Salaries and wages decreased $173 thousand in 2012 as compared to 2011. 2011 had increased over 2010 by $439 thousand.
Base salary, incentive, deferred costs from loans and restricted stock awards are compiled in this line item. One similarity between 2012 and 2011 is the increase in the incentive pay for the past two years and is reflective of the Company
outperforming its budget and performing better than the peer average. Base salaries decreased all three years even with the addition of the Hicksville office in July of 2010. Lower loan activity, continued increase in volume of transactions
processed electronically, and a continuing decrease in lobby traffic allowed the Company to decrease the workforce through attrition. Deferred costs from loans, which is an offset to salary expense, was larger in 2012 by $474 thousand
than 2011 and 2011 was smaller by $201.7 thousand than 2010. Again, 2012 is reflective of large refinancing activity of which 2011 experienced lower levels. Occupancy expense decreased by $82 thousand in 2012 as compared to 2011. Although real estate taxes and building repairs were higher, these were offset by lower insurance and utilities costs. Occupancy
expense increased by $45 thousand in 2011 as compared to 2010. The largest expense increase in 2011 occupancy expense was utilities, which was driven by the additional office added in July 2010. Data processing expense increased $141 thousand during 2012 and by only $25 thousand in 2011. A positive reduction in data processing expense of $183
thousand occurred in 2010. The larger reduction in 2010 was mainly due to the reduction of costs as the Bank switched its core service provider in February. The Company continues to investigate ways to reduce this expense. The pricing on many
services, however, is based on number of accounts and the Bank fully expects those to increase with the addition of the Waterville office and overall Bank growth. The FDIC assessment continues to decrease as new regulation changed the method of calculation in the summer of 2011. 2012 represented the first full year under the new method. As can be seen, the change
to calculations based on asset size rather than deposits has been very beneficial to F&M. The last line item in the noninterest expense
is other general and administrative. While it is higher by $944 thousand in 2012 following a decrease of $176 thousand in 2011 over 2010s $4.3 million, the fluctuation is not isolated to a single source. The largest fluctuation relates to
legal and loan collection expenses. 2011 included a reimbursement of over $300 thousand in costs with the collection of one relationship that took three years to complete. ATM expense, consulting and state taxes continue to trend upwards.
The largest cost decrease of $3.6 million to the Bank in 2011 was the Provision for Loan Losses and it was the largest increase in 2010. In
2012, it decreased another $977 thousand as compared to 2011. A tough economic environment existed for most businesses in our primary market area during 2007 through 2010. Gross charge-offs were $6.4 million for 2010 and $2.7 million for 2011, and
$891 thousand for 2012. Recoveries were $286, $351, and $795 thousand for 2012, 2011, and 2010, respectively. For all three years, activity was mainly commercial and commercial real estate driven in the provision allocation with charge-off activity
related to consumer portfolios, including real estate, in 2012. Further analysis by loan type is presented in the discussion of the allowance for credit losses. Net Interest Income The primary source of the Companys traditional banking revenue
is net interest income. Net interest income is the difference between interest income on interest earning assets, such as loans and securities, and interest expense on liabilities used to fund those assets, such as interest bearing deposits and
other borrowings. Net interest income is
affected by changes in both interest rates and the amount and composition of earning assets and liabilities. The change in net interest income is most often measured as a result of two statistics
 interest spread and net interest margin. The difference between the yields on earning assets and the rates paid for interest bearing liabilities supporting those funds represents the interest spread. Because noninterest bearing sources of
funds such as demand deposits and stockholders equity also support earning assets, the net interest margin exceeds the interest spread. Overall, we continue to see compression in the net interest margin and spread with the risk remaining fairly constant. The net interest margin decreased
by 26 basis points and the net interest spread decreased by 24 basis points in comparing 2012 to 2011, with both sides of the equation having lower yields. Major improvement occurred in the decrease of nonaccrual and watch list loans in 2011 with a
slight uptick in 2012 due to one commercial relationship. Nonaccruals had increased during the first part of 2010 and decreased due to charge-off and payoff during the second half, specifically the fourth quarter. In first quarter of 2011, the Bank
collected $640 thousand of nonaccured interest from a large agricultural loan that took three years to collect. During the fourth quarter 2011, the Bank again collected on a large agricultural loan that was in nonaccrual though the collection period
was all in 2011. This was why the loan yield only decreased 4 basis points from 2010. During third quarter 2012, a commercial relationship caused the nonaccrual and impaired loan totals to increase over 2011 yearend levels. Short term rates remained
flat throughout the years and long term rates lowered during the year 2012. Earning assets increased during the year in actual and average
balance. The interest collected on the earning assets decreased; the yield decreasing for 2012 as compared to 2011 and 2010 in all portfolios. The largest decrease in yield occurred in the loans. As a reminder, 2011 included a collection of over
$600 thousand in nonaccrual interest which aided the yield. 2012 was hampered by negative loan growth, lower variable loan repricing and overall loan refinancing. Investment securities had lower yields due to the large amount of calls on government
sponsored agencies and the yield on new purchases as the growth in the portfolio was over $38.2 million in average. It was not unusual for a called security to be replaced with a new security with a yield lower by 50 basis points or more. Overall,
this portfolios yield was 23 basis points lower in 2012 than in 2011, preceded by a 87 basis points drop in 2011 as compared to 2010. Loans which have the highest earning asset yield decreased in average by $11.4 million when comparing 2012 to 2011 average balance and having decreased
$46.6 million in average balance between 2011 and 2010. While the overall change in yield in the loan portfolio for 2011 was due mainly to the change in balance rather than to the change in rate, the 2012 yield was impacted more by rate decrease
than the change in balance. Given that the loan portfolio represented only 56% of the earning assets in 2012 as compared to 59% in 2011 and 67% in 2010, it stands to reason that the overall asset yield decreased in every year since 2009. Coupling
this with the growth in earning assets being invested in securities and Federal Funds Sold and interest bearing bank balances, the overall yield on earning assets decreased 50 basis points as compared to 2011 and 108 basis points lower than 2010.
Spread is the difference between what the Company earns on its assets and what it pays on its liabilities. It is on this spread that the
Company must fund its operations and generate profit. When the asset yield decreases so must the cost of funds to maintain profitability. It becomes increasingly challenging as the asset yield gets closer to the prime lending rate, or the break-even
point, of operations. Looking at the other side of the balance sheet and the interest cost of funds, a decrease in the cost is apparent for
2012 as compared to both 2011 and 2010. Unfortunately, in the three years presented the asset yield decreased more than the cost of funds decreased and the net interest margin and spread decreased as compared to 2009. The impact of the change in the portfolio mix was a factor in the liabilities as it was in the assets. All portfolios decreased in cost of funds in
comparing 2012 to 2011and 2011 to 2010. The growth in balances was related to the growth in the new KASASA product offerings which rewarded customers by paying a higher interest rate for deposits which was offset by noninterest related Bank earnings
and savings. By participating in the KASASA Saver product, a customer may have earned as much as 135 basis points more than the Banks basic savings account. Even with the increased interest cost to the Bank for offering these products, the
Bank was still able to decrease its cost of funds by 26 basis points. Time deposits and other borrowed money both decreased in cost and balances. The Bank borrowed funds from the Federal Home Loan Bank in the first quarter of 2010, to lock in lower
rates to replace maturities coming due in the second through fourth quarter of the year. The Bank did not borrow any additional funds in 2011 or 2012, and the cost of those funds was again lower in 2012 since the associated expense of the matured
advances was gone for a full year. The Bank paid off $5.1 and $3.2 million of FHLB borrowings during 2012 and 2011 respectively. The average balance of other borrowed money was lower by $10.1 and $12.1 million at December 31, 2012 and 2011,
respectively. The following tables present net interest income, interest spread and net interest margin for the three
years 2010 through 2012, comparing average outstanding balances of earning assets and interest bearing liabilities with the associated interest income and expense. The tables show their corresponding average rates of interest earned and paid. The
tax-exempt asset yields have been tax adjusted to reflect a marginal corporate tax rate of 34%. Average outstanding loan balances include non-performing loans and mortgage loans held for sale. Average outstanding security balances are computed based
on carrying values including unrealized gains and losses on available-for-sale securities. The percentage of interest earning assets to total
assets increased in 2012 over 2011 and 2011 over 2010 and remained above 90% at a respectable 94% and 93.9% for 2012 and 2011, respectively. As stated previously, the decreased yield on the assets was greater than the decreased cost of funds during all presented years. While the average
balance on interest bearing liabilities increased, the costs on those funds were significantly lower. The average cost for 2012 was .86% compared to 2011s 1.12% and 2010s 1.53%. The balances in noninterest bearing liabilities also
increased during the last three years. The largest fluctuation in the cost of funds was in the other time deposits. The cost on savings
decreased 10 basis points while on time deposits the cost decreased 33 basis points. The Bank has focused on increasing its core deposit base to lessen the dependency on higher cost time deposits. The Bank has also attempted to increase the duration
of the time deposits; however, customers have maintained a short-term, twelve month focus. The yield on Tax-Exempt investment securities
shown in the following charts were computed on a tax equivalent basis. The yield on Loans has been tax adjusted for the portion of tax-exempt IDB loans included in the total. Total Interest Earning Assets is therefore also reflecting a tax
equivalent yield in both line items, also with the Net Interest Spread and Margin. The adjustments were based on a 34% tax rate. [Remainder of this page intentionally left blank.]


ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following tables show changes in interest income, interest expense and net interest resulting from changes in volume
and rate variances for major categories of earnings assets and interest bearing liabilities.


As mentioned in the discussion earlier, in reviewing the 2012 to 2011 and the 2011 to 2010 comparison, an impact in
change due to volume is evident; however the largest impact was due to rate. The strategy during 2010, 2011 and beyond is to extend the maturities of time deposit specials to over 24 months to prepare for rising rates. The other strategy
employed during 2010 through 2012 was to increase core deposits by offering innovative products focused on customer needs: higher interest rates. In exchange for a high interest-bearing checking account, customers were asked to utilize services that
benefited both the Bank and themselves. Smaller time deposit rate shoppers had an option to perhaps change their behavior of banking or allow those deposits to run off. The new core deposit products were indeed embraced by our customers and have
helped to attain the deposit portfolio mix sought by the Bank. Allowance for Credit Losses The Company segregates its Allowance for Loan and Lease Losses (ALLL) into two reserves: The ALLL and the Allowance for Unfunded Loan Commitments and Letters of Credit (AULC). When combined, these
reserves constitute the total Allowance for Credit Losses (ACL). The Banks ALLL methodology captures trends in leading, current, and
lagging indicators which will directly affect the Banks allocation amount. Trends in such leading indicators as delinquency, unemployment changes in the Banks service area, experience and ability of staff, regulatory trends, and credit
concentrations are employed. A current indicator such as the total watch list loan amount to Capital, and a lagging indicator such as the charge off amount are referenced as well. A matrix is formed by loan type from these indicators that is
responsive in making ALLL adjustments. Special Mention loan balances increased 26.5% or $2.8 million as of 2012 compared to same date 2011.
Substandard and doubtful loan balances increased 7.1% or $793 thousand comparing the same dates as above. In response to this change, the Bank increased its ALLL to outstanding loan coverage percentage to 1.04% as of December 31, 2012 as
compared to 1.01% as of December 31, 2011. The Bank experienced a 4.5% decrease in Special Mention loan balances as of December 31, 2011 as compared to December 31, 2010. The Bank also experienced a 38.5% decrease or $7 million
decrease in Substandard and Doubtful loan balances as of December 31, 2011 as compared to 2010. The above indicators are reviewed
quarterly. Some of the indicators are quantifiable and as such will automatically adjust the ALLL once calculated. These indicators include the ratio of past due loans to total loans, loans past due greater than 30 days, and watch list to capital
ratios with the watch list made up of loans graded 5, 6 or 7 on a 1 to 7 scale, 1 being the best rating. Other indicators use more subjective data to the extent possible to evaluate the potential for inherent losses in the Banks loan
portfolio. For example, the economic indicator uses the unemployment statistics from the communities in our market area to help determine whether the ALLL should be adjusted. At the end of 2011 and 2012, a slight improvement was noted in
unemployment figures and several local firms were calling a small number of employees back from layoff while planning some expansion. The current recalls do not begin to approximate the number of positions lost. All aggregate commercial and agricultural credits including real estate loans of $250,000 and over are reviewed annually by both credit committees and
internal loan review to look for early signs of deterioration. To establish the specific reserve allocation in the instance of real estate, a
discount to the market value is established to account for liquidation expenses. The discounting percentage used for real estate mirrors the discounting of real estate as provided for in the Banks Loan Policy. However, unique or unusual
circumstances may be present which will affect the real estate value and, when appropriately identified, can adjust the discounting percentage at the discretion of management. The ACL increased $165 thousand during 2012, preceded by a $638 thousand decrease during 2011. With the decrease in loan balances, the percentage of ACL to the total loan portfolio actually increased from
1.03% as of December 31, 2011 to 1.07% as of December 31, 2012. As of December 31, 2011, the percentage of ACL to the total loan portfolio decreased to 1.03% from 1.12% as of December 31, 2010, due to the improvement in troubled
loan totals and a past due 30+ days percentage of .67%. This was the lowest since yearend 2006. Please see Note 4 in the consolidated
financial statement for additional tables regarding the composition of the ACL. Federal Income Taxes Effective tax rates were 28.51%, 25.36%, and 25.44%, for 2012, 2011, and 2010, respectively. The effect of tax-exempt interest from holding tax-exempt
securities and Industrial Development Bonds (IDBs) was $677, $689, and $744 thousand for 2012, 2011, and 2010, respectively. 2012 included an increase into a higher tax bracket for income over $10 million. Financial Condition Average earning assets increased $23.5 million during 2012 over 2011 and 2011s were higher by $34.2 million as compared to 2010. The main cause of fluctuation was the Hicksville acquisition and the
repositioning of the balance sheet. Average interest bearing liabilities increased $69 thousand over 2011 and 2011s increased $17.8 million from 2010. The increase in balances was due to the success of the KASASA suite of products to attract
funds into the savings deposit bucket and an increase in Health Savings Accounts. The increases there were larger than the decreases due to debit pay down. Securities The investment portfolio is primarily used to provide overall liquidity for the
Bank. It is also used to provide required collateral for pledging to the Banks Ohio public depositors for amounts on deposit over the FDIC coverage limits. It may also be used to pledge for additional borrowings from third parties. Investments
are made with the above criteria in mind while still seeking a fair market rate of return, and looking for maturities that fall within the projected overall strategy of the Bank. The possible need to fund growth is also a consideration. All of the Banks security portfolio is categorized as available for sale, with the exception of stock, and as such is recorded at market value.
Security balances as of December 31 are summarized below:


The following table sets forth the maturities of investment securities as of December 31, 2012 and the weighted
average yields of such securities calculated on the basis of cost and effective yields weighted for the scheduled maturity of each security. Tax-equivalent adjustments, using a thirty-four percent rate have been made in yields on obligations of
state and political subdivisions. Stocks of domestic corporations have not been included. [Remainder of this page
intentionally left blank.] Securities (Continued)


As of December 31, 2012 the Bank did not hold a large block of any one investment security, except for U.S.
Government agencies. The Bank also holds stock in the Federal Home Loan Bank of Cincinnati at a cost of $4.2 million. This is required in order to obtain Federal Home Loan Bank loans. The Bank also acquired stock in the Federal Home Loan Bank of
Indianapolis at a cost of $231.4 thousand through its acquisition of Knisely Bank. There were no borrowings at the time of acquisition associated with Federal Home Loan Bank of Indianapolis. The Bank had requested Federal Home Loan Bank of
Indianapolis to buy back its stock when the acquisition of Knisely was completed in January 2008. A five year waiting period was imposed and the stock will be redeemed in full in 2013. An early redemption of 42,000 shares occurred in 2010 with
another 41,000 shares redeemed in 2011. These decreased the holdings to a value of $148.4 thousand. The Bank also owns stock of Farmer Mac with a carrying value of $37.4 thousand which is required to participate loans in the program. Loan Portfolio The Banks various
loan portfolios are subject to varying levels of credit risk. Management mitigates these risks through portfolio diversification and through standardization of lending policies and procedures. Risks are mitigated through an adherence to Loan Policy with any exception being recorded and approved by senior management or committees comprised of
senior management. Loan Policy defines parameters to essential underwriting guidelines such as loan-to-value ratio, cash flow and debt-to-income ratio, loan requirements and covenants, financial information tracking, collection practice and others.
Limitation to any one borrower is defined by the Banks legal lending limits and is stated in policy. On a broader basis, the Bank restricts total aggregate funding in comparison to Bank capital to any one business or agricultural sector by an
approved sector percentage to capital limitation. The following table shows the Banks loan portfolio by category of loan as of
December 31st of each year, including loans held for
sale:


The following table shows the maturity of loans as of December 31, 2012:


The following table presents the total of loans due after one year which has either 1) predetermined interest rates
(fixed) or 2) floating or adjustable interest rates (variable):


The following table summarizes the Companys nonaccrual and past due 90 days or more and still accruing
loans as of December 31 for each of the last five years:


Although loans may be classified as non-performing, some pay on a regular basis, and many continue to pay interest
irregularly or at less than original contractual rates. Interest income that would have been recorded under the original terms of these loans was $544.8 thousand for 2012, $101.6 thousand for 2011, and $910 thousand for 2010. Any collections of
interest on nonaccrual loans are included in interest income when collected unless it is on an impaired loan with a specific allocation. A collection of interest on an impaired loan with a specific allocation is applied to the loan balance to
decrease the allocation needed. Total interest collections whether on an accrued or cash basis amounted to $26 thousand for 2012, $1.2 million for 2011 and $61 thousand for 2010. None of the interest collected in 2012 or 2011 was applied to reduce a
specific allocation. $3 thousand of interest collected in 2010 was applied to reduce the specific allocation. Loans are placed on nonaccrual
status in the event that the loan is in past due status for more than 90 days or payment in full of principal and interest is not expected. The loss of interest due to the high balances in nonaccruals as of 2010 and 2012 impacted the yield on loans.
The collection of interest on nonaccrual loans helped the yield in 2011. December 31, 2012 had nonaccrual loan balances of $4.8 million compared to $2.1 and $5.8 million nonaccrual loan balances as of yearend 2011 and 2010, respectively.
All of the balances of nonaccrual loans for the three years were secured. As of December 31, 2012 the Bank had $24.7 million of loans
which it considers to be potential problem loans in that the borrowers are experiencing financial difficulties compared to December 31, 2011 when the Bank had $22.7 million of these loans. These loans are subject to constant management
attention and are reviewed at least monthly. The amount of the potential problem loans was considered in managements review of the loan
loss reserve required at December 31, 2012 and 2011. In extending credit to families, businesses and governments, banks accept a measure
of risk against which an allowance for possible loan loss is established by way of expense charges to earnings. This expense, used to enlarge a banks allowance for loan losses, is determined by management based on a detailed monthly review of
the risk factors affecting the loan portfolio, including general economic conditions, changes in the portfolio mix, past due loan-loss experience and the financial condition of the banks borrowers. As of December 31, 2012, the Bank had loans outstanding to individuals and firms engaged in the various fields of agriculture in the amount of $57.8
million with an additional $40.1 million in agricultural real estate loans. The ratio of this segment of loans to the total loan portfolio is not considered unusual for a bank engaged in and servicing rural communities. Loan modifications granted are typically for seasonality issues where cash flow is decreased. The time period involved is generally quite short in
relation to the loan term. For example, a typical modification may consist of interest only payments for 90 days. We consider this treatment of interest only payments for a short time as an insignificant delay in payment. Consequently, we do not
consider these occurrences as troubled debt restructurings. Interest rate modification to reflect a decrease in market interest rates or maintain a relationship with the debtor, where the debtor is not experiencing financial difficulty
and can obtain funding from other sources, is not considered a troubled debt restructuring. As of December 31, 2012, the Bank had $5.5 million of its loans that were classified as troubled debt restructurings. The Bank had almost $3.2 million
classified as such as of December 31, 2011. The Bank is occasionally ordered by the courts to give terms to a borrower that are better than what the Bank would like for the risk associated with that credit but not below or beyond rates and
terms available for better credits in our market. Therefore, the Bank has not done any modifications that it would classify as troubled debt restructurings under those circumstances. Updated appraisals are required on all collateral dependent loans once they are deemed impaired. The Bank
may also require an updated appraisal of a watch list loan which the Bank monitors under their loan policy. On a quarterly basis, Bank management reviews properties supporting asset dependent loans to consider market events that may indicate a
change in value has occurred. To determine observable market price, collateral asset values securing an impaired loan are periodically
evaluated. Maximum time of re-evaluation is every 12 months for chattels and titled vehicles and every two years for real estate. In this process, third party evaluations are obtained and heavily relied upon. Until such time that updated appraisals
are received, the Bank may discount the existing collateral value used. Performing non-watch list customers secured in whole or in part by
real estate do not require an updated appraisal unless the loan is rewritten and additional funds advanced. Watch List customers secured in whole or in part by real estate require updated appraisals every two years. All loans are subject to loan to
values as found in Loan Policy no matter what their grade. Our watch list is reviewed on a quarterly basis by management and any questions to value are addressed at that time. The majority of the Banks loans are made in the market by lenders that live and work in the market. Thus, their evaluation of the independent valuation is also valuable and serves as a double check.
On extremely rare occasions, the Bank will make adjustments to the recorded values of collateral securing commercial real estate loans
without acquiring an updated appraisal for the subject property. The Bank has no formalized policy for determining when collateral value adjustments between regularly scheduled appraisals are necessary, nor does it use any specific methodology for
applying such adjustments. However, on a quarterly basis as part of its normal operations, the Banks senior management and the Loan Review Committee will meet to review all commercial credits either deemed to be impaired or on the Banks
Watch List. In addition to analyzing the recent performance of these loans, management and the Loan Review Committee will also consider any general market conditions that might warrant adjustments to the value of particular real estate
collateralizing commercial loans. In addition, management conducts annual reviews of all commercial loans exceeding certain outstanding balance thresholds. In each of these situations, any information available to management regarding market
conditions impacting a specific property or other relevant factors is considered, and lenders familiar with a particular commercial real estate loan and the underlying collateral may be present to provide their opinion on such factors. If the
available information leads management to conclude a valuation adjustment is warranted, such an adjustment may be applied on the basis of the information available. If management concludes that an adjustment is warranted but lacks the specific
information needed to reasonably quantify the adjustment, management will order a new appraisal on the subject property even though one may not be required under the Banks general policies for updating appraisal. Note 4 of the Consolidated Financial Statements may also be reviewed for additional tables dealing with the Banks loans and ALLL. ALLL is evaluated based on an assessment of the losses inherent in the loan portfolio. This assessment results in an allowance consisting of two
components, allocated and unallocated. Management considers several different risk assessments in determining ALLL. The allocated component
of ALLL reflects expected losses resulting from an analysis of individual loans, developed through specific credit allocations for individual loans and historical loss experience for each loan category. For those loans where the internal credit
rating is at or below a predetermined classification and management can reasonably estimate the loss that will be sustained based upon collateral, the borrowers operating activity and economic conditions in which the borrower operates, a specific
allocation is made. For those borrowers that are not currently behind in their payment, but for which management believes based on economic conditions and operating activities of the borrower, the possibility exists for future collection problems, a
reserve is established. The amount of reserve allocated to each loan portfolio is based on past loss experiences and the different levels of risk within each loan portfolio. The historical loan loss portion is determined using a historical loss
analysis by loan category. The unallocated portion of the reserve for loan losses is determined based on managements assessment of
general economic conditions as well as specific economic factors in the Banks marketing area. This assessment inherently involves a higher degree of uncertainty. It represents estimated inherent but undetected losses within the portfolio that
are probable due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrowers financial condition and other current risk factors that may not have yet manifested themselves in
the Banks historical loss factors used to determine the allocated component of the allowance. Actual charge-off of loan balances is based upon periodic evaluations of the loan portfolio by management.
These evaluations consider several factors, including, but not limited to, general economic conditions, financial condition of the borrower, and collateral. As presented below, charge-offs decreased to $891 thousand for 2012 and $2.7 million for 2011 preceded by an increase to $6.4 million for 2010. The provision also decreased in 2012 and 2011 and increased
for 2010. 2012 had provision expense of $738 thousand compared 2011 had provision expense of $1.7 million and 2010 expense of $5.3 million. The Commercial and Industrial portfolio had the largest net charge-off position in 2009 thru 2011. The loan
categories, consumer real estate and consumer & other loans, had the largest net charge-off position in 2012. The ratio of net charge offs to average loans outstanding is evidence of the recognition of troubled loans and the write down of
collateral values. The improvement in asset quality during the periods shown is reflected in the increased percentage of the allowance for loan loss to nonperforming loans. The increase percentage of ACL to total loans ratio provides for the high level of nonaccrual and watch list loans and recognizes the extended time period with which it has taken to achieve resolution
and/or collection of these loans. The ALLL for 2010 and 2011 decreased due to the improvement in the asset quality as the balances in impaired loans and nonaccruals were drastically reduced over the same time periods. In 2012, the increase is to
offset the higher yearend watch list values. A smaller portion of the allowance was needed to fund the impaired loans as collateral remained sufficient to cover the outstanding amounts in most cases. [Remainder of this page intentionally left blank.] The following table presents a reconciliation of the allowance for credit losses for the years ended
December 31, 2012, 2011 and 2010:


*
Nonperforming loans are defined as all loans on nonaccrual, plus any loans past due 90 days not on nonaccrual. Allocation of ALLL per Loan Category in terms of dollars and percentage of loans in each category to total
loans is as follows:


Deposits The amount of outstanding time certificates of deposits and other time deposits in amounts of $100,000 or more by maturity as of December 31, 2012
are as follows:

(In Thousands)

Over Three

Over Six

Months

Months Less

Over

Under

Less than

Than One

One

Three Months

Six Months

Year

Year

 Time Deposits

$
12,600

$
19,226

$
31,545

$
58,404

The following table presents the average amount of and average rate paid on each deposit category:


Liquidity Liquidity remains high and the Bank has access to $42 million of unsecured borrowings through correspondent banks and $159 million of unpledged securities which may be sold or used as collateral. An
additional $6.2 million is also available from the Federal Home Loan Bank based on current collateral pledging with up to $128 million available provided adequate collateral is pledged. Maintaining sufficient funds to meet depositor and borrower needs on a daily basis continues to be among our managements top priorities. This is accomplished not only by the immediately liquid
resources of cash, due from banks and federal funds sold, but also by the Banks available for sale securities portfolio. The average aggregate balance of these assets was $397.3million for 2012, compared to $356 million for 201, and $274
million for 2010. This represented 42.5 percent, 39 percent, and 31.3 percent of total average assets, respectively. Of the almost $356 million of debt securities in the companys portfolio as of December 31, 2012, $50.7million or 14.3
percent of the portfolio is expected to receive payments or mature in 2013. The availability of the funds may be reduced by the need to utilize securities for pledging purposes on public deposits. This liquidity provides the opportunity to fund loan
growth without having to aggressively price deposits. Historically, the primary source of liquidity has been core deposits that include
noninterest bearing and interest bearing demand deposits, savings, money market accounts and time deposits of individuals. Core deposits increased as of yearend balances in 2012, in all categories. Overall deposits increased an average of $20.7
million during 2012 compared to 2011s increase over 2010 of $34.6 million in average deposits. These represent changes of 2.9 percent and 8.3 percent in average total deposits, respectively. The Bank also utilized Federal Funds purchased at
times during 2011 and 2012. The average balance for 2012 was $2 thousand, which was mainly for verification of borrowing procedures should the need arise. Again, historically, the primary use of new funds is placing the funds back into the community through loans for the acquisition of new homes, consumer products and for business development. The use of
new funds for loans is measured by the loan to deposit ratio. The Companys average loan to deposit ratio for 2012 was 65 percent, 2011 was 68.24 percent and 2010 was 78.13 percent. The lower ratios in 2012 and 2011 were due to the success of
the deposit gathering function, the residential mortgage loans being sold in the secondary market and the lack of loan demand. The Companys goal is for this ratio to be higher with loan growth being the driver; however, this was and may be
difficult to achieve in 2013 with borrowers still taking a conservative approach to increasing their liabilities. Short-term debt such as
federal funds purchased and securities sold under agreement to repurchase also provides the Company with liquidity. Short-term debt for both federal funds purchased and securities sold under agreement to repurchase amounted to $51.3 million at the
end of 2012 compared to $52.4 million at the end of 2011 and to $51.2 million at the end of 2010. These accounts are used to provide a sweep product to the Banks commercial customers. Though no federal funds were purchased at year end, the Bank does have arrangements with correspondent Banks that can be utilized when necessary. Other borrowings are also a source of funds. Other borrowings consist of loans from the Federal Home Loan Bank of Cincinnati. These funds are then used to provide fixed rate mortgage loans secured by
homes in our community. Borrowings from this source decreased by $5.1 million to $11.6 million at December 31, 2012. This compares to decreased borrowings during 2011 of $13.2 million to $16.7 million at December 31, 2011 and increased
borrowings during 2010 of $4.3 million to $29.9 million to end at December 31, 2010. The decreased borrowings were payoffs of matured notes in 2011 and 2012. Sufficient funds were available to fund growth so new advances were not needed.
Asset/Liability Management The primary functions of asset/liability management are to assure adequate liquidity and maintain an appropriate balance between interest earning assets
and interest bearing liabilities. It involves the management of the balance sheet mix, maturities, re-pricing characteristics and pricing components to provide an adequate and stable net interest margin with an acceptable level of risk. Interest
rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. Changes in net income, other than those related to volume arise when interest rates on assets re-price in a time frame or interest rate environment that is different from that of the re-pricing period for
liabilities. Changes in net interest income also arise from changes in the mix of interest-earning assets and interest-bearing liabilities. Historically, the Bank has maintained liquidity through cash flows generated in the normal course of
business, loan repayments, maturing earning assets, the acquisition of new deposits, and borrowings. The Banks asset and liability management program is designed to maximize net interest income over the long term while taking into
consideration both credit and interest rate risk. Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. Overnight federal funds on which rates change daily and loans that are tied to the
market rate differ considerably from long-term investment securities and fixed rate loans. Similarly, time deposits over $100,000 and money market certificates are much more interest rate sensitive than passbook savings accounts. The Bank utilizes
shock analysis to examine the amount of exposure an instant rate change of 100, 200, and 300 basis points in both increasing and decreasing directions would have on the financials. Acceptable ranges of earnings and equity at risk are established and
decisions are made to maintain those levels based on the shock results. Impact of Inflation and Changing Prices The consolidated financial statements and notes thereto presented herein have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in
the increased cost of the Companys operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Companys performance
than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and service. Contractual Obligations Contractual Obligations of the Company totaled $333.4 million as
of December 31, 2012. Time deposits represent contractual agreements for certificates of deposits held by its customers. Long term debt represents the borrowings with the Federal Home Loan Bank and is further defined in Note 4 and 9 of the
Consolidated Financial Statements.


Capital Resources Stockholders equity was $110.2 million as of December 31, 2012 compared to $105.1 million at December 31, 2011. Dividends declared during 2012 were $0.78 per share totaling $3.64 million
and 2011 were $0.76 per share totaling $3.56 million. During 2012, the Company purchased 42,144 shares and awarded 11,000 restricted shares to 54 employees. For a summary of activity as it relates to the Companys restricted stock awards,
please refer to Note 11: Employee Benefit Plans in the consolidated financial statements. At yearend 2012, the Company held 515,942 shares in Treasury stock and 30,670 shares in unearned stock awards as compared to 2011, the Company held 483,663
shares in Treasury stock and 29,715 in unearned stock awards. On January 18, 2013 the Company announced the authorization by its Board of Directors for the Companys repurchase, either on the open market, or in privately negotiated
transactions, of up to 200,000 shares of its outstanding common stock commencing January 18, 2013 and ending December 31, 2013. Capital Resources (Continued) The Company continues to have a strong capital base and to maintain regulatory capital ratios that are significantly above the defined regulatory capital ratios. At December 31, 2012, The Farmers & Merchants State Bank and Farmers & Merchants Bancorp, Inc had total risk-based capital ratios
of 14.74% and 17.35%, respectively. Core capital to risk-based asset ratios of 13.85% and 16.45% are well in excess of regulatory guidelines. The Banks leverage ratio of 8.92% is also substantially in excess of regulatory guidelines as is the
Companys at 10.67%. For further discussion and analysis of regulatory capital requirements, refer to Note 14 of the Audited Financial Statements. The Companys subsidiaries are restricted by regulations from making dividend distributions in excess of certain prescribed amounts. Upon prior regulatory approval, the Bank may be allowed to pay
above the prescribed amount.


The following tables show changes in interest income, interest expense and net interest resulting from changes in
volume and rate variances for major categories of earnings assets and interest bearing liabilities.


Non-Interest Income In
comparing line items of the consolidated statements of income for years ended 2015 through 2017, it can be seen where the Company has been spending its time and the impact of the recession and slow recovery. This section will focus on the
significant noninterest items that impacted the operations of the Company. Non-interest income decreased in total for 2017 as compared to 2016, ending at
$10.7 million. 2016 had non-interest income of $11.4 million which had exceeded 2015s $10.8 million. The Company has concerns with the increased costs associated with regulatory compliance such as the possible loss
of revenue from new regulations stemming from the Dodd-Frank Act. History has proven the concern is justified. One area of revenue impacted was overdraft fees. The Bank has ended each of the last 4 years with a lower revenue stream from overdraft
fees. This has occurred in spite of the addition of the new offices. Each year, the number of checking accounts has increased along with the balances; however average collected overdraft fees per account decreased. Overdraft fees in 2017 accounted
for $2.3 million, 2016 and 2015 accounted for $2.4 million in noninterest income. The Bank had made this an area of focus for 2015 as this revenue stream remains under intense regulator review. In 2015, the Bank adjusted its overdraft program and
renamed it Courtesy Pay. Courtesy Pay establishes dynamic limits based on a customers behavior and likelihood of repayment. The Bank has sought to better service the customers needs while decreasing the need for collections
and improving profitability. At the current time, profitability has not improved and in 2016 it only slowed the amount of decrease. Service charges on checking accounts increased for 2017. During the second quarter 2017, new business checking
products were announced and existing business accounts were converted to one of three new products, Business Essential, Edge or Elite. The new products provided customers with new options to bundle services and for the Bank to utilize the full
relationship to determine pricing. This was the next step of implementation for the Banks earn to free strategic initiative. Upgrades to our digital products and services continue to occur in both retail and business lines.
Increases in the number of accounts and the number of services being utilized by our customers accounted for the increase in fees. These fees were up $292.7 thousand in 2017 as compared to 2016. Service charges on checking accounts had leveled off
in 2016 only $67.7 thousand higher than 2015. This improvement is credited to the new checking accounts mentioned previously. The Bank has long promoted
the use of debit cards by its customers and continued that philosophy with the introduction of additional new products. 2017 revenue improved $172.5 thousand, 2016 revenue improved $122.4 thousand, and 2015 revenue improved $142.9 thousand from
ATM/debit card usage as compared to each of the respective prior years. The Bank receives interchange revenue from each use by a customer of a Bank issued ATM/debit the card. While this revenue stream continues to improve with more depositors using
electronic methods for purchasing, the expense attributable to card fraud has offset a portion of the revenue gain. Further discussion can be found in the non-interest expense section regarding the net effect of debit card activity. Noninterest income from net gain on sales of loans was the highest in 2016 of the three year periods shown. The change may be related to the increase in rates
after the long duration of the flat interest rate environment. The net gain on sale of loans is derived from sales of real estate loans into the secondary market. Of these loan types, the Bank sells 100% of the residential loans and 90% of the
agricultural loans into the secondary market. Gains of $648.9 and $162.2 thousand were recorded for residential and agricultural real estate respectively for 2017. Gains of $683.7 and $204.0 thousand were recorded for residential and agricultural
real estate respectively for 2016. Gains of $559.6 and $140.8 thousand were recorded for residential and agricultural real estate respectively for 2015. In conjunction with these sales, the Bank maintains servicing rights and those income amounts
during all three years are included in the customer service fees line item and accounted for $460 thousand in 2017, $555.3 thousand in 2016 and $406.5 thousand in revenue for 2015. The last line item in the noninterest income section is the net gain on sale of investments. The Bank has taken advantage of this opportunity the last three
years and expects to continue as long as the yield curve is favorable to the transaction. The Bank will not increase short-term gains at the sacrifice of long-term profitability. The opportunity greatly lessened in 2017 with the increase in rates.
The available for sale security portfolio switched from an unrealized gain position into an unrealized loss position. The decrease in the balance of the security portfolio was due to calls and maturities and not sales made during 2017. Sales were
made early in the first quarter before the additional rate hike in March and in May before the rate hike in June occurred and with much lower gains than in the prior years. All of the sales of securities in 2017, 2016 and 2015 of $13.6, $85.7, and
$47.0 million respectively were used to fund loan growth. This is a source of funds that will continue to be analyzed for use in the coming year. Gains of $47 thousand were recorded for 2017, $588 thousand for 2016, and $451 thousand for 2015. This
line item was largely responsible for the lower non-interest income of 2017 as compared to 2016 and 2015. Non-Interest Expense Noninterest expense increased 4.7% in 2017 as compared to 2016 and was preceded by a 5.2% increase in 2016 as compared to 2015. Represented in dollars, 2017
was $1.3 million higher than 2016 and 2016 was $1.4 million higher than 2015. The largest factor behind the increase in both years was the expense of employee salaries and wages. During 2017, an additional $993 thousand was spent over 2016 which
correlates to an 8.6% increase. When making the same analysis for 2016 as compared to 2015, 2016s costs increased $713 thousand or 6.5%. Three main components flow
into salaries and wages: base salary, deferred costs, and incentives composed of the expense of restricted stock awards and performance incentives. Base pay has increased with the addition of the
three offices of Huntertown, Bowling Green and Sylvania, as well as from the operations of the Captive and through normal yearly increases to the remainder of the employees. Base pay was up $731.2 thousand for 2017 over the previous year and 2016
was up $669.7 thousand over 2015. The full time equivalent number of employees at each yearend increased to 275 for 2017, to 273 for 2016 compared to 2015s 265. Incentive pay as it related to performance was up $234.2 thousand in 2017 over 2016 and up $177.4 thousand in 2016 over 2015. Measurements used for award
incentive pay had improved in 2017 and 2016 and employees benefited accordingly. The expense for the restricted stock awards has also increased each of the last three years as more shares have been granted to a larger number of employees and the
market value of the shares has increased. The market value of the Companys stock increased significantly with the listing on NASDAQ and being included in the Russell 3000 Index during the second quarter of 2017. An equivalent number of
restricted shares were awarded as compared to 2016 though the value of these rewards was higher; therefore the expense for 2017 was higher by $105.3 thousand as compared to 2016 and will likely be higher in 2018 due to the value of the 2017 awards.
2016s cost for this program was $87.9 thousand higher than 2015. The awards incorporate a three year vesting period so the increase of any one year carries forward through the next two years. This expense should continue to increase as the
Company continues its expansion strategy. For further discussion in incentive pay and restricted stock awards, see Note 11 of the consolidated financial statements. Along with the salary and wage increase was an increase in employee benefits in 2017 as compared to 2016. Employee group insurance accounted for the largest
portion of the cost, which was an increase of $181.9 thousand over 2016. This was due to an increase in the cost to provide to a larger number of employees along with a higher level of medical claims. The cost of the 401-K retirement plan also
increased $72.7 thousand for 2017 as compared to 2016. Overall, employee benefits increased $312 thousand or 9.4% from 2016. Employee benefits decreased
in 2016 which correlated directly to a lower level of medical expense. As the Bank is partially self-insured, lower claims during 2016 decreased the expense. The cost of the 401-K retirement plan increased each year as the profit share component
increased along with the number of employees participating. Employee group insurance was down $266.9 thousand for 2016. Overall, employee benefits were down $232 thousand or 6.5% from 2015. Net occupancy expense typically increases as the Company expands, which is what has occurred for 2017 and 2016. One factor that can offset occupancy expense
is the receipt by the Company of building rent as it is netted out of occupancy expense. The greatest contributor to building rent comes from the division of FM Investments within the Bank. This division experienced a stronger 2017; however the
department was short staffed most of 2015 and 2016. The improved performance of $85.9 thousand in 2017 assisted in keeping the overall increase to net occupancy to $30 thousand. The 1-4 family mortgage refinancing activity has been slow over the last three years though increasing slightly each year. A correlating expense to that
activity is the amortization of mortgage servicing rights. The amortization is the expense that offsets the income recognized when the loan is first made. Income is recorded when the mortgage loan is first sold with servicing retained and is
therefore recognized within one year. The amortization, however, is calculated over the life of the loan and accelerated as loans are paid off early. An increase in this expense can be driven by two activities: an increase in the number of sold
loans and/or by the acceleration of the expense from payoff and refinance activity. The best picture of the bottom line impact is achieved by netting the income with the expense each year. The line items for 2017 indicate a higher number of new
loans versus refinances as compared to 2016. The net income for 2017 was $107 thousand; 2016 had net income of $136 thousand and was preceded by net income of $33 thousand for 2015. Of course, the value (or income) of the mortgage servicing right
when sold also impacts the net position. As of December 31, 2017, 3,636 loans are being serviced with corresponding balances of $288.6 million. 2016 had 3,599 loans serviced with corresponding balances of $280.4 million. This was almost
identical to the December 31, 2015 number and balance of loans 1-4 family being serviced. As of December 2015, 3,598 loans were being serviced with balances of $275.7 million. The impact of mortgage servicing rights to both noninterest income and expense is shown in the following table:


Furniture and equipment steadily increases as we continue to add facilities and invest in technology. Annual maintenance costs
continue to grow and become a greater piece of the overall cost. As new services are provided to our customers, the backroom cost to supply them continues to rise. The Company accepts it is an expected cost of doing business and keeping our services
relevant to the industry. Data processing costs were actually lower in 2017 as compared to 2016 by $196 thousand. Two reasons for the improvement was the
negotiation of an extended contract with our core processor and 2016 had the additional cost of upgrading Bank customer debit cards to incorporate EMV chip card technology. Both already better align with our future strategies while controlling
costs. Data processing expense increased $109 thousand during 2016 as compared to an increased $50 thousand during 2015. The Bank began conducting a
review of its core operating system in 2015 which culminated with a decision in the summer 2016 to extend the contract with the Banks existing provider, Fiserv, for an additional seven year period. The Bank saw a current reduction in monthly
expenses, though that reduction will be utilized to provide additional new product offerings and fund growth. The pricing on many services, however, is based on number of accounts and the Bank fully expects those to increase with the growth from the
newer offices and overall Bank growth. Overall, data processing expense for 2018 may be similar or slightly higher to 2017 with a wider variety of customer offerings. The FDIC assessment has a decreasing cost trend and that is expected to continue into 2018 as the fourth quarter 2017 assessment was again below that of the
previous quarter. This line item speaks to the health of the Bank and the financial industry. The assessment for 2017 was down $77 thousand from 2016 and the assessment for 2016 was down $78 thousand from 2015. The last line item with significant variation in noninterest expense to discuss is other general and administrative. Though 2017 did not increase
by as large an amount as 2016 had when compared to 2015, it was still an increase of $200 thousand. The two main reasons behind the increase were the costs associated with listing on the NASDAQ stock market and the cost of offering the Insured Cash
Sweep product. Both of these costs have been previously explained along with the benefits that have been provided by incurring said costs. The increase in 2016 over 2015 was much higher at $439 thousand. $249 thousand of the increased expense was a
result of managements decision to accelerate the issuance of chip debit cards along with the normal replacement of cards due to fraud and expiration dates. The chip enhanced cards were to help decrease fraud and establish liability
with the merchant if the chip was not used in the transaction. The Banks cost due to fraud was not lower in 2016; however it helped to mitigate fraud losses in 2017. Advertising and public relations increased also in 2016 by $113 thousand.
With the addition of new offices, the credit card launch in conjunction with Bowling Green State Universitys athletic department, it was expected to be higher than 2015. The Bank also celebrates the anniversary of office openings with a
special event in each community. Allowance for Credit Losses Provision expense decreased by $899 thousand for 2017 as compared to 2016. Provision expense increased by $496 thousand for 2016 in response to the significant
loan growth for the period. The decrease for 2017 was due to the consistent strong asset quality of the Banks loan portfolio as evidenced by low levels of both net charge-offs and delinquencies. Sustained strong asset quality kept the
provision expense lower than the growth alone would have warranted. Net charge-offs were $138, $394, and $473 thousand for 2017, 2016 and 2015, respectively. The consumer portfolios had the highest levels of charge-off activity in 2017 and 2016 at
$263 and $310 thousand
respectively. Net charge offs in the consumer portfolio was $161 and $223 thousand for 2017 and 2016 respectively. The Company segregates its Allowance for Credit Losses (ACL) into two reserves: The ACL and the Allowance for Unfunded Loan Commitments and Letters of Credit
(AULC). When combined, these reserves constitute the total ACL. The AUCL is included in other liabilities on the consolidated balance sheets. The
Banks ALLL methodology captures trends in leading, current, and lagging indicators which will directly affect the Banks allocation amount. The Bank monitors trends in such leading indicators as delinquency, unemployment changes in the
Banks service area, experience and ability of staff, regulatory trends, and credit concentrations. A current indicator such as the total watch list loan amount to Capital, and a lagging indicator such as the charge off amount are referenced as
well. A matrix formed by loan type from these indicators is used in making ALLL adjustments. Watch list loan balances are comprised of loans graded 5-8.
At yearend December 31, 2017 these loans totaled $20.8 million and were $75.9 thousand lower than December 31, 2016. The balances were very similar; however, approximately $1.3 million moved from Agricultural to Commercial Real Estate
between yearend 2017 and 2016. Grade 5 decreased $1.8 million in 2017 as compared to 2016 and Grade 6 increased in the same comparison. The majority of the downgrade is represented by one commercial customer. Those associated loans are adequately
secured by collateral. These loan balances increased $14.3 million as of December 31, 2016 as compared to same date 2015. The largest increases occurring in the lowest risk grade of 5. The loan grades of 7, which have a greater likelihood of
default, all decreased for 2016. All other measurements of asset quality improved during 2016. At December 31, 2017, 49.8% of the watch list was
classified as special mention, with an additional 49.3% classified as substandard. A very small 0.6% or $111.3 thousand of the $20.8 million watch list was classified as doubtful. At yearend 2016, 59.7% of the watch list was comprised of loans
classified as special mention, with an additional 39.0% classified as substandard and the remaining 1.3% classified as doubtful. The large increases in special mention and substandard were mainly driven by two loan relationships in the Banks
commercial real estate portfolio. Of the aggregate watch list loan balances, as of December 31, 2015, special mention accounted for 36.6% with
substandard comprising 49.1% and doubtful accounting for the final 14.3%. In response to these fluctuations and loan growth during 2015 through 2017, the
Banks ALLL to outstanding loan coverage percentage changed to 0.83% as of December 31, 2017, 0.89% as of December 31, 2016, and 0.88% as of December 31, 2015. The above indicators impacting ALLL are reviewed quarterly. Some of the indicators are quantifiable and, as such, will automatically adjust the ALLL once
calculated. These indicators include the ratio of past due loans to total loans, loans past due greater than 30 days, and the ratio of watch list loans to capital, with the watch list made up of loans graded 5, 6 or 7 on a scale of 1 (best) to 7
(worst). Other indicators consist of more subjective data used to evaluate the potential for inherent losses in the Banks loan portfolio. For example, the economic indicator uses the unemployment statistics from the communities in our market
area to help determine whether the ALLL should be adjusted. At the end of each of 2015, 2016 and 2017, improvements were noted in unemployment figures. All aggregate commercial and agricultural credits including real estate loans of $250,000 and over are reviewed annually by both credit committees and
internal loan review to look for early signs of deterioration. To establish the specific reserve allocation for real estate, a discount to the market
value is established to account for liquidation expenses. The discounting percentage used for real estate mirrors the discounting of real estate as provided for in the Banks Loan Policy. However, unique or unusual circumstances may be present
which will affect the real estate value and, when appropriately identified, can adjust the discounting percentage at the discretion of management. The
ACL increased $94, $736, and $153 thousand during 2017, 2016 and 2015 respectively. The large increase in 2016 directly correlates to the large increase in loan balances. With the improved asset quality, the metrics upon which the ACL is calculated
did not support a larger increase in 2017 even though loan growth occurred. The percentage of ACL to the total loan portfolio was 0.91% as of December 31, 2015 and 0.92% as of December 31, 2016, and 0.86% as

of December 31, 2017. December 31, 2017 had the lowest loans past due 30+ day percentage at 0.13% in the last ten years. December 31, 2015 and 2016 were still at respectable lows
of 0.32% and 0.23%. Please see Note 4 in the consolidated financial statement for additional tables regarding the composition of the ACL. Federal Income Taxes Effective tax rates were 28.95%,
28.53%, and 26.97%, for 2017, 2016 and 2015 respectively. The effect of tax-exempt interest from holding tax-exempt securities and Industrial Development Bonds (IDBs) was $413, $468, and $554 thousand for 2017, 2016, and 2015, respectively. All
years included an increase into a higher tax bracket for income over $10 million. Behind the decrease in 2015 is one of the benefits from the establishment of the Captive subsidiary. Material Changes in Financial Condition The shifts in
the balance sheet during 2017 and 2016 have positioned the Company for continued improvement in profitability. On the asset side, interest income increased primarily from loan growth with funding for the increase provided by a decrease in the
investment portfolio, growth in core deposits and growth in other borrowings generated in 2015 which carried over to 2016 and most of 2017. $5 million of other borrowings were paid off in December of 2017. The cost of funds was impacted by the
increase of both interest bearing liabilities and noninterest bearing deposits. Both contributed to improved profitability in 2017 and 2016, and the Company expects continued improvement through 2018. Average earning assets increased in balances throughout 2017 and 2016. Newer offices have contributed the most towards new loan production. Loan growth in
both years was the main factor. 2016 had two offices open, one in each half of the year and operating fully throughout 2017. An additional office will open in early 2018. Securities The investment portfolio is primarily used to
provide overall liquidity for the Bank. It is also used to provide required collateral for pledging to the Banks Ohio public depositors for amounts on deposit in excess of the FDIC coverage limits. It may also be used to pledge for additional
borrowings from third parties. Investments are made with the above criteria in mind while still seeking a fair market rate of return, and looking for maturities that fall within the projected overall strategy of the Bank. The possible need to fund
future loan growth is also a consideration. During 2016, the Bank began to utilize Promontorys ICS, product to replace pledged securities; thereby
increasing liquidity. ICS utilizes a nation-wide bank network to provide FDIC insurance coverage to the Banks depositors. The Bank is using the product to replace pledged securities to the Banks Ohio public customers and for commercial
sweep customers previously utilizing daily repurchase agreements to protect balances over $250 thousand. The majority of the commercial accounts converted in 2017 and is evidenced by the movement of funds out of repurchase agreements into interest
bearing deposits. All of the Banks security portfolio is categorized as available for sale and as such is recorded at market value. Security balances as of December 31 are summarized below:


The following table sets forth the maturities of investment securities as of December 31, 2017 and the
weighted average yields of such securities calculated on the basis of cost and effective yields weighted for the scheduled maturity of each security. Tax-equivalent adjustments, using a thirty-four percent rate, have been made in yields on
obligations of state and political subdivisions. Stocks of domestic corporations have not been included. Maturities of mortgage-backed securities are based on the stated maturity date of the security. Due to prepayments, actual maturities may be
different.


As of December 31, 2017 the Bank did not hold a large block of any one investment security in excess of 10% of
stockholders equity. The largest segment of holdings is in US Governments. The Bank also holds stock in the Federal Home Loan Bank of Cincinnati at a cost of $3.7 million. This is required in order to obtain Federal Home Loan Bank loans. The
Bank also owns stock of Farmer Mac with a carrying value of $37.4 thousand which is required to participate loans in the program. Loan Portfolio
The Banks various loan portfolios are subject to varying levels of credit risk. Management mitigates these risks through portfolio
diversification and through standardization of lending policies and procedures. Risks are mitigated through an adherence to the Banks loan
policies, with any exception being recorded and approved by senior management or committees comprised of senior management. The Banks loan policies define parameters to essential underwriting guidelines such as loan-to-value ratio, cash flow
and debt-to-income ratio, loan requirements and covenants, financial information tracking, collection practice and others. The maximum loan amount to any one borrower is limited by the Banks legal lending limits and is stated in policy. On a
broader basis, the Bank restricts total aggregate funding in comparison to Bank capital to any one business or agricultural sector by an approved sector percentage to capital limitation. The following table shows the Banks loan portfolio by category of loan as of December 31st of each year, excluding loans held for sale:


The following table shows the maturity of loans as of December 31, 2017:


The following table presents the total of loans due after one year which has either 1) predetermined interest rates (fixed) or
2) floating or adjustable interest rates (variable):


The following table summarizes the Companys nonaccrual, past due 90 days or more and still accruing loans,
and accruing troubled debt restructurings as of December 31 for each of the last five years:


Although loans may be classified as non-performing, some pay on a regular basis, and many continue to pay interest irregularly
or at less than original contractual rates. Interest income that would have been recorded under the original terms of these loans would have aggregated $205.4 thousand for 2017, $116.1 for 2016 and $117.1 thousand for 2015. Any collections of
interest on nonaccrual loans are included in interest income when collected unless it is on an impaired loan with a specific allocation. A collection of interest on an impaired loan with a specific allocation is applied to the loan balance to
decrease the allocation. Total interest collections, whether on an accrued or cash basis, amounted to $57 thousand for 2017, $64 thousand for 2016, $96 thousand for 2015 and $87 thousand for 2014. Loans are placed on nonaccrual status in the event that the loan is in past due status for more than 90 days or payment in full of principal and interest is
not expected. The Bank had nonaccrual loan balances of $1.0 million at December 31, 2017 compared to balances of $1.4 and $2.0 million as of year-end 2016 and 2015. All of the balances of nonaccrual loans for the past three years were
collaterally secured. As of December 31, 2017 the Bank had $20.8 million of loans which it considers to be potential problem loans in
that the borrowers are experiencing financial difficulties. At December 31, 2016, the Bank had $20.6 million of these loans. The increase in 2016 relates to mainly two relationships. At December 31, 2015, the Bank had $7.0 million of these
loans. These loans are subject to constant management attention and are reviewed at least monthly. The amount of the potential problem loans was considered in managements review of the loan loss reserve at December 31, 2017 and 2016. In extending credit to families, businesses and governments, banks accept a measure of risk against which an allowance for possible loan loss is established
by way of expense charges to earnings. This expense is determined by management based on a detailed monthly review of the risk factors affecting the loan portfolio, including general economic conditions, changes in the portfolio mix, past due
loan-loss experience and the financial condition of the banks borrowers. As of December 31, 2017, the Bank had loans outstanding to
individuals and firms engaged in the various fields of agriculture in the amount of $95.1 million with an additional $64.1 million in agricultural real estate loans these compared to $84.6 and $62.4 million respectively as of December 31, 2016.
The ratio of this segment of loans to the total loan portfolio is not considered unusual for a bank engaged in and servicing rural communities. Interest
rate modification to reflect a decrease in market interest rates or maintain a relationship with the debtor, where the debtor is not experiencing financial difficulty and can obtain funding from other sources, is not considered a troubled debt
restructuring. As of December 31, 2017, the Bank had $0.7 million of its loans that were classified as troubled debt restructurings, of which $149.1 thousand are included in non-accrual loans. This compares to $0.7 million as of same date 2016
and the Bank had $1.1 million classified as such as of December 31, 2015. Updated appraisals are required on all collateral dependent loans once
they are deemed impaired. The Bank may also require an updated appraisal of a watch list loan which the Bank monitors under their loan policy. On a quarterly basis, Bank management reviews properties supporting asset dependent loans to consider
market events that may indicate a change in value has occurred. To determine observable market value, collateral asset values securing an impaired loan
are periodically evaluated. Maximum time of re-evaluation is every 12 months for chattels and titled vehicles and every two years for real
estate. In this process, third party evaluations are obtained and heavily relied upon. Until such time that updated appraisals are received, the Bank may discount the existing collateral value
used. Performing non-watch list loans secured in whole or in part by real estate, do not require an updated appraisal unless the loan is
rewritten and additional funds advanced. Watch List loans secured in whole or in part by real estate require updated appraisals every two years. All loans are subject to loan to values as found in the Banks loan policies irrespective of their
grade. The Banks watch list is reviewed on a quarterly basis by management and any questions to value are addressed at that time. The majority of
the Banks loans are made in the market by lenders who live and work in the market. Thus, their evaluation of the independent valuation is also valuable and serves as a double check. On extremely rare occasions, the Bank will make adjustments to the recorded values of collateral securing commercial real estate loans without acquiring an
updated appraisal for the subject property. The Bank has no formalized policy for determining when collateral value adjustments between regularly scheduled appraisals are necessary, nor does it use any specific methodology for applying such
adjustments. However, on a quarterly basis as part of its normal operations, the Banks senior management and the Loan Review Committee will meet to review all commercial credits either deemed to be impaired or on the Banks watch list. In
addition to analyzing the recent performance of these loans, management and the Enterprise Risk Management Committee will also consider any general market conditions that might warrant adjustments to the value of particular real estate
collateralizing commercial loans. In addition, management conducts annual reviews of all commercial loans exceeding certain outstanding balance thresholds. In each of these situations, any information available to management regarding market
conditions impacting a specific property or other relevant factors are considered, and lenders familiar with a particular commercial real estate loan and the underlying collateral may be present to provide their opinion on such factors. If the
available information leads management to conclude a valuation adjustment is warranted, such an adjustment may be applied on the basis of the information available. If management concludes that an adjustment is warranted but lacks the specific
information needed to reasonably quantify the adjustment, management will order a new appraisal on the subject property even though one may not be required under the Banks general policies for updating appraisal. Note 4 of the Consolidated Financial Statements may also be reviewed for additional tables dealing with the Banks loans and ALLL. ALLL is evaluated based on an assessment of the losses inherent in the loan portfolio. This assessment results in an allowance consisting of two components,
allocated and unallocated. Management considers several different risk assessments in determining ALLL. The allocated component of ALLL reflects expected
losses resulting from an analysis of individual loans, developed through specific credit allocations for individual loans and historical loss experience for each loan category. For those loans where the internal credit rating is at or below a
predetermined classification and management can reasonably estimate the loss that will be sustained based upon collateral, the borrowers operating activity and economic conditions in which the borrower operates, a specific allocation is made. For
those borrowers that are not currently behind in their payment, but for which management believes, based on economic conditions and operating activities of the borrower, the possibility exists for future collection problems, a reserve is
established. The amount of reserve allocated to each loan portfolio is based on past loss experiences and the different levels of risk within each loan portfolio. The historical loan loss portion is determined using a historical loss analysis by
loan category. The unallocated portion of the reserve for loan losses is determined based on managements assessment of general economic conditions
as well as specific economic factors in the Banks marketing area. This assessment inherently involves a higher degree of uncertainty. It represents estimated inherent but undetected losses within the portfolio that are probable due to
uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrowers financial condition and other current risk factors that may not have yet manifested themselves in the Banks
historical loss factors used to determine the allocated component of the allowance. Actual charge-off of loan balances is based upon periodic evaluations
of the loan portfolio by management. These evaluations consider several factors, including, but not limited to, general economic conditions, financial condition of the borrower, and collateral. As presented in the table on the next page, charge-offs decreased to $288 thousand for 2017, the lowest level of
the five years presented. 91.3% of the charge-offs stemmed from the consumer related portfolios. Charge-offs were $550 thousand for 2016, $1.0 million for 2015, preceded by $778 thousand for 2014 and $1.3 million for 2013. Recoveries were also the
lowest in 2017 at $150 thousand compared to $156, $557, $298, and $374 thousand for 2016, 2015, 2014 and 2013, respectively. The net charge-offs for the last five years were all under $1 million. 2017 was the lowest at $138 thousand. Higher provision expense was used to fund the ALLL for loan growth in 2014 and 2016. For 2013 and 2015, the provision was used to replenish the balance
decreased by the net charge-off activity. Overall, the ALLL increased from $5.2 million at yearend 2013 to $6.9 million at yearend 2017. After adding the allowance for unfunded loan commitments, the ACL ended 2017 just under $7.1 million. As the
ratios on the bottom of the following table show, the trends for each have continually improved over the five years shown. Asset quality and the ACL are both strong and emphasize the level of credit quality. In reviewing the bigger picture of the allowance for credit loss, the years with the higher percentage of ACL to total nonperforming loans ratio account for
the lower level of nonaccrual and watch list loans. This demonstrates the extended time period with which it has taken to achieve resolution and/or collection of these loans. 2014s significant and continued loan growth since fourth quarter
2013 was the reason behind 2014s higher balances as asset quality remained strong. The ratio of ACL to nonperforming loans increased significantly in 2014 which is why provision loan expense was lower in 2015 in comparison. The ACL to
nonperforming loans for 2015 remained more than adequate and emphasizes the existing strong level of credit quality. 2017 did not warrant a large provision as the asset quality continued to strengthen. Loan growth occurred, though not at the double
digit percentage increases of 2015 and 2016. The following table presents a reconciliation of the allowance for credit losses for the years ended
December 31, 2017, 2016, 2015, 2014 and 2013:


*
Nonperforming loans are defined as all loans on nonaccrual, plus any loans past due 90 days not on nonaccrual. Allocation of ALLL per Loan Category in terms of dollars and percentage of loans in each category to total loans
is as follows:


Deposits The amount of
outstanding time certificates of deposits and other time deposits in amounts of $100,000 or more by maturity as of December 31, 2017 are as follows:

(In Thousands)

Over Three

Over Six

Months

Months Less

Over

Under

Less than

Than One

One

Three Months

Six Months

Year

Year

 Time Deposits

$
9,264

$
18,821

$
15,858

$
48,424

The following table presents the average amount of and average rate paid on each deposit category:


Liquidity Liquidity remains adequate though down from prior years as the Bank has decreased the investment portfolio to fund loans. The Bank has access to $69 million of
unsecured borrowings through correspondent banks and $94.6 million of unpledged securities which may be sold or used as collateral. The amount of unpledged securities increase almost $22.8 million as compared to 2016. This was accomplished with
utilizing Promontorys ICS product to protect Ohio public fund depositors and commercial sweep customers with FDIC coverage rather than pledged securities. For the Bank, an additional $5.7 million is also available from the Federal Home Loan
Bank based on current collateral pledging with up to $116.8 million available provided adequate collateral is pledged. Maintaining sufficient funds to
meet depositor and borrower needs on a daily basis continues to be among managements top priorities. This is accomplished not only by immediate liquid resources of cash, due from banks and federal funds sold, but also by the Banks
available for sale securities portfolio. The average aggregate balance of these assets was $206.3 for 2017, $228.0 for 2016 and $262.1 million for 2015. This represented 19.2%, 22.3%, and 28.0% of total average assets, respectively. Of the almost
$196.4 million of debt securities in the banks portfolio as of December 31, 2017, $21.6 million, or 11.0% of the portfolio, is expected to receive payments or mature in 2018. This liquidity provides the opportunity to fund loan growth by
analysis of the lowest cost and source of funds whether by increasing deposits, sales or runoff of investments or utilizing debt. In addition to the
Banks investment portfolio, the Company has $18.9 million held in the holding companys investment portfolio. $5.1 million of those investments will mature or receive payments in the next twelve months. These funds provide liquidity to
the Company. The Bank has been declaring additional dividends each quarter to provide this liquidity to the Company. The Captive has also upstreamed dividends to the Company and is expected to continue annually as long as reserve levels are
adequately provided for. This provides additional liquidity for Company activities. Historically, the primary source of liquidity has been core deposits
that include noninterest bearing and interest bearing demand deposits, savings, money market accounts and time deposits of individuals. Core deposit balances increased in all categories with the exception of time deposits as of December 31,
2017 compared to same date 2016. Average total savings balances increased $72.6 million in 2017 as compared to 2016. Core deposit balances as of year-end 2016 increased in all categories. Overall deposits increased an average of $47.1 million in
2016 and $2.6 million in 2015. The Bank also utilized Federal Funds purchased at times during 2015 through 2017. The average balance for 2017 was $2.2 million, for 2016 and 2015 was $1.9 million and $1.2 million respectively. The Bank used this
temporary funding source heavier in December 2015 while it secured more permanent funding. During 2016, it was used heavily in the third quarter. The Bank is comfortable accessing these funds on a regular basis. Historically, the primary use of new funds is placing the funds back into the community through loans for the acquisition of new homes, consumer products and
for business development. The use of new funds for loans is measured by the loan to deposit ratio. The Banks average loan to deposit ratio was 88.2% for 2017, 87.9% for 2016, and 80.7% for 2015. The Banks goal is for this ratio to be
higher in the 80-90 percent range with loan growth being the driver. The Bank ended the year 2017 at an 89.6% loan to deposit ratio. Short-term debt such
as federal funds purchased and securities sold under agreement to repurchase also provides the Company with liquidity. Short-term debt for both federal funds purchased and securities sold under agreement to repurchase amounted to $39.5 million at
December 31, 2017, $70.3 million at December 31, 2016, and $78.8 million at the end of 2015. These accounts are used to provide a sweep product to the Banks commercial customers and for some term deposits. As ICS was implemented, the
sweep balances moved into interest bearing deposits and for yearend 2017 the repurchase agreements are for term deposits only. Other
borrowings are also a source of funds. Other borrowings consist of loans from the Federal Home Loan Bank of Cincinnati. These funds are then used to provide loans in our community. The Bank utilized this funding source in December 2015 by
borrowing $10 million. These remained consistent borrowings during 2016 and in December of 2017 $5 million matured and was paid off. Asset/Liability Management The primary functions of asset/liability management are to assure adequate liquidity and maintain an appropriate balance between interest earning assets and
interest bearing liabilities. It involves the management of the balance sheet mix, maturities, re-pricing characteristics and pricing components to provide an adequate and stable net interest margin with an acceptable level of risk. Interest rate
sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. Changes in net income, other than those related to volume arise when interest rates on assets re-price in a time frame or interest rate environment that is
different from that of the re-pricing period for liabilities. Changes in net interest income also arise from changes in the mix of interest-earning assets and interest-bearing liabilities. Historically, the Bank has maintained liquidity through cash flows generated in the normal course of business, loan repayments, maturing earning assets, the
acquisition of new deposits, and borrowings. The Banks asset and liability management program is designed to maximize net interest income over the long term while taking into consideration both credit and interest rate risk. Interest rate
sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. Overnight federal funds on which rates change daily and loans that are tied to the market rate differ considerably from long-term investment
securities and fixed rate loans. Similarly, time deposits over $100,000 and money market certificates are much more interest rate sensitive than passbook savings accounts. The Bank utilizes shock analysis to examine the amount of exposure an instant
rate change of 100, 200, 300 and 400 basis points in both increasing and decreasing directions would have on the financials. Acceptable ranges of earnings and equity at risk are established and decisions are made to maintain those levels based on
the shock results. Impact of Inflation and Changing Prices The consolidated financial statements and notes thereto presented herein have been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Companys operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Companys performance than
do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and service. Contractual Obligations Contractual Obligations of the
Company totaled $569 million as of December 31, 2017. Excluded from the chart is Federal Funds Purchased of $10.4 million which are immediately payable the next business day. Time deposits represent contractual agreements for certificates of
deposits held by its customers. Long term debt represents the borrowings with the Federal Home Loan Bank and is further defined in Note 4 and 9 of the Consolidated Financial Statements.


Capital Resources Stockholders equity was $134.1 million as of December 31, 2017 compared to $125.6 million at December 31, 2016. Dividends declared during 2017
were $0.50 per share totaling $4.6 million and dividends declared during 2016 were $0.46 per share totaling $4.2 million. Throughout 2017, the Company awarded 32,000 shares of restricted stock awards to 74 employees. During 2016, the Company
purchased 14,000 shares and awarded 32,300 shares of restricted stock to 74 employees. For a summary of activity as it relates to the Companys restricted stock awards, please refer to Note 11: Employee Benefit Plans in the consolidated
financial statements. On December 31, 2017 the Company held 1,134,120 shares in Treasury Stock and 92,350 unvested shares of restricted stock. At yearend 2016, the Company held 1,158,250 shares in Treasury stock and 86,300 unvested shares of
restricted stock. On January 19, 2018 the Company announced the authorization by its Board of Directors for the Companys repurchase, either on the open market, or in privately negotiated transactions, of up to 400,000 shares of its
outstanding common stock commencing January 19, 2018 and ending December 31, 2018. The Company has a history of approving a similar resolution to be in effect each year for at least the last five years. The Company continues to have a strong capital base and maintains regulatory capital ratios that are above the defined regulatory capital ratios. At
December 31, 2017, the Bank and the Company had total risk-based capital ratios of 12.84% and 15.52%, respectively. Core capital to risk-based asset ratios of 12.04% and 14.73% for the Bank and the Company, respectively, are well in excess of
regulatory guidelines. The Banks leverage ratio of 9.92% is also substantially in excess of regulatory guidelines, as is the Companys at 12.02%. Under Basel III, the common equity Tier 1 Capital to risk-weighted assets ratios are also
well above the required 4.50% and the 6.50% well capitalized levels with the Company at 14.73% and the Bank at 12.04%. For further discussion and analysis of regulatory capital requirements, refer to Note 15 of the Audited Financial Statements. The Companys subsidiaries are restricted by regulations from making dividend distributions in excess of certain prescribed amounts. Upon prior
regulatory approval, the Bank may be allowed to pay above the prescribed amount.


Financial – Exposures

*Includes Owner Occupied  Report on Adjusted Loans as of December 31, 2020Our credit administration is closely monitoring and analyzing these higher risk segments within the loan portfolio, tracking loan payment deferrals, customer liquidity and providing timely reports to senior management and the board of directors.  The Bank is in frequent contact with our borrowers during this time of uncertainty and has had only one COVID-19 related downgrade which was less than $10 million during 2020.  The Bank has stress tested our top five commercial concentrations which include retail commercial real estate, hotels, multi-family, industrial commercial real estate and assisted living.  An outside third party has reviewed 55% of our commercial portfolio along with our internal credit department having reviewed 75% of our loan portfolio as a result of new money, renewals or annual reviews.  Based on the Company’s capital levels, prudent underwriting policies, loan concentration diversification and our geographic footprint, we expect to be able to manage the economic risks and uncertainties associated with the pandemic and remain adequately capitalized.


Net Interest Income

The following tables show changes in interest income, interest expense and net interest resulting from changes in volume and rate variances for major categories of earnings assets and interest bearing liabilities.


Non-Interest Expense

Furniture and equipment steadily increase as we continue to add facilities and invest in technology. Annual maintenance costs continue to grow and become a greater piece of the overall cost. As new services are provided to our customers, the backroom cost to supply them continues to rise. The Company accepts it is an expected cost of doing business and keeping our services relevant to the industry. Data processing costs were lower in 2020 as compared to 2019 by $785.0 thousand of which $867.6 thousand was acquisition related for termination fees incurred in 2019. Overall, data processing expense for 2019 was expected to be higher with the addition of the six acquired Indiana offices. Data processing expense increased $1.2 million during 2019 as compared to 2018.  As the pricing on many services is based on number of accounts and the Bank fully expects those to increase with the growth from the newer offices and overall Bank growth, this line item is expected to also increase.The FDIC assessment increased over 2019 while 2019 decreased as compared to 2018. This line item speaks to the health of the Bank and the financial industry. The assessment for 2020 was up $450.0 thousand compared to 2019 as a result of the total assessment base increasing. In 2020, Small Bank Assessment Credits of $125.9 thousand were applied to first quarter’s invoice. Credits in the amount of $204.2 thousand were applied to third and fourth quarter 2019’s invoice. The assessment for 2019 was down $143.0 thousand from 2018.The last line items with significant variation in noninterest expense to discuss is “consulting fees” and “other general and administrative.” Consulting fees increased by $300.0 thousand in 2020 over 2019 while decreased $259.9 thousand in 2019 compared to 2018. In 2020, $167.0 thousand was paid to the firm who assisted with identifying profit enhancements, $48.0 thousand for Chief Information Officer search, $25.0 thousand to Kasasa for contract termination and $34.0 thousand to develop a predictive customer behavior model. During 2019, consultants were used to complete a pay study review, assist with developing a three year strategic plan and to identify profit enhancement initiatives. Acquisition costs incurred in 2019 and 2018 total $1.28 million and $742.1 thousand respectively with expenses being recorded in multiple line items. Core deposit intangible expense which is included in the other general and administrative line decreased in 2020 compared to 2019 by $7.0 thousand; however, increased in 2019 compared to 2018 by $560.0 thousand with the acquisition. Advertising and public relations decreased in 2020 by $237.0 thousand with many events canceled due to the pandemic; however, had increased in 2019 by $682 thousand over 2018. With the addition of new offices in both years behind the increases, 2020 was expected to increase due to additional offices being added. The Bank also celebrates the anniversary of office openings with a special event in each community.


Securities

The following table sets forth the maturities of investment securities as of December 31, 2020 and the weighted average yields of such securities calculated on the basis of cost and effective yields weighted for the scheduled maturity of each security.  Tax-equivalent adjustments, using a twenty-one percent rate, have been made in yields on obligations of state and political subdivisions.  Stocks of domestic corporations have not been included. Maturities of mortgage-backed securities are based on the stated maturity date of the security. Due to prepayments, actual maturities may be different.


Securities

As of December 31, 2020, the Bank did not hold a large block of any one investment security in excess of 10% of stockholders’ equity. The largest segment of holdings is in U.S. Government agencies. The Bank also holds stock in the Federal Home Loan Bank of Cincinnati and Indianapolis at a cost of $5.8 million. This is required in order to obtain Federal Home Loan Bank loans.


Loan Portfolio

The following table shows the maturity of loans excluding fair value adjustments as of December 31, 2020:


Loan Portfolio

The following table presents the total of loans excluding fair value adjustments due after one year which has either 1) predetermined interest rates (fixed) or 2) floating or adjustable interest rates (variable):


Loan Portfolio

The following table summarizes the Company’s nonaccrual, past due 90 days or more and still accruing loans, and accruing troubled debt restructurings as of December 31 for each of the last five years: