Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward Looking Statements

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

Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detailed from time to time in the Company's filings with the Securities and Exchange Commission (the "Commission"), including without limitation, the risk factors disclosed in Item 1A, "Risk Factors," in the Company's 2025 Form 10-K, as updated in Item 1A, "Risk Factors," in this Quarterly Report on Form 10-Q.

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

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general economic conditions in markets where the Company conducts business, which could materially impact credit quality trends;

•

the length and extent of the economic impacts of the ongoing conflict with Iran;

	•	the length and extent of U.S. and foreign country tariff policies and their impact on global, national, and regional economic conditions;
	•	actions by the Federal Reserve Board, U.S. Treasury and other government agencies, including those that impact money supply, market interest rates and inflation;

•

disruptions in the mortgage and lending markets and significant or unexpected fluctuations in interest rates related to governmental responses to inflation, including financial stimulus packages and interest rate changes;

•

general business conditions in the banking industry;

•

the regulatory environment;

•

general fluctuations in interest rates;

•

demand for loans in the market areas where the Company conducts business;

•

rapidly changing technology and evolving banking industry standards;

•

competitive factors, including increased competition with regional and national financial institutions;

•

Farmers' ability to attract, recruit and retain skilled employees; and

•

new service and product offerings by competitors and price pressures.

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

Results of Operations. The following is a comparison of selected financial ratios and other results at or for the three month periods ended March 31, 2026 and 2025:

		At or for the Three Months Ended
		March 31,
(In Thousands, except Per Share Data)		2026				2025
Total assets		$	7,175,476			$	5,157,040
Net income		$	16,264			$	13,578
Diluted earnings per share		$	0.36			$	0.36
Return on average assets (annualized)			1.11	%			1.06	%
Return on average equity (annualized)			11.55	%			13.12	%
Dividends to net income			39.55	%			47.10	%
Net loans to assets			66.13	%			62.36	%
Loans to deposits			81.06	%			72.55	%

Net Income. The Company reported net income of $16.3 million, or $0.36 per diluted share, for the quarter ended March 31, 2026 compared to $13.6 million, or $0.36 per diluted share, for the quarter ended March 31, 2025. Net income for the first quarter of 2026 included a charge of $4.0 million related to the Merger with Middlefield and the conversion of our core system to Jack Henry. The new core platform contract will save the Company approximately $2.0 million per year, or $0.04 in diluted earnings per share, once the conversion is complete in August of 2026.

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

Average Balance Sheets and Related Yields and Rates

(Dollar Amounts in Thousands)

		Three Months Ended												Three Months Ended
		March 31, 2026												March 31, 2025
		AVERAGE												AVERAGE
		BALANCE				INTEREST				RATE (1)				BALANCE				INTEREST				RATE (1)
EARNING ASSETS
Loans (2)		$	3,811,021			$	55,214				5.80	%		$	3,261,908			$	46,810				5.74	%
Taxable securities			1,177,183				7,773				2.64	%			1,135,580				7,096				2.50	%
Tax-exempt securities (2)			403,587				3,415				3.38	%			377,078				2,990				3.17	%
Other investments			51,720				761				5.89	%			44,170				541				4.90	%
Federal funds sold and other			102,808				681				2.65	%			73,575				510				2.77	%
TOTAL EARNING ASSETS			5,546,319				67,844				4.89	%			4,892,311				57,947				4.74	%
Nonearning assets			315,777												226,456
TOTAL ASSETS		$	5,862,096											$	5,118,767
INTEREST-BEARING LIABILITIES
Time deposits		$	811,760			$	6,629				3.27	%		$	733,406			$	6,632				3.62	%
Brokered time deposits			0				0				0.00	%			143,393				1,538				4.29	%
Savings deposits			1,490,444				6,507				1.75	%			1,115,259				4,012				1.44	%
Demand deposits - interest bearing			1,447,299				7,304				2.02	%			1,377,522				7,535				2.19	%
Total interest-bearing deposits			3,749,503				20,440				2.18	%			3,369,580				19,717				2.34	%
Short term borrowings			333,056				3,135				3.77	%			218,444				2,417				4.43	%
Long term borrowings			89,218				974				4.37	%			86,209				976				4.53	%
Total borrowed funds			422,274				4,109				3.89	%			304,653				3,393				4.45	%
TOTAL INTEREST-BEARING LIABILITIES			4,171,777				24,549				2.35	%			3,674,233				23,110				2.52	%
NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits - noninterest bearing			1,102,395												977,619
Other liabilities			24,876												52,894
Stockholders' equity			563,048												414,021
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	5,862,096											$	5,118,767
Net interest income and interest rate spread						$	43,295				2.54	%						$	34,837				2.22	%
Net interest margin											3.12	%											2.85	%

(1)	Rates are calculated on an annualized basis.

(2)

Interest on certain tax-exempt loans and tax-exempt securities in 2026 and 2025 is not taxable for Federal income tax purposes. In order to compare the tax-exempt yields on these assets to taxable yields, the interest earned on these assets is adjusted to a pre-tax equivalent amount based on the marginal corporate federal income tax rate of 21%

Net Interest Income. Net interest income for the three months ended March 31, 2026, was $42.6 million compared to $34.2 million for the three months ended March 31, 2025. The Merger with Middlefield and a 27 basis point increase in the net interest margin were the primary reasons for this increase.

The net interest margin for the three-month period ended March 31, 2026, was 3.12% compared to 2.85% for the same period in 2025. Interest-earning asset yields increased 15 basis points in the first quarter of 2026 compared to the first quarter of 2025 while the cost of interest-bearing liabilities decreased 17 basis points when comparing these two periods. This decrease in interest-bearing liabilities resulted from a reduction in deposit costs of 18 basis points and a 56 basis point reduction in costs on borrowings rates in comparing the first quarter of 2025 to the first quarter of 2026.

Provision for Credit Losses and Provision for Unfunded Loans. The provision for credit losses and unfunded loans was a benefit of $1.0 million for the three months ended March 31, 2026, compared to a benefit of $204,000 for the three months ended March 31, 2025. The provision in the first quarter of 2026 was positively impacted by improvements in qualitative factors in the Company's CECL model.

Noninterest Income. Noninterest income for the first quarter of 2026 was $13.7 million compared to $10.5 million for the first quarter of 2025. The increase was driven by the Middlefield acquisition, growth in the wealth lines of business and lower losses on the sale of securities.

Service charges on deposit accounts increased $208,000 to $2.0 million for the first quarter of 2026 compared to $1.8 million for the first quarter in 2025 primarily as a result of the Merger. Bank owned life insurance income increased $682,000 during the first quarter of 2026 to $1.5 million compared to $810,000 in the first quarter of 2025. Death claims were higher by $416,000 in 2026 compared to 2025 and the addition of Middlefield was primarily responsible for the remaining difference. Trust fees increased to $3.0 million at March 31, 2026, from $2.6 million at March 31, 2025. The increase was due to continued growth in the business unit. Insurance agency commissions were $1.7 million both in the first quarter of 2026 and 2025. Losses on the sale of securities totaled $18,000 in the first quarter of 2026 compared to losses on the sale of securities of $1.3 million during the first quarter of 2025. The Company restructured $23.8 million of securities at the end of the first quarter of 2025 resulting in the loss realized on the sale. Retirement plan consulting fees increased slightly to $886,000 in the first quarter of 2026 from $798,000 in the first quarter of 2025. Investment commissions grew $342,000 to $871,000 in the first quarter of 2026 compared to $529,000 in the first quarter of 2025. The Company has a strong sales team in this line of business and is looking to grow with deeper penetration into newer markets. Other mortgage banking income was $477,000 in the first quarter of 2026 compared to $147,000 in the first quarter of 2025. This increase was primarily due to the Company recovering $303,000 of mortgage servicing rights impairment in the first quarter of 2026. Debit card income grew from $1.9 million in the first quarter of 2025 to $2.0 million in the first quarter of 2026 as better volumes were realized in the current period. Other noninterest income was $898,000 in the first quarter of 2026 compared to $1.2 million in the first quarter of 2025 primarily due to lower SBIC income in 2026.

Noninterest Expense. Noninterest expense totaled $37.3 million for the quarter ended March 31, 2026 compared to $28.5 million for the quarter ended March 31, 2025. Salaries and employee benefits were $18.5 million in the first quarter of 2026 compared to $16.2 million in the first quarter of 2025. The increase was primarily driven by higher salaries associated with employee raises, the acquisition of Middlefield in the first quarter of 2026 and higher commission expense from increased revenue in the fee-based businesses. Occupancy and equipment expense increased to $5.1 million in the first quarter of 2026 from $4.1 million in the first quarter of 2025 due to the Merger and increased maintenance costs in 2026 due to more severe winter weather conditions. FDIC and state and local taxes increased by $341,000 to $1.6 million in the first quarter of 2026 compared to $1.3 million in the first quarter of 2025 due to the Merger and higher capital levels year-over-year. Expense related to the Merger and to convert our core processing system increased to $4.0 million. There were no expenses recognized for these activities in the first quarter of 2025. Core processing expense increased to $1.7 million in the first quarter of 2026 from $1.4 million in the first quarter of 2025. The increase was due to the Merger and a lower level of service credits in 2026. Other noninterest expense increased by $650,000 to $3.8 million in the first quarter of 2026 primarily as a result of the acquisition and timing issues.

Income Taxes. Income tax expense was $3.7 million for the three months ended March 31, 2026 compared to $2.8 million for the three months ended March 31, 2025 due to higher pretax income in the first quarter of 2026.

Financial Condition

Cash and Cash Equivalents. Cash and cash equivalents increased $93.7 million during the first three months of 2026 to $186.1 million from $92.4 million at December 31, 2025. The increase in the cash balances was primarily due to the Company intentionally holding more liquidity on its balance sheet at March 31, 2026 and the Merger with Middlefield.

Securities. The Company had securities available for sale totaling $1.48 billion as of March 31, 2026 compared to $1.34 billion as of December 31, 2025. The increase is a direct result of the Merger. Net unrealized losses on the portfolio totaled $189.7 million at March 31, 2026, compared to $181.8 million at December 31, 2025. The Company anticipates continued volatility in the bond market in 2026, which will continue to affect the value of the portfolio.

Loans. Net loans (excluding loans held for sale) increased to $4.75 billion at March 31, 2026 from $3.27 billion at December 31, 2025. The increase in 2026 is primarily due to the Merger.

The following tables present the amortized cost basis of the Company's commercial real estate portfolio segment by industry as of March 31, 2026 and December 31, 2025:

						% of Commercial								Weighted Average				Weighted Average
(In Thousands of Dollars)		Amortized Cost				Real Estate				% of Total Portfolio				Loan-to-Value				Occupancy
March 31, 2026
Commercial real estate
Retail		$	336,456				14.57	%			7.01	%			50.87	%			88.59	%
Farmland			231,455				10.03	%			4.82	%			46.85	%			100.00	%
Warehouse/Industrial			232,623				10.08	%			4.85	%			51.12	%			93.90	%
Office			194,707				8.43	%			4.06	%			58.58	%			81.72	%
Multifamily			247,892				10.74	%			5.16	%			59.24	%			72.54	%
Medical			145,189				6.29	%			3.02	%			54.08	%			93.66	%
Hotel			43,459				1.88	%			0.91	%			43.57	%			75.61	%
Special Purpose			75,927				3.29	%			1.58	%			52.88	%			100.00	%
Restaurant			43,121				1.87	%			0.90	%			49.44	%			100.00	%
Multifamily - Construction			37,343				1.62	%			0.78	%			54.52	%			5.02	%
All Other			720,558				31.21	%			15.01	%			45.37	%			96.24	%
Total		$	2,308,730				100.00	%			48.10	%

						% of Commercial								Weighted Average				Weighted Average
(In Thousands of Dollars)		Amortized Cost				Real Estate				% of Total Portfolio				Loan-to-Value				Occupancy
December 31, 2025
Commercial real estate
Retail		$	337,257				20.97	%			10.21	%			51.86	%			87.81	%
Farmland			211,231				13.13	%			6.39	%			48.61	%			100.00	%
Warehouse/Industrial			236,391				14.70	%			7.15	%			52.50	%			93.23	%
Office			191,765				11.92	%			5.80	%			59.74	%			81.76	%
Multifamily			171,956				10.69	%			5.20	%			59.15	%			72.03	%
Medical			141,396				8.79	%			4.28	%			55.31	%			93.83	%
Hotel			44,356				2.76	%			1.34	%			44.15	%			75.81	%
Special Purpose			78,533				4.88	%			2.38	%			53.62	%			98.62	%
Restaurant			44,583				2.77	%			1.35	%			52.52	%			100.00	%
Multifamily - Construction			62,595				3.89	%			1.89	%			55.98	%			27.46	%
All Other			88,123				5.48	%			2.67	%			46.51	%			96.04	%
Total		$	1,608,186				100.00	%			48.66	%

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

Asset Quality History

(In Thousands of Dollars)

		3/31/2026				12/31/2025				9/30/2025				6/30/2025				3/31/2025
Nonperforming loans		$	59,854			$	26,215			$	35,344			$	27,819			$	20,724
Nonperforming loans as a % of total loans			1.25	%			0.79	%			1.06	%			0.84	%			0.64	%
Non-performing assets		$	59,977			$	26,318			$	35,519			$	28,052			$	20,902
Non-performing assets as a % of total assets			0.84	%			0.50	%			0.68	%			0.54	%			0.41	%
Loans delinquent 30-89 days		$	14,700			$	16,947			$	16,083			$	17,727			$	11,192
Loans delinquent 30-89 days as a % of total loans			0.31	%			0.51	%			0.48	%			0.54	%			0.34	%
Allowance for credit losses		$	54,684			$	36,811			$	39,528			$	35,863			$	35,549
Allowance for credit losses as a % of total loans			1.14	%			1.11	%			1.18	%			1.17	%			1.09	%
Allowance for credit losses as a % of nonperforming loans			91.36	%			140.42	%			111.84	%			138.62	%			171.54	%
Net charge-offs for the quarter		$	444			$	4,897			$	536			$	572			$	336
Annualized net charge-offs to average net loans outstanding			0.05	%			0.59	%			0.07	%			0.07	%			0.04	%

The Company's allowance for credit losses increased to $54.7 million for the period ended March 31, 2026, from $36.8 million for the period ended December 31, 2025. The increase in the allowance for credit losses was primarily driven by the Merger. The Company recorded a $4.0 million and $15.3 million increase to the allowance for credit losses for the Day 1 reserve for purchased financial assets with credit deterioration and purchased seasoned loans, respectively. The Company estimates the ACL based on the amortized cost basis of the underlying loan and has made an accounting policy election to exclude accrued interest from the loan's amortized cost basis and the related measurement of the ACL. Estimating the amount of the ACL is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge-offs, trends in past due and nonaccrual loans, and the level of potential problem loans, all of which may be susceptible to significant change.

Based on the evaluation of the adequacy of the allowance for credit losses, management believes that the allowance for credit losses at March 31, 2026 is adequate. The provision for credit losses is based on management's judgment after taking into consideration all factors connected with the collectability of the existing loan portfolio. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Specific factors considered by management in determining the amounts charged to operating expenses include previous credit loss experience, the status of past due interest and principal payments, the quality of financial information supplied by loan customers and the general condition of the industries in the community to which loans have been made.

Deposits. Total deposits increased to $5.9 billion at March 31, 2026 from $4.34 billion at December 31, 2025. Customer deposits grew $1.6 billion, including an increase of $282.7 million in public funds. The increase was primarily due to Middlefield, which added $1.49 billion in deposits, as well as seasonal growth in public funds.

Short-term Borrowings. Total short-term borrowing balances increased from $281.0 million at December 31, 2025 to $341.0 million at March 31, 2026. The Middlefield Merger added $145.0 million in short-term borrowings offset by payoffs.

Total Stockholders' Equity. Total stockholders' equity increased to $766.9 million at March 31, 2026 from $485.7 million at December 31, 2025. The increase was primarily due to an increase in common stock of $276.2 million from the Merger coupled with growth in retained earnings of $9.8 million due to $16.3 million of net income recognized during the first three months of the year partially offset by dividends paid on outstanding common shares.

The capital management function is a regular process that consists of providing capital for both the current financial position and the anticipated future growth of the Company. At March 31, 2026, the Company is required to maintain 4.5% common equity tier 1 to risk weighted assets excluding the conservation buffer to be adequately capitalized. The Company's common equity tier 1 to risk weighted assets was 11.70%, total risk-based capital ratio stood at 14.63%, and the Tier 1 risk-based capital ratio and Tier 1 leverage ratio were at 12.19% and 11.21%, respectively, at March 31, 2026. Management believes that the Company and the Bank meet all capital adequacy requirements to which they are subject, as of March 31, 2026.

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

Critical Accounting Policies

The Company follows financial accounting and reporting policies that are in accordance with U.S. GAAP. These policies are presented in Note 1 of the consolidated audited financial statements in the Company's Annual Report to Shareholders included in the Company's 2025 Form 10-K. Critical accounting policies are those policies that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has identified accounting policies that are critical accounting policies and an understanding of these policies is necessary to understand the Company's financial statements. These policies relate to determining the adequacy of the allowance for credit losses, if there is any impairment of goodwill or other intangible and estimating the fair value of assets acquired and liabilities assumed in connection with any merger activity. Additional information regarding these policies is included in the notes to the aforementioned 2025 consolidated financial statements, Note 1 (Summary of Significant Accounting Policies), Note 4 (Loans) and Note 2 (Business Combinations), and the sections captioned "Loan Portfolio."

Farmers maintains an allowance for credit losses. The allowance for credit losses is presented as a reserve against loans on the balance sheets. Credit losses are charged off against the allowance for credit losses, while recoveries of amounts previously charged off are credited to the allowance for credit losses. A provision for credit losses is charged to operations based on management's periodic evaluation of adequacy of the allowance.

The Company's allowance for credit losses represents management's estimate of expected credit losses over the remaining expected life of the Company's financial assets measured at amortized cost and certain off-balance sheet lending-related commitments.

The allowance for credit losses involves significant judgment on a number of matters including the weighting of macroeconomic forecasts and microeconomic statistics, incorporation of historical loss experience, assessment of risk characteristics, assignment of risk ratings, valuation of collateral, and the determination of remaining expected life. Refer to Note 4 for further information on these judgments as well as the Company's policies and methodologies used to determine the Company's allowance for credit losses.

A significant judgment involved in estimating the Company's allowance for credit losses relates to the macroeconomic forecasts used to estimate credit losses over the four-quarter forecast period within the Company's methodology. The four-quarter forecast incorporates three macroeconomic variables ("MEV") that are relevant for exposures across the Company.

•

U.S. changes in real gross domestic product (GDP).

•

U.S. personal consumption expenditures (PCE) inflation.

•

U.S. civilian unemployment rate.

Changes in the Company's assumptions and forecasts of economic conditions could significantly affect its estimate of expected credit losses in the portfolio at the balance sheet date or lead to significant changes in the estimate from one reporting period to the next.

It is difficult to estimate how potential changes in any one factor or input might affect the overall allowance for credit losses because management considers a wide variety of factors and inputs in estimating the allowance for credit losses. Changes in the factors and inputs considered may not occur at the same rate and may not be consistent across all product types, and changes in factors and inputs may be directionally inconsistent, such that improvement in one factor or input may offset deterioration in others.

To consider the impact of a hypothetical alternate macroeconomic forecast, the Company compared the modeled credit losses determined using its central and relative adverse macroeconomic scenarios. The central and relative adverse scenarios each included the three MEVs, but differed in the levels, paths and peaks/troughs of those variables over the four-quarter forecast period.

For example, compared to the Company's central scenario that is based on a four-quarter forecasted change in U.S. real GDP of 2.40% from 4Q2025 to 4Q2026, U.S. PCE inflation of 2.70%, and U.S. unemployment of 4.40%, the Company's relative adverse scenario assumes a four-quarter forecast with a contraction of U.S. real GDP, a PCE inflation between 5.00% and 7.00% and an elevated U.S. unemployment rate between 6.00% and 7.00%. This analysis is not intended to estimate expected future changes in the allowance for credit losses, for a number of reasons, including:

•

The impacts of changes in the MEVs are both interrelated and nonlinear, so the results of this analysis cannot be simply extrapolated for more severe changes in macroeconomic variables.

•

Expectations of future changes in portfolio composition and borrower behavior can significantly affect the allowance for credit losses.

To demonstrate the sensitivity of credit loss estimates to macroeconomic forecasts as of March 31, 2026, the Company compared the modeled estimates under its relative adverse scenario for two of the Company's largest loan pools to its central scenario for the same loan pools. Without considering offsetting or correlated effects in other qualitative components of the Company's allowance for credit losses, the comparison between these two scenarios for the exposures below reflect the following differences:

•

An increase of approximately $943,000 for residential real estate loans and lending-related commitments

•

An increase of approximately $1.4 million for commercial real estate non-owner occupied loans and lending-related commitments

This analysis relates only to the modeled credit loss estimates and is not intended to estimate changes in the overall allowance for credit losses as it does not reflect any potential changes in the other adjustments to the quantitative calculation, which would also be influenced by the judgment management applies to the modeled lifetime loss estimates to reflect the uncertainty and imprecision of these modeled lifetime loss estimates based on then-current circumstances and conditions.

Recognizing that forecasts of macroeconomic conditions are inherently uncertain, the Company believes that its process to consider the available information and associated risks and uncertainties is appropriately governed and that its estimates of expected credit losses were reasonable and appropriate for the period ended March 31, 2026.

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

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

Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. GAAP establishes standards for the amortization of acquired intangible assets and the impairment assessment of goodwill. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. The Company's goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of the Company's subsidiaries to provide quality, cost-effective services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods. GAAP requires an annual evaluation of goodwill for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The fair value of the goodwill is estimated by reviewing the past and projected operating results for the subsidiaries and comparable industry information. At March 31, 2026, on a consolidated basis, Farmers had intangibles of $36.8 million subject to amortization and $271.7 million in goodwill, which was not subject to periodic amortization.

The Company accounts for acquisitions under FASB ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. Assets acquired and liabilities assumed in a business combination are recorded at the estimated fair value on their purchase date. As provided for under GAAP, management has up to 12 months following the date of the acquisition to finalize the fair values of acquired assets and assumed liabilities. In particular, the valuation of acquired loans involves significant estimates, assumptions and judgment based on information available as of the acquisition date. Loans acquired in a business combination transaction are evaluated either individually or in pools of loans with similar characteristics; including consideration of a credit component. A number of factors are considered in determining the estimated fair value of purchased loans including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, contractual interest rates compared to market interest rates, and net present value of cash flows expected to be received.

Liquidity

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

Along with its liquid assets, the Bank has additional sources of liquidity available which help to ensure that adequate funds are available as needed. These other sources include, but are not limited to, access to funds in the wholesale arena, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds and borrowings on approved lines of credit at major domestic banks. The Bank has a line of credit totaling $25.0 million and there was no balance on this line at either March 31, 2026 or December 31, 2025. The Company also has access to borrow $11.5 million at the Federal Reserve Discount Window, however, there was no balance on this line at March 31, 2026 or December 31, 2025. The Federal Reserve Discount Window can be an additional source of funds with the posting of additional collateral. As of March 31, 2026, the Bank had $341.0 million in outstanding balances with the FHLB. Additional borrowing capacity at the FHLB was approximately $788.9 million at March 31, 2026. The Bank views its membership in the FHLB as a solid source of liquidity. Management feels that its liquidity position is adequate and will continue to monitor the position on a monthly basis.

Off-Balance Sheet Arrangements

In the normal course of business, to meet the financial needs of our customers, we are a party to financial instruments with off-balance sheet risk. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the Consolidated Balance Sheets. The Bank's maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. Because some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The same credit policies are used in making commitments as are used for on-balance sheet instruments. Collateral is required in instances where deemed necessary. Undisbursed balances of loans closed include funds not disbursed but committed for construction projects. Unused lines of credit include funds not disbursed, but committed for, home equity, commercial and consumer lines of credit. Financial standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily used to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Total unused commitments were $1.03 billion at March 31, 2026, and $710 million at December 31, 2025. Additionally, the Company has committed up to $21.2 million in subscriptions in SBIC investment funds and at March 31, 2026, the Company had invested $16.0 million in these funds.

Recent Market and Regulatory Developments

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

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