FARMERS & MERCHANTS BANCORP INC

Previous wording

F&M Commercial Banking Division saw loan demand soften beginning in the fourth quarter of 2023 and continued through the first quarter of 2024. Overall lending rates have increased in most markets and amortizations continue to stretch longer in select markets. Commercial clients are still concerned with the availability of workforce but are seeing some improvements in markets that have been affected by layoffs. Commercial clients have seen supply chain and material availability improve, but price increases remain a concern. Credit quality of the portfolio remains solid and first quarter 2024 collateral values are still holding consistent with previous quarters.

Current wording

The Commercial Banking Division saw loan demand soften in Q1 and remain flat for Q2 and what remains projected to be a flat 2024. Overall lending rates have increased consistently in the markets that F&M serves. Commercial clients are seeing some improvements in the employment market affected by layoffs. Commercial clients have seen supply chain and material availability improve, but price increases remain a concern in 2024. Credit quality of the portfolio remains solid and Q2 collateral values and auction values are still holding consistent with previous quarters. F&M continues to monitor the portfolio closely for the impact on higher rates and inflationary pressures.

Previous wording

Our executive offices are located at 307 North Defiance Street, Archbold, Ohio 43502, and our telephone number is (419) 446-2501. The Bank operates thirty-seven full-service banking offices throughout Northwest Ohio and Northeast Indiana and a drive-up facility in Archbold. The Bank also operates four Loan Production Offices (LPOs), two in Ohio with one in Indiana and one in Michigan.

Current wording

Our executive offices are located at 307 North Defiance Street, Archbold, Ohio 43502, and our telephone number is (419) 446-2501. The Bank operates thirty-seven full-service banking offices throughout Northwest Ohio, Northeast Indiana and Southeast Michigan along with a drive-up facility in Archbold. The Bank also operates four Loan Production Offices (LPOs), two in Ohio with one in Indiana and one in Michigan.

Previous wording

The Bank has established underwriting policies and procedures which facilitate operating in a safe and sound manner in accordance with supervisory and regulatory guidance. Within this sphere of safety and soundness, the Bank's practice has been to not promote innovative, unproven credit products which may not be in the best interest of the Bank or its customers. The Bank does offer a hybrid mortgage loan. Hybrid loans are loans that start out as a fixed rate mortgage but after a set number of years automatically adjust to an adjustable rate mortgage. The Bank offers a three year, a five year and a seven year fixed rate mortgage after which the interest rate will adjust annually. In order to offer longer term fixed rate mortgages, the Bank does participate in the Freddie Mac, Farmer Mac and Small Business Lending programs. The Bank also normally retains the servicing rights on these partially or 100% sold loans. In order for the customer to participate in these programs they must meet the requirements established by those agencies. In addition, the Bank does sell some of its longer term fixed rate agricultural mortgages into the secondary market with the aid of brokers. With the acquisition of Perpetual Federal Savings Bank in the 4 th quarter of 2021 and the addition of Peoples Federal Savings in the 4th quarter of 2022, the Bank saw an increase in fixed rate, long-term mortgage loans to our portfolio from that banking service area.

Current wording

The Bank has established underwriting policies and procedures which facilitate operating in a safe and sound manner in accordance with supervisory and regulatory guidance. Within this sphere of safety and soundness, the Bank's practice has been to not promote innovative, unproven credit products which may not be in the best interest of the Bank or its customers. The Bank does offer a hybrid mortgage loan. Hybrid loans are loans that start out as a fixed rate mortgage but after a set number of years automatically adjust to an adjustable rate mortgage. The Bank offers a three year, a five year and a seven year fixed rate mortgage after which the interest rate will adjust annually. In order to offer longer term fixed rate mortgages, the Bank does participate in the Freddie Mac, Farmer Mac and Small Business Lending programs. The Bank also normally retains the servicing rights on these partially or 100% sold loans. In order for the customer to participate in these programs they must meet the requirements established by those agencies. In addition, the Bank does sell some of its longer term fixed rate agricultural mortgages into the secondary market with the aid of brokers. With the acquisition of Perpetual Federal Savings Bank in the fourth quarter of 2021 and the addition of Peoples Federal Savings in the fourth quarter of 2022, the Bank saw an increase in fixed rate, long-term mortgage loans to our portfolio from that banking service area.

Previous wording

FM Investment Services, the brokerage department of the Bank, opened for business in April 1999. Securities are offered through Raymond James Financial Services, Inc. In November of 2020, FM Investment Services purchased the assets and clients of Adams County Financial Resources (ACFR) which is discussed in further detail in Note 2 to the Company’s financial statements. Securities are offered through Raymond James Financial Services, Inc.

Current wording

FM Investment Services, the brokerage department of the Bank, opened for business in April 1999. Securities are offered through Raymond James Financial Services, Inc. In November of 2020, FM Investment Services purchased the assets and clients of Adams County Financial Resources (ACFR) which is discussed in further detail in Note 2 to the Company’s financial statements.

Previous wording

At March 31, 2024, we had 465 full time equivalent employees. The employees are not represented by a collective bargaining unit. We provide our employees with a comprehensive benefit program, some of which is contributory. We consider our employee relations to be good.

Current wording

At June 30, 2024, we had 467 full time equivalent employees. The employees are not represented by a collective bargaining unit. We provide our employees with a comprehensive benefit program, some of which is contributory. We consider our employee relations to be good.

Previous wording

The Bank remains attentive to the current regulatory environment in light of the regulatory agencies’ risk-based approach to examinations. Regulatory changes and the complexity of new and amended rules have resulted in challenges and uncertainties which could pose an increased risk of noncompliance. Various significant mortgage rules require monitoring by means of testing, validation of results, additional training, and further research or consultation to assist with ongoing compliance.

Current wording

The Company and the Bank remain attentive to the current regulatory environment in light of the regulatory agencies’ risk-based approach to examinations. Regulatory changes and the complexity of new and amended rules have resulted in challenges and uncertainties which could pose an increased risk of noncompliance. Various significant mortgage rules require monitoring by means of testing, validation of results, additional training, and further research or consultation to assist with ongoing compliance.

Previous wording

Under the Truth in Lending Act (TILA) Ability to Repay requirements, the Bank focuses on Qualified Mortgage (QM) status for mortgage loans originated as they provide certain presumptions of compliance under the Ability to Repay rules adopted under the Dodd-Frank Act. In satisfying QM requirements, any mortgage lender regardless of their size can make loans which are entitled to the QM presumption of compliance. New final rules, effective October 2022, amending the Ability to Repay/Qualified Mortgage Rules were implemented. The General QM Final Rule amended the definition of the QM category to offset the impact of the sunsetting of the temporary Government Sponsored Enterprise (GSE) QMs. Amended General QM loan definition removed the 43% debt-to-income limit, eliminated Appendix Q underwriting standards and any requirement to use them as a qualification for General QM status, and instead implemented price-based thresholds. The Company complies with the revised price-based new General QM Loan definition and its requirements. Since the Company sells fixed rate consumer mortgage loans to the Federal Home Loan Mortgage Corporation, it remains attentive to their current loan underwriting requirements. On occasion, the Bank does make Non-Qualified Mortgages. Approvals and originations of both Non-QM loans and Higher Priced Mortgage Loans are periodically reported to the Bank’s Loan Committee.

Current wording

Under the Truth in Lending Act (TILA) Ability to Repay requirements, the Bank focuses on Qualified Mortgage (QM) status for mortgage loans originated as they provide certain presumptions of compliance under the Ability to Repay rules adopted under the Dodd-Frank Act. In satisfying QM requirements, any mortgage lender regardless of their size can make loans which are entitled to the QM presumption of compliance. New final rules, effective October 2022, amending the Ability to Repay/Qualified Mortgage Rules were implemented. The General QM Final Rule amended the definition of the QM category to offset the impact of the sunsetting of the temporary Government Sponsored Enterprise (GSE) QMs. Amended General QM loan definition removed the 43% debt-to-income limit, eliminated Appendix Q underwriting standards and any requirement to use them as a qualification for General QM status, and instead implemented price-based thresholds. The Bank complies with the revised price-based new General QM Loan definition and its requirements. Since the Bank sells fixed rate consumer mortgage loans to the Federal Home Loan Mortgage Corporation, it remains attentive to their current loan underwriting requirements. On occasion, the Bank does make Non-Qualified Mortgages. Approvals and originations of both Non-QM loans and Higher Priced Mortgage Loans are periodically reported to the Bank’s Loan Committee.

Previous wording

On March 30, 2023, the CFPB issued final rules which amend Regulation B to implement changes to the Equal Credit Opportunity Act (ECOA) as made by Section 1071 of the Dodd-Frank Act. Covered financial institutions are required to collect and report data on covered credit applications involving small businesses, including those businesses owned by women or minorities. Small businesses are defined as those businesses (including agricultural businesses) which had gross annual revenue of $5 million of less during its most recent fiscal year. Data would be reported to the CFPB which will then make aggregated information publicly available. These new final rules have a phased implementation period with the largest lenders being required to collect and report data first.

Current wording

On March 30, 2023, the Consumer Financial Protection Bureau (CFPB) issued final rules which amend Regulation B to implement changes to the Equal Credit Opportunity Act (ECOA) as made by Section 1071 of the Dodd-Frank Act. Covered financial institutions are required to collect and report data on covered credit applications involving small businesses, including those businesses owned by women or minorities. Small businesses are defined as those businesses (including agricultural businesses) which had gross annual revenue of $5 million of less during its most recent fiscal year. Data would be reported to the CFPB which will then make aggregated information publicly available. These new final rules have a phased implementation period with the largest lenders being required to collect and report data first.

Previous wording

Lenders that originated at least 2,500 small business loans annually must begin data collection on October 1, 2024. Lenders that originated at least 500 small business loans annually will be required to begin data collection as of April 1, 2025. For those Lenders that originated at least 100 small business loans annually, data collection will be required to begin as of January 1, 2026. The Bank conducted a preliminary assessment based on the number of covered loans originated in 2022. Based on the preliminary assessment, the Bank would be subject to the data collection requirements as of April 1, 2025. Data collection and reporting of small business loans does not include nonprofit or government entities or businesses with gross annual revenues that exceed $5 million. Additionally, data collection involves demographic information collected from a loan applicant regarding that applicant’s status as a minority-owned business, a women-owned business, and an LGBTQI+-owned business, as well as the applicant’s principal owners’ ethnicity, race, and sex. Applicants can refuse to provide demographic information. Implementation of these final rules will involve significant changes to processes and procedures in conjunction with new software configurations to accommodate and capture required data points regarding applications and final action taken.

Current wording

Lenders that originated at least 2,500 small business loans annually were originally required to begin data collection on October 1, 2024. Lenders that originated at least 500 small business loans annually were originally required to begin data collection as of April 1, 2025. For those lenders that originated at least 100 small business loans annually, data collection was originally required to begin as of January 1, 2026. The Bank conducted a preliminary assessment based on the number of covered loans originated in 2022. Based on the preliminary assessment, the Bank would be subject to the original data collection requirements as of April 1, 2025. Data collection and reporting of small business loans does not include nonprofit or government entities or businesses with gross annual revenues that exceed $5 million. Additionally, data collection involves demographic information collected from a loan applicant regarding that applicant’s status as a minority-owned business, a women-owned business, and an LGBTQI+-owned business, as well as the applicant’s principal owners’ ethnicity, race, and sex. Applicants can refuse to provide demographic information. Implementation of these final rules will involve significant changes to processes and procedures in conjunction with new software configurations to accommodate and capture required data points regarding applications and final action taken.

Previous wording

Presently, the Bank's compliance date for commencement of small business lending data collection is uncertain. A lawsuit filed in May 2023 by the Texas Bankers Association and Rio Bank based in McAllen, Texas in the U.S. District Court for the Southern District of Texas challenged the CFPB's final rule implementing Section 1071 of the Dodd-Frank Act. Shortly thereafter, the American Bankers Association joined the lawsuit as a plaintiff. The argument is the final rule far exceeded the statutory scope of Section 1071, failed to take into consideration relevant industry comments, and did not conduct appropriate cost-benefit analysis. Additionally, the constitutionality of the CFPB was challenged based on its funding structure, and which is based upon another pending lawsuit which is awaiting a hearing by the U.S. Supreme Court regarding CFPB's funding. An injunction was granted by a federal judge in the Southern District of Texas banning the CFPB from requiring Rio Bank, and members of both the Texas Bankers Association and the American Bankers Association from complying with the final rules implementing Section 1071 of the Dodd-Frank Act until the Supreme Court of the United States rules on the CFPB's funding. Subsequently, a motion was filed by the Independent Community Bankers of America, the Independent Bankers Association of Texas, and Texas First Bank in the U.S. District Court for the Southern District of Texas requesting expansion of the injunction previously granted. In late October 2023, the federal judge granted the expansion of the injunctive relief to provide a nationwide injunction to all community banks and covered financial institutions thus ensuring relief was not limited by trade association membership. The Bank is presently impacted by the injunction on implementation of the Section 1071 final rule.

Current wording

Presently, the Bank's compliance date for commencement of small business lending data collection is uncertain. A lawsuit filed in April 2023 by the Texas Bankers Association and Rio Bank based in McAllen, Texas in the U.S. District Court for the Southern District of Texas challenged the CFPB's final rule implementing Section 1071 of the Dodd-Frank Act. Shortly thereafter, the American Bankers Association joined the lawsuit as a plaintiff. The argument is the final rule far exceeded the statutory scope of Section 1071, failed to take into consideration relevant industry comments, and did not conduct appropriate cost-benefit analysis. Additionally, the constitutionality of the CFPB was challenged based on its funding structure, and which is based upon another pending lawsuit which is awaiting a hearing by the U.S. Supreme Court regarding CFPB's funding. On July 31, 2023, an injunction was granted by a federal judge in the Southern District of Texas banning the CFPB from requiring Rio Bank, and members of both the Texas Bankers Association and the American Bankers Association from complying with the final rules implementing Section 1071 of the Dodd-Frank Act until the Supreme Court of the United States rules on the CFPB's funding. On August 4, 2023, a motion was filed by the Independent Community Bankers of America, the Independent Bankers Association of Texas, and Texas First Bank in the U.S. District Court for the Southern District of Texas requesting expansion of the injunction previously granted. In late October 2023, the federal judge granted the expansion of the injunctive relief to provide a nationwide injunction to all community banks and covered financial institutions thus ensuring relief was not limited by trade association membership. The U.S. Supreme Court issued its long-awaited decision on the challenge to the CFPB’s funding mechanism on May 16, 2024. The Supreme Court ruled that the CFPB’s funding does not violate the U.S. Constitution’s Appropriations Clause. Subsequently, the CFPB issued an interim final rule on June 25, 2024, to make date related adjustments on a day for day basis based on recent court orders involving ongoing litigation. This extended compliance dates for beginning data collection by 290 days. The Bank is presently impacted by the injunction and remaining arguments in the litigation involving the Section 1071 final rule.

Previous wording

A final rule with amendments to the Community Reinvestment Act (CRA) was jointly released by the Federal Reserve, the FDIC, and Office of the Comptroller of the Currency on October 24, 2023. These amendments are intended to update how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated. The final rule was effective on April 1, 2024, with certain amendments effective April 1, 2024, through January 1, 2031, and other amendments in the final rule were delayed indefinitely. The final CRA rules were published in the Federal Register on February 1, 2024. Shortly thereafter, the American Bankers Association, the U.S. Chamber of Commerce, the Independent Community Bankers of America, along with four state associations jointly sued the Federal Reserve, FDIC, and Office of Comptroller of the Currency for exceeding their statutory authority. The lawsuit filed in the U.S. District Court for the Northern District of Texas requested the three regulatory agencies vacate the rule and sought a preliminary injunction pausing the new rules while the court decided the merits of the case. On March 21, 2024, the Federal Reserve, FDIC, and Office of Comptroller of the Currency issued an interim final rule and a technical corrections final rule related to the CRA final rule both effective on April 1, 2024. The Agencies also requested comments on the interim final rule for a period of 45 days after publication in the Federal Register. The interim final rule extended two provisions of the CRA final rule from April 1, 2024, to January 1, 2026. Then on March 29, 2024, the district court judge granted a temporary injunction to pause the implementation of CRA final rule while the case moves forward. The injunction extended implementation dates on a day for day basis for each day the injunction remains in place. As a large bank examined for its CRA performance, the Bank remains attentive to the impact of the injunction granted, the outcome of the lawsuit, and significant amendments made by the final CRA rules.

Current wording

A final rule with amendments to the Community Reinvestment Act (CRA) was jointly released by the Federal Reserve, the FDIC, and Office of the Comptroller of the Currency on October 24, 2023. These amendments are intended to update how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated. The final rule was effective on April 1, 2024, with certain amendments effective April 1, 2024, through January 1, 2031, and other amendments in the final rule were delayed indefinitely. The final CRA rules were published in the Federal Register on February 1, 2024. On February 5, 2024, the American Bankers Association, the U.S. Chamber of Commerce, the Independent Community Bankers of America, along with four state associations jointly sued the Federal Reserve, FDIC, and Office of Comptroller of the Currency for exceeding their statutory authority. The lawsuit filed in the U.S. District Court for the Northern District of Texas requested the regulatory agencies vacate the rule and sought a preliminary injunction pausing the new rules while the court decided the merits of the case. On March 21, 2024, the Federal Reserve, FDIC, and Office of Comptroller of the Currency issued an interim final rule and a technical corrections final rule related to the CRA final rule both effective on April 1, 2024. The Agencies also requested comments on the interim final rule for a period of 45 days after publication in the Federal Register. The interim final rule extended two provisions of the CRA final rule from April 1, 2024, to January 1, 2026. Then on March 29, 2024, the district court judge granted a temporary injunction to pause the implementation of CRA final rule while the case moves forward. The injunction extended implementation dates on a day for day basis for each day the injunction remains in place. As a large bank examined for its CRA performance, the Bank remains attentive to the outcome of the preliminary injunction granted and the significant impact of the amendments made by the final CRA rules.

Previous wording

With regard to all regulatory matters, the Bank remains committed in making good faith efforts to comply with technical requirements of the laws, rules, regulations, and guidance from both federal and state agencies which govern its activities.

Current wording

With regard to all regulatory matters, the Company and the Bank remain committed in making good faith efforts to comply with technical requirements of the laws, rules, regulations, and guidance from both federal and state agencies which govern its activities.

Previous wording

These assumptions, estimates and judgments are based on information available as of the date of the financial statements. As this information changes, the financial statements could reflect different assumptions, estimates and judgments. Certain policies inherently have a greater reliance on assumptions, estimates and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Examples of critical assumptions, estimates and judgments are when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not required to be recorded at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability must be recorded contingent upon a future event. These policies, along with the disclosures presented in the notes to the condensed consolidated financial statements and in the management's discussion and analysis of the financial condition and results of operations, provide information on how significant assets and liabilities are valued and how those values are determined for the financial statements. Based on the valuation techniques used and the sensitivity of financial statement amounts to assumptions, estimates, and judgments underlying those amounts, management has identified the determination of the ACL, the valuation of its Loan Servicing Rights (LSR), the valuation of real estate acquired through or in lieu of loan foreclosures (“OREO Property”) and goodwill as the accounting areas that require the most subjective or complex judgments, and as such could be the most subject to revision as new information becomes available.

Current wording

These assumptions, estimates and judgments are based on information available as of the date of the financial statements. As this information changes, the financial statements could reflect different assumptions, estimates and judgments. Certain policies inherently have a greater reliance on assumptions, estimates and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Examples of critical assumptions, estimates and judgments are when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not required to be recorded at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability must be recorded contingent upon a future event. These policies, along with the disclosures presented in the notes to the condensed consolidated financial statements and in the management's discussion and analysis of the financial condition and results of operations, provide information on how significant assets and liabilities are valued and how those values are determined for the financial statements. Based on the valuation techniques used and the sensitivity of financial statement amounts to assumptions, estimates, and judgments underlying those amounts, management has identified the determination of the Allowance for Credit Losses (ACL), the valuation of its Loan Servicing Rights (LSR), the valuation of real estate acquired through or in lieu of loan foreclosures (“OREO Property”) and goodwill as the accounting areas that require the most subjective or complex judgments, and as such could be the most subject to revision as new information becomes available.

Previous wording

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs. Accrued interest receivable totaled $10.9 million and $10.1 million at March 31, 2024 and December 31, 2023, respectively, and was reported in Other Assets on the condensed consolidated balance sheets and is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipation repayments.

Current wording

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs. Accrued interest receivable totaled $11.7 million and $10.1 million at June 30, 2024 and December 31, 2023, respectively, and was reported in Other Assets on the condensed consolidated balance sheets and is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipation repayments.

Previous wording

Due to the Company’s loss history not being sufficient enough to predict future losses, the Company is utilizing peer data from a peer group of 307 banks in the region with asset sizes less than $5 billion. The reserves are calculated at the loan level and based on the note characteristics, essentially balances times loss rate + qualitative factors + forward look, with the forward looking forecast eliminated after 12 months. In order to provide a reasonable and supportable forward looking forecast, a regression analysis of the bank’s historical loss rates against the Federal Open Market Committee (FOMC) quarterly economic projections for Change in real GDP and National Unemployment is completed. Annual projections are broken down using a straight-line approach for quarterly changes.

Current wording

Due to the Company’s loss history not being sufficient enough to predict future losses, the Company is utilizing peer data from a peer group of 307 banks in the region with asset sizes less than $5 billion. The reserves are calculated at the loan level and based on the note characteristics, essentially balances times loss rate + qualitative factors + forward look, with the forward looking forecast eliminated after 12 months. In order to provide a reasonable and supportable forward looking forecast, a regression analysis of the Bank’s historical loss rates against the Federal Open Market Committee (FOMC) quarterly economic projections for National Unemployment is completed. The Bank previously also included the FOMC’s forecasted change in real GDP as a second independent variable in its forward look regression; however, it was removed in the second quarter of 2024 due to reflecting little statistically significant correlation to the Bank’s historical loss rates. The impact of this change to the ACL was immaterial due to the variable having such a low coefficient value at this time. Annual projections are broken down using a straight-line approach for quarterly changes.

Previous wording

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation; reserves for expected credit losses for collateral-dependent loans are based on the expected shortfall of the loan based on the discounted collateral value. This specific reserve portion of the ACL was $0.4 million at December 31, 2023, and $2.0 million at December 31, 2022. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. At 90 days delinquent, secured consumer loans are charged down to the value of the collateral, if repossession of the collateral is assured and/or in the process of repossession. Consumer mortgage loan deficiencies are charged down upon the sale of the collateral or sooner upon the recognition of collateral deficiency.

Current wording

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation; reserves for expected credit losses for collateral-dependent loans are based on the expected shortfall of the loan based on the discounted collateral value. This specific reserve portion of the ACL was $57 thousand at June 30, 2024 and $386 thousand at December 31, 2023. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. At 90 days delinquent, secured consumer loans are charged down to the value of the collateral, if repossession of the collateral is assured and/or in the process of repossession. Consumer mortgage loan deficiencies are charged down upon the sale of the collateral or sooner upon the recognition of collateral deficiency.

Previous wording

As a result of this refined analysis, representing a change in accounting estimate, management recognized an additional $712 thousand of agricultural loan servicing rights during the quarter ended June 30, 2023. This change in estimate took place during the quarter ended June 30, 2023 and had no effect on past periods. Management intends to continue to obtain the appraisal of the agricultural real estate loan servicing rights from the independent third party specialist on a quarterly basis and work to refine the valuation methodology and model inputs.

Current wording

As a result of this refined analysis, representing a change in accounting estimate, management recognized an additional $712 thousand of agricultural loan servicing rights during the quarter ended June 30, 2023. This change in estimate took place during the quarter ended June 30, 2023 and had no effect on past periods. Management has obtained and intends to continue to obtain the appraisal of the agricultural real estate loan servicing rights from the independent third party specialist on a quarterly basis.

Previous wording

The Bank’s servicing rights relating to loans serviced for others represent an asset. This asset is initially capitalized and included on the condensed consolidated balance sheets. The servicing rights are then amortized as noninterest expense in proportion to, and over the period of the estimated future net servicing income of the underlying servicing rights. There are a number of factors, however, that can affect the ultimate value of the servicing rights to the Bank. The expected and actual rates of ag loans and single 1-4 family loan prepayments are the most significant factors driving the potential for the impairment of the value of servicing assets. Increases in loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced, meaning that the present value of the servicing rights is less than the carrying value of those rights on the Bank's balance sheet.

Current wording

The Bank’s servicing rights relating to loans serviced for others represent an asset. The servicing rights are amortized as noninterest expense in proportion to, and over the period of the estimated future net servicing income of the underlying servicing rights. There are a number of factors, however, that can affect the ultimate value of the servicing rights to the Bank. The expected and actual rates of agricultural real estate loans and single 1-4 family loan prepayments are the most significant factors driving the potential for the impairment of the value of servicing assets. Increases in loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced, meaning that the present value of the servicing rights is less than the carrying value of those rights on the Bank's balance sheet.

Previous wording

The accuracy of these estimates and assumptions by management and its third party valuation specialist can be directly tied back to the fact that management has only been required to record minor valuation allowances through its income statement over time based upon the valuation of each stratum of servicing rights in the single family real estate. The valuation of the agricultural real estate rights continues to be evaluated for the most reasonable and representative values as the market for these is not as widely known and accepted as the single family.

Current wording

The accuracy of these estimates and assumptions by management and its third party valuation specialist can be directly tied back to the fact that management has only been required to record minor valuation allowances through its income statement over time based upon the valuation of each stratum of servicing rights in the single family real estate. The valuation of the agricultural real estate rights is evaluated for the most reasonable and representative values as the market for these is not as widely known and accepted as the single family.

Previous wording

The Company had begun to experience a slowdown in its growth mode in the last half of the year of 2023. For the first quarter of 2024, the Company intentionally slowed even further. The outlook for 2024 is to have little to no loan growth. Therefore, we also chose to participate out a portion of our larger loans with other financial institutions, both new loans and some existing. Paydowns and payoffs will be used to fund originations to existing customers and to build relationships in our newer markets. Loan balances as of March 31, 2024, were $38.3 million lower than December 31, 2023, balances though there remain $98.0 million of funds committed to complete construction projects of business customers.

Current wording

The Company had begun to experience a slowdown in its growth mode in the last half of the year of 2023. For the first quarter of 2024, the Company intentionally slowed even further. During the second quarter of 2024, loan growth was minimal at 0.7% or $18.4 million compared to first quarter of 2024. The outlook for 2024 is to have little to no loan growth as the avenue to greater profitability is to focus on earnings improvement. Currently, funding large loan growth would be a determent to that focus. Therefore, we have chosen to participate out a portion of our larger loans, both new loans and some existing, with other financial institutions. Paydowns and payoffs will be used to fund originations to existing customers and to build relationships in our newer markets. Loan balances as of June 30, 2024, were $19.9 million lower than December 31, 2023 balances; however, there remains $115.9 million of funds committed to complete construction projects of business customers as of June 30, 2024.

Previous wording

Where the Company continues to focus on growth is in the areas of core deposits and the expansion of contingency funding. Growing deposits will be a focus especially in our newer markets throughout 2024. The Bank has increased the number of team members in our Treasury Management area and has continued to offer specials in our deposit offerings. The Bank offers the Insured Cash Sweep (ICS) product and CDARS, a certificate of deposit registry, accessed through the IntraFi network of financial institutions which helps to reduce the amount of pledged securities needed. The Bank’s uninsured deposit ratio remains low at 11.8%. As of March 31, 2024, total uninsured deposits of the Bank were $308.8 million of $2.6 billion total deposits. If the amount of coverage is adjusted for what is insured by FDIC alone, the percentage is 21.1% or $552.3 million of uninsured deposits as of March 31, 2024. The underlying difference between these two percentages is the protection required for public funds which the Bank uses securities to pledge in Ohio and in Indiana, a state insurance fund exists. The state of Michigan also does not require the pledging of collateral for public funds though some entities do request it.

Current wording

Where the Company continues to focus on growth is in the areas of core deposits and the expansion of contingency funding. Growing deposits will be a focus especially in our newer markets throughout 2024. The Bank has increased the number of team members in our Treasury Management area and has continued to offer specials in our deposit offerings. The Bank offers the Insured Cash Sweep (ICS) product and CDARS, a certificate of deposit registry, accessed through the IntraFi network of financial institutions which helps to reduce the amount of pledged securities needed. The Bank’s uninsured deposit ratio remains low at 10.5%. As of June 30, 2024, total uninsured deposits of the Bank were $276.9 million of $2.6 billion total deposits. If the amount of coverage is adjusted for what is insured by FDIC alone, the percentage is 21.7% or $574.0 million of uninsured deposits as of June 30, 2024. The underlying difference between these two percentages is the protection required for public funds for which the Bank pledges securities. A State insurance fund exists for public funds in Ohio and Indiana. The state of Michigan also does not require the pledging of collateral for public funds though some entities do request it.

Previous wording

Deposits have increased $13.9 million as of March 31, 2024, since December 31, 2023, and cash and cash equivalents have increased $45.6 million over the same time period. The nearly $187.8 million of cash holdings represents 5.7% of total assets and 7.2% of total deposits as of March 31, 2024. The Bank is comfortable with operating at this level as 5% is the desired base level for the total asset’s percentage. The management liquidity meetings had increased in frequency in 2023 to weekly and additional reports and analysis were built throughout the year in order to be more responsive to opportunities and threats as they arose. Reaching many of the guidelines, such as the cash ratio mentioned, has enabled those meetings to be lowered to a biweekly frequency. Additional capacity had also been created through enrollment and the pledging of $60.5 million of securities, having a par value of $71.9 million, to the Federal Reserve's Bank Term Funding Program (BTFP). The BTFP collateral values were based on the par value of the securities rather than the fair values most other lenders utilize. Currently, par values are higher than fair value which results in a higher available balance for borrowings. This program ended in March of this year and the Bank plans to release approximately half of the securities and move the pledging of the other half to the Federal Reserve Discount Window program. The Company had not utilized any funding from the BTFP.

Current wording

Deposits have increased $33.7 million as of June 30, 2024 since December 31, 2023, and cash and cash equivalents have increased $50.9 million over the same time period. The nearly $193.1 million of cash holdings represents 5.8% of total assets and 7.3% of total deposits as of June 30, 2024. The Bank is comfortable with operating at this level as 5% is the guideline the Bank has established. Since March 31, 2024, deposits have increased $19.7 million or 0.8% and cash and cash equivalents have increased $5.3 million or 2.8%. The management liquidity meetings had increased in frequency in 2023 to weekly and additional reports and analysis were built throughout the year in order to be more responsive to opportunities and threats as they arose. Reaching many of the guidelines, such as the cash ratio mentioned, has enabled those meetings to be lowered to a biweekly frequency. With the Federal Reserve’s Bank Term Funding Program (BTFP) ending in March of 2024, $31.9 million of securities were moved to the Federal Reserve’s Discount Window program for borrowing capacity while the remainder of the $61.7 million pledged as of the end of December 2023 were released. The Company had not utilized any funding from the BTFP.

Previous wording

During the first quarter 2024, borrowings from the Federal Home Loan Bank “FHLB” decreased $9.1 million through normal paydowns and the Bank engaged in the use of brokered CDs utilizing two fresh sources in the amount of $16.6 million. This was done to establish relationships to test the access of such funds and decrease the cost of funds going forward. To assure a proper net interest margin over the 3- and 4-year time period of these CDs, the Bank internally looked at loan originations in the first quarter with similar or slightly longer fixed interest rate periods. The Bank does plan to tap the brokered CD market for an additional $10 million early in the second quarter to complete this strategy. The Bank also tested all correspondent borrowing lines during the quarter to assure availability should the need arise. The availability for overnight borrowing on unsecured Federal Funds lines is $103 million. Combining the available line of credit at the holding company level, the Company has $118 million overnight borrowing availability.

Current wording

During the second quarter 2024, borrowings from the Federal Home Loan Bank “FHLB” decreased $5.5 million through normal paydowns with the Bank undertaking one new 10 year puttable advance with repricing options every three months. The Bank continued its use of brokered CDs in second quarter 2024 by utilizing one additional source in the amount of $10.0 million for a total of $26.6 million from three sources. This was done to establish relationships to test the access of such funds and decrease the cost of funds going forward. To assure a proper net interest margin over the 3- and 4-year time period of these CDs, the Bank internally looked at loan originations in the first quarter with similar or slightly longer fixed interest rate periods. The Bank also tested all correspondent borrowing lines during first quarter to assure availability should the need arise and will test again during third quarter. The availability for overnight borrowing on unsecured Federal Funds lines is $118 million. Combining the available line of credit at the holding company level, the Company has $133 million overnight borrowing availability.

Previous wording

In comparing to the same prior year period, the March 31, 2024 (net of deferred fees and cost) loan balances of $2.5 billion accounted for $93.7 million or 3.8% increase when compared to 2023’s $2.4 billion. The year over year improvement was made up of a combined increase in commercial and industrial related loans of 6.4%. Individual growth was comprised of 6.4% in commercial real estate loans and 5.9% in non-real estate commercial loans. Consumer real estate loans increased by 4.4% while consumer loans decreased by 16.4%. Agricultural related loans decreased 1.2% year over year. Individual decline was comprised of 0.2% in agricultural real estate loans and 2.9% in non-real estate agricultural loans. Other loans decreased by 8.7%. The Company credits the growth to the strong team of lenders focused on providing customers valuable localized services and thereby increasing our market share. The acquisition of Peoples Federal Savings and Loan Association in the fourth quarter of 2022 brought $101.8 million of loans to the portfolio. See Note 2 to the consolidated financial statements.

Current wording

In comparing to the same prior year period, the June 30, 2024 (net of deferred fees and cost) loan balances of $2.6 billion accounted for $43.3 million or 1.7% increase when compared to 2023’s $2.5 billion. The year over year improvement was made up of a combined increase in commercial and industrial related loans of 2.5%. Individual growth was comprised of 1.8% in commercial real estate loans and 5.9% in non-real estate commercial loans. Consumer real estate loans increased by 3.8% while consumer loans decreased by 19.7%. Agricultural related loans increased 1.8% year over year. Individual growth was comprised of 11.4% in non-real estate agricultural loans offset by a decline of 3.6% in agricultural real estate loans. Other loans decreased by 8.8%. The Company credits the growth to the strong team of lenders focused on providing customers valuable localized services and thereby increasing our market share. The acquisition of Peoples Federal Savings and Loan Association in the fourth quarter of 2022 brought $101.8 million of loans to the portfolio. See Note 2 to the consolidated financial statements.

Previous wording

The Bank maintains a well-balanced, diverse and high performing commercial real estate loan portfolio. Commercial real estate loans, excluding deferred loan fees and other costs, represented 51.31% of the Company's total gross loan portfolio as of March 31, 2024. The below charts break out the commercial real estate portfolio by category, location and loan grade.

Current wording

The Bank maintains a well-balanced, diverse and high performing commercial real estate loan portfolio. Commercial real estate loans, excluding deferred loan fees and other costs, represented 50.91% of the Company's total gross loan portfolio as of June 30, 2024. The below charts break out the commercial real estate portfolio by category, location and loan grade.

Previous wording

Management feels confident that liquidity needs can be met through additional maturities from the security portfolio, increased deposits and additional borrowings. For short term needs, the Bank has the unsecured borrowing capacity through its correspondent banks mentioned above along with access to $150.1 million through a Cash Management Advance with the Federal Home Loan Bank as of March 31, 2024. The Bank's secured borrowing capacity limits at the Federal Home Loan Bank would have allowed draws on the Cash Management Advance of $44.2 million on March 31, 2024.

Current wording

Management feels confident that liquidity needs can be met through additional maturities from the security portfolio, increased deposits and additional borrowings. For short term needs, the Bank has the unsecured borrowing capacity through its correspondent banks mentioned above along with access to $163.7 million through a Cash Management Advance with the Federal Home Loan Bank as of June 30, 2024. The Bank's secured borrowing capacity limits at the Federal Home Loan Bank would have allowed draws on the Cash Management Advance of $174.7 million on June 30, 2024.

Previous wording

While the security portfolio has been utilized to fund loan growth in previous periods, additional sources have been cultivated during 2022, 2023, and 2024. The security portfolio decreased in the first three months of 2024 from year end 2023 due to the maturity of $9.0 million of securities, offset by a purchase of $0.3 million and a $2.0 million decrease in unrealized losses. The amount of pledged investment securities increased by $2.3 million as compared to year end and $94.1 million as compared to March 31, 2023. As of March 31, 2024, pledged investment securities totaled $258.1 million. The Company does plan to do additional purchases of securities the remainder of the year for the dual purpose of increasing the holdings for liquidity and contingency planning and with a focus on improving our investments in Community Reinvestment Act qualifying securities.

Current wording

While the security portfolio has been utilized to fund loan growth in previous periods, additional sources have been cultivated during 2022, 2023, and 2024. The security portfolio increased in the first six months of 2024 from year end 2023 due to purchases of $20.5 million offset by maturities and paydowns of $13.7 million, net amortization of $0.6 million and a $0.5 million decrease in unrealized losses. The amount of pledged investment securities decreased by $22.1 million as compared to year end and $8.8 million as compared to June 30, 2023. As of June 30, 2024, pledged investment securities totaled $233.7 million. The Company does plan to do additional purchases of securities the remainder of the year for the purposes of increasing the holdings for liquidity and contingency planning and as a means of balance sheet gap management. The purchases in second quarter 2024 were done with a focus on improving our investments in Community Reinvestment Act (CRA) qualifying securities.

Previous wording

An additional $44.2 million is also available to the Bank from the Federal Home Loan Bank based on current amounts of pledged collateral. At the present time, only 1-4 family, home equity, commercial real estate portfolios and specific securities are pledged. The Bank did designate additional commercial real estate holdings as pledges to increase the availability going forward. The Bank will also add multifamily real estate to our pledged assets to FHLB in the future. With additional pledging, the Bank would have nearly $1.1 billion available to borrow.

Current wording

An additional $174.7 million is also available to the Bank from the Federal Home Loan Bank based on current amounts of pledged collateral. The Bank has pledged eligible 1-4 family, home equity, commercial real estate, multifamily real estate portfolios and specific securities. Multifamily real estate was added to our assets pledged to the FHLB in second quarter 2024 and additional commercial real estate holdings were designated as pledges to increase the availability in first quarter 2024. Based on total asset capacity, the Bank would have nearly $1.0 billion available to borrow.

Previous wording

Overall total assets remained relatively flat, increasing only 0.13% or $4.3 million since year end 2023. The intended and largest growth in cash holdings was discussed above.

Current wording

Overall total assets remained relatively flat, increasing only 1.2% or $39.4 million since year end 2023. The intended and largest growth in cash holdings was discussed above.

Previous wording

Total deposits accounted for the largest growth within liabilities. The mix of deposits saw increases in interest bearing checking, savings and money market deposits since December 31, 2023. Noninterest-bearing accounts and time deposit accounts saw decreases from December 31, 2023.

Current wording

Total deposits accounted for the largest growth within liabilities of $33.6 million or 1.3%. The mix of deposits saw increases in interest bearing checking, savings and money market deposits along with time deposit accounts since December 31, 2023. Noninterest-bearing accounts saw decreases from December 31, 2023.

Previous wording

Shareholders’ equity increased by $1.1 million as of the first quarter of 2024 compared to year end 2023. Earnings exceeded dividend declarations during the three months ended March 31, 2024. Accumulated other comprehensive loss increased in unrealized loss position by $1.6 million from December 2023 to an unrealized loss of $30.6 million on March 31, 2024. The implementation of ASU 2016-13 (CECL) resulted in an entry which reduced retained earnings $3.4 million on January 1, 2023. This adjustment is permitted to be spread over three years when calculating regulatory capital, which for 2023 was over $2.5 million. This adjustment decreased to $1.7 million for 2024. Dividends declared remained unchanged from the prior quarter at $0.22 per share and were 4.76% over first quarter 2023’s $0.21 per share. Compared to March 31, 2023, shareholders’ equity increased 3.9% or $11.9 million. Net income was lower for the quarter ended March 2024 compared to March 2023 by $1.1 million and $175 thousand lower than fourth quarter 2023. Encouraging is the main income driver of net interest income was higher for first quarter 2024 than for the prior quarter.

Current wording

Shareholders’ equity increased by $6.1 million as of the second quarter of 2024 compared to year end 2023. Earnings exceeded dividend declarations during the six months ended June 30, 2024. Accumulated other comprehensive loss decreased in unrealized loss position by $0.4 million from December 2023 to an unrealized loss of $28.6 million on June 30, 2024. Dividends declared remained unchanged from the prior quarter at $0.22 per share and were 4.76% over second quarter 2023’s $0.21 per share. Compared to June 30, 2023, shareholders’ equity increased 5.9% or $18.0 million with $7.3 million attributed to an improvement in accumulated other comprehensive loss. Net income was lower for the quarter ended June 2024 compared to June 2023 by $319 thousand; however, net income improved by $323 thousand over first quarter 2024. We are encouraged that net interest income has continued to improve quarter over quarter since third quarter 2023.

Previous wording

While the Holding Company generally has sufficient liquidity to maintain its dividend policy without relying on the upstreaming of dividends from the Bank, the Bank declared a $3.0 million dividend during the first quarter of 2024.

Current wording

While the Holding Company generally has sufficient liquidity to maintain its dividend policy without relying on the upstreaming of dividends from the Bank, the Bank declared a $3.0 million dividend during both the first and second quarters of 2024.

Previous wording

When comparing first quarter 2024 to first quarter 2023, average loan balances grew $180.1 million which represented a 7.5% increase in a one-year time period. Interest income on loans increased $5.5 million as compared to the quarter ended March 31, 2023. The Company's loan portfolio is 31.9% variable with 14.2% of total loans repricing within the next three months and 25.7% repricing within the next twelve months.

Current wording

When comparing second quarter 2024 to second quarter 2023, average loan balances grew $79.6 million which represented a 3.2% increase in a one-year time period. Interest income on loans increased $5.2 million or 16.7% as compared to the quarter ended June 30, 2023. During the current quarter, the Company recognized loan interest income of slightly more than $1.0 million related to the payoff of one nonaccrual relationship of which approximately $185 thousand was earned in second quarter 2024. The Company reversed previously recognized loan interest income from one relationship in the amount of approximately $463 thousand in second quarter 2023. The Company's loan portfolio is 34.1% variable with 17.5% of total loans subject to repricing within the next three months.

Previous wording

The available-for-sale securities portfolio decreased in average balances by $17.8 million when comparing to the same quarter in 2023 while the income associated with the security portfolio increased $173 thousand over first quarter 2023. Federal funds sold and interest-bearing deposits increased in average balances by $41.8 million as compared to the same quarter in 2023 with increased income of $1.2 million for the current quarter. The increased balances are the result of the focus on liquidity and deposit generation.

Current wording

The available-for-sale securities portfolio decreased in average balances by $11.2 million when comparing to the same quarter in 2023 while the income associated with the security portfolio increased $285 thousand over second quarter 2023. The decreased balances were used to fund loan growth. Federal funds sold and interest-bearing deposits increased in average balances by $138.5 million as compared to the same quarter in 2023 with increased income of $2.3 million for the current quarter. The increased balances are the result of the focus on liquidity and deposit generation.

Previous wording

The overall total average balance of the Bank’s earning assets increased by $204.1 million and interest income for the quarter comparisons was higher for first quarter 2024 by 21.5% or $6.9 million as compared to first quarter 2023. Increases in the prime lending rate between periods has contributed to approximately 64.0% of the growth.

Current wording

The overall total average balance of the Bank’s earning assets increased by $207.0 million and interest income for the quarter comparisons was higher for second quarter 2024 by 23.3% or $7.8 million as compared to second quarter 2023. Increases in the prime lending rate between periods has contributed to approximately 72.0% of the growth.

Previous wording

Annualized yield, for the quarter ended March 31, 2024, was 5.00% as compared to 4.41% for the quarter ended March 31, 2023. The following charts demonstrate increased loan balances accounted for 40.6% of the increased loan interest income while rate increases accounted for the remaining 59.4%. The yields on tax-exempt securities and the portion of the tax-exempt IDB loans included in loans have been tax adjusted based on a 21% tax rate in the charts to follow. The tax-exempt interest income was $157 and $153 thousand for the first quarter 2024 and 2023 which resulted in a federal tax savings of $33 and $32 thousand, respectively.

Current wording

Annualized yield, for the quarter ended June 30, 2024, was 5.22% as compared to 4.53% for the quarter ended June 30, 2023. The following charts demonstrate increased loan balances accounted for 19.3% of the increased loan interest income while rate increases accounted for the remaining 80.7%. The yields on tax-exempt securities and the portion of the tax-exempt IDB loans included in loans have been tax adjusted based on a 21% tax rate in the charts to follow. The tax-exempt interest income was $115 and $139 thousand for the second quarter 2024 and 2023 which resulted in a federal tax savings of $24 and $29 thousand, respectively.

Previous wording

Outpacing the higher interest income improvement for the quarter was an increase in interest expense in 2024 of $8.4 million or 83.2% compared to first quarter 2023. Since 2023, average interest-bearing deposit balances have increased $113.9 million or 5.8% and the Company recognized $7.1 million more in interest expense for the most recent quarter. During 2023, there were four increases of 25 basis points in February, March, May and July. Deposit rates have been adjusted numerous times with all the rate increases. Interest expense on FHLB borrowings and other borrowings increased $1.4 million in the first quarter 2024 over the same time frame in 2023 due to new FHLB borrowings in 2023 used to fund loan growth. Interest expense on fed funds purchased and securities sold under agreement to repurchase decreased $121 thousand compared to first quarter 2023 due to the decrease of $10.4 million in average balances. Another factor in the increased cost of funds is the change in the mix of funding. Growth has occurred in interest bearing deposit balances supplemented with increased borrowings while noninterest bearing deposits balances decreased compared to first quarter 2023. The Bank continues to focus on capturing the full customer relationship; however, it has resulted in more expensive deposits being brought in. The average cost of funds increased to 3.06% in first quarter 2024 compared to 1.85% in first quarter 2023. Refer to Note 12 for additional information on subordinated notes.

Current wording

Offsetting the higher interest income improvement for the quarter was an increase in interest expense in 2024 of $6.5 million or 49.3% compared to second quarter 2023. Since 2023, average interest-bearing deposit balances have increased $191.7 million or 9.7% and the Company recognized $6.1 million more in interest expense for the most recent quarter. During 2023, there were four increases to the federal funds rate by the Federal Reserve of 25 basis points in February, March, May and July. Deposit rates have been adjusted numerous times with all the rate increases. Interest expense on FHLB borrowings and other borrowings increased $629 thousand in the second quarter 2024 over the same time frame in 2023 due to new FHLB borrowings in 2023 used to fund loan growth. During the current quarter, new FHLB borrowings of $15.0 million were undertaken while $5.5 million FHLB borrowings were paid off. Interest expense on fed funds purchased and securities sold under agreement to repurchase decreased $151 thousand compared to second quarter 2023 due to the decrease of $12.2 million in average balances. Another factor in the increased cost of funds is the change in the mix of funding. Growth has occurred in interest bearing deposit balances supplemented with increased borrowings while noninterest bearing deposits balances decreased $13.3 million compared to second quarter 2023. The Bank continues to focus on capturing the full customer relationship; however, it has resulted in more expensive deposits being brought in. The average cost of funds increased to 3.18% in second quarter 2024 compared to 2.35% in second quarter 2023. Refer to Note 11 for additional information on subordinated notes.

Previous wording

Overall, net interest spread for the first quarter 2024 was 62 basis points lower than same period last year. As the following chart indicates, the improvement in yields on interest earning assets only partially offset the increased cost of funds when comparing to the same period a year ago. Competition for deposits remains intense with most competitors offering special rates for specific terms.

Current wording

Overall, net interest spread for the second quarter 2024 was 14 basis points lower than same period last year. As the following chart indicates, the improvement in yields on interest earning assets of 69 basis points only partially offset the increased cost of funds of 83 basis points when comparing to the same period a year ago. Competition for deposits remains intense with most competitors offering special rates for specific terms.

Previous wording

Net interest income decreased approximately $1.6 million for the first quarter 2024 over the same time frame in 2023 with the increase in interest income of $6.9 million offset by the higher interest expense of $8.4 million as previously mentioned. As the new loans added in 2023 and 2024 generate more income, management expects the benefits of the Company’s strategy of repositioning the balance sheet to increase interest income in the long run. Loans as a percentage of earning assets increased to 83.3% in first quarter 2024 compared to 83.0% in first quarter 2023. Loans to total assets increased to 79.2% in first quarter 2024 compared to 78.1% for the same period 2023. The percentage of earning assets to total assets increased to 95.1% in 2024 compared to 94.1% in 2023. In terms of net interest margin, the Bank recognizes competition for deposits continues to increase with higher interest rates putting pressure on the margin which may lead to a further tightening in the short term.

Current wording

Net interest income increased approximately $1.3 million for the second quarter 2024 over the same time frame in 2023 with the increase in interest income of $7.8 million offset by the higher interest expense of $6.5 million as previously mentioned. As the new loans added in 2023 and 2024 generate more income, management expects the benefits of the Company’s strategy of repositioning the balance sheet to increase interest income in the long run. Loans as a percentage of earning assets decreased to 81.0% in second quarter 2024 compared to 84.0% in second quarter 2023. Loans to total assets decreased to 77.2% in second quarter 2024 compared to 79.4% for the same period 2023. The percentage of earning assets to total assets increased to 95.3% in 2024 compared to 94.6% in 2023. In terms of net interest margin, the Bank recognizes competition for deposits continues to increase with higher interest rates putting pressure on the margin which may lead to a further tightening in the short term.

Previous wording

The Allowance for Credit Losses (ACL) has a direct impact on the provision expense. The increase in the ACL is funded through recoveries and provision expense. The following tables both deal with the allowance for credit losses. The first table breaks down the activity within ACL for each loan portfolio class and shows the contribution provided by both the recoveries and the provision along with the reduction of the allowance caused by charge-offs. The second table discloses how much of the ACL is attributed to each class of the loan portfolio, as well as the percent that each particular class of the loan portfolio represents to the entire loan portfolio in the aggregate. The commercial and industrial loan portfolio along with the consumer loan portfolio accounted for the largest component of recoveries and charge-offs for three months ended March 31, 2024 while the consumer loan portfolio accounted for the largest component of recoveries and charge-offs for the three months ended March 31, 2023. The commercial real estate portfolio is currently creating a large impact on the ACL due to the loan growth.

Current wording

The Allowance for Credit Losses (ACL) has a direct impact on the provision expense. The increase in the ACL is funded through recoveries and provision expense. The following tables both deal with the allowance for credit losses. The first table breaks down the activity within ACL for each loan portfolio class and shows the contribution provided by both the recoveries and the provision along with the reduction of the allowance caused by charge-offs. The second table discloses how much of the ACL is attributed to each class of the loan portfolio, as well as the percent that each particular class of the loan portfolio represents to the entire loan portfolio in the aggregate. The commercial and industrial loan portfolio along with the consumer loan portfolio accounted for the largest component of recoveries while the consumer loan portfolio accounted for the largest component of charge-offs for the three months ended June 30, 2024 versus the agriculture real estate loan portfolio and consumer loan portfolio accounted for the largest component of recoveries and the consumer loan portfolio accounted for the largest component of charge-offs for the three months ended June 30, 2023. The commercial real estate portfolio is currently creating a large impact on the ACL due to the loan growth.