FARMERS & MERCHANTS BANCORP INC

Previous wording

After many months of higher than normal past due and nonperforming loan ratios, the second quarter 2024 ended at what was previously considered the norm at F&M. The collection of over $6.4 million in funds on nonaccrual loans accounted for the largest improvement of the quarter and year-to-date. The payment provided for a principal decrease of $5.3 million and the processing of interest and fees of over $1.0 million. This one transaction bolstered the net interest margin, with collection of nonaccrual interest from September 2023 to June 2024. Past due loans over 30 days were 0.21% of total loans as of June 30, 2024.

Current wording

The benefits of slowing our growth continue to be evident in the financials as we realized a slight widening of our net interest margin accompanied with continued strong asset quality. Last quarter was aided by the collection of over $6.4 million in funds on nonaccrual loans, accounting for the largest improvement year-to-date. The payment provided for a principal decrease of $5.3 million and the processing of interest and fees of over $1 million. Past due loans over 30 days were 0.21% of total loans as of June 30, 2024, and remained low at 0.20% for September 30, 2024. Our net interest margin improved 2 basis points at 2.68% year-to-date as of September 30 th compared to 2.66% year-to-date as of June 30, 2024. This was accomplished by increasing our asset yield greater than the cost funds increase. We are optimistic about continued improvement in asset yield from loans repricing higher and slowing, with eventually reversing, the direction of our cost of funds.

Previous 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.

Current wording

The F&M Commercial Banking Division saw loan demand continue to soften in Q3 2024. Overall lending rates have increased throughout 2024 and expect to retract with the Federal Reserve Board's 50 basis point reduction in the federal funds rate in September. Commercial clients have seen material availability improve, but inflationary impacts remain a concern in 2024. Credit quality of the commercial portfolio remains solid and Q3 collateral values and auction values are still holding consistent with previous quarters. F&M continues to monitor the portfolio closely for the impact of higher rates and inflationary pressures.

Previous wording

Nonetheless, the Bank is seeing signs in the commercial real estate market that present future challenges as interest rate adjusters reset for adjustable-rate loans and commercial real estate in the office and retail sectors shows increasing vacancy. Asset quality remains very solid with non-performing assets declining, but the Bank continues to stress its loan portfolio and credit metrics for weakness. The Bank is monitoring its commercial real estate portfolio very carefully and has internal thresholds in place for loan categories including office, retail, hospitality, non-owner occupied, development, and related segments.

Current wording

Nonetheless, the Bank is seeing signs in the commercial real estate market that present future challenges as interest rate adjusters reset for adjustable-rate loans and commercial real estate in the office and retail sectors shows increasing vacancy. Asset quality remains very solid with non-performing assets declining, but the Bank continues to stress test its loan portfolio and credit metrics for weakness. The Bank is monitoring its commercial real estate portfolio very carefully and has internal thresholds in place for loan categories including office, retail, hospitality, non-owner occupied, development, and related segments.

Previous wording

The Bank had 18% of its commercial and agricultural loan portfolio reviewed by an independent third-party in the second quarter with no recommended risk rating changes and no material findings. The Bank expects to have a similar review with comparable coverage of the loan portfolio in the second half of the year as well.

Current wording

The Bank had 18% of its commercial and agricultural loan portfolio reviewed by an independent third-party in the second quarter with no recommended risk rating changes and no material findings. The Bank expects to have a similar review with comparable coverage of the loan portfolio in the fourth quarter as well.

Previous wording

The Bank is excited to have become a participant in the OHIO HOMEBUYER PLUS Saver program offered in conjunction with the State of Ohio to future Ohio homeowners as a way to save for a home purchase within the next five years. The Bank can offer a higher than market interest rate to our depositor with the State placing a lower than market rate CD with the Bank to provide funding. The program is capped at $100 million in use and an account limitation of $100 thousand.

Current wording

The Bank was excited to have become a participant in the OHIO HOMEBUYER PLUS Saver program offered in conjunction with the State of Ohio to future Ohio homeowners to save for a home purchase within the next five years. During the quarter, the State of Ohio changed the terms of the offering due to the extremely unexpected high demand for the program. The Bank suspended offering of the product until such time as we can adjust our offering to the new conditions of the State. We expect to offer again in the fourth quarter under modified terms. The Bank can offer a higher than market interest rate to our depositor with the State placing a lower than market rate CD with the Bank to provide funding. The adjusted program is capped at $100 million in use and an account limitation of $100 thousand with the State only matching the first $25,000 with a lower than market rate.

Previous wording

Currently, the Bank has seen an increase in the number of foreclosure demand notices that needed to be sent. Three-fourths of the notices were delivered to in-house customers with the total balance just under $1 million. The borrowers are spread throughout our market area and it does represent the highest number of notices sent and the highest dollar amount of past due ($3.1 million) in the consumer home loan portfolio since the onset of COVID in 2020. Two scenarios that are impacting the borrower’s ability to pay: 1. Increase in escrow due to property insurance cost increases and 2. Appraisal values continue to increase with one county in our market, reporting an average increase of 28% for appraisal values on which property taxes are levied.

Current wording

Last quarter, the Bank had seen an increase in the number of foreclosure demand notices that needed to be sent. Three quarters of the notices were delivered to in-house customers with the total balance just under $1 million. The borrowers were spread throughout our market area and it represented the highest number of notices sent and the highest dollar amount of past due ($3.1 million) in the consumer home loan portfolio since the onset of COVID in 2020. For the current quarter ended, the number of active foreclosure demand notices are down along with the dollar amount of over 30 days past due. The Bank does not have any Other Real Estate Owned and 2 accounts are in the foreclosure process which will likely not be resolved until 2025.

Previous wording

Since the Federal Reserve raised rates the last couple of years, our net interest margin has suffered from our earning assets not repricing as quickly or by as much as our cost of funds. And while we are still not surpassing 2023 levels, we did see improvement in second quarter 2024 at 2.71% compared to first quarter 2024’s 2.60%. This carried through to the year-to-date second quarter 2024 ending at 2.66%, also above last quarter. Removing the benefit of collecting $643 thousand of prior 2024 interest income from the calculation, the net interest margin still improved over first quarter 2024 by 2 basis points. It is wonderful to see the expansion of the net interest margin, no matter how slight. The Bank continues to work on lowering the cost of new funds and is enjoying the benefits of loans repricing higher.

Current wording

Since the Federal Reserve raised rates the last couple of years, our net interest margin has suffered from our earning assets not repricing as quickly or by as much as our cost of funds. And while we are still not surpassing 2023 levels, we did see improvement in 2 ndand 3 rd quarters as mentioned previously. It is wonderful to see the expansion of the net interest margin, no matter how slight. The Bank continues to focus on lowering the cost of new funds and is enjoying the benefits of loans repricing higher.

Previous wording

Overall, net income for the quarter was higher than the previous quarter by over $300 thousand and was behind same quarter last year by nearly the same amount. Capital balances as of June 30, 2024, increased $18.0 million over same date 2023. At the same time, the Company continues to increase our dividend for our shareholders, which remains a priority. The Company continues to focus on improving our capital and overall financial performance. The steps may be small; however, they are moving in a more positive direction.

Current wording

Overall, net income for the quarter was higher than the previous quarter by over $800 thousand and over same quarter last year by $1.7 million. On a year-to-date basis, net income surpassed September 30, 2023’s by $313 thousand. The benefits of adjusting our focus for 2024 has begun to show in the financials. Capital balances as of September 30, 2024, increased $18.8 million over same date 2023. At the same time, the Company continues to increase our dividend for our shareholders, which remains a priority. The declared dividend in September 2024 included matching the previous quarterly declaration and adding a 1/8 th of a cent to it. The Company’s annual dividend will have increased from $0.2375 in 2004 to $0.8825 in 2024, reflecting a 6.8% compound annual growth rate over this period. The Company continues to focus on improving our capital and overall financial performance. The steps may be small; however, they are continuing to move in a more positive direction.

Previous wording

Farmers & Merchants Bancorp, Inc. (the “Company”) is a financial holding company incorporated under the laws of Ohio in 1985. Our subsidiary is The Farmers & Merchants State Bank (the “Bank”), a local independent community bank that has been primarily serving Northwest Ohio, Northeast Indiana and Southeast Michigan since 1897. Farmers & Merchants Risk Management, Inc., a captive insurance company formed in December 2014 and located in Nevada was a subsidiary of the Company which was dissolved in December 2023. We report our financial condition and net income on a consolidated basis and we have only one segment.

Current wording

Farmers & Merchants Bancorp, Inc. (the “Company”) is a financial holding company incorporated under the laws of Ohio in 1985. Our subsidiary is The Farmers & Merchants State Bank (the “Bank”), a local independent community bank that has been primarily serving Northwest Ohio, Northeast Indiana and Southeast Michigan since 1897. F&M Insurance Agency, LLC was formed in November of 2023. Farmers & Merchants Risk Management, Inc., a captive insurance company formed in December 2014 and located in Nevada was a subsidiary of the Company which was dissolved in December 2023. We report our financial condition and net income on a consolidated basis and we have only one segment.

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 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.

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. The Bank began offering a low income home buyer mortgage program, currently Hometown Advantage Mortgage Program, in November of 2023.

Previous wording

The Bank’s primary market includes communities located in the Ohio counties of Butler, Champaign, Defiance, Fulton, Hancock, Henry, Lucas, Shelby, Williams, Wood and in the Indiana counties of Adams, Allen, DeKalb, Jay, Steuben and Wells. The Michigan footprint includes Oakland County. In our banking activities, we compete directly with other commercial banks, credit unions, farm credit services, and savings and loan institutions in each of our operating localities. In a number of our locations, we compete against entities which are much larger than us. The primary factors in competing for loans and deposits are the rates charged as well as location and quality of the services provided.

Current wording

Wells. The Michigan footprint includes Oakland County. In our banking activities, we compete directly with other commercial banks, credit unions, farm credit services, and savings and loan institutions in each of our operating localities. In a number of our locations, we compete against entities which are much larger than us. The primary factors in competing for loans and deposits are the rates charged as well as location and quality of the services provided.

Previous 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.

Current wording

At September 30, 2024, we had 446 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

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.

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 would 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

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.

Current wording

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. As a lender that originates at least 100 small business loans annually, data collection must now begin on January 16, 2026 with a filing deadline of June 1, 2027. The Bank remains attentive to the ongoing arguments, appeals, and related cases in the litigation involving the Section 1071 final rule.

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 $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.

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 $12.1 million and $10.1 million at September 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 of repayments.

Previous wording

Interest income on mortgage and commercial loans is discontinued and placed on nonaccrual status at the time the loan is 90 days delinquent unless the loan is well secured and in process of collection. Mortgage loans are charged off at 180 days past due, and commercial loans are charged off to the extent principal or interest is deemed uncollectible. Consumer and credit card loans continue to accrue interest until they are charged off no later than 120 days past due unless the loan is in the process of collection. Past-due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

Current wording

Interest income on mortgage and commercial loans is discontinued and placed on nonaccrual status at the time the loan is 90 days delinquent unless the loan is well secured and in process of collection. Consumer and credit card loans continue to accrue interest until they are charged off no later than 120 days past due unless the loan is in the process of collection. Past-due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

Previous wording

The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The ACL reflects the Company’s estimated credit losses over the life of the loan. Management assesses changes in prepayment assumptions, interest rates, collateral values, portfolio composition, trends in non-performing loans, and other economic factors. In addition to an extensive internal loan monitoring process, the Company also aims to have an external, independent loan review of approximately 35% of its commercial and agricultural loan portfolio. Management in turn assesses the results from the reviews to make changes in internal risk ratings of loans and the related ACL.

Current wording

The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The ACL reflects the Company’s estimated credit losses over the life of the loan. Management assesses changes in prepayment assumptions, interest rates, collateral values, portfolio composition, trends in non-performing loans, and other economic factors. In addition to an extensive internal loan monitoring process, the Company also aims to have an annual external, independent loan review of approximately 35% of its commercial and agricultural loan portfolio. Management in turn assesses the results from the reviews to make changes in internal risk ratings of loans and the related ACL.

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 $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.

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 $53 thousand at September 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

Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed for impairment at least annually. If possible impairment is likely, the Bank will utilize the assistance of an independent third party for an appraisal and any such impairment is recognized in the period identified. The goodwill impairment analysis was performed as of September 30, 2023 by an independent third party. The goodwill impairment analysis consisted of a first step goodwill impairment test which was used to identify potential impairment by comparing the fair value of the relevant reporting entity with its carrying value, including goodwill. The analysis was performed under guidance of FASB ASC 350. As of September 30, 2023, the excess fair value of capital was $8.8 million or 2.7% over the carrying value and was slightly over 0.1 times the value of goodwill being carried.

Current wording

Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed for impairment at least annually. If possible impairment is likely, the Bank will utilize the assistance of an independent third party for an appraisal and any such impairment will be recognized in the period identified. Periodically, the Bank will have an independent third party assess the possibility of impairment of goodwill. The goodwill impairment analysis was last performed as of September 30, 2023 by an independent third party. The goodwill impairment analysis consisted of a first step goodwill impairment test which was used to identify potential impairment by comparing the fair value of the relevant reporting entity with its carrying value, including goodwill. The analysis was performed under guidance of FASB ASC 350. In the quantitative testing completed as of September 30, 2024, the excess fair value of capital was $16.2 million or 4.5% over the carrying value and was approximately 0.2 times the value of goodwill being carried. The testing completed as of September 30, 2024 shows improvement compared to the testing completed as of September 30, 2023.

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. 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.

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 half of 2024, the Company intentionally slowed even further. During the third quarter of 2024, loan balances decreased $23.9 million, or 0.9% compared to second quarter of 2024. The outlook for the remainder of 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 deterrent 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 September 30, 2024, were $43.8 million lower than December 31, 2023 balances; however, there remains $102.1 million of funds committed to complete construction projects of business customers as of September 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 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.

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 has been 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 September 30, 2024, total uninsured deposits of the Bank were $283.2 million of $2.7 billion total deposits. If the amount of coverage is adjusted for what is insured by FDIC alone, the percentage is 20.9% or $560.8 million of uninsured deposits as of September 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 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 $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.

Current wording

Deposits have increased $77.4 million as of September 30, 2024 since December 31, 2023, and cash and cash equivalents have increased $103.3 million over the same time period. The nearly $245.5 million of cash holdings represents 7.2% of total assets and 9.1% of total deposits as of September 30, 2024. The Bank is comfortable with operating at this level as 5% is the guideline the Bank has established. Since June 30, 2024, deposits have increased $43.7 million or 1.7% and cash and cash equivalents have increased $52.4 million or 27.2%. 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, $32.2 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 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.

Current wording

During the third quarter 2024, borrowings from the Federal Home Loan Bank “FHLB” decreased $3.0 million through normal paydowns. The Bank continued its use of brokered CDs in third quarter 2024 by utilizing one additional source in the amount of $295 thousand for a total of $26.9 million from four 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 the third quarter to assure availability should the need arise. The availability for overnight borrowing on unsecured Federal Funds lines is $118.0 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 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.

Current wording

In comparing to the same prior year period, the September 30, 2024 (net of deferred fees and cost) loan balances of $2.5 billion accounted for $5.7 million or 0.2% increase when compared to 2023. The year over year improvement was made up of an increase in commercial and industrial related loans of 0.5%. Individual growth was comprised of 3.9% in non-real estate commercial loans offset by a decline of 0.2% in commercial real estate loans. Consumer real estate loans increased by 2.2% while consumer loans decreased by 18.8%. Agricultural related loans increased 2.4% year over year. Individual growth was comprised of 11.0% in non-real estate agricultural loans offset by a decline of 2.4% in agricultural real estate loans. Other loans decreased by 16.6%. The Company's strong team of lenders remain 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 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.

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 51.29% of the Company's total gross loan portfolio as of September 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 $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.

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 September 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 $151.4 million on September 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 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.

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 nine months of 2024 from year end 2023 due to purchases of $56.1 million offset by maturities and paydowns of $21.0 million, net amortization of $0.9 million and a $12.2 million decrease in unrealized losses. The amount of pledged investment securities decreased by $8.8 million as compared to year end and increased $1.5 million as compared to September 30, 2023. As of September 30, 2024, pledged investment securities totaled $247.0 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 third quarter 2024 were done with a focus on improving our investments in Community Reinvestment Act (CRA) qualifying securities.

Previous 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.

Current wording

An additional $151.4 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 $1.1 billion available to borrow.

Previous 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.

Current wording

Overall total assets increased only 3.2% or $106.0 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 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.

Current wording

Total deposits accounted for the largest growth within liabilities of $77.4 million or 3.0%. 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 $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.

Current wording

Shareholders’ equity increased by $18.8 million as of the third quarter of 2024 compared to year end 2023. Earnings exceeded dividend declarations during the nine months ended September 30, 2024. Accumulated other comprehensive loss decreased in unrealized loss position by $9.6 million from December 2023 to an unrealized loss of $19.4 million on September 30, 2024. Dividends declared were $0.22125 per share during the third quarter compared to $0.22 per share during the second quarter, an increase of 0.6%. This represents an increase of 5.4% over the third quarter of 2023 dividend of $0.21 per share. Compared to September 30, 2023, shareholders’ equity increased 10.6% or $32.2 million with $20.1 million attributed to an improvement in accumulated other comprehensive loss. Net income was higher for the quarter ended September 2024 compared to September 2023 by $1.7 million and net income improved by $834 thousand over second 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 both the first and second quarters 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, second and third quarters of 2024.

Previous 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.

Current wording

When comparing third quarter 2024 to third quarter 2023, average loan balances grew $15.0 million which represented a 0.6% increase in a one-year time period. Interest income on loans increased $3.1 million or 9.1% as compared to the quarter ended September 30, 2023. In third quarter 2023, the Company reversed loan interest income from one relationship in the amount of approximately $492 thousand of which approximately $324 thousand was previously recognized in prior periods. Third quarter 2023 also included loan income of $594 thousand from the recovery of two acquired relationships that had been fully charged off prior to acquisition. The Company's loan portfolio is 34.5% variable with 19.5% of total loans subject to repricing within the next three months.

Previous wording

The available-for-sale securities portfolio decreased in average balances by $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.

Current wording

The available-for-sale securities portfolio increased in average balances by $17.7 million when comparing to the same quarter in 2023 while the income associated with the security portfolio increased $545 thousand over third quarter 2023. The increased balances were the result of increasing our holdings for liquidity and contingency planning purposes and to improve our investments in CRA qualifying securities. Federal funds sold and interest-bearing deposits increased in average balances by $111.7 million as compared to the same quarter in 2023 with increased income of $1.9 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 $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.

Current wording

The overall total average balance of the Bank’s earning assets increased by $144.5 million and interest income for the quarter comparisons was higher for third quarter 2024 by 15.2% or $5.5 million as compared to third quarter 2023. Increases in the prime lending rate between periods has contributed to approximately 73.2% of the growth.

Previous 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.

Current wording

Annualized yield, for the quarter ended September 30, 2024, was 5.27% as compared to 4.79% for the quarter ended September 30, 2023. The following charts demonstrate increased loan balances accounted for 6.5% of the increased loan interest income while rate increases accounted for the remaining 93.5%. 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 $114 and $133 thousand for the third quarter 2024 and 2023 which resulted in a federal tax savings of $24 and $28 thousand, respectively.

Previous 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.

Current wording

Interest expense on FHLB borrowings and other borrowings increased $63 thousand in the third 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, FHLB borrowings of $3.0 million were paid off. Interest expense on fed funds purchased and securities sold under agreement to repurchase decreased $72 thousand compared to third quarter 2023 due to the decrease of $6.6 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 offset by decreased borrowings while noninterest bearing deposits balances decreased $17.6 million compared to third 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 3.21% in third quarter 2024 compared to 2.82% in third quarter 2023. Refer to Note 11 for additional information on subordinated notes.

Previous 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.

Current wording

Overall, net interest spread for the third quarter 2024 was 9 basis points higher than same period last year. As the following chart indicates, the improvement in yields on interest earning assets of 48 basis points offset the increased cost of funds of 39 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 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.

Current wording

Net interest income increased approximately $1.9 million for the third quarter 2024 over the same time frame in 2023 with the increase in interest income of $5.5 million offset by the interest expense increase of $3.6 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 80.1% in third quarter 2024 compared to 83.4% in third quarter 2023. Loans to total assets decreased to 76.1% in third quarter 2024 compared to 78.8% for the same period 2023. The percentage of earning assets to total assets increased to 95.0% in 2024 compared to 94.4% in 2023. In terms of net interest margin, the Bank recognizes competition for deposits will continue; however, there is a greater opportunity for gradual improvement with loans repricing upwards in the next year and a likely continuing slight decrease in cost of funds.

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 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.

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 September 30, 2024 versus the consumer loan portfolio and consumer real estate 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 September 30, 2023.