Manageme nt’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of historical fact, but rather statements based on the Company’s current expectations, beliefs and assumptions regarding the future of Farmers’ business, future plans and strategies, projections, anticipated events and trends, its intended results and future performance, the economy and other future conditions. Forward-looking statements are preceded by terms such as “will,” “would,” “should,” “could,” “may,” “expect,” “estimate,” “believe,” “anticipate,” “intend,” “plan,” “project,” or variations of these words, or similar expressions. Forward-looking statements are not a guarantee of future performance and actual future results could differ materially from those contained in forward-looking information. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Numerous uncertainties, risks, and changes could cause or contribute to Farmers’ actual results, performance, and achievements to be materially different from those expressed or implied by the forward-looking statements.

Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detailed from time to time in the Company’s filings with the Securities and Exchange Commission (the “Commission”), including without limitation, the risk factors disclosed in Item 1A, “Risk Factors,” in the Company’s 2022 Form 10-K, as updated in Item 1A, “Risk Factors,” in this Quarterly Report on Form 10-Q.

Many of these factors are beyond the Company’s ability to control or predict, and readers are cautioned not to put undue reliance on those forward-looking statements. The following, which is not intended to be an all-encompassing list, summarizes several factors that could cause the Company’s actual results to differ materially from those anticipated or expected in any forward-looking statement:

•
general economic conditions in markets where the Company conducts business, which could materially impact credit quality trends;
•
the length and extent of the economic impacts of the COVID-19 pandemic;
•
actions by the Federal Reserve Board, U.S. Treasury and other government agencies, including those that impact money supply, market interest rates and inflation;
•
disruptions in the mortgage and lending markets and significant or unexpected fluctuations in interest rates related to governmental responses to inflation, including financial stimulus packages and interest rate changes;
•
general business conditions in the banking industry;
•
the regulatory environment;
•
general fluctuations in interest rates;
•
demand for loans in the market areas where the Company conducts business;
•
rapidly changing technology and evolving banking industry standards;
•
competitive factors, including increased competition with regional and national financial institutions;
•
Farmers' ability to attract, recruit and retain skilled employees; and
•
new service and product offerings by competitors and price pressures.

Other factors not currently anticipated may also materially and adversely affect the Company’s results of operations, cash flows and financial position. There can be no assurance that future results will meet expectations. While the Company believes that the forward-looking statements in the presentation are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. The Company does not undertake, and expressly disclaims, any obligation to update or alter any statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.

Results of Operations. The results of operation, and comparisons to results from the prior periods of 2022, are materially impacted by the acquisition of Emlenton which closed on January 1, 2023.

38

The following is a comparison of selected financial ratios and other results at or for the three and nine month periods ended September 30, 2023 and 2022:

|  | At or for the Three Months Ended September 30, |  |  | At or for the Nine Months Ended September 30, |
(In Thousands, except Per Share Data) |  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Total assets |  | $ | 4,971,163 |  |  | $ | 4,120,022 |  |  | $ | 4,971,163 |  |  | $ | 4,120,022 |
Net income |  | $ | 13,314 |  |  | $ | 15,446 |  |  | $ | 35,356 |  |  | $ | 47,241 |
Diluted earnings per share |  | $ | 0.36 |  |  | $ | 0.46 |  |  | $ | 0.94 |  |  | $ | 1.39 |
Return on average assets (annualized) |  |  | 1.06 | % |  |  | 1.48 | % |  |  | 0.93 | % |  |  | 1.51 | %
Return on average equity (annualized) |  |  | 14.49 | % |  |  | 18.71 | % |  |  | 12.79 | % |  |  | 16.55 | %
Equity to asset ratio |  |  | 6.36 | % |  |  | 6.45 | % |  |  | 6.36 | % |  |  | 6.45 | %
Dividends to net income |  |  | 47.82 | % |  |  | 35.06 | % |  |  | 36.21 | % |  |  | 34.39 | %
Net loans to assets |  |  | 63.04 | % |  |  | 57.59 | % |  |  | 63.04 | % |  |  | 57.59 | %
Loans to deposits |  |  | 70.23 | % |  |  | 67.28 | % |  |  | 70.23 | % |  |  | 67.28 | %

Net Income. The Company's net income for the quarter ended September 30, 2023 totaled $13.3 million, or $0.36 per diluted share, compared to $15.4 million, or $0.46 per diluted share, for the three months ended September 30, 2022. The acquisition of Emlenton had a positive impact on the earnings of the Company but net interest margin compression due to high rates and an inverted yield curve continues to act as a headwind to overall earnings in 2023 as compared to 2022.

Net income for the first nine months of 2023 was $35.4 million compared to $47.2 million for the first nine months of 2022. The change in net income during the first nine months of 2023, compared with the first nine months of 2022, was impacted by acquisition-related expenses for the Emclaire transaction that closed on January 1, 2023. The first nine months of 2023 included merger-related expenses of $5.0 million compared to merger related costs of $3.5 million for the first nine months of 2022. The first nine months of 2023 also included Day 1 provision for credit losses and provision for unfunded loans under the CECL model of $7.7 million. The net interest margin compression discussed above also had a negative impact on 2023 results compared to the first nine months of 2022.

Net Interest Income. The following schedule details the various components of net interest income for the periods indicated. All asset yields are calculated on a tax-equivalent basis where applicable. Security yields are based on amortized cost.

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Average Balance Sheets and Related Yields and Rates

(Dollar Amounts in Thousands)

| Three Months Ended |  |  | Three Months Ended |
| September 30, 2023 |  |  | September 30, 2022 |
| AVERAGE |  |  |  |  |  |  |  |  | AVERAGE |  |  |  |  |  |  |
| BALANCE |  |  | INTEREST |  |  | RATE (1) |  |  | BALANCE |  |  | INTEREST |  |  | RATE (1) |
EARNING ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans (2) (3) | $ | 3,153,309 |  |  | $ | 43,928 |  |  |  | 5.57 | % |  | $ | 2,386,184 |  |  | $ | 27,570 |  |  |  | 4.62 | %
Taxable securities (2) |  | 1,132,959 |  |  |  | 6,492 |  |  |  | 2.29 |  |  |  | 1,112,411 |  |  |  | 5,477 |  |  |  | 1.97 |
Tax-exempt securities (2) (3) |  | 413,117 |  |  |  | 3,251 |  |  |  | 3.15 |  |  |  | 473,677 |  |  |  | 3,814 |  |  |  | 3.22 |
Other investments |  | 42,581 |  |  |  | 487 |  |  |  | 4.57 |  |  |  | 33,524 |  |  |  | 199 |  |  |  | 2.37 |
Federal funds sold and other |  | 78,922 |  |  |  | 751 |  |  |  | 3.81 |  |  |  | 59,289 |  |  |  | 205 |  |  |  | 1.38 |
TOTAL EARNING ASSETS |  | 4,820,888 |  |  |  | 54,909 |  |  |  | 4.56 |  |  |  | 4,065,085 |  |  |  | 37,265 |  |  |  | 3.67 |
Nonearning assets |  | 215,445 |  |  |  |  |  |  |  |  |  | 99,770 |  |  |  |  |  |  |
TOTAL ASSETS | $ | 5,036,333 |  |  |  |  |  |  |  |  | $ | 4,164,855 |  |  |  |  |  |  |
INTEREST-BEARING LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Time deposits | $ | 677,291 |  |  | $ | 5,308 |  |  |  | 3.13 | % |  | $ | 338,794 |  |  | $ | 586 |  |  |  | 0.69 | %
Brokered time deposits |  | 145,839 |  |  |  | 1,882 |  |  |  | 5.16 |  |  |  | 50,494 |  |  |  | 142 |  |  |  | 1.12 |
Savings deposits |  | 1,099,682 |  |  |  | 2,625 |  |  |  | 0.95 |  |  |  | 832,828 |  |  |  | 165 |  |  |  | 0.08 |
Demand deposits - interest bearing |  | 1,412,922 |  |  |  | 7,647 |  |  |  | 2.16 |  |  |  | 1,426,801 |  |  |  | 2,317 |  |  |  | 0.65 |
Short term borrowings |  | 141,717 |  |  |  | 1,961 |  |  |  | 5.53 |  |  |  | 90,978 |  |  |  | 533 |  |  |  | 2.34 |
Long term borrowings |  | 88,494 |  |  |  | 1,038 |  |  |  | 4.69 |  |  |  | 88,031 |  |  |  | 886 |  |  |  | 4.03 |
TOTAL INTEREST-BEARING LIABILITIES |  | 3,565,945 |  |  |  | 20,461 |  |  |  | 2.30 |  |  |  | 2,827,926 |  |  |  | 4,629 |  |  |  | 0.65 |
NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand deposits - noninterest bearing |  | 1,052,062 |  |  |  |  |  |  |  |  |  | 969,700 |  |  |  |  |  |  |
Other liabilities |  | 50,726 |  |  |  |  |  |  |  |  |  | 36,929 |  |  |  |  |  |  |
Stockholders' equity |  | 367,600 |  |  |  |  |  |  |  |  |  | 330,300 |  |  |  |  |  |  |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 5,036,333 |  |  |  |  |  |  |  |  | $ | 4,164,855 |  |  |  |  |  |  |
Net interest income and interest rate spread |  |  |  | $ | 34,448 |  |  |  | 2.26 | % |  |  |  |  | $ | 32,636 |  |  |  | 3.02 | %
Net interest margin |  |  |  |  |  |  |  | 2.86 | % |  |  |  |  |  |  |  |  | 3.21 | %

(1)
Rates are calculated on an annualized basis.
(2)
Includes unamortized discounts and premiums. Average balance and yield are computed using the average historical amortized cost.
(3)
For 2023, adjustments of $90 thousand and $590 thousand, respectively, were made to tax equate income on tax exempt loans and tax exempt securities. For 2022, adjustments of $76 thousand and $779 thousand, respectively, were made to tax equate income on tax exempt loans and tax exempt securities. These adjustments were based on a marginal federal income tax rate of 21%, less disallowances.

40

Average Balance Sheets and Related Yields and Rates

(Dollar Amounts in Thousands)

| Nine Months Ended September 30, 2023 |  |  | Nine Months Ended September 30, 2022 |
| AVERAGE BALANCE |  |  | INTEREST |  |  | RATE (1) |  |  | AVERAGE BALANCE |  |  | INTEREST |  |  | RATE (1) |
EARNING ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans (2) (3) | $ | 3,144,817 |  |  | $ | 127,293 |  |  |  | 5.40 | % |  | $ | 2,346,542 |  |  | $ | 79,008 |  |  |  | 4.49 | %
Taxable securities (2) |  | 1,153,804 |  |  |  | 19,697 |  |  |  | 2.28 |  |  |  | 1,074,020 |  |  |  | 15,287 |  |  |  | 1.90 |
Tax-exempt securities (2) (3) |  | 422,151 |  |  |  | 10,048 |  |  |  | 3.17 |  |  |  | 469,878 |  |  |  | 11,372 |  |  |  | 3.23 |
Other investments |  | 40,211 |  |  |  | 1,457 |  |  |  | 4.83 |  |  |  | 32,901 |  |  |  | 545 |  |  |  | 2.21 |
Federal funds sold and other |  | 78,224 |  |  |  | 1,911 |  |  |  | 3.26 |  |  |  | 82,031 |  |  |  | 348 |  |  |  | 0.57 |
TOTAL EARNING ASSETS |  | 4,839,207 |  |  |  | 160,406 |  |  |  | 4.42 |  |  |  | 4,005,372 |  |  |  | 106,560 |  |  |  | 3.55 |
Nonearning assets |  | 219,762 |  |  |  |  |  |  |  |  |  | 160,975 |  |  |  |  |  |  |
TOTAL ASSETS | $ | 5,058,969 |  |  |  |  |  |  |  |  | $ | 4,166,347 |  |  |  |  |  |  |
INTEREST-BEARING LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Time deposits | $ | 636,939 |  |  | $ | 13,171 |  |  |  | 2.76 | % |  | $ | 357,241 |  |  | $ | 1,782 |  |  |  | 0.67 | %
Brokered time deposits |  | 145,115 |  |  |  | 4,889 |  |  |  | 4.49 |  |  |  | 37,400 |  |  |  | 206 |  |  |  | 0.73 |
Savings deposits |  | 1,128,760 |  |  |  | 6,981 |  |  |  | 0.82 |  |  |  | 837,937 |  |  |  | 473 |  |  |  | 0.07 |
Demand deposits |  | 1,421,208 |  |  |  | 19,619 |  |  |  | 1.84 |  |  |  | 1,422,583 |  |  |  | 3,644 |  |  |  | 0.34 |
Short term borrowings |  | 145,509 |  |  |  | 5,608 |  |  |  | 5.14 |  |  |  | 45,568 |  |  |  | 631 |  |  |  | 1.85 |
Long term borrowings |  | 88,382 |  |  |  | 3,043 |  |  |  | 4.59 |  |  |  | 87,915 |  |  |  | 2,505 |  |  |  | 3.80 |
TOTAL INTEREST-BEARING LIABILITIES |  | 3,565,913 |  |  |  | 53,311 |  |  |  | 1.99 |  |  |  | 2,788,644 |  |  |  | 9,241 |  |  |  | 0.44 |
NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand deposits |  | 1,075,493 |  |  |  |  |  |  |  |  |  | 966,173 |  |  |  |  |  |  |
Other liabilities |  | 48,936 |  |  |  |  |  |  |  |  |  | 30,904 |  |  |  |  |  |  |
Stockholders' equity |  | 368,627 |  |  |  |  |  |  |  |  |  | 380,626 |  |  |  |  |  |  |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 5,058,969 |  |  |  |  |  |  |  |  | $ | 4,166,347 |  |  |  |  |  |  |
Net interest income and interest rate spread |  |  |  | $ | 107,095 |  |  |  | 2.43 | % |  |  |  |  | $ | 97,319 |  |  |  | 3.11 | %
Net interest margin |  |  |  |  |  |  |  | 2.95 | % |  |  |  |  |  |  |  |  | 3.24 | %

(1)
Rates are calculated on an annualized basis.
(2)
Includes unamortized discounts and premiums. Average balance and yield are computed using the average historical amortized cost.
(3)
For 2023, adjustments of $268 thousand and $1.9 million, respectively, are made to tax equate income on tax exempt loans and tax exempt securities. For 2022, adjustments of $238 thousand and $2.3 million, respectively, are made to tax equate income on tax exempt loans and tax exempt securities. These adjustments are based on a marginal federal income tax rate of 21%, less disallowances.

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Net Interest Income. Net interest income for the three month period ended September 30, 2023, was $33.8 million compared to $31.8 million for the same period in 2022. A larger earning asset base due to the acquisition of Emlenton was the primary driver of this increase offset by a 35 basis point decline in the net interest margin.

The net interest margin for the three months ended September 30, 2023, was 2.86%, a 35 basis point decrease from the quarter ended September 30, 2022. In comparing the third quarter of 2023 to the same period in 2022, interest-earning asset yields increased 89 basis points, while the cost of interest-bearing liabilities increased 165 basis points. This increase in funding costs has been due to the rapid increase in deposit rates due to intense competition for deposits, the continued Federal Reserve rate hiking cycle and runoff of deposit balances which are being replaced by much costlier wholesale funding. This increase in funding costs continues to outstrip the increases on the yield of interest-earning assets pushing the net interest margin lower.

Net interest income for the nine month period ended September 30, 2023, was $105.0 million compared to $94.7 million for the same period in 2022. The increase in net interest income was driven by the same factors as the third quarter increase. The net interest margin was 2.95% for the nine month period ended September 30, 2023 compared to 3.24% for the same period in 2022. The decline in net interest margin for the nine month period ended September 30, 2023, was also driven by the same factors.

Provision for Credit Losses and Provision for Unfunded Loans. The Company recorded a provision for credit losses and unfunded loans of $243,000 during the third quarter of 2023 compared to a provision for credit losses and unfunded loans of $448,000 for the third quarter of 2022. The allowance for credit losses to total loans was 1.10% at September 30, 2023, compared to 1.12% at December 31, 2022.

The provision for credit losses and unfunded loans was $8.9 million for the first nine months of 2023 compared to a provision for credit losses and unfunded loans of $706 thousand for the first nine months of 2022. Included in the $8.9 million figure is a Day 1 provision for credit losses and provision for unfunded loans under the CECL model of $7.7 million related to the acquisition of Emlenton. There was no Day 1 provision recorded in the first nine months of 2022.

Noninterest Income. Noninterest income totaled $9.8 million for the three months ended September 30, 2023, compared to $8.8 million for the three months ended September 30, 2022. Service charges on deposit accounts have increased by $483,000 in the third quarter of 2023 compared to the third quarter of 2022. The increase is primarily due to the acquisition of Emclaire. Bank owned life insurance income, other mortgage banking fee income and debit card income have also increased in the third quarter of 2023 compared to the third quarter of 2022 due to the Emclaire acquisition. Insurance agency commissions are flat in the third quarter of 2023 compared to the third quarter of 2022 but growth for the year has been solid as growth in the insurance business and increased annuity sales have bolstered income. Security losses in the third quarter of 2023 totaled $624,000 compared to losses of $17,000 in the third quarter of 2022. The Company sold securities during the quarter to improve net interest margin in future periods. Investment commissions are up slightly for the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022, as customers have been more interested in the annuities mentioned above as opposed to traditional investment products. Net gains on the sale of loans have increased but are still sluggish due to the high level of interest rates and lack of loan volume.

Noninterest income for the nine month period ended September 30, 2023, was $29.7 million compared to $36.0 million for the same period in 2022. The decline in noninterest income for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, was primarily due to $8.4 million in income from a legal settlement received in 2022. The decline was partially offset by increases in noninterest income categories due to the acquisition of Emlenton.

Noninterest Expense. Noninterest expense was $27.7 million for the quarter ended September 30, 2023, compared to $21.4 million for the quarter ended September 30, 2022. The increase in expense is primarily due to the acquisition of Emclaire. Salaries and employee benefits increased $3.5 million to $14.2 million in the third quarter of 2023 compared to the same period in 2022. The acquisition of Emclaire along with normal raise activity were the primary reasons for the increase. Occupancy and equipment expense increased $782,000 primarily due to the acquisition. FDIC and state and local taxes increased due to the acquisition and the increase in the rate paid for FDIC insurance in 2023. Intangible amortization expense and core processing charges increased due to the acquisition. Merger related costs were $268,000 for the third quarter of 2023 compared to $872,000 in the third quarter of 2022. Other noninterest expense increased due the acquisition and due to the recognition of $785,000 in expense related to the settlement of a lawsuit.

Total noninterest expense was $84.8 million for the nine month period ended September 30, 2023, compared to $73.3 million for the same nine month period in 2022. The increase in expense is primarily due to the Company being larger due to the acquisition of Emlenton. There was also a charitable contribution of $6.0 million to the Farmers Charitable Foundation and $2.1 million in legal costs associated with the legal settlement, as discussed previously. Both of these charges were incurred in the first nine months of 2022 and were not repeated in 2023.

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Income Taxes. Income tax expense totaled $2.3 million for the quarter ended September 30, 2023 compared to $3.3 million for the quarter ended September 30, 2022. The decrease was due to the decline in income before income taxes.

Income tax expense totaled $5.6 million for the nine month period ended September 30, 2023, and $9.5 million for the nine month period ended September 30, 2022. This decline is also due to the decline in income before income taxes.

Financial Condition

Cash and Cash Equivalents. Cash and cash equivalents increased $18.4 million during the first nine months of 2023 from $75.6 million at December 31, 2022 to $93.9 million at September 30, 2023. The increase in the cash balances was primarily due to the Company intentionally holding more cash on its balance sheet and due to the acquisition of Emlenton.

Securities. Securities available-for-sale decreased by $57.3 million to $1.21 billion at September 30, 2023, compared to $1.27 billion at December 31, 2022. The Company had sales and runoff from the portfolio that totaled approximately $130.2 million in the first nine months of 2023. In addition, unrealized losses on the portfolio increased from $266.5 million at December 31, 2022 to $320.0 million at September 30, 2023. Offsetting, the declines was the addition of $127.0 million in available for sale securities from Emlenton.

Loans. Gross loans (excluding loans held for sale) increased to $3.17 billion at September 30, 2023 from $2.40 billion at December 31, 2022. The increase of $763.8 million for the year was primarily driven by the loans acquired from Emlenton which totaled $741.7 million.

Allowance for Credit Losses. The following table indicates key asset quality ratios that management evaluates on an ongoing basis. The recorded investment balances were used in the calculations.

Asset Quality History

(In Thousands of Dollars)

| 9/30/2023 |  |  | 6/30/2023 |  |  | 3/31/2023 |  |  | 12/31/2022 |  |  | 9/30/2022 |
Nonperforming loans | $ | 18,368 |  |  | $ | 17,956 |  |  | $ | 17,959 |  |  | $ | 14,803 |  |  | $ | 12,976 |
Nonperforming loans as a % of total loans |  | 0.58 | % |  |  | 0.57 | % |  |  | 0.57 | % |  |  | 0.62 | % |  |  | 0.54 | %
Loans delinquent 30-89 days | $ | 13,314 |  |  | $ | 12,321 |  |  | $ | 10,219 |  |  | $ | 9,605 |  |  | $ | 6,659 |
Loans delinquent 30-89 days as a % of total loans |  | 0.42 | % |  |  | 0.39 | % |  |  | 0.32 | % |  |  | 0.40 | % |  |  | 0.28 | %
Allowance for credit losses | $ | 34,753 |  |  | $ | 34,957 |  |  | $ | 36,011 |  |  | $ | 26,978 |  |  | $ | 27,282 |
Allowance for credit losses as a % of total loans |  | 1.10 | % |  |  | 1.11 | % |  |  | 1.14 | % |  |  | 1.12 | % |  |  | 1.14 | %
Allowance for credit losses as a % of nonperforming loans |  | 189.20 | % |  |  | 194.68 | % |  |  | 200.52 | % |  |  | 182.25 | % |  |  | 210.25 | %
Net charge-offs for the quarter | $ | 386 |  |  | $ | 799 |  |  | $ | 271 |  |  | $ | 570 |  |  | $ | 605 |
Annualized net charge-offs to average net loans outstanding |  | 0.05 | % |  |  | 0.10 | % |  |  | 0.03 | % |  |  | 0.10 | % |  |  | 0.10 | %
Non-performing assets | $ | 18,522 |  |  | $ | 18,167 |  |  | $ | 18,053 |  |  | $ | 14,876 |  |  | $ | 13,042 |
Non-performing assets as a % of total assets |  | 0.37 | % |  |  | 0.36 | % |  |  | 0.35 | % |  |  | 0.36 | % |  |  | 0.32 | %

ASU 2022-02 was adopted on January 1, 2023 and such, non-performing loans balances include prior period TDRs and current period loans that had modifications due to financial difficulty.

The Company's allowance for credit losses increased to $34.8 million for the period ended September 30, 2023 from $27.0 million for the period ended December 31, 2022. This increase was primarily driven by the Day 1 provision for credit losses associated with the acquisition of Emlenton that added $7.5 million to the allowance for credit losses. In addition, the Company also recorded a $1.0 million increase to the allowance for credit losses for the Day 1 reserve for purchase credit deteriorated loans from Emlenton. The Company estimates the ACL based on the amortized cost basis of the underlying loan and has made an accounting policy election to exclude accrued interest from the loan’s amortized cost basis and the related measurement of the ACL. Estimating the amount of the ACL is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge-offs, trends in past due and nonaccrual loans, and the level of potential problem loans, all of which may be susceptible to significant change.

Based on the evaluation of the adequacy of the allowance for credit losses, management believes that the allowance for credit losses at September 30, 2023, is adequate. The provision for credit losses is based on management’s judgment after taking into consideration all factors connected with the collectability of the existing loan portfolio. Management estimates the allowance balance using relevant

43

available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Specific factors considered by management in determining the amounts charged to operating expenses include previous credit loss experience, the status of past due interest and principal payments, the quality of financial information supplied by loan customers and the general condition of the industries in the community to which loans have been made.

Non-performing loans to total loans at September 30, 2023 were 0.58% compared to 0.62% at December 31, 2022. Early stage delinquencies, which are loans 30 - 89 days delinquent, also continue to remain at low levels, at 0.42% of total loans, at September 30, 2023 compared to 0.40% at December 31, 2022. Annualized net charge-offs to average net loans outstanding for the third quarter of 2022 were 0.05% compared to 0.10% for the same quarter in 2022.

Deposits. Total deposits increased to $4.51 billion at September 30, 2023, compared to $3.56 billion at December 31, 2022. This increase was primarily due to the $875.8 million in deposits assumed in the acquisition of Emlenton and an increase in brokered deposits of $116.2 million. The increases were offset somewhat by a decline of $42.1 million in customer deposits. The Company used more brokered deposits in the 3rd quarter of 2023 as they were less expensive than FHLB advances.

Short-term Borrowings. Total short-term borrowing balances declined from $95.0 million at December 31, 2022 to zero at September 30, 2023. This decrease was due to the Company paying down FHLB advances with brokered time deposits.

Total Stockholders' Equity. Total stockholders’ equity increased to $316.0 million at September 30, 2023 from $292.3 million at December 31, 2022. The increase was primarily due to a $59.2 million increase from the share issuance for the acquisition of Emclaire and net income of $35.4 million for the first nine months of 2023. Offsetting the increase was an increase for accumulated other comprehensive loss of $41.7 million and an increase of $10.4 million in treasury stock balances as the Company repurchased 850,799 of its outstanding shares during the first nine months of 2023. In addition, shareholders received $0.17 per share, per quarter, in cash dividends in each of the first three quarter of 2023.

The capital management function is a regular process that consists of providing capital for both the current financial position and the anticipated future growth of the Company. At September 30, 2023 the Company is required to maintain 4.5% common equity tier 1 to risk weighted assets excluding the conservation buffer to be adequately capitalized. The Company’s common equity tier 1 to risk weighted assets was 10.37%, total risk-based capital ratio stood at 13.83%, and the Tier 1 risk-based capital ratio and Tier 1 leverage ratio were at 10.86% and 7.84%, respectively, at September 30, 2023. The Company opted not to phase in, over 3 years, the effects of the initial CECL entry to equity for the implementation of ACS 326, recorded on January 1, 2021. Management believes that the Company and the Bank meet all capital adequacy requirements to which they are subject, as of September 30, 2023.

Federal bank regulatory agencies finalized a rule that simplifies capital requirements for community banks by allowing them to adopt a simple leverage ratio to measure capital adequacy. The community bank leverage ratio framework removes requirements for calculating and reporting risk-based capital ratios for a qualifying community bank that opts into the framework. The Company has not elected to adopt this framework.

Critical Accounting Policies

The Company follows financial accounting and reporting policies that are in accordance with U.S. GAAP. These policies are presented in Note 1 of the consolidated audited financial statements in the Company’s Annual Report to Shareholders included in the Company’s 2022 Form 10-K. Critical accounting policies are those policies that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has identified three accounting policies that are critical accounting policies and an understanding of these policies is necessary to understand the Company’s financial statements. These policies relate to determining the adequacy of the allowance for credit losses, for both the investment and loan portfolios and if there is any impairment of goodwill or other intangible. Additional information regarding these policies is included in the notes to the aforementioned 2022 consolidated financial statements, Note 1 (Summary of Significant Accounting Policies), Note 2 (Business Combinations), Note 4 (Loans), and the sections captioned “Loan Portfolio.”

Securities classified as AFS are those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors.

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The Company evaluates securities AFS in unrealized loss positions on a quarterly basis to determine whether the decline in fair value below the amortized costs basis (impairment) is due to credit-related factors or noncredit-related factors. In making this evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. Any impairment that is not credit-related is recognized in other comprehensive income, net of related deferred income taxes. Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the balance sheet based on the amount by which the amortized cost basis exceeds the fair value, with a corresponding charge to net income. Both the ACL and the charge to net income may be reversed if conditions change. However, if the Company intends to sell an impaired AFS security, or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount must be recognized in net income with a corresponding adjustment to the security’s amortized cost basis rather than through the establishment of an ACL. The Company has recorded no ACL related to the investment portfolio as of September 30, 2023.

The current expected credit loss model (“CECL”) is used for calculating the allowance for credit losses which considers the possibility of loss over the life of the loan. It also considers historical loss rates and other qualitative adjustments, as well as a new forward-looking component that considers reasonable and supportable forecasts over the expected life of each loan. To develop the ACL estimate under the current expected loss model, the Company segments the loan portfolio into loan pools based on loan type and similar credit risk elements. The Company uses the cohort (“cohort”) and the probability of default/loss given default (“PD/LGD”) methodologies as described in the Credit Quality Indicators section of the loan footnote. Under ASC 326, if a loan does not share similar risk characteristics with loans in that pool, expected credit losses for that loan are evaluated individually. The Company has established specific thresholds for the loan portfolio that trigger when loans need to be evaluated individually. In addition, ASC 326 requires the Company to establish a separate liability for anticipated credit losses for unfunded commitments.

Under CECL the credit loss estimation process involves procedures that consider the unique characteristics of the Company’s loan portfolio segments. These segments are disaggregated into the loan pools for monitoring. A model of risk characteristics, such as loss history and delinquency experience, trends in past due and non-performing loans, as well as existing economic conditions and supportable forecasts used to determine credit loss assumptions.

The Company uses two methodologies, the cohort and the PD/LGD, to analyze loan pools. Cohort relies on the creation of cohorts to capture loans that qualify for a particular segment, as of a point in time. Those loans are then tracked over their remaining lives to determine their loss experience. The Company aggregates financial assets on the basis of similar risk characteristics when evaluating loans on a collective basis. Those characteristics include, but are not limited to, internal or external credit score, risk ratings, financial asset, loan type, collateral type, size, effective interest rate, term, or geographical location. The Company uses cohort primarily for consumer loan portfolios.

The probability of default (“PD”) portion of PD/LGD is defined by the Company as 90 days past due, placed on non-accrual or is partially, or wholly, charged-off. Typically, a one-year time period is used to asses PD. PD can be measured and applied using various risk criteria. Risk rating is one common way to apply PDs. Loss given default (“LGD”) is to determine the percentage of loss by facility or collateral type. LGD estimates can sometimes be driven, or influenced, by product type, industry or geography. The Company uses PD/LGD primarily for commercial loan portfolios.

To the extent that any purchased loan is not specifically reviewed, such loan is assumed to have characteristics similar to the characteristics of the originated risk pools. The grade for each purchased loan without evidence of credit deterioration is reviewed subsequent to the date of acquisition any time a loan is renewed or extended or at any time information becomes available to the Company that provides material insight regarding the loan’s performance, the status of the borrower or the quality or value of the underlying collateral. To the extent that current information indicates it is probable that the Company will collect all amounts according to the contractual terms thereof, such loan is not individually considered in the determination of the required allowance for credit losses. To the extent that current information indicates it is probable that the Company will not be able to collect all amounts according to the contractual terms thereof, such loan is considered in the determination of the required level of allowance.

In determining the day one fair values of purchased loans without evidence of credit deterioration at the date of acquisition, management includes (i) no carry-over of any previously recorded allowance for loan losses and (ii) an adjustment of the unpaid principal balance to reflect an appropriate market rate of interest and credit risk, given the risk profile and grade assigned to each loan. This adjustment is accreted into earnings as a yield adjustment, using the effective yield method, over the remaining life of each loan.

The ACL represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date. The Company estimates the ACL based on the amortized cost basis of the underlying loan and has made an accounting policy election to exclude accrued interest from the loan’s amortized cost basis and the related measurement of the ACL. Estimating the amount of the ACL is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge-offs, trends in past due and nonaccrual loans, and the level of potential problem loans, all of which may be susceptible to significant change. While management

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uses the best information available to establish the allowance, future adjustments to the allowance may be necessary, which may be material, if economic conditions differ substantially from the assumptions used in estimating the allowance. If additions to the original estimate of the allowance for credit losses are deemed necessary, they will be reported in earnings in the period in which they become reasonably estimable and probable. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

Liquidity

The Company maintains, in the opinion of management, liquidity sufficient to satisfy depositors’ requirements and meet the credit needs of customers. The Company depends on its ability to maintain its market share of deposits as well as acquiring new funds. The Company’s ability to attract deposits and borrow funds depends in large measure on its profitability, capitalization and overall financial condition. The Company’s objective in liquidity management is to maintain the ability to meet loan commitments, purchase securities or to repay deposits and other liabilities in accordance with their terms without an adverse impact on current or future earnings. Principal sources of liquidity for the Company include assets considered relatively liquid, such as federal funds sold, cash-due from banks, as well as cash flows from maturities and repayments of loans, and to a lesser extent securities.

Along with its liquid assets, the Bank has additional sources of liquidity available which help to ensure that adequate funds are available as needed. These other sources include, but are not limited to, access to funds in the wholesale arena, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds and borrowings on approved lines of credit at major domestic banks. At September 30, 2023, this line of credit totaled $25.0 million of which the Bank had not borrowed against. In addition, the Company has a revolving line of credit with a correspondent bank totaling $5.0 million. There was no balance on this line at September 30, 2023 and December 31, 2022. Management feels that its liquidity position is adequate and will continue to monitor the position on a monthly basis. As of September 30, 2023, the Bank had no outstanding balances with the FHLB. Additional borrowing capacity at the FHLB was approximately $892.6 million at September 30, 2023. The Company also has access to the Federal Reserve Discount Window, which provides an additional source of funds with the posting of collateral. The Bank views its membership in the FHLB as a solid source of liquidity.

Off-Balance Sheet Arrangements

In the normal course of business, to meet the financial needs of our customers, we are a party to financial instruments with off-balance sheet risk. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the Consolidated Balance Sheets. The Bank’s maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. Because some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The same credit policies are used in making commitments as are used for on-balance sheet instruments. Collateral is required in instances where deemed necessary. Undisbursed balances of loans closed include funds not disbursed but committed for construction projects. Unused lines of credit include funds not disbursed, but committed for, home equity, commercial and consumer lines of credit. Financial standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily used to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Total unused commitments were $808.2 million at September 30, 2023, and $634.3 million at December 31, 2022. Additionally, the Company committed up to $19.7 million in subscriptions in Small Business Investment Company investments funds. At September 30, 2023, the Company has invested $16.4 million in these funds.

Recent Market and Regulatory Developments

Various and significant legislation affecting financial institutions and the financial industry is from time to time introduced in the U.S. Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system.

Also, such statutes, regulations and policies are continually under review by Congress, state legislatures and federal and state regulatory agencies and are subject to change at any time, particularly in the current economic and regulatory environment. Any such change in statutes, regulations or regulatory policies applicable to the Company could have a material effect on the business of the Company.

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Item 3. Quantitative and Qualita tive Disclosures about Market Risk

The Company’s ability to maximize net income is dependent, in part, on management’s ability to plan and control net interest income through management of the pricing and mix of assets and liabilities. Because a large portion of assets and liabilities of the Company are monetary in nature, changes in interest rates and monetary or fiscal policy affect its financial condition and can have significant impact on the net income of the Company.

The Company considers the primary market exposure to be interest rate risk. Simulation analysis is used to monitor the Company’s exposure to changes in interest rates, and the effect of the change to net interest income. The following table shows the effect on net interest income and the net present value of equity in the event of sudden and sustained interest rate increases and sudden and sustained interest rate decreases.

Changes In Interest Rate (basis points) |  | September 30, 2023 Result |  |  | December 31, 2022 Result |  |  | ALCO Guidelines |
Net Interest Income Change |  |  |  |  |  |  |  |  |
+400 |  |  | -9.8 | % |  | * |  |  |  | -12.5 | %
+300 |  |  | -7.8 | % |  |  | -5.4 | % |  |  | -10.0 | %
+200 |  |  | -5.3 | % |  |  | -3.6 | % |  |  | -7.5 | %
+100 |  |  | -2.9 | % |  |  | -1.8 | % |  |  | -5.0 | %
-100 |  |  | 2.4 | % |  |  | 1.1 | % |  |  | -5.0 | %
-200 |  |  | 4.4 | % |  |  | 1.5 | % |  |  | -10.0 | %
-300 |  |  | 6.3 | % |  |  | 1.6 | % |  |  | -15.0 | %
-400 |  |  | 6.4 | % |  | * |  |  |  | -20.0 | %
Net Present Value Of Equity Change |  |  |  |  |  |  |  |  |
+400 |  |  | -38.5 | % |  | * |  |  |  | -12.5 | %
+300 |  |  | -29.0 | % |  |  | -20.9 | % |  |  | -10.0 | %
+200 |  |  | -19.1 | % |  |  | -13.4 | % |  |  | -7.5 | %
+100 |  |  | -9.8 | % |  |  | -6.4 | % |  |  | -5.0 | %
-100 |  |  | 7.0 | % |  |  | 3.9 | % |  |  | -10.0 | %
-200 |  |  | 10.9 | % |  |  | 5.5 | % |  |  | -15.0 | %
-300 |  |  | 11.4 | % |  |  | 4.4 | % |  |  | -20.0 | %
-400 |  |  | 10.4 | % |  | * |  |  |  | -25.0 | %

* Not calculated for December 31, 2022

The yield curve at September 30, 2023 is very different than that of a year ago. The Federal Open Market Committee, in its intense efforts to diffuse inflation, has raised the discount rate 5.25% throughout the past seven quarters, the fastest pace on record. With the entire curve highly elevated and inverted, asset valuation has declined substantially as evidenced by the 20.9% valuation reserve on the investment portfolio. For interest rate risk modeling purposes, although further rate increases are possible, movement beyond 25 more basis points is doubtful. However, the elevated rates do bring back into play the 400 basis point scenarios, which have not been modeled in recent years. The above table presents results in the up rate scenarios that exceed policy limits for the Economic Value of Equity (“EVE”). This unprecedented outcome was created by the events occurring over the past two years, namely, the massive influx of liquidity in the form of deposits in 2020 and 2021 from government assistance while interest rates were at their lowest; the deployment of those funds at those low rates; and now the usage of those deposits as consumers drain their accounts in this highly inflationary economy and prevent the Company from investing in the higher rates now available. With the EVE model moving rates even higher, it further exacerbates the differential between market rates and book rates, thereby creating the out of policy consequence. To mitigate these results, the Company has prioritized loan growth, while shrinking the investment portfolio, thereby closing the gap between the book rates and market rates. The Company has also utilized wholesale funding in response to deposit shrinkage so as not to incur cost increases on its core deposits.

The remaining results of the simulations indicate that interest rate change results fall within internal limits established by the Company at September 30, 2023 and December 31, 2022. A report on interest rate risk is presented to the Board of Directors and the Asset/Liability Committee on a quarterly basis. The Company has no market risk sensitive instruments held for trading purposes.

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Item 4. Controls a nd Procedures

Based on their evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective. There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a–15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART I I - OTHER INFORMATION

Item 1. L egal Proceedings

The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, although the Company establishes accruals where losses are deemed probable and reasonably estimable. The Company’s assessment of the current exposure with respect to adverse claims in legal matters could change in the event of the discovery of additional facts in such matters or upon determinations by judges, juries, administrative agencies or other finders of fact that are inconsistent with the Company’s evaluation of claims. It is possible that the ultimate resolution of matters, if unfavorable, may be material to the results of operations in a particular future period as the time and amount of any resolution of such actions and its relationship to the future results of operations are not known.

The Company is a defendant in a matter styled Kirt Banister v. Farmers National Bank of Canfield, Case No. 2022-cv-00214, pending in the Court of Common Pleas of Mahoning County, Ohio. The complaint, purportedly brought on behalf of a class consisting of all account holders within the six years preceding the filing of the complaint who were charged more than one NSF fee per item or who were charged an NSF fee on a debit card transaction that was authorized while the account held a positive balance, alleges breach of contract and breach of the duty of good faith and fair dealing and seeks damages in the form of all allegedly unauthorized NSF fees paid by the class. On July 22, 2022, the court denied the Company’s motion to dismiss the claims. Farmers has reached a tentative agreement to settle the matter in its entirety, conditioned on the release of all claims by the participating putative class members and certain other conditions, in an amount not to exceed $785,000, inclusive of all payments to putative class members, attorney fees, and fees and costs associated with claims administration. The tentative agreement will require preliminary and final approval by the court. If the court grants those approvals and the conditions to the settlement are satisfied, the litigation will terminate after payments are made as required by the final approval order.

Item 1A. Risk Fact ors

The Company is exposed to risk when other financial institutions experience financial difficulties which could have an adverse impact on the banking industry environment in which the Company operates. The collapses of Silicon Valley Bank, Signature Bank and First Republic Bank have caused uncertainty in the investor community and banking customers. While the Company does not believe that the circumstances of these three bank failures are indicators of broader issues within the banking system, the failures may reduce customer confidence, affect sources of funding and liquidity, increase regulatory requirements and costs, adversely affect financial markets and/or have a negative reputational ramification for the financial services industry, including the Company. The Company will continue to monitor the ongoing events concerning these three banks as well as any future potential bank failures and volatility within the financial services industry generally, together with any responsive measures taken by the banking regulators to mitigate or manage potential turmoil in the financial services industry.

For further discussion of risk factors related to the Company, refer to Part 1, Item 1A, “Risk Factors,” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

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

Purchases of equity securities by the issuer.

On March 1, 2023, the Company announced that its Board of Directors authorized the purchase of up to 1,000,000 shares of its common stock in the open market or in privately negotiated transactions, from time to time and subject to market and other conditions. This 2023 Repurchase Program supersedes the Company's 2019 share repurchase program. The 2023 Repurchase Program may be modified, suspended or terminated by the Company at any time.

Period |  | Total Number of Shares Purchased |  |  | Average Price Paid per Share |  |  | Total Number of Shares Purchased as Part of Publicly Announced Program |  |  | Maximum Number of Shares that May Yet be Purchased Under the Program |
Beginning balance |  |  |  |  |  |  |  |  |  |  |  | 497,047 |
July 1-31 |  |  | 1,073 |  |  | $ | 12.59 |  |  |  | 0 |  |  |  | 497,047 |
August 1-31 |  |  | 0 |  |  |  | 0.00 |  |  |  | 0 |  |  |  | 497,047 |
September 1-30 |  |  | 0 |  |  |  | 0.00 |  |  |  | 0 |  |  |  | 497,047 |
Ending balance |  |  | 1,073 |  |  |  | 12.59 |  |  |  | 0 |  |  |  | 497,047 |

There was no treasury stock activity under the program during the three month period ended September 30, 2023. The Company did repurchase 850,799 shares during the first quarter of 2023.

Ite m 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine S afety Disclosures

Not applicable.

Item 5. Other Information

Securities Trading Plans of Directors and Executive Officers

During the three months ended September 30, 2023, none of our directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”

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Item 6. Exhibits

The following exhibits are filed or incorporated by reference as part of this report:

3.1 | Articles of Incorporation of Farmers National Banc Corp., as amended (incorporated by reference from Exhibit 4.1 to the Company’s Registration Statement on Form S-3 filed with the Commission on October 3, 2001 (File No. 333-70806)).
3.2 | Amendment to Articles of Incorporation of Farmers National Banc Corp., as amended (incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 1, 2013).
3.3 | Amendment to Articles of Incorporation of Farmers National Banc Corp., as amended (incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 20, 2018).
3.4 | Amended Code of Regulations of Farmers National Banc Corp. (incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 17, 2020).
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Kevin J. Helmick, President and Chief Executive Officer of the Company (principal executive officer) (filed herewith).
31.2 | Rule 13a-14(a)/15d-14(a) Certification of A. Troy Adair, Executive Vice President, Chief Financial Officer and Secretary of the Company (principal financial officer) (filed herewith).
32.1 | Certification pursuant to 18 U.S.C. Section 1350 of Kevin J. Helmick, President and Chief Executive Officer of the Company (principal executive officer) (filed herewith).
32.2 | Certification pursuant to 18 U.S.C. Section 1350 of A. Troy Adair, Executive Vice President, Chief Financial Officer and Secretary of the Company (principal financial officer) (filed herewith).
101 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in iXBRL (Inline Extensible Business Reporting Language), filed herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows; and (vi) Notes to Unaudited Consolidated Financial Statements.
104 | The cover page from the Company’s Quarterly report on Form 10-Q for the quarter ended September 30, 2023, has been formatted in Inline XBRL.

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SIGNAT URES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FARMERS NATIONAL BANC CORP.

Dated: November 8, 2023

/s/ Kevin J. Helmick
Kevin J. Helmick President and Chief Executive Officer

Dated: November 8, 2023

/s/ A. Troy Adair
A. Troy Adair Senior Executive Vice President, Chief Financial Officer and Secretary

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