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 expense increased $109 thousand during 2016 as compared to an increased $50 thousand during 2015 and
by $38 thousand in 2014 over 2013. 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 growth from the
newer offices and overall Bank growth. 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 expects to see a current reduction in monthly expenses, though that reduction will be utilized to provide additional new
product offerings and fund growth. Overall, data processing expense for 2017 may be similar to 2016 with a wider variety of customer offerings. The FDIC
assessment has a decreasing cost trend and that is expected to continue into 2017 as the fourth quarter 2016 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 2016 was down $78 thousand from 2015. The last line item with significant variation in noninterest expense to discuss is other
general and administrative. The line item increased by $439 thousand during 2016 to end at $6.1 million as of December 31, 2016. $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 yet in 2016; however it is hoped it will help 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. 2015 experienced a decrease in the other general and administrative line item. The decrease of $348 thousand for 2015 as
compared to 2014 can be mainly attributed to a $195.7 thousand reduction in marketing and consulting costs. A renegotiation of one service provider contract along with the maturity of another during 2015 led to the decrease. Another contributor
to the reduction was lower losses due to NSF and fraud. The Bank applauds the work of our front-line staff to recognize possible fraud and scams attempted on our customers and stopping them before they can occur. An investment in additional fraud
detection software has also helped our back office personnel to detect possible digital fraud. This was down $60.2 thousand in 2015 compared to an increase in 2014 of $40.9 thousand. Allowance for Credit Losses Provision expense increased
by $496 thousand for 2016 in response to the significant loan growth for the period. It decreased by $566 thousand for 2015, following an increase of $333 thousand for 2014. The decrease for 2015 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. The increase for 2014 was needed to account for the loan growth and the net charge-off activity
of
2014. Sustained strong asset quality kept the provision expense lower than the growth alone would have warranted. Net charge-offs were $394, $473, and $480 thousand for 2016, 2015 and 2014,
respectively. Commercial and Industrial loans had the largest charge-off activity in 2015. The consumer portfolios had the highest levels of charge-off activity in 2016
and 2014. 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. 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. The Bank is mindful of the grade 5 loans
but expects the number to decrease during first half 2017. All other measurements of asset quality improved during 2016. The watch list loan balances decreased 53.6% or $7.2 million from December 31, 2014 to December 31, 2015. The
balances decreased mainly due to successful results from collection efforts. Given the size of the decrease, it is no surprise it is attributed mainly to the commercial real estate portfolio decreasing by $5.9 million. Three customers made up
the bulk of the balances with one of three finding funding elsewhere. Commercial loans (non-real estate) on the Banks watch list also had a nice decrease during 2015, though just not as high at
$1.9 million. 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 are 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 comparison to 2014, special mention was down $7.2 million, substandard up slightly by $161 thousand and doubtful down almost exactly the same amount at $162 thousand. For 2014, the increase in special mention is offset by significant decreases in the substandard classifications of those same commercial related portfolios.
Overall, substandard and doubtful loans decreased 42.5% or $2.9 million as compared to yearend 2013. In response to these fluctuations and loan growth during 2014 and 2015, the Bank changed ALLL to outstanding loan coverage percentage changed
to 0.89% as of December 31, 2016, 0.88% as of December 31, 2015, and 0.95% as of December 31, 2014. 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 2014, 2015 and 2016, a slight improvement was 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 $736, $153 and $755 thousand during 2016, 2015 and 2014 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 2015 even though loan growth occurred. The percentage of ACL to
the total loan portfolio was 0.98% as of December 31, 2014, 0.91% as of December 31, 2015 and 0.92% as of December 31, 2016. December 31, 2016 had the lowest loans past due 30+ day percentage at 0.23% in the last ten years.
December 31, 2014 and 2015 were still at respectable lows of 0.37% and 0.32%. 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 28.53%, 26.97%, and 28.64% for 2016, 2015 and 2014 respectively. The effect of tax-exempt
interest from holding tax-exempt securities and Industrial Development Bonds (IDBs) was $468, $554, and $634 thousand for 2016, 2015, and 2014, 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 2016 and 2015 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. The cost of funds was impacted by the shift of interest bearing liabilities to noninterest and the limited use of time
deposits in 2016 with a decrease in time deposits in 2015. Both contributed to improved profitability in 2016 and 2015, and the Company expects continued improvement through 2017 and into 2018. Average earning assets increased throughout 2016 and 2015. Loan growth in both years was the main factor. 2014 was also aided by the Custar acquisition which
took place in December 2013 and brought in $29 million in deposits. 2015 also benefited from the Sylvania office having been in office for a full year along with the growth in the other newer offices. 2016 had two offices open, one in each half
of the year. 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 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. 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:


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

The following table sets forth the maturities of investment securities as of December 31, 2016 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, 2016 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, including loans held for sale:


The following table shows the maturity of loans as of December 31, 2016:


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 $116.1 thousand for 2016, $117.1 for 2015 and
$52.3 thousand for 2014. 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 $64 thousand for 2016, $96 thousand for 2015 and $87 thousand for 2014.
$20.6 thousand of interest collected in 2015 was applied to reduce the specific allocation and was applied for the same reason in 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 $1.4 million at December 31, 2016
compared to balances of $2.0 and $1.7 million as of year-end 2015 and 2014. All of the balances of nonaccrual loans for the past three years were collaterally secured. As of December 31, 2016 the Bank had $20.4 million of loans which it considers to be potential problem loans in that the borrowers are
experiencing financial difficulties. At December 31, 2015, the Bank had $7.0 million of these loans. The increase in 2016 relates to mainly two relationships. 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, 2016 and 2015. 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, 2016, the Bank had loans outstanding to
individuals and firms engaged in the various fields of agriculture in the amount of $84.6 million with an additional $63.4 million in agricultural real estate loans these compared to $82.7 and $58.5 million respectively as of
December 31, 2015. 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, 2016, the Bank had $0.7 million of its loans that were classified as troubled debt restructurings, of which
$138.3 thousand are included in non-accrual loans. This compares to $1.1 million as of same date 2015 and the Bank had almost $797.2 thousand classified as such as of December 31, 2014.
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 below, charge-offs decreased to $550 thousand for 2016, the lowest level of the five years presented. 75.6% of the charge-offs
stemmed from the consumer related portfolios. Charge-offs were $1.0 million for 2015, preceded by $778 thousand for 2014, $1.3 million for 2013, and $891 thousand for 2012. Recoveries were also the lowest in 2016 at
$156 thousand compared to $557, $298, $374 and $286 thousand for 2015, 2014, 2013 and 2012, respectively. The net charge-offs for the last five years were all under $1 million. 2016 was the lowest at $394 thousand. Higher provision expense was used to fund the ALLL for loan growth in 2014 and 2016. For 2012, 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 2012 to $6.8 million at yearend 2016. After adding the
allowance for unfunded loan commitments, the ACL ended 2016 just over $7 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. In 2012,
the provision expense was to offset the higher year-end 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. 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. The following table presents a reconciliation of the allowance for credit losses for the years ended
December 31, 2016, 2015, 2014, 2013 and 2012:


*
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, 2016 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

$
21,606

$
9,038

$
13,071

$
56,225

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
$58 million of unsecured borrowings through correspondent banks and $71.9 million of unpledged securities which may be sold or used as collateral. The amount of unpledged securities increase almost $42.5 million as compared to 2015.
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 $4.7 million is also
available from the Federal Home Loan Bank based on current collateral pledging with up to $115.7 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 $228.0 for 2016 and
$262.1 million for 2015, and $296.5 million for 2014. This represented 22.3%, 28.0% and 31.8% of total average assets, respectively. Of the almost $201.2 million of debt securities in the banks portfolio as of December 31,
2016, $16.7 million, or 8.3% of the portfolio, is expected to receive payments or mature in 2017. 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 $17.3 million held in the
holding companys investment portfolio. $2.6 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. In future years, the Captive will also upstream dividends to the Company once reserve levels are adequately provided for. This will also provide 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 as of year-end 2016 increased in all categories. Overall deposits increased an average of $39.7 million in 2016, $2.6 million
in 2015 and $913 thousand in 2014. The Bank also utilized Federal Funds purchased at times during 2014 through 2016. The average balance 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 87.9% for 2016, 80.7% for 2015 and 76.4% for 2014. 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 2016 at an 89.4% 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 $70.3 at December 31, 2016, $78.8 million at the end of 2015 compared to $56.0 million at the end of 2014. These accounts are used to
provide a sweep product to the Banks commercial customers. As ICS is implemented, the sweep balances will move into interest bearing deposits. 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. Prior borrowings from this source had decreased by $4.5 million to none at December 31, 2014. This compares to
consistent borrowings during 2016 of $10 million. The decreased borrowings were payoffs of matured notes in 2013 and 2014. 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 $263.2 million as of December 31, 2016. 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 $125.6 million as of December 31, 2016 compared to $120.1 million at December 31, 2015. Dividends declared
during 2016 were $0.91 per share totaling $4.2 million and dividends declared during 2015 were $0.87 per share totaling $3.99 million. Throughout 2016, the Company purchased 7,000 shares and awarded 16,150 shares of restricted stock awards
to 74 employees. During 2015, the Company purchased 30,685 shares and awarded 16,000 shares of restricted stock to 67 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, 2016 the Company held 579,125 shares in Treasury Stock and 43,150 unvested shares of restricted stock. At yearend 2015, the Company held 587,466 shares in Treasury stock
and 38,995 unvested shares of restricted stock. On January 20, 2017 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 20, 2017 and ending December 31, 2017. 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, 2016, the Bank and the Company had total risk-based capital ratios of 12.73% and 15.28%, respectively. Core
capital to risk-based asset ratios of 11.91% and 14.46% for the Bank and the Company, respectively, are well in excess of regulatory guidelines. The Banks leverage ratio of 9.75% is also substantially in excess of regulatory guidelines, as is
the Companys at 11.77%. 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 14.46% and the Bank at 11.91%. 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.


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 2014 to 2013, the change in volume is the main driver for the
improved ratio which is opposite of the change between 2013 to 2012 where an impact in change due to volume is evident; however the largest impact was due to rate. The strategy since 2010 is to extend the maturities of time deposit
specials to over 24 months to prepare for rising rates. The other strategy employed since 2011 was to increase core deposits by offering innovative products focused on customer needs, such as higher interest rates and fraud notification.
In exchange for these accounts, 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. Non-Interest Income The discussion now turns to the noninterest activity of 2014 operations, beginning with the revenue portion. In comparing line items of the consolidated
statement of income for years ended 2012 through 2014, 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. 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. Updated Regulation E guidelines were implemented on August 15, 2010 and the Bank has ended each
year since with a lower revenue stream. This has occurred in spite of the addition of the new offices since 2010. At year-end 2012 and 2013, the number of checking accounts again increased along with the balances; however average collected overdraft
fees per account decreased as compared to 2011. In the last two years, 2013 and 2014, checking balances have increased while average revenue per account continued to decline. Overdraft fees in 2014 accounted for $2.5 million in noninterest income
and $2.7 million for 2013. This represents 65.45% of the line item service charges and fees on the income statement which was down from 2013s percentage of 71.5%. The Bank has made this an area of focus for 2014 as this revenue stream remains
under intense regulator review. The decrease in the percentage is due to an increase in the service charge revenue on checking accounts with the new offerings and discontinuation of some checking products. Service charges on checking accounts,
excluding Health Savings Accounts, were up $208.7 thousand for 2014 as compared to 2013. The Bank has long promoted the use of debit cards by its
customers and continued that philosophy with the introduction of additional new products. 2014 revenue improved $250.5 and $558.8 thousand from ATM/debit
card usage as compared to 2013 and 2012, respectively. The Bank receives interchange revenue from each swipe of the card. In 2011, this revenue stream was at risk of being reduced by the Federal Reserve regulation of the interchange fee.
The establishment of a tiered pricing for banks under $10 billion has helped to protect the profitability from such fees, although the concern remains as to how long this tiered pricing will remain in effect. While this revenue stream continues to
improve with more depositors using electronic methods for purchasing, the expense of 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.
Overall, noninterest income decreased for 2014 as compared to both 2013 and 2012. Unfortunately, this has become a trend mainly due to the duration of
the flat rate interest environment. In 2012, the largest positive impact on the income statement was derived from sales activity; including net gain on
sale of loans and net gain on sale of securities. During 2012, the net gain on sale of loans, which is derived from sales of real estate loans into the secondary market, was the most significant factor for this category. The gain on residential real
estate loans accounted for $1.3 million and $725 thousand was derived from gain on sales of agricultural real estate. Both of these programs are offered to our customers to enable them to have a fixed rate loan while the Bank limits its interest
rate risk exposure. Of these loan types, the Bank sells 100% of the residential loans and 90% of the agricultural loans into the secondary market. 2013 or 2014 activity did not reach the same high levels as 2012. Gains of $452.7 and $194.3 thousand
were recorded for residential and agricultural real estate respectively for 2014 along with gains of $865 and $258 thousand were recorded for residential and agricultural real estate respectively for 2013. 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 account for over a $1 million in revenue each year. However, new sales in 2012 catapulted this income higher than 2013
or 2014. The last line item in the noninterest income section as was discussed previously 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 rates remain low and the yield curve is favorable to the transaction. The Bank will not increase short-term gain at the sacrifice of long-term profitability.
All of the sales of securities in 2014 of $57.9 million were used to fund loan growth while only some of the $91 million in proceeds realized on the sale of securities in 2013 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 $494 thousand were recorded for 2014 as compared to $775 and $852 thousand for 2013 and 2012 respectively. Overall, noninterest income decreased $654 thousand in 2014 following a year where it had decreased $758
thousand. Some of the revenue may not be easily duplicated as it is dependent on economic and market conditions to provide the opportunity. However, the increased revenue amounts from deposit and loan services should continue to provide improved
profitability in the future. Gains on sales should also continue in the near term though when it will change is unknown at this time. Moving to the
noninterest expense side, overall, noninterest expense increased 4.2% in 2014 as compared to 2013 and 2012 which were basically equal at $24.2 million. The largest factor behind the higher 2014 level was the impact of employee salaries and wages on
the income statement. Employee wages increased $633.3 thousand in 2014 over 2013; they increased $513.4 thousand in 2013 compared to 2012. 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 Waterville, Custar and Sylvania and through normal yearly increases to the remainder of the employees. Base was up
$474.1 thousand for 2014 over the previous year and 2013 was up $408.1 thousand over 2012. The full time equivalent number at each yearend of employees increased to 260 for 2014 compared to 2012s 248. Incentive pay as it related to performance was up $209.5 thousand in 2014 over 2013. Both measurements used to award incentive pay had improved in 2014 and
employees benefited accordingly. This followed a year in which the incentive performance pay was down $110.1 thousand from 2012. The Banks performance was not up to the level of 2012, even though the number of employees receiving an incentive
was higher. (For further discussion in incentive pay, see note 11 of the consolidated financial statements.) While net loss on sale of other assets
owned, mainly OREO property, does not represent income for the years presented, the decrease in the amount of the loss for 2014 and 2013, as compared to 2012, does contribute to improved profitability. The loss of $634 thousand for 2012 stems not
only from sales but also from write-downs in the carrying value of those properties still held on the Banks balance sheet. The number of properties decreased and the carrying value declined in 2014 to $1.1 million and 2013 to $2.3 million from
$3.6 million in 2012. The mortgage refinancing activity has declined over the last three years. 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. 2014 had net expense of $42.7 thousand, 2013 had a net income of $2 thousand and
2012 had net expense of $8 thousand. Of course, the value (or income) of the mortgage servicing right when sold also impacts the net position. While gain on sale of these loans was high in 2012, the net position was an expense indicating the
activity was mainly refinance. 2013 had new loan activity and lower refinance activity making the additions and amortization almost equal. The number of loans and balances also indicates this as the levels have remained fairly constant. 2014 was a
year with limited sales and the amortization expense was therefore higher than the capitalized additions. As of December 31, 2014, there were 3,638 loans serviced with balances of $275.4 million. As of December 2013, there were 3,684 loans
serviced with balances of $282.1 million. As of December 2012, there were 3,674 loans serviced with balances of $280.4 million. The impact of mortgage
servicing rights to both noninterest income and expense is shown in the following table:


Occupancy expense decreased by $144 thousand in 2014 as compared to 2013 and by $168 thousand in 2013 as compared to 2012.
Although real estate taxes and building depreciation were higher on our office locations, these were offset by the increased rental income from the Banks investment services. $97.7 thousand more was collected in 2014 as compared to 2013 and
2013 collected $217 thousand more than 2012. Data processing expense increased $38 thousand during 2014 and by $93 thousand in 2013. 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 growth from the newer additions of the Waterville, Custar and Sylvania offices and
overall Bank growth. The FDIC assessment decreased in 2012 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. 2013 was higher than 2012 as the Bank grew in size by $19.3 million over 2012 and was
lower in 2014 by $32 thousand as the Bank decreased in size by $24.7 million. The last line item in the noninterest expense is other general and
administrative. While it is higher by $461 thousand in 2014 following a smaller increase of $449 thousand in 2013 over 2012s $5.1 million, the fluctuation is not isolated to a single source. The primary factors impacting this fluctuation
in 2014 and 2013 are increases in both ATM expense and core deposit intangible expenses. The increased expense of $52.7 and $376.3 thousand relating to ATM and debit cards in 2014 and 2013 respectively, over the previous year is caused by many
factors. First, 2012 was lower due to incentive credits received by the Bank for switching providers and these credits were depleted early in 2013. Increased usage during both years corresponds to increases in both revenue and cost. Finally, fraud
increases cost as new cards have to be issued to limit the risk exposure. The fraud losses themselves are not recognized in this breakout, however the cost of replacement cards is. The Bank is not currently deploying chip technology within its
cards; however the Bank is aware the adoption of embedded chips will increase this expense in the coming years. 2014 experienced additional expense over 2013 in consulting ($161.7 thousand), audit and accounting fees ($166.5 thousand) and
advertising ($101.3 thousand). The first two line items increased related to the new deposit products offered and the establishment of an affiliate
subsidiary by the Company. To establish the new subsidiary, actuarial studies and consulting services were utilized to determine the feasibility and benefit thereof. By establishing at yearend, the Company has enabled 2015 to fully capture the
benefits with limited additional cost. The affiliate is a Captive insurance company insuring the Company and the Bank in addition to their coverage before the formation. The Captive has provided additional coverage that was not available from our
current carriers or was cost prohibitive. The Captive also provides a tax benefit to the Company with its formation in Nevada. The increase in advertising expense is warranted with the Banks increased marketing area. Provision for loan losses is the last non-interest line item to discuss. The provision expense increased $333 thousand for 2014. The increase was needed to
offset account for the loan growth and the net charge-off activity of 2014. Sustained strong asset quality kept the provision expense lower than the growth alone would have warranted. The provision expense for 2013 was higher than for 2012 by $120
thousand. Net charge-offs of $480 and $888 thousand for 2014 and 2013, respectively, were in the middle of the $605 thousand recorded for 2012. Commercial and Industrial loans had the largest charge-off activity in 2013, while 2014 and 2012 were
impacted with higher levels in the consumer portfolios. Further analysis by loan type is presented in the discussion of the allowance for credit losses. Allowance for Credit Losses 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. Special mention loan balances increased 21.2% or $1.7 million overall as of yearend 2014 compared to same date 2013. The increase is in the commercial and
commercial real estate portfolios. The largest increase of $2.1 million was in the commercial real estate caused mainly by one large relationship being downgraded. Agricultural real estate showed a decrease of $618 thousand offsetting the above
increase. Special Mention loan balances decreased 40.6% or $5.4 million as of December 31, 2013 as compared to
December 31, 2012. The balances decreased due to pay offs received and improved performance of the companies, thereby resulting in an upgrade out of special mention. This improvement was preceded by an increase of 26.5% or $2.8 million from
2011 to 2012. For 2014, the increase in special mention is offset by significant decreases in the substandard classifications of those same commercial related portfolios. Overall, substandard and doubtful loans decreased 42.5% or $2.9 million as
compared to yearend 2013. A similar level of improvement is evident in substandard and doubtful loans during the same time frames for a year ago. 2013 had a decrease of 71.1%, or $2.5 million, compared to 2012. In response to these fluctuations and
loan growth during 2014, the Bank changed ALLL to outstanding loan coverage percentage to .95% as of December 31, 2014 from .90% as of December 31, 2013 and 1.04% as of December 31, 2012. 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 loans to capital ratios, with the watch list made up of loans graded 5, 6 or 7 on a scale of 1 (best) to 7 (worst). 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 each of 2012, 2013 and 2014, 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. 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 $755 thousand during 2014, which was preceded by a $29 thousand decrease during 2013. The large increase in 2014 directly correlates to the
large increase in loan balances. With the improved asset quality, the percentage of ACL to the total loan portfolio actually decreased from 1.07% as of December 31, 2012 to .93% as of December 31, 2013 and .95% as of December 31,
2014. December 31, 2013 had the lowest loans past due 30+ day percentage at .25% in the Banks known history, December 31, 2014 was still at a respectable low of .37%. 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 28.64%,
28.53% and 28.51% for 2014, 2013 and 2012 respectively. The effect of tax-exempt interest from holding tax-exempt securities and Industrial Development Bonds (IDBs) was $649, $640, and $677 thousand for 2014, 2013, and 2012, respectively. All years
included an increase into a higher tax bracket for income over $10 million. Material Changes in Financial Condition The shifts in the balance sheet during 2014 have positioned the Company for continued improvement in profitability. On the asset side, the Company experiences
an increase in asset yield due to loan growth with funding provided by a decrease in the investment portfolio. The cost of funds was impacted by the shift of interest bearing liabilities to noninterest and the decrease in time deposits and other
borrowed money. Both contributed to improved profitability in 2014 and expected liabilities improvement in future years. Average earning assets increased
$1.5 million during 2013 over 2012. The main cause of fluctuation was the opening of the Waterville office in 2013 and the repositioning of the balance sheet. The Custar acquisition had minimal effect on the average balance of earning assets, given
that it took place in December 2013. The $29 million of deposits from the Custar acquisition impacted 2014. Average interest bearing liabilities decreased $16.5 thousand over 2012. The decrease in balances was due to the runoff of time deposits and
payoff of debt from FHLB. Savings deposits increased nicely in 2013 due to the success of the KASASA suite of products and Health Savings Accounts. 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 growth is also a consideration. 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, 2014 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.]


As of December 31, 2013 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 $3.7 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 was ultimately redeemed in full during 2013. An early redemption of 42,000 shares occurred in 2010 with another 41,000
shares redeemed in 2011. These decreased the aggregate holdings to a value of $148.4 thousand which was redeemed in 2013. 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, including loans held for sale:


The following table shows the maturity of loans as of December 31, 2014:


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 would have aggregated $52.3 thousand for 2014, $139.1 thousand for 2013 and $544.8 thousand for
2012. 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 $87 thousand for 2014, $60 thousand for 2013 and $26 thousand for 2012. None of the interest collected in 2012 was applied to
reduce a specific allocation. $12.8 thousand dollars of interest collected in 2014 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 2012 impacted the yield on
loans. The Bank had nonaccrual loan balances of $4.8 million at December 21, 2012 compared to balances of $3.3 and $1.7 million as of year-end 2013 and 2014, respectively. All of the balances of nonaccrual loans for the past three years were
collaterally secured. As of December 31, 2014 the Bank had $13.5 million of loans which it considers to be potential problem loans in
that the borrowers are experiencing financial difficulties. At December 31, 2013, the Bank had $14.8 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, 2014 and 2013. 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, 2014, the Bank had loans outstanding to individuals and firms engaged in the various fields of agriculture in the amount of $74.6
million with an additional $50.1 million in agricultural real estate loans these compared to $65.4 and $44.3 million respectively as of December 31, 2013. 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 has 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, 2014, the Bank had $797.2 thousand of its loans that were classified as
troubled debt restructurings. This compares to $911.2 thousand as of same date 2013 and the Bank had almost $5.5 million classified as such as of December 31, 2012. 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 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 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 $778 thousand for 2014 and increased to $1.3 million for 2013 and decreased to $891 thousand for
2012 and $2.7 million for 2011. The provision expense also decreased in 2012 and 2011 and increased for 2013 and 2014. 2014 and 2013 had provision expense of $1.2 million and $858 thousand respectively. 2012 had provision expense of $738 thousand
with 2011 having provision expense of $1.7 million. The Commercial and Industrial portfolio had the largest net charge-off position in 2011 through 2014. Consumer real estate and consumer & other loans were the loan categories which 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 in 2011. 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 years with the higher percentage of ACL to
total loans ratio account for the higher level of nonaccrual and watch list loans, which demonstrates 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 in provision expense was to offset the higher year-end watch list values.
2013s lower balance again recognizes the improvement in asset quality. The monetary decrease is minimal. However, the decrease as a percentage of loans is wider as compared to 2012 due to loan growth during 2013. 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. 2014s significant and continued loan growth since fourth quarter 2013 was the reason behind 2014s higher
balances as asset quality remained strong. [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, 2014, 2013, 2012, 2011 and 2010:


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, 2014 are as follows:

(In Thousands)

UnderThree Months

Over ThreeMonthsLess thanSix Months

Over SixMonths LessThan OneYear

OverOneYear

 Time Deposits

$
9,536

$
14,218

$
16,858

$
40,985

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


Liquidity Liquidity remains high though down from prior years as the Bank has decreased the investment portfolio to fund loans. The Bank has access to $58 million of
unsecured borrowings through correspondent banks and $71.6 million of unpledged securities which may be sold or used as collateral. An additional $15.0 million is also available from the Federal Home Loan Bank based on current collateral pledging
with up to $112.6 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 $296.5 for 2014 and $387.7 million for 2013, and $397.3 million for 2012. This represented 31.8 percent and 42.5 percent of total average assets, respectively. Of the almost $248.5 million of debt
securities in the companys portfolio as of December 31, 2014, $23.5 million, or 9.5 percent of the portfolio, is expected to receive payments or mature in 2015. 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 by analysis of the lowest cost and source of funds whether by increasing deposits, sales or runoff of investments or utilizing debt.
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 as of year-end 2014 increased in all categories with the exception of time deposits. Overall deposits increased an average of $913 thousand in 2014, $4.7 million during
2013 and $20.7 million in average deposits in 2012. The Bank also utilized Federal Funds purchased at times during 2012 through 2014. The average balance for 2014 and 2013 was $1.4 million and $785.5 thousand respectively, which was mainly for
verification of borrowing procedures should the need arise and while awaiting the influx of deposits from the Custar acquisition. 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 76.4 percent for 2014, 66.2 percent for 2013 and 65 percent for 2012. The lower ratios in 2013 and 2012 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 Banks goal is for this ratio to be higher in the 80-90 percent range with loan growth being the driver. 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 $56.0 million at the end of 2014 compared to $69.8 million at the end of 2013 and to $51.3 million at the end of 2012. 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 $4.5 million to none at December 31, 2014. This compares to decreased borrowings during 2013 of $7.1 million and decreased
borrowings during 2012 of $5.1 million to $11.6 million to end at December 31, 2012. The decreased borrowings were payoffs of matured notes in 2013 and 2014. 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, 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 $252.4 million as of December 31, 2014. 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 $114.5 million as of December 31, 2014 compared to $108.6 million at December 31, 2013. Dividends declared during 2014
were $.84 per share totaling $3.86 million and during 2013 were $0.81 per share totaling $3.75 million. During 2014, the Company purchased 23,570 shares and awarded 13,250 restricted shared to 61 employees. During 2013, the Company purchased 56,000
shares and awarded 11,000 restricted shares to 53 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
2014, the Company held 572,772 shares in Treasury stock and 33,390 unvested shares of restricted stock. At year-end 2013, the Company held 561,562 shares in Treasury stock and 31,890 unvested shares of restricted stock. On January 16, 2015 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 16,
2015 and ending December 31, 2015. The decrease in the equity balance of 2013 as compared to 2012 was due to the market value fluctuation of our
available for sale investment portfolio. 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, 2014, the Bank and the Company had total risk-based capital ratios of 14.35% and 16.68%, respectively. Core capital to risk-based asset ratios of 13.46% and 15.79% for the Bank and the Company,
respectively, are well in excess of regulatory guidelines. The Banks leverage ratio of 10.01% is also substantially in excess of regulatory guidelines, as is the Companys at 11.70%. 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.


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

Salaries and wages increased $172 thousand in 2010 over 2009. Three main components flow into
salaries and wages: base salary, deferred costs from loans and incentive pay. Base salaries
decreased during 2010 even with the addition of the Hicksville office by $338 thousand. The
deferred costs component actually decreased by $318 thousand which in effect increases salary
expense and incentive pay increased $192 thousand. (For further discussion on incentive pay, see
note 11 of the consolidated financial statements). During the first part of 2009, some of the
Banks lending officers were also very busy in auto loan financing. This activity was spurred by
government and auto manufacturer incentives along with large banks exiting the market in the first
half of the year. The consumer loan portfolio grew by 26%, or almost $6 million. This increased
activity offset the increased salary expense as deferred costs from these loans are recorded as a
deduction to the salary expense when the loans are made. While salaries and wages decreased in
2009


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 2010 to 2009 comparison, an impact in
change due to volume is evident, where as the 2009 to 2008 comparison shows the impact was due
mainly to rate. What did remain the same in the two comparisons is that the change in interest in
total is still due mainly to rate change. The strategy during 2010 and currently is to extend the
maturities of time deposit specials to over 24 months to prepare for rising rates. The other
strategy employed during 2009 and 2010 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 those deposits were allowed to run off. The new core deposit products were
indeed embraced by our customers and have helped to reach the deposit portfolio mix the Bank was
after.


The following table sets forth the maturities of investment securities as of December 31,
2010 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.


As of December 31, 2010 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 and Bankers Bancorp, Inc at a cost of $50.8 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 by January 3, 2013. An early redemption
of 42,000 shares occurred in November 2010, decreasing the holdings to a value of $189.4 thousand.
The value of the stock in Bankers Bancorp, Inc was written down to zero at the end of 2009 as the
institution was taken over by its regulators. The Bank also owns stock of Farmer Mac with a
carrying value of $27.4 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, 2010:


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 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 $0.91 million for 2010,
$2.0 for 2009, and $1.4 for 2008. 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 amounted to $41 thousand for
2010, $290 thousand for 2009, and $332 thousand for 2008. $3 thousand of interest collected in
2010 was applied to reduce the specific allocation, $6 thousand of interest collected in 2009 and
$20 thousand of interest collected in 2008 was applied to reduce the specific allocations.


*

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, 2010 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

$
30,925

$
25,178

$
24,969

$
51,299

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


Liquidity
Liquidity remains high with the Bank also having access to $27 million of
unsecured borrowings through correspondent banks and $76 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 $115 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 $274 million for 2010, compared to $216 million for 2009, and $220
million for 2008. This represented 31.25 percent, 26.3 percent, and 28.0 percent of total average
assets, respectively. Of the almost $288 million of debt securities in the companys portfolio as
of December 31, 2010, $39 million or 13.7 percent of the portfolio is expected to receive payments
or mature in 2011. Taking into consideration possible calls of the debt


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 $4.3 million to
$29.9 million at December 31, 2010. This compares to decreased borrowings during 2009 of $11.4
million to $34.2 million at December 31,
2009 and increased borrowings during 2008 of $13.8 million to $45.6 million to end at December 31,
2008. The increased borrowings in 2008 and 2007 were used to fund loan growth and were a cheaper
source of funds than certificate of deposits. The decreased borrowings were payoffs of matured
notes in 2009. Sufficient funds were available to fund growth so new advances were not needed in
2009.


Capital Resources
Stockholders equity was $94.4 million as of December 31, 2010 compared to $93.6 million at
December 31, 2009. Dividends declared during 2010 were $0.73 per share totaling $3.44 million and
2009 were $0.72 per share totaling $3.41 million. During 2010, the Company purchased 48,130 shares
and awarded 10,150 restricted shares to 53 employees under its long term incentive plan. During
2009, the Company purchased 28,907 shares and awarded 10,000 restricted shares to 49 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 year end 2010, the
Company held 477,106 shares in Treasury stock and 28,925 shares in unearned stock awards as
compared to 2009, the Company held 437,551 shares in Treasury stock and 27,775 in unearned stock
awards. On January 21, 2011 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 21, 2011 and ending
December 31, 2011.
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, 2010, The Farmers & Merchants State Bank and Farmers & Merchants Bancorp, Inc had
total risk-based capital ratios of 14.88% and 14.95%, respectively. Core capital to risk-based
asset ratios of 11.56% and 14.02% are well in excess of regulatory guidelines. The Banks leverage
ratio of 8.1% is also substantially in excess of regulatory guidelines as is the Companys at
9.82%.
The Companys subsidiaries are restricted by regulations from making dividend distributions in
excess of certain prescribed amounts.