FARMERS & MERCHANTS BANCORP INC

Previous wording

All significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the notes to the consolidated financial statements and in the management's discussion and analysis of 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), Other Real Estate Owned (OREO) 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

All significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the notes to the consolidated financial statements and in the management's discussion and analysis of 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 Allowance for Credit Losses (ACL) as the accounting area that requires the most subjective or complex judgments, and as such could be the most subject to revision as new information becomes available.

Previous wording

The allowance for credit losses represents management's estimate of credit losses inherent in the Bank's loan portfolio at the report date. The estimate is a composite of a variety of factors including experience, collateral value, and the general economy. The collection and ultimate recovery of the book value of the collateral, in most cases, is beyond our control.

Current wording

The total allowance for credit losses represents management's estimate of credit losses inherent in the Bank's loan portfolio and unfunded loan commitments at the report date. The estimate is a composite of a variety of factors including experience, collateral value, and the general economy. The collection and ultimate recovery of the book value of the collateral, in most cases, is beyond our control.

Previous wording

For more information regarding the estimates and calculations used to establish the ACL and the value of Loan Servicing Rights, please see Note 1 to the consolidated financial statements provided herewith.

Current wording

For more information regarding the estimate and calculation used to establish the ACL, please see Note 1 to the consolidated financial statements provided herewith.

Previous wording

2022's record earnings were primarily attributed to the $17.3 million improvement in net interest income as compared to 2021. Interest and fee income from loans were responsible for the improvement and increased $22.6 million in 2022 as compared to 2021 which included $4.5 million in loan interest and fee income from PPP loans. In 2022, the volume of loan growth, 21.4% organic and 5.1% attributed to acquisitions, was the largest contributing factor to the improved profitability. For 2021, the Company’s loan portfolio was 26.5% variable with 20.7% of total loans repricing within the next twelve months. The security portfolio increased $51.4 million in average during 2022 as compared to 2021 with associated interest income increasing $1.1 million over 2021. During 2021, cash funds from stimulus and acquisitions were placed in securities to earn a greater return. Beginning in March of 2022, the prime rate increased 25 basis points followed by a 50 basis point increase in May, four 75 basis point increases in June, July, September and November with a final 50 basis point increase in December to end the year at 7.50%. In 2023, there were four additional 25 basis point increases in February, March, May and July to the current prime rate of 8.50%. Overall, total interest income was $38.7 million higher for 2023 than 2022 on an additional $378.9 million in total average earning assets and was $24.3 million higher for 2022 than 2021 on an additional $511.4 million in total average earning assets.

Current wording

In 2024, the focus was on increasing profitability while also repositioning the balance sheet. The effects of which can be seen in the improvement of $4.5 million to net interest income as compared to 2023. Total interest income increased $23.8 million which was offset by increased interest expense of approximately $19.3 million. Interest and fee income from loans were responsible for $16.0 million of the improved interest income with rate accounting for 78.6% of this increase. Average loan balances increased $65.7 million from the prior year and accounted for 21.4% of the increased loan interest income. As of December 31, 2024, the Company’s loan portfolio was 36.0% variable with 31.4% of total loans subject to repricing within the next twelve months. The security portfolio, used for purposes of liquidity and contingency planning as a means of balance sheet gap management, increased $11.8 million in average during 2024 as compared to 2023 with associated interest income increasing $1.9 million over 2023. Average federal funds sold and interest bearing deposit balances increased $91.3 million as compared to the prior year and generated an additional $5.9 million in interest income. During 2024, the prime rate decreased 50 basis points in September and 25 basis points in both November and December to end the year at 7.50%.

Previous wording

One of the largest factors of the reduced earnings for 2023 as compared to 2022 was the decrease in net interest income of $5.4 million. Increases in average balances and interest rates led to an increase in interest income of approximately $38.7 million which was absorbed by an increase in interest expense of $44.0 million. Loan interest and associated fee income increased $35.1 million as compared to the prior year with 54.2% of it driven by volume. The growth in average loan balances of $417.8 million over 2022 was 5.0% related to organic growth within the Bank's broader markets and 4.5% directly attributable to the Company's recent acquisitions. The Company’s loan portfolio is 31.6% variable with 24.9% of total loans repricing within the next twelve months. Average balances on the security portfolio decreased $28.6 million as compared to 2022 with an increase in interest income of $612 thousand. As securities matured, the balances were used to fund loan growth. During the first quarter of 2023, securities of $21.6 million with an annual yield of $274 thousand were swapped at a loss of $891 thousand with securities with an annual yield of $1.6 million. In 2023 with the higher interest rates, interest income on fed funds sold and interest bearing bank deposits generated an additional $3.0 million over 2022.

Current wording

One of the largest factors of the reduced earnings for 2023 as compared to 2022 was the decrease in net interest income of $5.4 million. Increases in average balances and interest rates led to an increase in interest income of approximately $38.7 million which was absorbed by an increase in interest expense of $44.0 million. Loan interest and associated fee income increased $35.1 million as compared to the prior year with 54.2% of it driven by volume. The growth in average loan balances of $417.8 million over 2022 was 5.0% related to organic growth within the Bank's broader markets and 4.5% directly attributable to the Company's recent acquisitions. The Company’s loan portfolio at December 31, 2023, was 31.6% variable with 24.9% of total loans repricing within the next twelve months. Average balances on the security portfolio decreased $28.6 million as compared to 2022 with an increase in interest income of $612 thousand. As securities matured, the balances were used to fund loan growth. During the first quarter of 2023, securities of $21.6 million with an annual yield of $274 thousand were swapped at a loss of $891 thousand with securities with an annual yield of $1.6 million. In 2023 with the higher interest rates, interest income on federal funds sold and interest bearing bank deposits generated an additional $3.0 million over 2022. Beginning in March of 2022, the prime rate increased 25 basis points followed by a 50 basis point increase in May, four 75 basis point increases in June, July, September and November with a final 50 basis point increase in December to end the year at 7.50%. In 2023, there were four additional 25 basis point increases in February, March, May and July to end the year at 8.50%. Overall, total interest income was $23.8 million higher for 2024 than 2023 on an additional $168.8 million in total average earning assets and was $38.7 million higher for 2023 than 2022 on an additional $378.9 million in total average earning assets.

Previous wording

Interest expense (which includes deposit, federal funds purchased, securities sold under agreement to repurchase, borrowed funds and subordinated notes) increased from all interest bearing funding sources in 2023 over the time period of 2022 and 2022 over the time period of 2021. Average interest bearing liabilities increased $366.4 million over 2022 with an additional $44.0 million of interest expense while average interest bearing liabilities increased $414.2 million over 2021 with an additional $7.0 million of interest expense. Overall, the funding goal the last three years has been to grow core deposits. Two strategies have been employed through the years, one of allowing expensive time deposits to run off until needed for funding and secondly to offer new non-interest bearing deposit products. Both of these strategies were designed to assist in controlling interest expense in a rising rate environment. In 2023, liquidity needs and loan growth created the need to quickly generate deposits. The Bank raised $100 million through several deposit promotions during the last half of the year. Competition within the market areas forced us to increase rates for deposits in 2023 and 2022 while rates were lowered or remained flat in 2021 in response to the prime rate drop of 150 basis points in March 2020. Between 2022 and 2023, the prime rate increased 525 basis points. Average interest bearing deposits increased $230.4 million compared to 2022. During 2023, interest expense from deposits increased by $37.0 million from 2022 and 2022 increased by $4.5 million from 2021. The majority, approximately 95.5%, of the increased deposit expense of 2023 and 59.7%, of the increased expense of 2022 was influenced by rates rather than due to additional cost associated with deposit growth. Borrowed fund balances increased in 2023 and 2022 by $145.8 million and $44.9 million, respectively, as a means to fund the phenomenal loan growth which resulted in an additional interest expense of $6.7 million and $1.4 million, respectively. During 2021, the Company issued subordinated notes and incurred $1.1 million of interest expense in both 2023 and 2022. Refer to Note 10 of the Company’s consolidated financial statements for further discussion regarding subordinated notes.

Current wording

Interest expense (which includes deposit, federal funds purchased, securities sold under agreement to repurchase, borrowed funds and subordinated notes) increased from all interest bearing funding sources with the exception of federal funds purchased and securities sold under agreement to repurchase in 2024 over 2023 and all funding sources in 2023 over 2022. Average interest bearing liabilities increased $183.3 million over 2023 with approximately $19.3 million additional interest expense while average interest bearing liabilities increased $366.4 million over 2022 with an additional $44.0 million of interest expense. Overall, the funding goal the last three years has been to grow core deposits. Two strategies have been employed through the years, one of allowing expensive time deposits to run off until needed for funding and secondly to offer new non-interest bearing deposit products. Both of these strategies were designed to assist in controlling interest expense in a rising rate environment. In 2024 and 2023, liquidity needs and loan growth created the need to quickly generate deposits. Competition within the market areas forced us to increase rates for deposits during the three year time period. Between 2022 and 2023, the prime rate increased 525 basis points and decreased 100 basis points in 2024. Average interest bearing deposits increased $149.0 million compared to 2023 and $230.4 million compared to 2022. During 2024, interest expense from deposits increased by $17.5 million from 2023 and 2023 increased by $37.0 million from 2022. The majority, 81.7%, of the increased deposit expense of 2024 and 95.5%, of the increased expense of 2023 was influenced by rates rather than due to additional cost associated with deposit growth. Borrowed fund balances increased in 2024 and 2023 by $41.9 million and $145.8 million, respectively, as a means to fund the loan growth which resulted in an additional interest expense of $2.1 million and $6.7 million, respectively. During 2021, the Company issued subordinated notes and incurred $1.1 million of interest expense in both 2024 and 2023. Refer to Note 10 of the Company’s consolidated financial statements for further discussion regarding subordinated notes.

Previous wording

Total interest expense totaled $58.4, $14.4 and $7.3 million for 2023, 2022 and 2021, respectively. The increased expense was approximately 87.2% attributable to the rising interest rate environment in 2023 as compared to 2022 and 43.2% attributable to the rising interest rate environment in 2022 as compared to 2021.

Current wording

Total interest expense totaled $77.7, $58.4 and $14.4 million for 2024, 2023 and 2022, respectively. The increased expense was approximately 76.2% attributable to the higher interest rate environment in 2024 as compared to 2023 and 87.2% attributable to the rising interest rate environment in 2023 as compared to 2022.

Previous wording

Overall, we have seen a decrease in the net interest margin and spread comparing 2021 to 2023. The increased interest expense resulted in a decrease in interest margin of 60 basis points and interest spread of 99 basis points compared to the prior year due to the cost of funds increasing more than the increase in asset yield. Interest margin increased by 1 basis point while interest spread decreased by 5 basis points in 2022 as compared to 2021 with the increased cost of funds only being partly offset by the higher asset yields. For 2023, average loan balances increased $417.8 million over the prior year with increased interest income of $35.1 million. In 2023, the Bank was able to see the impact of rate increases with 45.8% of the increased interest income related to rate changes as presented in the below charts. Average balances of fed funds sold and interest bearing deposits with other institutions decreased $10.3 million; however, increased interest rates generated an additional $3.0 million in interest income over 2022. The overall asset yield for 2023 increased 80 basis points as compared to 2022. Looking at the components behind the change in net interest margin for 2022 as compared to 2021, increased average balances in loans of $551.6 million stands out. Loans acquired with the one acquisition in 2022 were $101.8 million. The additional revenue of $22.6 million that those balances were responsible for was the largest contributor to the increased interest income of $24.3 million. In 2022 and 2021, loan revenue was negatively impacted by the change in the interest rate. Roughly 26.5% of the Bank's loans are variable with the majority of those loans with floor rates that had attained the point where rate increases would cause to go above the floor. As mentioned previously, 2022 had seven rate increases totaling 425 basis points. The large revenue gain in loan interest was aided by the increased earnings in securities of $1.1 million. Average balances of fed funds sold and interest bearing deposits decreased in average balances by $91.7 million as the funds were used for loan growth. The overall asset yield in 2022 increased by 26 basis points over 2021.

Current wording

Overall, we have seen a decrease in the net interest margin and spread comparing 2022 to 2024. The increased interest expense of 2024 resulted in interest margin remaining flat while interest spread decreased 9 basis points compared to 2023 due to the cost of funds increasing more than the increase in asset yield. Interest margin decreased by 60 basis points and interest spread decreased by 99 basis points in 2023 as compared to 2022 with the increased cost of funds outpacing the increased asset yield. For 2024, average loan balances increased $65.7 million over the prior year with increased interest income of $16.0 million. In 2024, the Bank was able to see the impact of a higher rate environment with 78.6% of the increased interest income related to rate changes as presented in the charts below. Average balances of federal funds sold and interest bearing deposits with other institutions increased $91.3 million and increased interest rates generated an additional $5.9 million in interest income over 2023. The overall asset yield for 2024 increased 50 basis points as compared to 2023. Looking at the components behind the change in net interest margin for 2023 as compared to 2022, increased average balances in loans of $417.8 million over the prior year contributed to increased interest income of $35.1 million with volume responsible for 54.2% of the increase as presented in the charts below. The large revenue gain in loan interest was aided by the increased earnings from federal funds sold and interest bearing deposits of $3.0 million with decreased average balances of $10.3 million as the funds were used for loan growth. The overall asset yield in 2023 increased by 80 basis points over 2022.

Previous wording

For 2023, interest expense continued to increase and was 306.7% higher than 2022 and was 87.2% impacted by changes in interest rates. Competition for deposits was extremely high and rate shopping between financial institutions was apparent. The Company’s goal is to increase core deposits which includes savings deposits and non-interest bearing demand deposits which increased $41.0 and $13.4 million in average balances, respectively as compared to 2022. In 2023, the Company ran several time deposit promotions which resulted in increased average balances of $189.4 million. The increased interest expense in 2023 for savings deposits and time deposits accounted for 84.1% of the total interest expense increase. Overall, cost of funds increased 179 basis points or 241.9% over 2022 with only 12.8% due to volume increases. The remaining 87.2% was related to changes in interest rates as the prime rate increased 525 basis points between 2022 and 2023. The increased interest expense in 2022 correlated to a much higher rate environment in which competition for deposits forced higher interest rates as compared to 2021 while the decreased interest expense in 2021 correlated to a much lower rate environment. In the area where the strategic plan was to gather core deposits, the average balance in savings grew by $189.6 million during 2022 as compared to 2021’s average balance. Interest bearing deposits acquired with the one acquisition were $104.7 million. The other average balance increase for core deposits was the change in non-interest bearing demand deposits. 2022’s average balance in this portfolio was $79.6 million higher than 2021’s average balance. Non-interest bearing demand deposits acquired with the one acquisition were $7.1 million. Overall, cost of funds increased 26 basis points for 2022 over 2021. The reason behind the increase was 43.2% due to rate increases and 56.8% due to volume increases.

Current wording

23.3% over 2023 with only 23.8% due to volume increases. The remaining 76.2% was related to changes in interest rates. In the area where the strategic plan was to gather core deposits, the average balance in savings grew by $41.0 million during 2023 as compared to 2022’s average balance. The other average balance increase for core deposits was the change in non-interest bearing demand deposits. 2023’s average balance in this portfolio was $13.4 million higher than 2022’s average balance. In 2023, the Company ran several time deposit promotions which resulted in increased average balances of $189.4 million. The increased interest expense in 2023 for savings deposits and time deposits accounted for 84.1% of the total interest expense increase. Overall, cost of funds increased 179 basis points for 2023 over 2022. The reason behind the increase was 87.2% due to rate increases and 12.8% due to volume increases.

Previous wording

In comparing 2023 to 2022, net interest margin was 2.72% which decreased 60 basis points while net interest spread decreased 99 basis points to 2.14%. Loan volume accounted for $35.1 million or 90.7% of the increased interest income with an increased asset yield of 64 basis points. The asset yield on fed funds sold and interest bearing deposits increased 361 basis points year over year. Total asset yield increased 80 basis points while total cost of funds increased 179 basis points, creating the 99 basis point difference in spread. Overall yield improves when the balances of the highest yielding asset, which is loans, increases. Loans as a percentage of earning assets was 83.2% while loans to total assets was 78.0% for 2023. The goal is, as always, to improve the net interest margin and spread and thereby improve profitability.

Current wording

In comparing 2024 to 2023, net interest margin was 2.72% which remained flat while net interest spread decreased 9 basis points to 2.05%. Loan volume accounted for $16.0 million or 67.3% of the increased interest income with an increased asset yield of 49 basis points. The asset yield on federal funds sold and interest bearing deposits increased 97 basis points year over year. Total asset yield increased 50 basis points while total cost of funds increased 59 basis points, creating the 9 basis point difference in spread. Overall yield improves when the balances of the highest yielding asset, which is loans, increases. Loans as a percentage of earning assets was 80.8% while loans to total assets was 76.8% for 2024. The goal is, as always, to improve the net interest margin and spread and thereby improve profitability.

Previous wording

The net interest margin for 2022 was 3.32% compared to 2021 which was 3.31%. The 0.01% increase for 2022 was related to the increased interest income which was greater than the increased interest expense. Net interest spread was 3.13% for 2022 compared to 2021’s 3.18%, creating a 5 basis point difference in the spread. Loans as a percentage of earning assets was 79.2% while loans to total assets was 74.7% for 2022.

Current wording

The net interest margin for 2023 was 2.72% compared to 2022 which was 3.32%. The 0.60% decrease for 2023 was related to the increased interest expense which was greater than the increased interest income. Loan volume accounted for $35.1 million or 90.7% of the increased interest income with an increased asset yield of 64 basis points. The asset yield on federal funds sold and interest bearing deposits increased 179 basis points compared to the prior year. Net interest spread was 2.14% for 2023 compared to 2022’s 3.13%, creating a 99 basis point difference in the spread. Loans as a percentage of earning assets was 83.2% while loans to total assets was 78.0% for 2023.

Previous wording

The Company will always prefer to see improvement in real dollars over percentages. The strategy for increasing core deposits, in order to mitigate the higher cost of funds and to continue the opportunity for fee dollars from services provided, is a top focus for 2024.

Current wording

The Company will always prefer to see improvement in real dollars over percentages. The strategy for increasing core deposits, in order to mitigate the higher cost of funds and to continue the opportunity for fee dollars from services provided, continues to be a top focus for 2025.

Previous wording

Total assets of the Company increased overall as did the earning assets in both average and year-end during 2023 and 2022. This matched the increase in interest dollars. The percentage of average earning assets to total average assets reflects the best utilization of funds. For 2023, the percentage at 93.80% was slightly lower than 2022 at 94.29%. The addition of new offices increased the non-earning assets with cash balances held at the new offices and also the investment in the capital assets of their building and furniture. One of the things that helped to improve the profitability of 2022 was the percentage of average loans to total assets. For 2023 the average balance of loans to total average assets was 78.02%, 74.73% for 2022 and 68.26% for 2021. Loans are the highest yielding asset for the Company.

Current wording

Total assets of the Company increased overall as did the earning assets in both average and year-end during 2024 and 2023. This matched the increase in interest dollars. The percentage of average earning assets to total average assets reflects the best utilization of funds. For 2024, the percentage at 95.06% was higher than 2023 at 93.81%. The addition of new offices increased the non-earning assets with cash balances held at the new offices and also the investment in the capital assets of their building and furniture. One of the things that has helped to improve the profitability over the years was the percentage of average loans to total assets. For 2024, the average balance of loans to total average assets was 76.82%, 78.02% for 2023 and 74.73% for 2022. Loans are the highest yielding asset for the Company.

Previous wording

In terms of interest expense, 2023’s increase as compared to 2022 was approximately 87.2% due to the increase in rates. 2022’s increase was approximately 43.2% due to the increase in rates as compared to 2021.

Current wording

In terms of interest expense, 2024’s increase as compared to 2023 was approximately 76.2% due to the increase in rates. 2023’s increase was approximately 87.2% due to the increase in rates as compared to 2022.

Previous wording

The impact of the change in the portfolio mix was a factor in the liabilities as it was in the assets. In comparing to 2022, 2023 had increases in average balances of all interest bearing liabilities with the exception of fed funds purchased and securities sold under agreement to repurchase while 2022 as compared to 2021, had average balance increases in all categories. Refer to Note 10 for additional information on other borrowed money, which consists of both short and long term borrowings, and subordinated notes.

Current wording

The impact of the change in the portfolio mix was a factor in the liabilities as it was in the assets. In comparing to 2023 and 2022, both 2024 and 2023 had increases in average balances of all interest bearing liabilities with the exception of federal funds purchased and securities sold under agreement to repurchase. Refer to Note 10 for additional information on other borrowed money, which consists of both short and long term borrowings, and subordinated notes.

Previous wording

The following tables present net interest income, interest spread and net interest margin for the three years 2021 through 2023, comparing average outstanding balances of earning assets and interest bearing liabilities with the associated interest income and expense. The tables show the corresponding average rates of interest earned and paid. Average outstanding loan balances include non-performing loans, real estate loans held for sale and carrying value adjustments of $2.7 million related to interest rate swaps for 2023. Average outstanding security balances are computed based on carrying values including unrealized gains and losses on available-for-sale securities. The average cost of funds for 2023 was 2.53%, 179 basis points higher than 2022’s 0.74%.

Current wording

The following tables present net interest income, interest spread and net interest margin for the three years 2022 through 2024, comparing average outstanding balances of earning assets and interest bearing liabilities with the associated interest income and expense. The tables show the corresponding average rates of interest earned and paid. Average outstanding loan balances include non-performing loans, real estate loans held for sale and carrying value adjustments related to interest rate swaps of $1.1 and $2.7 million for 2024 and 2023, respectively. Average outstanding security balances are computed based on carrying values including unrealized gains and losses on available-for-sale securities. The average cost of funds for 2024 was 3.12%, 59 basis points higher than 2023’s 2.53%.

Previous wording

The yield on tax-exempt investment securities shown in the following charts were computed on a tax equivalent basis. The yield on loans has also been tax adjusted for the portion of tax-exempt IDB loans included in the total. Total interest earning assets is therefore also reflecting a tax equivalent yield in both line items, also within the net interest spread and margin. The adjustments were based on a 21% tax rate for all years. The tax-exempt interest income was $590, $614 and $551 thousand for 2023, 2022 and 2021, respectively which resulted in a federal income tax savings of $124, $129 and $116 thousand, respectively.

Current wording

The yield on tax-exempt investment securities shown in the following charts were computed on a tax equivalent basis. The yield on loans has also been tax adjusted for the portion of tax-exempt IDB loans included in the total. Total interest earning assets is therefore also reflecting a tax equivalent yield in both line items, also within the net interest spread and margin. The adjustments were based on a 21% tax rate for all years. The tax-exempt interest income was $503, $590 and $614 thousand for 2024, 2023 and 2022, respectively which resulted in a federal income tax savings of $106, $124 and $129 thousand, respectively.

Previous wording

The discussion now focuses on the noninterest income and expense generated by the Company for the years ended 2021 through 2023. For 2023, noninterest income was $16.0 million an increase of 3.2% over 2022. Noninterest income decreased to $15.5 million, or 11.8% in total for 2022 as compared to 2021 which ended at $17.6 million.

Current wording

The discussion now focuses on the noninterest income and expense generated by the Company for the years ended 2022 through 2024. For 2024, noninterest income was $15.6 million, a decrease of $284 thousand or 1.8% from 2023. Noninterest income increased $109 thousand, or 0.7% in total for 2023 as compared to 2022 which ended at $15.8 million.

Previous wording

Other service charges and fees increased $2.4 million during 2023 as compared to 2022. The establishment of agricultural real estate servicing rights during 2023 recognized $2.3 million of service charge income that was not present in prior years. Overdraft, returned check charges and recurring overdraft fees also increased during 2023 as compared to 2022. Customer service fees decreased $366 thousand during 2023 as compared to 2022. Decreased fee income from credit cards was the largest factor for the decrease. 2022 customer service fee revenue was $287 thousand higher than 2021, mostly due to increased credit card income.

Current wording

Other service charges and fees increased $130 thousand during 2024 as compared to 2023. Overdraft, returned check charges and recurring overdraft fees also increased $75 thousand during 2024 as compared to 2023. Other service charges and fees increased $117 thousand during 2023 as compared to 2022. This was mainly due to increased overdraft, returned check charges and recurring overdraft fees which increased $116 thousand during 2023 over 2022. 2023 customer service fee revenue was $718 thousand lower than 2022, mostly due to decreased credit card income.

Previous wording

The Bank has long promoted the use of debit cards by its customers and continues to build on that philosophy with the introduction of new products. Interchange revenue and fees collected on foreign ATM usage (noncustomers utilizing our ATMs) increased $323 thousand to $5.3 million during 2023 as compared to 2022. During 2022 the Bank collected interchange revenue, combined with fees collected on foreign ATM usage, of $5.0 million which was $149.3 thousand higher than 2021. 2023 included a Mastercard growth credit of $196.3 thousand. For 2022, the Mastercard growth credit was $188 thousand and $151 thousand for 2021. In December of 2019, the Bank became a principal with MasterCard and received a $1.75 million signing bonus. The signing bonus is based on achieving $1.1 billion in signature transactions over five years. The bonus is being recognized over 60 months with $350.8 thousand included in 2023, 2022 and 2021’s $5.3 million, $5.0 million and $4.8 million, respectively. While this revenue stream continues to improve with more depositors using electronic methods for purchasing, the expense attributable to card fraud has offset a portion of the revenue gain. Further discussion can be found in the noninterest expense section regarding the net effect of debit card activity.

Current wording

The Bank has long promoted the use of debit cards by its customers and continues to build on that philosophy with the introduction of new products. Interchange revenue and fees collected on foreign ATM usage (noncustomers utilizing our ATMs) increased $78 thousand to $5.4 million during 2024 as compared to 2023. During 2023, these revenues increased to $5.3 million as compared to $5.0 million during 2022. 2024 included a Mastercard growth credit of $213 thousand. For 2023, the Mastercard growth credit was $196 thousand and $188 thousand for 2022. In December of 2019, the Bank became a principal with MasterCard and received a $1.75 million signing bonus. The signing bonus was based on achieving $1.1 billion in signature transactions over five years. The bonus was recognized over 60 months with $319 thousand included in 2024 and $351 thousand included in 2023 and 2022’s $5.4 million, $5.3 million and $5.0 million, respectively. While this revenue stream continues to improve with more depositors using electronic methods for purchasing, the expense attributable to card fraud has offset a portion of the revenue gain. Further discussion can be found in the noninterest expense section regarding the net effect of debit card activity.

Previous wording

The Bank has seen a decrease in its mortgage production volume and the corresponding gains on the sale of these loans. Loan originations driven by refinance activity have decreased with the higher interest rates in 2023. Noninterest income from net gain on sales of loans was the highest in 2021 of the three year periods shown. Net gain on sales of loans was $699 thousand, $1.4 million and $3.9 million respectively in 2023, 2022 and 2021. The net gain on sale of loans is derived from sales of real estate loans into the secondary market. Of these loan types, the Bank sells 100% of the residential loans and 90% of the agricultural loans. 84.3% of the gains were attributed to the residential loans in 2023, 37.6% in 2022 and 47.4% in 2021. In conjunction with these sales, the Bank maintains servicing rights. The income from one to four mortgage servicing rights was $415 thousand, $537 thousand and $1.4 million for 2023, 2022 and 2021 respectively. Agriculture mortgage servicing rights were $2.3 million in 2023.

Current wording

The Bank has seen an increase in its mortgage production volume and the corresponding gains on the sale of these loans. Loan originations driven by refinance activity decreased with the higher interest rates in 2023. Noninterest income from net gain on sales of loans was the highest in 2022 of the three year periods shown. Net gain on sales of loans was $859 thousand, $699 thousand and $1.4 million, respectively in 2024, 2023 and 2022. The net gain on sale of loans is derived from sales of real estate loans into the secondary market. Of these loan types, the Bank sells 100% of the residential loans and 90% of the agricultural loans. 45.9% of the gains were attributed to the residential loans in 2024. 84.3% of the gains were attributed to the residential loans in 2023 and 37.6% in 2022. In conjunction with these sales, the Bank maintains servicing rights. The income from one to four mortgage servicing rights was $502 thousand, $415 thousand and $537 thousand for 2024, 2023 and 2022 respectively. Agriculture mortgage servicing rights income was $324 thousand and $2.3 million in 2024 and 2023, respectively.

Previous wording

The last item in the noninterest income section is the net gain or loss of sale of investments. During the first quarter of 2023, securities were swapped at a loss of $891 thousand with securities with a higher annual yield. The loss was recouped by the higher yield during the first eight months of 2023. The Bank did not sell any securities in 2022. The Bank had sold securities in 2021 for two main purposes: to provide funds for loan growth and to take advantage of the position of the yield curve when a gain can be recognized on sales without extending the duration of the portfolio longer than wanted. In March of 2021, the Company sold and recognized a gain on the sale of securities from the holding company of $293 thousand in preparation for the acquisition of Ossian State Bank. The available for sale security portfolio switched from an unrealized gain position in 2020 into an unrealized loss position in 2021 that continued through 2023.

Current wording

The last item in the noninterest income section is the net gain or loss on sale of investments. During the first quarter of 2023, securities were swapped at a loss of $891 thousand with securities with a higher annual yield. The loss was recouped by the higher yield during the first eight months of 2023. The Bank did not sell any securities in 2024 or 2022. The available for sale security portfolio switched from an unrealized gain position in 2020 into an unrealized loss position in 2021 that continued through 2024.

Previous wording

Noninterest expense increased 17.6% in 2023 as compared to 2022 and was preceded by a 5.7% increase in 2022 as compared to 2021. Represented in dollars, 2023 was $10.1 million higher than 2022 and 2022 was $3.1 million higher than 2021. Acquisition costs incurred in 2023 and 2022 totaled $207.6 thousand and $2.5 million, respectively with expenses being recorded in multiple line items. The largest factor behind the increase in both years was the expense of employee salaries and wages. During 2023, an additional $4.2 million was spent over 2022 which correlates to an 18.6% increase. When making the same analysis for 2022 as compared to 2021, 2022’s costs increased $2.5 million or 12.5%. Three main components flow into salaries and wages: base salary, deferred costs, and incentives comprised of the expense of restricted stock awards and performance incentives. 2023 saw an increase due to the investment in people for our strategic growth initiative and staffing of new offices. 2022 increased with the acquisition of Peoples Federal Savings and Loan offices. 2021 increased with the addition of one new office and the acquisition of Ossian State Bank and Perpetual Federal Savings Bank offices. Normal yearly increases to the employees would be included in all years. Base pay was up $4.7 million for 2023 over the previous year and 2022 was up $2.7 million over 2021. The full time equivalent number of employees at each year-end increased to 456 for 2023, to 431 for 2022 compared to 2021’s 385.

Current wording

Noninterest expense increased 2.2% in 2024 as compared to 2023 and was preceded by a 16.9% increase in 2023 as compared to 2022. Represented in dollars, 2024 was $1.5 million higher than 2023 and 2023 was $9.7 million higher than 2022. Acquisition costs incurred in 2023 and 2022 totaled $208 thousand and $2.5 million, respectively with expenses being recorded in multiple line items. There were no acquisition costs in 2024. The largest factor behind the increase in both years was the expense of employee salaries and wages. During 2024, an additional $3.3 million was spent over 2023 which correlates to a 12.1% increase. When making the same analysis for 2023 as compared to 2022, 2023’s costs increased $4.2 million or 18.6%. Three main components flow into salaries and wages: base salary, deferred costs, and incentives comprised of the expense of restricted stock awards and performance incentives. 2024 saw an increase due to our continued investment in people and staffing needs. 2023 saw an increase due to the investment in people for our strategic growth initiative and staffing of new offices. 2022 increased with the acquisition of Peoples Federal Savings and Loan offices. Normal yearly increases to the employees were included in all years. Base pay was up $1.4 million for 2024 over the previous year and 2023 was up $4.7 million over 2022. The full time equivalent number of employees at each year-end increased to 473 for 2024, 456 for 2023 and to 431 for 2022.

Previous wording

Incentive pay as it relates to performance was down $1.7 million in 2023 over 2022 and up $464.1 thousand in 2022 over 2021. The Return on Assets multiple used to award incentive pay decreased in 2023 to 0.36 compared to 1.196 in 2022 and 1.165 in 2021. In 2022 and 2021, acquisition costs were eliminated from the calculation. The expense for the restricted stock awards increased in 2023 due to more shares being granted to a slightly larger number of employees. 13,897 additional shares were awarded in 2023 with lower market values. The expense for 2023 increased by $381.8 thousand over 2022. The expense for the restricted stock awards increased in 2022 due to more shares being granted to a slightly larger number of employees and the market value of the shares increasing compared to 2021. 7,746 additional shares were awarded in 2022 with a higher value as compared to 2021. The expense for 2022 was higher by $77.4 thousand which included reduced expense due to retirement of $56.9 thousand as compared to 2021. The awards incorporate a three year vesting period so the increase of any one year carries forward through the next two years. This expense should continue to increase as the Company continues its expansion strategy. For further discussion in incentive pay and restricted stock awards, see Note 11 of the consolidated financial statements.

Current wording

Incentive pay as it relates to performance was up $2.2 million in 2024 over 2023 and down $1.7 million in 2023 over 2022. The Return on Assets multiple used to award incentive pay increased in 2024 to 1.043 compared to 0.36 in 2023 and 1.196 in 2022. In 2022, acquisition costs were excluded from the calculation. The expense for the restricted stock awards increased in 2024 even though 4,056 fewer shares were granted. This was due to higher market value rates and $108 thousand for the acceleration of stock awards for executive retirements. Restricted stock award expense increased in total $79 thousand in 2024 over 2023. Restricted stock awards expense increased in 2023 due to more shares being granted to a slightly larger number of employees. 7,729 additional shares were awarded in 2023 with lower market values. The expense for 2023 increased by $382 thousand over 2022 with $28 thousand due to the acceleration of stock awards. The awards incorporate a three year vesting period so the increase of any one year carries forward through the next two years. This expense should continue to increase as the Company continues its expansion strategy. For further discussion in incentive pay and restricted stock awards, see Note 12 of the consolidated financial statements.

Previous wording

Employee benefits expense decreased in 2022 as compared to 2021. Miscellaneous personnel expense accounted for the largest portion of the decrease, which was a decrease of $528.1 thousand over 2021. Acquisition related costs included in this line were $217.3 thousand. The cost of the 401-K retirement plan decreased $251.6 thousand for 2022 as compared to 2021. The contribution portion relating to the discretionary profit-sharing percentage was 5.5% in 2022 compared to 5.0% for 2021. Overall, employee benefits decreased $418.8 thousand or 5.7% from 2021.

Current wording

Employee benefits expense increased in 2024 as compared to 2023. The 401-K retirement plan accounted for the largest portion of the increase, which was an increase of $601 thousand over 2023. The contribution portion relating to the discretionary profit-sharing percentage was 4.5% in 2024 compared to 1.7% in 2023. Overall, employee benefits increased $1.0 million or 13.6% from 2023.

Previous wording

Employee benefits expense increased in 2023 as compared to 2022. Employee group insurance accounted for the largest portion of the increase, which was an increase of $665.0 thousand over 2022. Acquisition related costs included in employee benefits expense were $143.9 thousand in 2023. The cost of the 401-K retirement plan decreased $215.7 thousand for 2023 as compared to 2022. The contribution portion relating to the discretionary profit-sharing percentage was 1.7% in 2023 compared to 5.5% in 2022. Overall, employee benefits increased $616.9 thousand or 8.9% from 2022.

Current wording

Employee benefits expense increased in 2023 as compared to 2022. Employee group insurance expense accounted for the largest portion of the increase. Acquisition related costs included in this line were $144 thousand. The cost of the 401-K retirement plan decreased $216 thousand for 2023 as compared to 2022. The contribution portion relating to the discretionary profit-sharing percentage was 5.5% in 2022.

Previous wording

Net occupancy expense typically increases as the Company expands. Net occupancy expense increased for 2023 $1.3 million and increased $381.8 thousand in 2022. One factor that can offset occupancy expense is the receipt by the Company of building rent as it is netted out of occupancy expense. The greatest contributor to building rent comes from the division of FM Investments within the Bank. For 2023, building rent as generated from FM Investments decreased by $93.8 thousand. Rent is received in lieu of commissions. This revenue was able to partially offset increased building repair and maintenance expenses of $113.0 thousand and lease expense of $296.1 thousand and increased building depreciation expense of $367.3 thousand. Building rent as generated by FM Investments was higher by $106.5 thousand in 2022 which offset building repair and maintenance expenses of $14.0 thousand. Net occupancy expense increased for 2022 $381.8 thousand over 2021.

Current wording

Net occupancy expense typically increases as the Company expands. Net occupancy expense increased for 2024 $319 thousand and increased $1.3 million in 2023. One factor that can offset occupancy expense is the receipt by the Company of building rent as it is netted out of occupancy expense. The greatest contributor to building rent comes from the division of FM Investments within the Bank. For 2024, building rent as generated from FM Investments decreased by $195 thousand. Rent is received in lieu of commissions. This revenue was able to partially offset increased building repair and maintenance expenses of $39 thousand and lease expense of $439 thousand and increased building depreciation expense of $328 thousand. Building rent as generated by FM Investments was higher by $94 thousand in 2023 which offset increased building repair and maintenance expenses of $113 thousand. Net occupancy expense increased for 2023 $1.3 million over 2022.

Previous wording

The 1-4 family real estate refinancing activity continued to decrease from 2022 with the increase in interest rates. 2020 accounted for the largest number of loans being closed in the Bank’s history. A correlating expense to that activity as it relates to loans sold to the secondary market, is the amortization of servicing rights. The amortization is the expense that offsets the income recognized when the loan is first made. Income is recorded when the real estate loan is first sold with servicing retained and is therefore recognized immediately. The amortization, however, is calculated over the life of the loan and accelerated as loans are paid off early. An increase in this expense can be driven by two activities: an increase in the number of sold loans and/or by the acceleration of the expense from payoff and refinance activity. The best picture of the bottom line impact is achieved by netting the income with the expense each year. Prior to 2023, servicing rights only included 1-4 family real estate loans. The establishment of agricultural real estate servicing rights, incorporated in the table below for 2023, included capitalized additions of $2.3 million and corresponding amortization of $123 thousand. For 2023, combined servicing rights yielded a net income of $2.1 million along with the establishment of a $7 thousand valuation allowance. 2022 had a net loss of $22 thousand which excluded the reversal of the $414 thousand valuation allowance established the prior year. The net income for 2021 was $251 thousand with a carrying value that was greater than the $3.2 million market value thus creating the need to establish a $414 thousand valuation allowance. Of course, the value (or income) of the servicing right when the loans are sold also impacts the net position. As of December 31, 2023, 3,749 1-4 family real estate loans and 593 agricultural loans are being serviced with corresponding balances of $367.8 million and $135.8 million, respectively. 2022 had 3,861 loans serviced with corresponding balances of $375.6 million. As of December 2021, 3,961 loans were being serviced with balances of $380.8 million. Refer to Note 7 for additional information on servicing rights.

Current wording

A correlating expense to the Company's refinancing activity as it relates to loans sold to the secondary market, is the amortization of servicing rights. The amortization is the expense that offsets the income recognized when the loan is first made. Income is recorded when the real estate loan is first sold with servicing retained and is therefore recognized immediately. The amortization, however, is calculated over the life of the loan and accelerated as loans are paid off early. An increase in this expense can be driven by two activities: an increase in the number of sold loans and/or by the acceleration of the expense from payoff and refinance activity. The best picture of the bottom line impact is achieved by netting the income with the expense each year. Prior to 2023, servicing rights only included 1-4 family real estate loans. The establishment of agricultural real estate servicing rights, incorporated in the table below for 2023, included capitalized additions of $2.3 million and corresponding amortization of $123 thousand. For 2024, combined servicing rights yielded a net income of $98 thousand along with the establishment of a $97 thousand valuation allowance. For 2023, combined servicing rights yielded a net income of $2.1 million along with the establishment of a $7 thousand valuation allowance. 2022 had a net loss of $22 thousand which excluded the reversal of the $414 thousand valuation allowance established the prior year. Of course, the value (or income) of the servicing right when the loans are sold also impacts the net position. As of December 31, 2024, 3,677 1-4 family real estate loans and 619 agricultural loans are being serviced with corresponding balances of $364.3 million and $141.9 million, respectively. At December 31, 2023, 3,749 1-4 family real estate loans and 593 agricultural loans were being serviced with corresponding balances of $367.8 million and $135.8 million, respectively. 2022 had 3,861 loans serviced with corresponding balances of $375.6 million.

Previous wording

Data processing costs were lower in 2023 as compared to 2022 by $808.3 thousand. Data processing costs were higher in 2022 as compared to 2021 by $454.2 thousand. Acquisition related data processing expense decreased $257.2 thousand in 2022 compared to 2021. As the pricing on many services is based on number of accounts which the Bank fully expects to increase with the growth from the newer offices and overall Bank growth, data processing costs are expected to increase.

Current wording

Data processing costs were lower in 2024 as compared to 2023 by $1.7 million as a result of using credits from the 67 month amended agreement commencing on January 1, 2024. Data processing costs were lower in 2023 as compared to 2022 by $808 thousand. As the pricing on many services is based on number of accounts which the Bank fully expects to increase with the growth from the newer offices and overall Bank growth, data processing costs are expected to increase.

Previous wording

ATM expense increased $394.1 thousand over 2022 while 2022 increased $371.2 thousand from 2021. Included in this line are the debit card fees incurred which offset the debit card income as discussed above.

Current wording

ATM expense also decreased $942 thousand from 2023 as a result of using credits from the 67 month amended agreement commencing on January 1, 2024 while 2023 increased $394 thousand from 2022. Included in this line are the debit card fees incurred which offset the debit card income as discussed in the noninterest income section.

Previous wording

The FDIC assessment increased from 2022 due to an increased assessment base while 2022 decreased as compared to 2021 due to a decreased assessment rate. With continued growth, the assessment base increases which leads to a greater expense. 2023’s assessment was $1.1 million over 2022. The assessment for 2022 was down $168.3 thousand compared to 2021 as a result of the decreased assessment rate.

Current wording

The FDIC assessment increased from 2023 due to an increased assessment base while 2023 increased as compared to 2022 also due to an increased assessment base. With continued growth, the assessment base increases which leads to a greater expense. 2024’s assessment was $127 thousand over 2023. The assessment for 2023 was up $1.1 million compared to 2022.

Previous wording

Advertising and public relations increased in 2023 by $960.8 thousand and increased in 2022 by $210.1 thousand. With the addition of new offices and our new logo launch, 2023 was expected to increase over 2022. 2022 saw the celebration and promotion of the Bank's 125th anniversary.

Current wording

Advertising and public relations decreased in 2024 by $463 thousand and increased in 2023 by $961 thousand. With the addition of new offices and our new logo launch, 2023 increased over 2022.

Previous wording

Acquisition expenses included in the other general and administrative line were $45.6 thousand for 2023 and $590.3 thousand for 2022. Credit card expense increased $458.6 thousand over 2022. The conversion of our credit card platform in 2023 included $108 thousand of scorecard conversion expense. This represented awards earned by customers that the Company paid to honor rather than allowing them to be lost in the conversion. Auditing and exam fees increased $124.4 thousand in 2023 over 2022 which included $33.6 thousand of acquisition expense and 2022 increased $103.1 thousand over 2021 which included $77.3 thousand of acquisition related costs. Legal expenses decreased in 2023 by $226.4 thousand which included $4.0 thousand of acquisition expense. In 2022, loan and collection expenses increased $287.0 thousand over 2021 and legal expenses decreased $223.3 thousand from 2021 of which $205.1 thousand of the decrease was acquisition related.

Current wording

The last line items with significant variation in noninterest expense are “consulting fees” and “other general and administrative.” Consulting fees increased by $45 thousand in 2024 from 2023 and decreased $470 thousand in 2023 compared to 2022. Consulting expenses related to acquisitions were $543 thousand in 2022. Acquisition expenses included in the other general and administrative line were $46 thousand for 2023 and $590 thousand for 2022. There were no acquisition expenses in 2024. Credit card expense decreased $576 thousand from 2023 as we switched to a referral based partner. Credit card expense for 2023 increased $459 thousand over 2022. The sale of our credit card platform in 2023 included $108 thousand of scorecard conversion expense. This represented awards earned by customers that the Company paid to honor rather than allowing them to be lost in the conversion. Auditing and exam fees increased $289 thousand in 2024 over 2023 and 2023 increased $124 thousand over 2022 which included $34 thousand of acquisition related costs. Legal expenses increased in 2024 by $74 thousand. In 2023, legal expenses decreased $226 thousand from 2022 of which $4 thousand of the decrease was acquisition related.

Previous wording

Provision expense decreased by $2.9 million for 2023 as compared to 2022 and increased by $1.2 million for 2022 as compared to 2021. The increase in provision expense for 2022 was attributed to the net charge-off activity and significant loan growth. Sustained strong asset quality kept the provision expense lower than the growth alone would have warranted. Management continues to monitor asset quality, making adjustments to the provision as necessary. The commercial and industrial portfolio had the highest level of charge-off activity in 2023, 2022 and 2021 at $565, $418 and $814 thousand, respectively. Net charge-offs in the commercial and industrial portfolio were $481, $325 and $557 thousand in 2023, 2022 and 2021, respectively. Total net charge-offs were $551, $529 and $874 thousand for 2023, 2022 and 2021, respectively.

Current wording

Provision expense decreased by $754 thousand for 2024 as compared to 2023 and decreased by $2.9 million for 2023 as compared to 2022. Sustained strong asset quality and reduced loan balances kept the provision expense lower. Management continues to monitor asset quality, making adjustments to the provision as necessary. Total net charge-offs were $142, $551 and $529 thousand for 2024, 2023 and 2022, respectively. The consumer portfolio had the largest charge-off activity during 2024 at $346 thousand which was down from $425 and $409 thousand in 2023 and 2022, respectively. The commercial and industrial portfolio had $106 thousand of charge-offs in 2024; however, had the highest level of charge-off activity in 2023 and 2022 at $565 and $418 thousand, respectively. Consumer recoveries were $189, $197 and $169 thousand for 2024, 2023 and 2022, respectively with commercial and industrial recoveries $133, $84 and $93 thousand for the same time periods, respectively. Consumer net charge-offs were $157, $228 and $240 thousand in 2024, 2023 and 2022, respectively. Net charge-offs in the commercial and industrial portfolio were $481 and $325 thousand in 2023 and 2022, respectively with 2024 being a net recovery of $27 thousand.

Previous wording

The allowance for credit losses (ACL) represents management’s estimate of probable credit losses inherent in the Bank’s loan portfolio and unfunded loan commitments at the report date. The ACL methodology is regularly reviewed for its appropriateness and is approved annually by the Board of Directors. This written methodology is consistent with Generally Accepted Accounting Principles which provides for a consistently applied analysis.

Current wording

The total allowance for credit losses (ACL) represents management’s estimate of expected credit losses inherent in the Bank’s loan portfolio and unfunded loan commitments at the report date. The ACL methodology is regularly reviewed for its appropriateness and is approved annually by the Board of Directors. This written methodology is consistent with Generally Accepted Accounting Principles which provides for a consistently applied analysis.

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

The Bank’s methodology provides an estimate of the probable credit losses either by calculating a reserve per credit or by applying our methodology to groupings based on similar risk characteristics. The loan portfolio was grouped based on loans of similar type, including acquired loans. The loan groupings for the CECL calculation consist of Commercial Real Estate, Construction & Land Development, Multi-family real estate, Commercial & Industrial, Farmland, Agriculture, Single Family real estate, Home Equity Lines of Credit, and Consumer. All groups use the average charge-off method for calculating the ACL. This incorporates a historical loss period from March 2000, since Call Report data became more granular regarding loan groupings, and includes several economic cycles. As a percentage, the reserves are the highest against construction and development loans, while farmland loans have the lowest overall reserve due to having such low loss rates.

Current wording

The Bank’s methodology provides an estimate of the expected credit losses either by calculating a reserve per credit or by applying our methodology to groupings based on similar risk characteristics. The loan portfolio was grouped based on loans of similar type, including acquired loans. The loan groupings for the CECL calculation consist of Commercial Real Estate, Commercial & Industrial, Agricultural Real Estate, Agricultural, Consumer Real Estate, and Consumer. All groups use the average charge-off method for calculating the ACL. This incorporates a historical loss period from March 2000, since Call Report data became more granular regarding loan groupings, and includes several economic cycles. As a percentage, the reserves are the highest against construction and development loans, while farmland loans have the lowest overall reserve due to having such low loss rates.

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

The Company is utilizing peer data from a peer group of 316 banks in the region of Ohio, Michigan and Indiana with asset sizes less than $5 billion as of December 31, 2024. 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

In addition to this quantitative analysis, management also utilizes qualitative analysis each quarter to assess the general reserve on the loan portfolio. The Qualitative factors include nine categories: ability of staff, changes in collateral values, changes in loan concentration levels, economic conditions, external factors such as regulatory, level and trends in non-accrual or adversely classified loans, loan review results, nature and volume of the portfolio and loan terms, and changes in lending policies and procedures. Items within these categories are ranked as baseline, low, medium, or high levels of risk, and the related risk level per categories dictates the level of qualitative factor that is used depending on the standard deviation level from historical loss.

Current wording

In addition to this quantitative analysis, management also utilizes qualitative analysis each quarter as a component of the ACL. The Qualitative factors include nine categories: ability of staff, changes in collateral values, changes in loan concentration levels, economic conditions, external factors such as regulatory, level and trends in non-accrual or adversely classified loans, loan review results, nature and volume of the portfolio and loan terms, and changes in lending policies and procedures. The methodology allows for additional qualitative factors as other risks emerge. Items within these categories are ranked as baseline, low, medium, or high levels of risk, and the related risk level per categories dictates the level of qualitative factor that is used depending on the standard deviation level from historical loss.

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

31, 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.