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What changed in FARMERS & MERCHANTS BANCORP INC's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of FARMERS & MERCHANTS BANCORP INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+347 added−323 removedSource: 10-K (2024-02-27) vs 10-K (2023-02-24)

Top changes in FARMERS & MERCHANTS BANCORP INC's 2023 10-K

347 paragraphs added · 323 removed · 221 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

35 edited+7 added−1 removed98 unchanged
Biggest changeIn addition, Automated Teller Machines (ATMs) or Interactive Teller Machines (ITMs) are provided at most branch locations along with other independent locations in the market area. The Bank has custodial services for Individual Retirement Accounts (IRAs) and Health Savings Accounts (HSAs). The Bank provides on-line banking access for consumer and business customers.
Biggest changeThe Bank also provides checking account services, as well as savings and time deposit services such as certificates of deposits. In addition, Automated Teller Machines (ATMs) or Interactive Teller Machines (ITMs) are provided at most branch locations along with other independent locations in the market area.
Final rules issued by the Bureau or jointly with other regulatory agencies implemented requirements under the Dodd-Frank Act regarding mortgage-related matters such as ability-to-repay, qualified mortgage standards, mortgage servicing, mortgage loan originator compensation, escrow requirements for 8 higher-priced mortgage loans, and providing appraisals.
Final rules issued by the Bureau or jointly with other 8 regulatory agencies implemented requirements under the Dodd-Frank Act regarding mortgage-related matters such as ability-to-repay, qualified mortgage standards, mortgage servicing, mortgage loan originator compensation, escrow requirements for higher-priced mortgage loans, and providing appraisals.
The amended General QM loan definition removed the 43% debt-to-income limit, eliminated Appendix Q underwriting standards and any requirement to use them as a qualification for General QM status, and instead implemented price-based thresholds. The Bank's Loan Policy was revised accordingly.
Amended General QM loan definition removed the 43% debt-to-income limit, eliminated Appendix Q underwriting standards and any requirement to use them as a qualification for General QM status, and instead implemented price-based thresholds. The Bank's Loan Policy was revised accordingly.
Reportable data points were significantly expanded to 52 fields which included applicant age, credit score, automated underwriting system information, property value, application channel, points and fees, borrower-paid origination charges, discount points, lender credits, loan 9 term, prepayment penalty, interest rate, loan originator identifier, as well as other data fields.
Reportable data points were significantly expanded to 52 fields which included applicant age, credit score, automated underwriting system information, 9 property value, application channel, points and fees, borrower-paid origination charges, discount points, lender credits, loan term, prepayment penalty, interest rate, loan originator identifier, as well as other data fields.
Copies of these documents may also be obtained, either in electronic or paper form, by contacting Barbara J. Britenriker, Chief Financial Officer of the Company at (419) 446-2501. 10
Copies of these documents may also be obtained, either in electronic or paper form, by contacting Barbara J. Britenriker, Chief Financial Officer of the Company at (419) 446-2501.
The Company files reports with the Securities and Exchange Commission (SEC). Because the Company makes its filings with the SEC electronically, you may access such reports at the SEC’s website (www.sec.gov).
The Company files reports with the Securities and Exchange Commission (SEC). Because the Company makes its filings with the SEC electronically, you may 10 access such reports at the SEC’s website (www.sec.gov).
The Bank offers a three year, a five year, a seven year and a ten year fixed rate mortgage and a fifteen year jumbo fixed rate mortgage after which the interest rate will adjust annually for all.
The Bank offers a three year, a five year, a seven year and a ten year fixed rate mortgage and a ten year jumbo fixed rate mortgage after which the interest rate will adjust annually for all.
Because the majority of the Bank's offices are located in Northwest Ohio and Northeast Indiana, a substantial amount of the loan portfolio is comprised of loans made to customers in the farming industry for such things as farm land, farm equipment, livestock and operating loans for seed, fertilizer, and feed.
Because the majority of the Bank's offices are located in Northwest Ohio, Northeast Indiana and Southern Michigan, a substantial amount of the loan portfolio is comprised of loans made to customers in the farming industry for such things as farm land, farm equipment, livestock and operating loans for seed, fertilizer, and feed.
See Note 16 to the consolidated financial statements for additional information on applicable dividend restrictions. Deposit Insurance Assessments The deposits of the Bank are insured up to the regulatory limits set by the FDIC. The FDIC maintains the Deposit Insurance fund (“DIF”) by assessing depository institutions an insurance premium (assessment).
See Note 17 to the consolidated financial statements for additional information on applicable dividend restrictions. Deposit Insurance Assessments The deposits of the Bank are insured up to the regulatory limits set by the FDIC. The FDIC maintains the Deposit Insurance fund (“DIF”) by assessing depository institutions an insurance premium (assessment).
The commercial banking business in this market is highly competitive, with approximately 34 other depository institutions currently doing business in the Bank’s primary market. 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.
The commercial banking business in this market is highly competitive, with approximately 48 other depository institutions currently doing business in the Bank’s primary market. 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.
Our primary subsidiary, The Farmers & Merchants State Bank (Bank) is a local independent community bank that has been primarily serving Northwest Ohio and Northeast Indiana since 1897. Our other subsidiary, Farmers & Merchants Risk Management (Captive) is a captive insurance company formed in December 2014 and located in Nevada.
Our primary subsidiary, The Farmers & Merchants State Bank (Bank) is a local independent community bank that has been primarily serving Northwest Ohio and Northeast Indiana since 1897. Our other subsidiary, Farmers & Merchants Risk Management (Captive) was a captive insurance company formed in December 2014 and located in Nevada. The Captive was dissolved in December 2023.
Our subsidiary Bank is in turn regulated and examined by the Ohio Division of Financial Institutions and the Federal Deposit Insurance Corporation. The activities of our Bank subsidiary are also subject to other federal and state laws and regulations. The Company also formed a Captive insurance company in December 2014.
Our subsidiary Bank is in turn regulated and examined by the Ohio Division of Financial Institutions and the Federal Deposit Insurance Corporation. The activities of our Bank subsidiary are also subject to other federal and state laws and regulations. The Company also formed a Captive insurance company in December 2014 and dissolved it in 4 December 2023..
At December 31, 2022, we had 431 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.
At December 31, 2023, we had 456 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.
The required capital levels along with the Bank’s capital position at December 31, 2022 and 2021 are summarized in the table included in Note 15 to the consolidated financial statements. Beginning in 2015, the Company and Bank were required to measure capital adequacy using Basel III accounting.
The required capital levels along with the Bank’s capital position at December 31, 2023 and 2022 are summarized in the table included in Note 16 to the consolidated financial statements. Beginning in 2015, the Company and Bank were required to measure capital adequacy using Basel III accounting.
The Bank does not have a program to fund sub-prime loans. Sub-prime loans are characterized as a lending program or strategy that targets borrowers who pose a significantly higher risk of default than traditional retail banking customers. All loan requests are reviewed as to credit worthiness and are subject to the Bank's underwriting guidelines as to secured versus unsecured credit.
Sub-prime loans are characterized as a lending program or strategy that targets borrowers who pose a significantly higher risk of default than traditional retail banking customers. All loan requests are reviewed as to credit worthiness and are subject to the Bank's underwriting guidelines as to secured versus unsecured credit.
For a discussion of the general development of the Company’s business throughout 2022, please see the portion of Management’s Discussion and Analysis of Financial Condition and Results of Operations captioned “2022 in Review.” Nature of Activities The Farmers & Merchants State Bank engages in general commercial banking business.
For a discussion of the general development of the Company’s business throughout 2023, please see the portion of Management’s Discussion and Analysis of Financial Condition and Results of Operations captioned “2023 in Review.” Nature of Activities The Farmers & Merchants State Bank engages in general commercial banking business.
As of December 31, 2022, the Bank was well capitalized pursuant to these prompt corrective action guidelines.
As of December 31, 2023, the Bank was well capitalized pursuant to these prompt corrective action guidelines.
Real Estate: • Maximum LTVs range from 70%-80% depending on type. • Maximum LTV on non-traditional borrower loans up to 85%. FM Investment Services, the brokerage department of the Bank, has served the Bank’s customers, providing investment services, since April of 1999.
Real Estate: • Maximum LTVs range from 70%-80% depending on type. • Maximum LTV on non-traditional borrower loans up to 85%. • Maximum LTV on F&M First Time Homebuyer loans up to 100% FM Investment Services, the brokerage department of the Bank, has served the Bank’s customers, providing investment services, since April of 1999.
Based on deposit data as of June 30, 2022 from the FDIC and using zip codes in our markets, the Bank ranked 1st with a 14.94% market share in markets served. The primary factors in competing for loans and deposits are the rates charged as well as location and quality of the services provided.
Based on deposit data as of June 30, 2023 from the FDIC and using zip codes in our markets, the Bank ranked 3rd with a 13.30% market share in markets served. The primary factors in competing for loans and deposits are the rates charged as well as location and quality of the services provided.
Upgrades to our digital products and services continue to occur in both retail and business lines. 3 The Bank has established underwriting policies and procedures which facilitate operating in a safe and sound manner in accordance with supervisory and regulatory guidance.
In addition, the Bank offers remote deposit capture or electronic deposit processing. Upgrades to our digital products and services continue to occur in both retail and business lines. 3 The Bank has established underwriting policies and procedures which facilitate operating in a safe and sound manner in accordance with supervisory and regulatory guidance.
The Captive is an insurance company incorporated in Nevada and regulated by the State of Nevada, Division of Insurance. 5 Holding Company Activities As a financial holding company incorporated and doing business within the State of Ohio, the Company is subject to regulation and supervision under the Bank Holding Act of 1956, as amended (the "Act").
The Insurance agency is a limited liability company organized in Ohio and regulated by the State of Ohio, Division of Insurance. Holding Company Activities As a financial holding company incorporated and doing business within the State of Ohio, the Company is subject to regulation and supervision under the Bank Holding Act of 1956, as amended (the "Act").
Its activities include commercial, agricultural and residential mortgage as well as consumer and credit card lending activities.
Our activities include commercial, agricultural and residential mortgage as well as consumer lending activities.
Consumer real estate also increased substantially with the acquisition of Perpetual Federal Savings Bank on October 1, 2021. The Bank also operates four Loan Production Offices (LPOs) , two in Ohio and one in Indiana and Michigan. The Bank also provides checking account services, as well as savings and time deposit services such as certificates of deposits.
Consumer real estate also increased substantially with the acquisition of Perpetual Federal Savings Bank on October 1, 2021 and Peoples Federal Savings and Loan Association on October 1, 2022. The Bank also operates four Loan Production Offices (LPOs), two in Ohio and one in Indiana and Michigan.
The Bank is an Ohio chartered commercial bank. It is subject to regulation and examination by both the Ohio Division of Financial Institutions (ODFI) and the Federal Deposit Insurance Corporation (FDIC).
The Bank is an Ohio chartered commercial bank. It is subject to regulation and examination by both the Ohio Division of Financial Institutions (ODFI) and the Federal Deposit Insurance Corporation (FDIC). 5 The Captive was an insurance company incorporated in Nevada, regulated by the State of Nevada, Division of Insurance and was dissolved in December 2023.
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 order to offer longer term fixed rate mortgages, the Bank does participate in the Freddie Mac, FSA guaranteed secondary Ag market, and Small Business Lending programs. The Bank also normally retains the servicing rights on these partially or 100% sold loans.
The Captive is located in Nevada and regulated by the State of Nevada Division of Insurance. 4 The Bank’s primary market includes communities located in the Ohio counties of Champaign, Defiance, Fulton, Hancock, Henry, Lucas, Shelby, Williams, Wood and in the Indiana counties of Adams, Allen, DeKalb, Jay, Steuben and Wells.
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 addition, a company is required to obtain the approval of the Federal Reserve Board under the Bank Holding Company Act before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of any class of outstanding voting stock of a bank holding company, or otherwise obtaining control or a "controlling influence" over that bank holding company. 6 Liability for Banking Subsidiaries Under the current Federal Reserve Board policy, a bank holding company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and to maintain resources adequate to support each subsidiary bank.
In addition, a company is required to obtain the approval of the Federal Reserve Board under the Bank Holding Company Act before acquiring 25% (5% in the 6 case of an acquirer that is a bank holding company) or more of any class of outstanding voting stock of a bank holding company, or otherwise obtaining control or a "controlling influence" over that bank holding company.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) revised the statutory authorities governing the FDIC’s management of the DIF. A key requirement from the Dodd-Frank Act resulted in the FDIC’s adoption 7 of new rules in February 2011 regarding Assessments, Dividends, Assessment Base, and Large Bank Pricing.
A key requirement from the Dodd-Frank Act resulted in the FDIC’s adoption of new rules in February 2011 regarding Assessments, Dividends, Assessment Base, and Large Bank Pricing.
For consumers, this includes bill-pay, on-line statement opportunities and mobile banking. For business customers, it provides the option of electronic transaction origination such as wire and Automated Clearing House (ACH) file transmittal. In addition, the Bank offers remote deposit capture or electronic deposit processing and merchant credit card services.
The Bank has custodial services for Individual Retirement Accounts (IRAs) and Health Savings Accounts (HSAs). The Bank provides on-line banking access for consumer and business customers. For consumers, this includes bill-pay, on-line statement opportunities and mobile banking. For business customers, it provides the option of electronic transaction origination such as wire and Automated Clearing House (ACH) file transmittal.
The DIF is primarily funded through quarterly assessments on insured depository institutions, but it also earns interest income on its securities. Decreases in the DIF result from loss provisions associated with the resolution of failed banks and FDIC operating expenses.
The DIF is primarily funded through quarterly assessments on insured depository institutions, but it also earns interest income on its securities.
Thus, issuance of guidance and final rules must be monitored in order to be effectively implemented. Unfair or deceptive acts or practices (UDAP) standards originally developed years ago by the Federal Trade Commission focused on unacceptable practices that may not specifically be addressed elsewhere in banking or consumer finance law.
Unfair or deceptive acts or practices (UDAP) standards originally developed years ago by the Federal Trade Commission focused on unacceptable practices that may not specifically be addressed elsewhere in banking or consumer finance law. Banking regulatory agencies have increasingly used this authority over the years to address acts or practices that are deemed harmful, deceptive, or misleading to consumers.
Awareness of UDAP standards, and the Bureau’s unfair, deceptive or abusive acts or practices (UDAAP) in relation to the offering and marketing of Bank products and services remains important.
Awareness of UDAP standards, and the Bureau’s unfair, deceptive or abusive acts or practices (UDAAP) in relation to the offering and marketing of Bank products and services remains important. A final rule with amendments to the Community Reinvestment Act (CRA) was jointly released by the OCC, FRB, and FDIC on October 24, 2023.
Effective September 21, 2018, consumers could freeze their credit information and place one-year fraud alerts for free. Additionally, parents can freeze the credit information of their children under age 16 for free. In some instances, regulators still need to issue proposals, provide guidance, and publish final rules for various provisions.
The Protecting Tenants in Foreclosure Act was restored and permanently extended as of June 23, 2018. Effective September 21, 2018, consumers could freeze their credit information and place one-year fraud alerts for free. Additionally, parents can freeze the credit information of their children under age 16 for free.
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 in the 4 th quarter of 2021, the Bank saw an increase in fixed rate, long-term mortgage loans to our portfolio from that banking service area.
With the acquisitions in the 4 th quarters of 2022 and 2021, the Bank saw an increase in fixed rate, long-term mortgage loans to our portfolio from that banking service area. The Bank does not have a program to fund sub-prime loans.
Banking regulatory agencies have increasingly used this authority over the years to address acts or practices that are deemed harmful, deceptive, or misleading to consumers. The authority of the Federal Trade Commission (FTC) for credit practice rules was repealed as a result of the Dodd-Frank Act.
The authority of the Federal Trade Commission (FTC) for credit practice rules was repealed as a result of the Dodd-Frank Act.
Removed
The Protecting Tenants in Foreclosure Act was restored and permanently extended as of June 23, 2018. An interim final rule was jointly issued by the OCC, FRB, and FDIC allowing an extended examination cycle for qualifying insured depository institutions with less than $3 billion in total assets.
Added
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.
Added
The Captive was located in Nevada and regulated by the State of Nevada Division of Insurance. The Bank formed an insurance agency in November 2023 to offer insurance products to our customers.
Added
Liability for Banking Subsidiaries Under the current Federal Reserve Board policy, a bank holding company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and to maintain resources adequate to support each subsidiary bank.
Added
Decreases in the DIF result from loss provisions associated with the resolution of failed banks and FDIC operating expenses. 7 The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) revised the statutory authorities governing the FDIC’s management of the DIF.
Added
In some instances, regulators still need to issue proposals, provide guidance, and publish final rules for various provisions. Thus, issuance of guidance and final rules must be monitored in order to be effectively implemented.
Added
These amendments are intended to update how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated. The final rule is effective on April 1, 2024, with certain amendments effective April 1, 2024 through January 1, 2031, and other amendments in the final rule were delayed indefinitely.
Added
As a large bank examined for CRA, the Bank is most attentive to the significant impact these amendments have. Review of the various amendments and the specific requirements, timing to meet timing requirements and overall impact is ongoing. The final rule has not yet been published in the Federal Register as of year end.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

34 edited+11 added−26 removed67 unchanged
Biggest changeNon-officer employees are paid a cash incentive based on the projected overall performance of the Bank in terms of Return of Average Assets (“ROA”) and the achievement of pre-established team and/or individual goals. The Compensation Committee determines the target performance levels on which the percentage of pay will be based.
Biggest changeThe Bank splits the incentive based on pay ranges and position with each having a percentage of base pay used for the incentive. The employees are paid a cash incentive based on the projected overall performance of the Bank in terms of Return of Average Assets (“ROA”) and the achievement of pre-established team and/or individual goals.
The success of the farm may be affected by many factors outside the control of the borrower, including adverse weather conditions that prevent the planting of a crop or limit crop yields (such as hail, drought and floods), loss of livestock due to 11 disease or other factors, declines in market prices for agricultural products (both domestically and internationally) and the impact of government regulations (including changes in price supports, subsidies and environmental regulations).
The success of the farm may be affected by many factors outside the control of the borrower, including adverse weather conditions that prevent the planting of a crop or limit crop yields (such as hail, drought and floods), loss of livestock due to disease or other factors, declines in market prices for agricultural products (both domestically and internationally) and the impact of government regulations (including changes in price supports, subsidies and environmental regulations).
If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then we may not be able to realize the amount of security that we anticipated at the time of originating the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results and financial condition.
If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then we may not be able to realize the amount of security that we anticipated at the time of originating the loan, which could cause us to increase our provision for credit losses and adversely affect our operating results and financial condition.
In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed expectations, we will need additional provisions to increase the allowance for loan losses.
In addition, bank regulatory agencies periodically review our allowance for credit losses and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed expectations, we will need additional provisions to increase the allowance for credit losses.
These individuals are rewarded based on overall ROA of the Bank along with individual pre-established goals. Non-executive officers, therefore, have incentive pay at risk for individual performance. The individualized goals are recommended by each individual’s supervisor and are approved by an incentive committee of the Bank.
These individuals are rewarded based on overall ROA of the Bank along with individual pre-established 13 goals. Non-executive officers, therefore, have incentive pay at risk for individual performance. The individualized goals are recommended by each individual’s supervisor and are approved by an incentive committee of the Bank.
As a result, commercial construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest.
As a result, commercial construction 11 loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest.
This could adversely affect our financial condition and results of operations. In addition, to the extent changes in the political environment have a negative impact on us or on the markets in which we operate, our business, results of operations and financial condition could be materially and adversely impacted in the future.
This could adversely affect our financial condition and results of operations. In addition, to 12 the extent changes in the political environment have a negative impact on us or on the markets in which we operate, our business, results of operations and financial condition could be materially and adversely impacted in the future.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes.
The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes.
For more information on this subject, see the section under Part I, Item 1 of this Form 10-K captioned “Supervision and Regulation.” Changes in U.S. Trade Policies From 2018 through 2022, the U.S. government implemented tariffs on certain products from countries or entities such as Mexico, Canada, China and the European Union.
For more information on this subject, see the section under Part I, Item 1 of this Form 10-K captioned “Supervision and Regulation.” Changes in U.S. Trade Policies From 2018 through 2023, the U.S. government implemented tariffs on certain products from countries or entities such as Mexico, Canada, China and the European Union.
Our loan portfolio has a large concentration of real estate loans Real estate loans, which constitute a large portion of our loan portfolio, include home equity, agricultural, commercial, construction and residential loans, and such loans are concentrated in the Bank’s primary markets in Northwest Ohio, Northeast Indiana and complimented with additional exposure in new areas from our LPOs.
Our loan portfolio has a large concentration of real estate loans Real estate loans, which constitute a large portion of our loan portfolio, include home equity, agricultural, commercial, construction and residential loans, and such loans are concentrated in the Bank’s primary markets in Northwest Ohio, Northeast Indiana and Southern Michigan and complimented with additional exposure in new areas from our LPOs.
Potential Inadequacy of our Allowance for Loan Losses Like all financial institutions, we maintain an allowance for loan losses to provide for loan defaults and non-performance.
Potential Inadequacy of our Allowance for Credit Losses Like all financial institutions, we maintain an allowance for credit losses to provide for loan defaults and non-performance.
On average, three to four goals were given to each non-executive officer in 2022. Non-executive officers are paid cash incentives based on the year-end ROA of the Bank and receive it within the first quarter of the following year.
On average, three to four goals were given to each non-executive officer in 2023. Non-executive officers are paid cash incentives based on the year-end ROA of the Bank and receive it within the first quarter of the following year.
Economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses.
Economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for credit losses.
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," which replaces the current "incurred loss" model for recognizing credit losses with an "expected loss" model referred to as the Current Expected Credit Loss model, or “CECL.” Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected.
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," which replaced the "incurred loss" model for recognizing credit losses with an "expected loss" model referred to as the Current Expected Credit Loss model, or “CECL.” Under the CECL model, we are required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected.
Any increases in the allowance for loan losses may result in a decrease in net income and capital and may have a material adverse effect on our financial condition and results of operations.
Any increases in the allowance for credit losses may result in a decrease in net income and capital and may have a material adverse effect on our financial condition and results of operations.
With the formation of the Captive, the ROA goal has been exclusive of the effect of the additional insurance expense at the Bank level, as well as other expenses as agreed upon by the Compensation Committee.
With the formation of the Captive, the ROA goal had been exclusive of the effect of the additional insurance expense at the Bank level, as well as other expenses as agreed upon by the Compensation Committee.
Should the ROA be forecasted to be positive but below the base target set by the Board, the covered non-executive officers are paid an incentive under the same basis and timing as non-officers disclosed above.
Should the ROA be forecasted to be positive but below the base target set by the Board, the covered non-executive officers are paid an incentive under the same basis and timing as lower based employees disclosed above.
The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter.
The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement takes place at the time the financial asset is first added to the balance sheet and periodically thereafter.
Our allowance for loan losses is based on our historical loss experience as well as an evaluation of the risks associated with our loan portfolio, including the size and composition of the loan portfolio, current economic conditions and concentrations within the portfolio.
Our allowance for credit losses is based on our historical loss experience and forward-looking data as well as an evaluation of the risks associated with our loan portfolio, including the size and composition of the loan portfolio, current economic conditions 15 and concentrations within the portfolio.
The Company may receive dividends from the Bank which is subject to restrictions and limitations in the amount and timing of the dividends it may pay to the Company. The Bank has been declaring additional dividends each quarter to provide this liquidity to the Company.
The Company may receive dividends from the Bank which is subject to restrictions and limitations in the amount and timing of the dividends it may pay to the Company. The Bank declared additional dividends the fourth quarter to provide this liquidity to the Company.
The Committee takes into account the five and ten year trend of ROA along with budget forecasted for the next year and the Bank’s past year performance. The Committee also considers the predicted banking environment under which the Bank will be operating.
The Compensation Committee determines the target performance levels on which the percentage of pay will be based. The Committee takes into account the five and ten year trend of ROA along with budget forecasted for the next year and the Bank’s past year performance. The Committee also considers the predicted banking environment under which the Bank will be operating.
Limited Trading Market The Company has its shares of stock listed and traded on the NASDAQ Capital Market. The Company’s trading symbol is “FMAO.”
Limited Trading Market The Company has its shares of stock listed and traded on the NASDAQ Capital Market. The Company’s trading symbol is “FMAO.” ITEM 1b. UNRESOLVE D STAFF COMMENTS None.
Any successful cyber attack may also subject the Company to regulatory investigations, litigation or enforcement, or require the payment of regulatory fines or penalties or undertaking costly remediation efforts with respect to third parties affected by a cyber security incident, all or any of which could adversely affect the Company’s business, financial condition or results of operations and damage its reputation. 15 We are constantly at risk of increased losses from fraud Criminals are committing fraud at an increasing rate and are using more sophisticated techniques.
Any successful cyber attack may also subject the Company to regulatory investigations, litigation or enforcement, or require the payment of regulatory fines or penalties or undertaking costly remediation efforts with respect to third parties affected by a cyber security incident, all or any of which could adversely affect the Company’s business, financial condition or results of operations and damage its reputation.
In some cases, these individuals are part of larger criminal rings, which allow them to be more effective. Such fraudulent activity has taken many forms, ranging from debit card fraud, check fraud, mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information, or impersonation of clients through the use of falsified or stolen credentials.
Such fraudulent activity has taken many forms, ranging from debit card fraud, check fraud, mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information, or impersonation of clients through the use of falsified or stolen credentials.
The majority of non-officers receive incentive pay in December of the same year based on the year-to-date base compensation through the last pay received in November. 13 Officers, other than executive officers, and specified non-officers based on their Job Roles (“non-executive officers”) receive incentive pay based on additional criterion.
The majority of lower based employees receive incentive pay in December of the same year based on the year-to-date base compensation through the last pay received in November. Higher pay range employees, often officers ("non-executive officers"), other than executive officers receive incentive pay based on additional criterion.
The Captive also upstreams dividends to the Company when reserve levels are adequately provided for and may not exceed the net income of the prior twelve months. Please see Note 16 in the notes to consolidated financial statements for additional information on dividend payout restrictions.
The Captive upstreamed dividends to the Company when reserve levels were adequately provided for and did not exceed the net income of the prior twelve months. With the dissolving of the Captive, no such upstream of dividends will occur in 2024. Please see Note 17 in the notes to consolidated financial statements for additional information on dividend payout restrictions.
These seven rate increases totaling 425 basis points have negatively impacted our loan revenue. The Bank manages interest rate risk within an overall asset/liability framework. The principal objectives of asset/liability management are to manage sensitivity of net interest spreads and net interest income to potential changes in interest rates.
The Bank manages interest rate risk within an overall asset/liability framework. The principal objectives of asset/liability management are to manage sensitivity of net interest spreads and net interest income to potential changes in interest rates. The Bank also analyzes the interest rate, risk utilizing the net interest margin.
The new CECL standard will become effective for us for fiscal years beginning after December 15, 2022 and for interim periods during 2023. Please see Note 1 in the notes to consolidated financial statements for additional information. Attraction of Deposits and other Short-term Funding In managing our liquidity, our primary source of short-term funding is customer deposits.
Please see Note 1 in the notes to consolidated financial statements for additional information. Attraction of Deposits and other Short-term Funding In managing our liquidity, our primary source of short-term funding is customer deposits.
For more information on the exposure of the Company and the Bank to credit risk, see the section under Part II, Item 7 of this Form 10-K captioned “Loan Portfolio.” Dependence upon the Accuracy and Completeness of Information In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements and other financial information.
The Company only has available-for-sale securities. Dependence upon the Accuracy and Completeness of Information In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements and other financial information.
Any activity that jeopardizes our network and the security of the information stored thereon may result in significant cost and have a significant adverse effect on our reputation. We maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks. Such insurance coverage may be insufficient to cover all losses.
We maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of cyber risks. Such insurance coverage may be insufficient to cover all losses.
Although we employ detection and response mechanisms designed to contain and mitigate security incidents, early detection may be thwarted by persistent sophisticated attacks and malware designed to avoid detection.
Although we employ detection and response mechanisms designed to contain and mitigate security incidents, early detection may be thwarted by persistent sophisticated attacks and malware designed to avoid detection. Any activity that jeopardizes our network and the security of the information stored thereon may result in significant cost and have a significant adverse effect on our reputation.
Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. If we are required to increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.
If we are required to increase our level of allowance for credit losses for any reason, such increase could adversely affect our business, financial condition and results of operations. The new CECL standard became effective for us for fiscal years beginning after January 1, 2023 and for interim periods during 2023.
This differs significantly from the "incurred loss" model required under current GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance.
This differs significantly from the "incurred loss" model previously required under GAAP, which delayed recognition until it was probable a loss had been incurred. Accordingly, the adoption of the CECL model materially affects how we determine our allowance for credit losses. Moreover, the CECL model may create more volatility in the level of our allowance for credit losses.
Historically, net interest spreads for other financial institutions have widened and narrowed in response to these and other factors, which are often collectively referred to as “interest rate risk.” After many years of a low and flat rate environment, the Federal Reserve began increasing the Federal Funds rate in 2015.
Net interest spreads have widened and narrowed in response to these and other factors, which are often collectively referred to as “interest rate risk.” The Federal Reserve began increasing the Federal Funds rate in 2022 and continued into 2023 in an effort to tame inflation. These rate increases totaling 550 basis points have negatively impacted our interest spread.
Removed
Global Economic and Geopolitical Instability and Inflationary Risks Instability in global economic conditions and geopolitical matters, as well as volatility in financial markets, could have a material adverse effect on the Company’s results of operations and financial condition. The macroeconomic environment in the United 12 States is susceptible to global events and volatility in financial markets.
Added
For more information on the exposure of the Company and the Bank to credit risk, see the section under Part II, Item 7 of this Form 10-K captioned “Loan Portfolio.” Under the credit loss model, we are required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected.
Removed
For example, global demand for products continues to exceed supply during the economic recovery from the COVID-19 pandemic, creating significant inflationary pressures which, in turn, may adversely impact regional and global economic conditions, as well as the Company’s financial condition and results of operations.
Added
While the net interest spread measures the asset yield compared to the cost of funds, the net interest margin is equivalent to net interest income divided by earning assets. Both net interest spread and net interest margin are presented in the interest charts within the Management's Discussion and Analysis on interest income and expense.
Removed
The Company did not experience improvement in its asset yield on loans until such time that the rate increases enabled the loan rates to rise above the floors which had been on the majority of the variable rate loans.
Added
We are constantly at risk of increased losses from fraud Criminals are committing fraud at an increasing rate and are using more sophisticated techniques. In some cases, these individuals are part of larger criminal rings, which allow them to be more effective.
Removed
During 2017, the increasing rates, having reached over 100 basis points, triggered rate changes above the floors and the Company experienced improvement in the interest spread. The improvement in the net interest spread during 2017 through 2019 directly correlated to the improvement of the Bank’s loan to asset ratio.
Added
Global Economic and Geopolitical Instability and Inflationary Risks Geopolitical conditions, terrorist attacks, military conflicts, natural disasters, severe weather, widespread health emergencies or pandemics, information or cybersecurity incidents (including intrusion into or degradation or unavailability of systems or technology by cyberattacks), operational incidents and other catastrophic events can have a material adverse effect on our business.
Removed
The Federal Reserve began decreasing the Federal Funds rate in the second half of 2019, and made further cuts in 2020, which contributed to a deterioration in the interest rate spread in 2020 and continued in 2021. The Federal Reserve began increasing the Federal Funds rate in 2022 in an effort to tame inflation.
Added
Political and social conditions, including actions upending geopolitical stability (such as from tensions involving China and the U.S.), fiscal and monetary policies (including developments related to the U.S. federal debt ceiling, budgetary issues and government shutdowns), trade wars and tariffs, labor shortages, regional or domestic hostilities, economic sanctions and the prospect or occurrence of more widespread conflicts could also negatively affect our business, operations and partners, consumer and business spending, including consumer spending patterns and business investment, and demand for credit.
Removed
We also face risks related to cyber attacks and other security breaches in connection with card transactions that typically involve the transmission of sensitive information regarding our customers through various third parties.
Added
Although U.S. and global economies have begun to recover from the COVID-19 pandemic as many health and safety restrictions have been lifted and vaccine distribution has increased, certain adverse consequences of the pandemic, including labor shortages, disruptions of global supply chains, and inflationary pressures, continue to impact the macroeconomic environment and could adversely affect our business.
Removed
Some of these parties have in the past been the target of security breaches and cyber attacks, and because the transactions involve third parties and environments that we do not control or secure, future security breaches or cyber attacks affecting any of these third parties could impact us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them.
Added
The pandemic and resulting containment measures adversely impacted a significant portion of our operations. The global macroeconomic outlook continues to remain uncertain due to a variety of factors, including the emergence of new variants, impacts to the labor market, supply chain disruptions and inflation.
Removed
We also rely on numerous other third party service providers to conduct other aspects of our business operations and face similar risks relating to them. While we conduct security assessments on our higher risk third party service providers, we cannot be sure that their information security protocols are sufficient to withstand a cyber attack or other security breach.
Added
The extent to which our business and results of operations may continue to be adversely affected by this macroeconomic uncertainty will depend on numerous evolving factors and future developments, including the continued spread and severity of the virus and new variants; the availability, distribution, use and effectiveness of treatments and vaccines; the extent and duration of lingering effects on the economy, inflation, consumer confidence and consumer and business spending; and the impact on consumers and businesses as forbearance and government support programs end, including the end of the moratorium on student loan repayments. 16 Several military conflicts are currently taking place across the world (such as the ongoing Russia-Ukraine and Israel-Hamas wars), and geopolitical tensions may result in additional conflicts or escalate existing conflicts.
Removed
There can be no assurance that cyber incidents will not occur and they could occur more frequently and on a more significant scale. We devote significant resources to implement, maintain, monitor and regularly upgrade our systems and networks with measures such as intrusion detection and prevention and firewalls to safeguard critical business applications.
Added
This conflict has led to economic uncertainty and market disruptions, including the imposition of financial and economic sanctions and export controls designed to constrain Russia.
Removed
The additional cost to the Company of our cyber security monitoring and protection systems and controls includes the cost of hardware and software, third party technology providers, consulting, and legal fees, in addition to the incremental cost of our personnel who focus a substantial portion of their responsibilities on cyber security.
Added
The conflict in Israel and surrounding areas has also created economic uncertainty and regional instability, including due to the risk of escalation into a wider regional conflict, and resulted in the imposition of sanctions targeting Hamas-affiliated individuals and entities.
Removed
In addition, because cyber attacks can change frequently we may be unable to implement effective preventive or proactive measures in time. With the assistance of third-party service providers, we intend to continue to implement security technology and establish procedures to maintain network security, but there is no assurance that these measures will be successful.
Added
The broader consequences of these conflicts remain uncertain, but may include further sanctions, regional instability and geopolitical shifts, increased prevalence and sophistication of cyberattacks, potential retaliatory action, heightened regulatory scrutiny related to sanctions compliance, increased inflation, further increases or fluctuations in commodity and energy prices, decreases in global economic activity, further disruptions to the global supply chain and other adverse effects on macroeconomic conditions.
Removed
As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.
Removed
Vendor Relationship Risk We rely on third-party vendors to provide key components of our business operations such as data processing, recording and monitoring transactions, online and mobile banking interfaces and services, internet connections and network access. While we 16 have performed due diligence procedures in selecting vendors, we do not control their actions.
Removed
In the event that one or more of our vendors suffers a bankruptcy or otherwise becomes unable to continue to provide products or services or fails to protect non-public personal information of our customers or employees, we may suffer operational impairments, reputational damage and financial losses. Replacing these third-party vendors could create significant delay and expense.
Removed
Accordingly, use of such third parties creates an inherent risk to our business operations. COVID-19 Pandemic The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.
Removed
In December 2019, a novel coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency.
Removed
The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment.
Removed
Since the COVID-19 outbreak an unprecedented number of individuals have filed claims for unemployment, and stock markets have experienced significant volatility, with bank stocks suffering significant declines in value.
Removed
In response to the COVID-19 outbreak, the Federal Reserve Board reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes declined to historic lows.
Removed
The federal banking agencies encouraged financial institutions to prudently work with affected borrowers and passed legislation to provide relief from reporting loan classifications due to modifications related to the COVID-19 outbreak.
Removed
The ongoing development of variants has led to continued modifications to our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.
Removed
There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities. In addition, the success of our operations substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years.
Removed
The unanticipated loss or unavailability of key employees due to the continued outbreak could harm our ability to operate our business or execute our business strategy. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business.
Removed
As the result, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: • demand for our products and services may decline, making it difficult to grow assets and income; • if government intervention forces a new wave of economic shutdowns, levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; • collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; • our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income; • the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; • as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; • a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend; • we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and • Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.
Removed
Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects. In addition, ongoing labor shortages and supply chain disruptions associated with the pandemic may continue to negatively impact economic conditions, both nationally and regionally within our geographic banking markets.
Removed
And while circumstances surrounding the pandemic have stabilized somewhat over prior fiscal, with relative widespread 17 vaccination rates, it is still impossible to determine the overall impact that the pandemic will have on the overall economy or predict whether future variants of COVID-19 or other infectious diseases will cause further widespread disruptions.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

1 edited+0 added−0 removed0 unchanged
Biggest changeITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings, other than ordinary routine proceedings incidental to the business of the Company or its subsidiaries, to which we are a party or of which any of our properties are the subject. ITEM 4. MINE SAF ETY DISCLOSURES Not applicable. 19 PART II
Biggest changeITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings, other than ordinary routine proceedings incidental to the business of the Company or its subsidiaries, to which we are a party or of which any of our properties are the subject. ITEM 4. MINE SAF ETY DISCLOSURES Not applicable. 20 PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

7 edited+0 added−0 removed1 unchanged
Biggest changeISSUER PURCHASES OF EQUITY SECURITIES Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plan or Programs Remaining Share Repurchases Authorization 10/1/2022 to - - - 600,000 10/31/2022 11/1/2022 to - - - 600,000 11/30/2022 12/1/2022 to - - - 600,000 12/31/2022 Total - - - 600,000 (1) From time to time, the Company purchases shares in the market pursuant to a stock repurchase program publicly announced on January 25, 2022.
Biggest changeThe Company continues to have a strong capital base. 2023 2022 Tier I Leverage Ratio 7.86 % 8.39 % Risk Based Capital Tier I 9.75 % 10.29 % Total Risk Based Capital 11.51 % 12.39 % Stockholders' Equity/Total Assets 9.64 % 9.89 % 21 ISSUER PURCHASES OF EQUITY SECURITIES Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plan or Programs Remaining Share Repurchases Authorization 10/1/2023 to - - - 650,000 10/31/2023 11/1/2023 to 255 (2) 18.40 - 650,000 11/30/2023 12/1/2023 to 636 (2) 23.43 - 650,000 12/31/2023 Total 891 21.99 - 650,000 (1) From time to time, the Company purchases shares in the market pursuant to a stock repurchase program publicly announced on January 24, 2023.
As of December 31, 2022, there were 2,013 record holders of our common stock of which 50.16% of the outstanding shares are being held in brokerage accounts or “street name” and only considered as one record holder. Dividends are declared and paid quarterly.
As of December 31, 2023, there were 1,903 record holders of our common stock of which 52.65% of the outstanding shares are being held in brokerage accounts or “street name” and only considered as one record holder. Dividends are declared and paid quarterly.
On that date, the Board of Directors authorized the repurchase of up to 600,000 common shares between January 25, 2022 and December 31, 2022. (2) Shares which were repurchased for taxes on vested stock awards are outside of this program. ITEM 6. R ESERVED
On that date, the Board of Directors authorized the repurchase of up to 650,000 common shares between January 24, 2023 and December 31, 2023. (2) Shares which were repurchased for taxes on vested stock awards are outside of this program.
Per share dividends declared for the years ended 2022 and 2021 are as follows: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total 2022 $ 0.1900 $ 0.2025 $ 0.2100 $ 0.2100 $ 0.8125 2021 $ 0.1700 $ 0.1700 $ 0.1800 $ 0.1900 $ 0.7100 Dividends declared during 2022 were $0.8125 per share totaling $10.6 million, 14.4% higher than 2021 declared dividends of $0.71 per share.
Per share dividends declared for the years ended 2023 and 2022 are as follows: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total 2023 $ 0.2100 $ 0.2100 $ 0.2100 $ 0.2200 $ 0.8500 2022 $ 0.1900 $ 0.2025 $ 0.2100 $ 0.2100 $ 0.8125 Dividends declared during 2023 were $0.85 per share totaling $11.5 million, 4.6% higher than 2022 declared dividends of $0.8125 per share.
During 2021, the Company awarded 48,750 shares to 96 employees and 2,575 shares were forfeited under its long term incentive plan. At year-end 2021, the Company held 997,766 shares in Treasury stock and 111,131 in unearned stock awards. The Company currently expects to continue to maintain the payment of its quarterly dividend consistent with its past practices.
During 2022, the Company awarded 56,496 shares to 109 employees and 8,000 shares were forfeited under its long term incentive plan. At year-end 2022, the Company held 956,003 shares in Treasury stock and 128,952 in unearned stock awards. The Company currently expects to continue to maintain the payment of its quarterly dividend consistent with its past practices.
During 2022, the Company awarded 56,496 shares to 109 employees and 8,000 shares were forfeited under its long term incentive plan. At year-end 2022, the Company held 956,003 shares in Treasury stock and 128,952 in unearned stock awards. Dividends declared during 2021 were $0.71 per share totaling $8.2 million, 7.6% higher than 2020 declared dividends of $0.66 per share.
During 2023, the Company awarded 64,225 shares to 113 employees and 6,350 shares were forfeited under its long term incentive plan. At year-end 2023, the Company held 899,784 shares in Treasury stock and 151,350 in unearned stock awards. Dividends declared during 2022 were $0.8125 per share totaling $10.6 million, 14.4% higher than 2021 declared dividends of $0.71 per share.
The Company continues to have a strong capital base. 2022 2021 Tier I Leverage Ratio 8.39 % 8.47 % Risk Based Capital Tier I 10.29 % 11.77 % Total Risk Based Capital 12.39 % 14.60 % Stockholders' Equity/Total Assets 9.89 % 11.26 % 20 On January 24, 2023, the Company announced the authorization by its Board of Directors for the Company’s repurchase, either on the open market, or in privately negotiated transactions, of up to 650,000 shares of its outstanding common stock commencing January 24, 2023 and ending December 31, 2023.
On January 16, 2024, the Company announced the authorization by its Board of Directors for the Company’s repurchase, either on the open market, or in privately negotiated transactions, of up to 650,000 shares of its outstanding common stock commencing January 16, 2024 and ending December 31, 2024. ITEM 6. R ESERVED

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

141 edited+104 added−72 removed41 unchanged
Biggest changeThe ALLL to nonperforming loans for all years remained more than adequate and emphasizes the existing strong level of credit quality. 38 The following table presents a reconciliation of the allowance for credit losses for the years ended December 31, 2022, 2021, 2020, 2019 and 2018: (In Thousands) 2022 2021 2020 2019 2018 Loans $ 2,356,387 $ 1,857,419 $ 1,302,990 $ 1,218,999 $ 846,374 Daily average of outstanding loans $ 2,073,737 $ 1,522,088 $ 1,313,675 $ 1,129,231 $ 831,614 Nonaccrual loans $ 4,689 $ 8,076 $ 9,404 $ 3,400 $ 542 Nonperforming loans $ 4,689 $ 8,076 $ 9,404 $ 3,400 $ 542 Allowance for Loan Losses - Jan 1 $ 16,242 $ 13,672 $ 7,228 $ 6,775 $ 6,868 Loans Charged off: Consumer Real Estate - 19 35 98 63 Agricultural Real Estate - 105 - - - Agricultural - 143 - 37 - Commercial Real Estate - - 8 - 16 Commercial and Industrial 418 814 297 215 142 Consumer 409 251 380 491 359 827 1,332 720 841 580 Loan Recoveries: Consumer Real Estate 20 13 9 - 18 Agricultural Real Estate - - - - - Agricultural 7 14 - 3 8 Commercial Real Estate 9 10 10 11 10 Commercial and Industrial 93 257 24 22 13 Consumer 169 164 140 120 114 298 458 183 156 163 Net Charge-offs: Consumer Real Estate (20 ) 6 26 98 45 Agricultural Real Estate - 105 - - - Agricultural (7 ) 129 - 34 (8 ) Commercial Real Estate (9 ) (10 ) (2 ) (11 ) 6 Commercial and Industrial 325 557 273 193 129 Consumer 240 87 240 371 245 529 874 537 685 417 Provision for loan loss 4,600 3,444 6,981 1,138 324 Acquisition provision for loan loss - - - - - Allowance for Loan & Lease Losses - Dec 31 20,313 16,242 13,672 7,228 6,775 Allowance for Unfunded Loan Commitments & Letters of Credit - Dec 31 1,262 1,041 641 479 274 Total Allowance for Credit Losses - Dec 31 $ 21,575 $ 17,283 $ 14,313 $ 7,707 $ 7,049 Ratio of Net Charge-offs to Average Outstanding Loans 0.03 % 0.06 % 0.04 % 0.06 % 0.05 % Ratio of Nonaccrual Loans to Loans 0.20 % 0.43 % 0.72 % 0.28 % 0.06 % Ratio of the Allowance for Loan & Lease Losses to Loans 0.86 % 0.87 % 1.05 % 0.59 % 0.80 % Ratio of the Allowance for Loan & Lease Losses to Nonaccrual Loans 273.67 % 201.11 % 145.47 % 209.70 % 1249.57 % Ratio of the Allowance for Loan & Lease Losses to Nonperforming Loans 273.67 % 201.11 % 145.47 % 209.70 % 1249.57 % *Nonperforming loans are defined as all loans on nonaccrual, plus any loans past due 90 days not on nonaccrual. 39 Allocation of ALLL per Loan Category in terms of dollars and percentage of loans in each category to total loans is as follows: 2022 2021 2020 2019 2018 Amount Amount Amount Amount Amount (000's) % (000's) % (000's) % (000's) % (000's) % Balance at End of Period Applicable To: Consumer Real Estate $ 998 20.98 $ 857 21.31 $ 633 13.45 $ 311 13.51 $ 247 9.48 Agricultural Real Estate 349 9.36 1,040 10.66 958 14.49 314 16.31 250 8.10 Agricultural 751 5.47 709 6.38 701 7.25 691 9.18 768 12.83 Commercial Real Estate 11,924 48.83 9,130 45.61 7,415 45.10 3,634 45.14 3,217 49.52 Commercial and Industrial 5,382 11.55 3,847 11.20 3,346 15.67 1,727 11.81 1,305 15.10 Consumer 891 3.81 625 3.11 606 4.04 551 4.05 484 4.97 Unallocated 18 0.00 34 1.73 13 0.00 - 0.00 504 0.00 Allowance for Loan & Lease Losses $ 20,313 100.00 $ 16,242 100.00 $ 13,672 100.00 $ 7,228 100.00 $ 6,775 100.00 Off Balance Sheet Commitments 1,262 1,041 641 479 274 Total Allowance for Credit Losses $ 21,575 $ 17,283 $ 14,313 $ 7,707 $ 7,049 Deposits The amount of outstanding time certificates of deposits and other time deposits in amounts of $100,000 or more by maturity both in total and uninsured greater than $250,000 as of December 31, 2022 are as follows: (In Thousands) Over Three Over Six Months Months Less Over Under Less than Than One One Three Months Six Months Year Year Time Deposits $ 74,723 $ 72,617 $ 119,424 $ 87,219 Uninsured Time Deposits $ 8,366 $ 10,604 $ 16,283 ` $ 26,835 The following table presents the average amount of and average rate paid on each deposit category: (In Thousands) Non-Interest Interest Savings Time DDAs DDAs Accounts Accounts December 31, 2022: Average balance $ 480,389 $ 688,908 $ 646,363 $ 451,013 Average rate 0.00 % 0.71 % 0.21 % 1.29 % December 31, 2021: Average balance $ 400,801 $ 635,544 $ 510,092 $ 306,600 Average rate 0.00 % 0.24 % 0.18 % 1.16 % December 31, 2020: Average balance $ 304,276 $ 503,771 $ 375,898 $ 264,827 Average rate 0.00 % 0.66 % 0.26 % 1.68 % Uninsured deposits greater than $250,000 are presented by year in the table below: (In Thousands) 2022 2021 2020 Uninsured Deposits $ 511,291 $ 436,628 $ 320,483 Liquidity Liquidity remains adequate as the Bank has increased the investment portfolio in 2021 and 2022.
Biggest changeAfter adding the allowance for unfunded loan commitments, the ACL ended 2023 at $27.2 million. 42 The following table presents a reconciliation of the allowance for credit losses for the years ended December 31, 2023, 2022, 2021, 2020 and 2019: (In Thousands) 2023 2022 2021 2020 2019 Loans $ 2,578,472 $ 2,356,387 $ 1,857,419 $ 1,302,990 $ 1,218,999 Daily average of outstanding loans $ 2,491,502 $ 2,073,737 $ 1,522,088 $ 1,313,675 $ 1,129,231 Nonaccrual loans $ 22,353 $ 4,689 $ 8,076 $ 9,404 $ 3,400 Nonperforming loans $ 22,353 $ 4,689 $ 8,076 $ 9,404 $ 3,400 Allowance for Credit Losses - Jan 1 $ 20,313 $ 16,242 $ 13,672 $ 7,228 $ 6,775 Adjust for accounting change (ASU 2016-13) 3,564 - - - - Loans Charged off: Consumer Real Estate - - 19 35 98 Agricultural Real Estate - - 105 - - Agricultural - - 143 - 37 Commercial Real Estate - - - 8 - Commercial and Industrial 565 418 814 297 215 Consumer 425 409 251 380 491 990 827 1,332 720 841 Loan Recoveries: Consumer Real Estate 35 20 13 9 - Agricultural Real Estate 105 - - - - Agricultural 10 7 14 - 3 Commercial Real Estate 8 9 10 10 11 Commercial and Industrial 84 93 257 24 22 Consumer 197 169 164 140 120 439 298 458 183 156 Net Charge-offs: Consumer Real Estate (35 ) (20 ) 6 26 98 Agricultural Real Estate (105 ) - 105 - - Agricultural (10 ) (7 ) 129 - 34 Commercial Real Estate (8 ) (9 ) (10 ) (2 ) (11 ) Commercial and Industrial 481 325 557 273 193 Consumer 228 240 87 240 371 551 529 874 537 685 Provision for credit losses 1,698 4,600 3,444 6,981 1,138 Acquisition provision for credit losses - - - - - Allowance for Credit Losses - Dec 31 25,024 20,313 16,242 13,672 7,228 Allowance for Unfunded Loan Commitments & Letters of Credit - Dec 31 2,212 1,262 1,041 641 479 Total Allowance for Credit Losses - Dec 31 $ 27,236 $ 21,575 $ 17,283 $ 14,313 $ 7,707 Ratio of Net Charge-offs to Average Outstanding Loans 0.02 % 0.03 % 0.06 % 0.04 % 0.06 % Ratio of Nonaccrual Loans to Loans 0.87 % 0.20 % 0.43 % 0.72 % 0.28 % Ratio of the Allowance for Credit Losses to Loans 0.97 % 0.86 % 0.87 % 1.05 % 0.59 % Ratio of the Allowance for Credit Losses to Nonaccrual Loans 111.95 % 273.67 % 201.11 % 145.47 % 209.70 % Ratio of the Allowance for Credit Losses to Nonperforming Loans 111.95 % 273.67 % 201.11 % 145.47 % 209.70 % *Nonperforming loans are defined as all loans on nonaccrual, plus any loans past due 90 days not on nonaccrual.
At year-end December 31, 2022, these loans totaled $60.0 million and were $4.6 million higher than December 31, 2021. Grade 5 increased $2.6 million in 2022 as compared to 2021 and Grade 6 increased $2.0 million in the same comparison. At year-end December 31, 2021, these loans totaled $55.4 million and were approximately $1.0 million lower than December 31, 2020.
At year-end December 31, 2022, these loans totaled $60.0 million and were approximately $4.6 million higher than December 31, 2021. Grade 5 increased $2.6 million in 2022 as compared to 2021 and Grade 6 increased $2.0 million in the same comparison. At year-end December 31, 2021 these loans totaled $55.4 million and were $1.0 million lower than December 31, 2020.
Watch List loans secured in whole or in part by real estate require updated appraisals every two years. All loans are subject to loan to values as found in the Bank’s loan policies irrespective of their grade. The Bank’s watch list is reviewed on a quarterly basis by management and any questions to value are addressed at that time.
Watch List loans secured in whole or in part by real estate require updated appraisals every two years. All loans are subject to loan to values as found in the Bank’s loan policies irrespective of their grade. The Bank’s watch list is reviewed on a quarterly basis by management and any questions as to value are addressed at that time.
In addition to analyzing the recent performance of these loans, management and the Enterprise Risk Management Committee will also consider any general market conditions that might warrant adjustments to the value of particular real estate collateralizing commercial loans. In addition, management conducts annual reviews of all commercial loans 37 exceeding certain outstanding balance thresholds.
In addition to analyzing the recent performance of these loans, management and the Enterprise Risk Management Committee will also consider any general market conditions that might warrant adjustments to the value of particular real estate collateralizing commercial loans. In addition, management conducts annual reviews of all commercial loans exceeding certain outstanding balance thresholds.
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 at 7.50%.
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%.
The estimates of prepayment speeds and discount rates are inherently uncertain, and different estimates could have a material impact on the Company’s net income and results of operations. The valuation allowance is evaluated and adjusted quarterly by management to reflect changes in the fair value of the underlying mortgage servicing rights based on market conditions.
The estimates of prepayment speeds and discount rates are inherently uncertain, and different estimates could have a material impact on the Company’s net income and results of operations. The valuation allowance is evaluated and adjusted quarterly by management to reflect changes in the fair value of the underlying loan servicing rights based on market conditions.
The accuracy of these estimates and assumptions by management and its third party can be directly tied back to the fact that management has only been required to record minor valuation allowances through its income statement based upon the valuation of each stratum of serving rights.
The accuracy of these estimates and assumptions by management and its third party can be directly tied back to the fact that management has only been required to record minor valuation allowances through its income statement based upon the valuation of each stratum of servicing rights.
The Bank's asset and liability management program is designed to maximize net interest income over the long term while taking into consideration both credit and interest rate risk. 41 Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities.
The Bank's asset and liability management program is designed to maximize net interest income over the long term while taking into consideration both credit and interest rate risk. 45 Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities.
These policies, along with the disclosures presented in the notes to the consolidated financial statements and in the management 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.
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.
All commercial and agricultural relationships with term debt only and aggregate loan exposure greater than $750,000 are also reviewed by the Bank’s Credit Department. These reviews are conducted to identify early signs of deterioration. To establish the specific reserve allocation for real estate, a discount to the market value is established to account for liquidation expenses.
All commercial and agricultural relationships with term 35 debt only and aggregate loan exposure greater than $1,000,000 are also reviewed by the Bank’s Credit Department. These reviews are conducted to identify early signs of deterioration. To establish the specific reserve allocation for real estate, a discount to the market value is established to account for liquidation expenses.
Mortgage servicing assets are initially recorded at fair value, based upon pricing multiples as determined by the purchaser, when the loans are sold. Mortgage servicing assets are carried at the lower of the initial carrying value, adjusted for amortization, or estimated fair value.
Loan servicing assets are initially recorded at fair value, based upon pricing multiples as determined by the purchaser, when the loans are sold. Loan servicing assets are carried at the lower of the initial carrying value, adjusted for amortization, or estimated fair value.
Total interest earning assets is therefore also reflecting a tax equivalent yield in both line items, also with the net interest spread and margin. The adjustments were based on a 21% tax rate for all years.
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.
For example, if the mortgage loan is prepaid, the Company will receive fewer servicing fees, meaning that the present value of the mortgage servicing rights is less than the carrying value of those rights on the Company’s balance sheet.
For example, if the loan is prepaid, the Company will receive fewer servicing fees, meaning that the present value of the loan servicing rights is less than the carrying value of those rights on the Company’s consolidated balance sheet.
The Bank has sold securities in 2021 and 2020 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.
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 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 within the next five years. The bonus is being recognized over 60 months with $350.8 thousand included in 2022 and 2021’s $5.0 million and $4.8 million, respectively.
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.
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. 2020 had net income of $691 thousand. Of course, the value (or income) of the mortgage servicing right when the loans are sold also impacts the net position.
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.
All of the Bank’s security portfolio is categorized as available for sale and as such is recorded at market value. 34 Our cash position increased with each of the acquisitions and the excess cash was partially invested in the security portfolio. Security balances as of December 31 are summarized below: (In Thousands) 2022 2021 2020 U.S.
All of the Bank’s security portfolio is categorized as available for sale and as such is recorded at market value. 37 Our cash position increased with each of our recent acquisitions and the excess cash was partially invested in the security portfolio. Security balances as of December 31 are summarized below: (In Thousands) 2023 2022 2021 U.S.
The Bank had nonaccrual loan balances of $4.7 million at December 31, 2022 compared to balances of $8.1 million and $9.4 million as of year-end 2021 and 2020. All of the balances of nonaccrual loans for the past three years were collaterally secured.
The Bank had nonaccrual loan balances of $22.4 million at December 31, 2023 compared to balances of $4.7 million and $8.1 million as of year-end 2022 and 2021. All of the balances of nonaccrual loans for the past three years were collaterally secured.
The following tables present net interest income, interest spread and net interest margin for the three years 2020 through 2022, 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.
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.
The independent third party’s valuation of the mortgage servicing rights is based on relevant characteristics of the Company’s loan servicing portfolio, such as loan terms, interest rates and recent national prepayment experience, as well as current national market interest rate levels, market forecasts and other economic conditions.
The independent third party’s valuations of the loan servicing rights are based on relevant characteristics of the Company’s loan servicing portfolio, such as loan terms, interest rates and recent national prepayment experience, as well as current national market interest rate levels, market forecasts and other economic conditions.
Allowance for Credit Losses Provision expense increased by $1.2 million for 2022 as compared to 2021 and decreased by $3.5 million for 2021 as compared to 2020. The increase in provision expense for 2022 was attributed to the net charge-off activity and significant loan growth.
Allowance for Credit Losses 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.
The amount of the potential problem loans was considered in management’s review of the loan loss reserve at December 31, 2022 and 2021. In extending credit to families, businesses and governments, banks accept a measure of risk against which an allowance for possible loan loss is established by way of expense charges to earnings.
The amount of the potential problem loans was considered in management’s determination of the allowance for credit losses at December 31, 2023, 2022 and 2021. In extending credit to families, businesses and governments, banks accept a measure of risk against which an allowance for possible credit losses is established by way of expense charges to earnings.
The two line items of noninterest income on the consolidated income statement for 2022 which improved over both 2021 and 2020 were customer service fee revenue and other service charges and fees. 2022 customer service fee revenue was $287 thousand higher than 2021, mostly due to increased credit card income while 2021 was $778 million higher than 2020, mainly due to increased debit card income.
The two line items of noninterest income on the consolidated income statement for 2022 which improved over 2021 were customer service fee revenue and other service charges and fees. 2022 customer service fee revenue was $287 thousand higher than 2021, mostly due to increased credit card income.
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.
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.
On January 24, 2023 the Company announced the authorization by its Board of Directors for the Company’s repurchase, either on the open market, or in privately negotiated transactions, of up to 650,000 shares of its outstanding common stock commencing January 24, 2023 and ending December 31, 2023.
On January 16, 2024, the Company announced the authorization of 650,000 shares for the Company’s repurchase, either in the open market, or in privately negotiated transactions, of its outstanding common stock commencing January 16, 2024, and ending December 31, 2024, by our Board of Directors.
Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and service. Contractual Obligations Contractual Obligations of the Company totaled $792.7 million as of December 31, 2022. Time deposits, contractual agreements for certificates of deposits held by its customers, were $558.0 million.
Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and service. Contractual Obligations Contractual obligations of the Company totaled $1.0 billion as of December 31, 2023. Time deposits, contractual agreements for certificates of deposits held by its customers, were $663.0 million.
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.
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.
The impact of mortgage servicing rights to both noninterest income and expense is shown in the following table: (In Thousands) 2022 2021 2020 Beginning of Year $ 3,571 $ 3,320 $ 2,629 Capitalized Additions 537 1,417 1,722 Amortization (559 ) (1,166 ) (1,031 ) Ending Balance, December 31 3,549 3,571 3,320 Valuation Allowance - (414 ) - Mortgage Servicing Rights net, December 31 $ 3,549 $ 3,157 $ 3,320 Furniture and equipment steadily increase as we continue to add facilities and invest in technology.
The impact of servicing rights to both noninterest income and expense is shown in the following table: (In Thousands) 2023 2022 2021 Beginning of Year $ 3,549 $ 3,571 $ 3,320 Capitalized Additions 2,710 537 1,417 Amortization (604 ) (559 ) (1,166 ) Ending Balance, December 31 5,655 3,549 3,571 Valuation Allowance (7 ) - (414 ) Servicing Rights net, December 31 $ 5,648 $ 3,549 $ 3,157 Furniture and equipment steadily increase as we continue to add facilities and invest in technology.
During 2022 the Bank collected interchange revenue, combined with fees collected on foreign ATM usage (noncustomers utilizing our ATMs), of $5.0 million which was $149.3 thousand higher than 2021 and $1.1 million higher than 2020. 2022 included a Mastercard growth credit of $188 thousand. For 2021, the Mastercard growth credit was $151 thousand.
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 addition, for 2022, 2021 and 2020, our allowance for loan and lease losses does not include a $785 thousand, $1.2 million and $1.7 million credit mark associated with the Limberlost acquisition. For 2022 and 2021, our allowance for loan and lease losses also does not include a $480 thousand or $966 thousand credit mark associated with the Ossian acquisition.
In addition, for 2023, 2022 and 2021, our allowance for credit losses does not include a $363 thousand, $785 thousand and $1.2 million credit mark associated with the Limberlost acquisition. For 2023, 2022 and 2021, our allowance for credit losses also does not include a $294 thousand, $480 thousand or $966 thousand credit mark associated with the Ossian acquisition.
The credit mark not included in the allowance for loan losses associated with the Perpetual Federal Savings Bank acquisition for 2022 and 2021 was $4.4 million and $5.5 million, respectively. 2022 also includes a $798 thousand credit mark associated with 32 the Peoples Federal Savings and Loan Bank acquisition.
The credit mark not included in the allowance for credit losses associated with the Perpetual Federal Savings Bank acquisition for 2023, 2022 and 2021 was $2.8 million, $4.4 million and $5.5 million, respectively. 2023 and 2022 also include a $566 thousand and $798 thousand credit mark associated with the Peoples Federal Savings and Loan Bank acquisition.
A collection of interest on an impaired loan with a specific allocation is applied to the loan balance to decrease the allocation. Total interest collections, whether on an accrued or cash basis, amounted to $361 thousand for 2022, $292 thousand for 2021 and $269 thousand for 2020.
A collection of interest on a loan with an expected credit loss and with a specific allocation is applied to the loan balance to decrease the allocation. Total interest collections, whether on an accrued or cash basis, amounted to $43 thousand for 2023, $361 thousand for 2022 and $292 thousand for 2021.
In response to these fluctuations and the offset by loan growth during 2020 through 2022, the Bank’s ALLL to outstanding loan coverage percentage changed to 0.86% as of December 31, 2022, 0.87% as of December 31, 2021 and 1.05% as of December 31, 2020.
In response to these fluctuations and the offset by loan growth during 2021 through 2023, the Bank’s ACL to outstanding loan coverage percentage changed to 0.97% as of December 31, 2023, 0.86% as of December 31, 2022 and 0.87% as of December 31, 2021.
At year-end 2021, of the $55.4 million watch list loans, 39.7% were classified as special mention and 60.3% were classified as substandard.
At December 31, 2022, of the $60.0 million watch list loans, 41.0% were classified as special mention and 59.0% were classified as substandard. At year-end 2021, of the $55.4 million watch list loans, 39.7% were classified as special mention and 60.3% were classified as substandard.
At December 31, 2021, the Bank had $55.4 million of these loans and at December 31, 2020, the Bank had $56.3 million of these loans. These loans are subject to constant management attention and are reviewed at least monthly.
At December 31, 2022, the Bank had $60.0 million of these loans and at December 31, 2021, the Bank had $55.4 million of these loans. These loans are subject to constant management attention and are reviewed at least monthly.
The Company’s subsidiaries are restricted by regulations from making dividend distributions in excess of certain prescribed amounts. Upon prior regulatory approval, the Bank may be allowed to pay above the prescribed amount. 42
The Company’s subsidiary is restricted by regulations from making dividend distributions in excess of certain prescribed amounts. Upon prior regulatory approval, the Bank may be allowed to pay above the prescribed amounts. 46
Acquisition costs incurred in 2022 and 2021 totaled $2.5 million and $3.9 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 2022, an additional $2.5 million was spent over 2021 which correlates to a 12.5% increase.
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.
Treasury $ 94,678 $ 89,177 $ - U.S.
Treasury $ 80,270 $ 94,678 $ 89,177 U.S.
As of December 31, 2022, the Bank had loans outstanding to individuals and firms engaged in the various fields of agriculture in the amount of $128.7 million with an additional $220.9 million in agricultural real estate loans which compared to $118.4 and $198.3 million respectively as of December 31, 2021.
As of December 31, 2023, the Bank had loans outstanding to individuals and firms engaged in the various fields of agriculture in the amount of $132.6 million with an additional $223.8 million in agricultural real estate loans which compared to $128.7 and $220.9 million respectively as of December 31, 2022.
Now the discussion moves on to the percentages and the change in the net interest margin and spread. Overall, we have seen a decrease in the net interest margin and spread from 2020 to 2022.
Now the discussion moves on to the percentages and the change in the net interest margin and spread. Overall, we have seen a decrease in the net interest margin and spread comparing 2021 to 2023.
Non-Interest Expense Noninterest expense increased 5.7% in 2022 as compared to 2021 and was preceded by a 22.1% increase in 2021 as compared to 2020. Represented in dollars, 2022 was $3.1 million higher than 2021 and 2021 was $9.8 million higher than 2020.
Non-Interest Expense 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.
Interest income that would have been recorded under the original terms of these loans 36 would have aggregated $157 thousand for 2022, $502 thousand for 2021 and $272 thousand for 2020. Any collections of interest on nonaccrual loans are included in interest income when collected unless it is on an impaired loan with a specific allocation.
Interest income that would have been recorded under the original terms of these loans would have aggregated $1.6 million for 2023, $157 thousand for 2022 and $502 thousand for 2021. Any collections of interest on nonaccrual loans are included in interest income when collected unless it is on a loan with expected credit loss and with a specific allocation.
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.
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. The Company will always prefer to see improvement in real dollars over percentages.
The majority of the increase for 2021 was related to services charges from business and consumer accounts while the decrease for 2020 was attributed to overdraft, returned check charges and recurring overdraft fees from combined business accounts and consumer accounts. Upgrades to our digital products and services continue to occur in both retail and business lines.
The increase of other service charges and fees in 2022 was attributed to overdraft, returned check charges and recurring overdraft fees from combined business accounts and consumer accounts. Upgrades to our digital products and services continue to occur in both retail and business lines.
Long term debt was comprised of borrowings with the Federal Home Loan Bank of $127.5 million and subordinated notes of $35.0 million. Short term and long term debt is further defined in Note 9 of the Consolidated Financial Statements. Capital Resources Stockholders’ equity was $298.1 million as of December 31, 2022 compared to $297.2 million at December 31, 2021.
Long term debt was comprised of borrowings with the Federal Home Loan Bank of $265.8 million and subordinated notes of $35.0 million. Short term and long term debt is further defined in Note 10 of the consolidated financial statements. Capital Resources Stockholder’s Equity was $316.5 million as of December 31, 2023, compared to $298.1 million on December 31, 2022.
Net occupancy expense increased for 2022 $381.8 thousand but decreased in 2021. 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.
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.
Government agencies 139,767 156,886 124,241 Mortgage-backed securities 86,927 117,927 113,056 State and local governments 69,417 65,941 70,515 $ 390,789 $ 429,931 $ 307,812 The following table sets forth the maturities of investment securities as of December 31, 2022 and the weighted average yields of such securities calculated on the basis of cost and effective yields weighted for the scheduled maturity of each security.
Government agencies 128,222 139,767 156,886 Mortgage-backed securities 82,132 86,927 117,927 State and local governments 67,854 69,417 65,941 $ 358,478 $ 390,789 $ 429,931 The following table sets forth the maturities of investment securities as of December 31, 2023 and the weighted average yields of such securities calculated on the basis of cost and effective yields weighted for the scheduled maturity of each security.
In addition, based upon the independent third party’s valuation of the Company’s mortgage servicing rights, management then establishes a valuation allowance by each strata, if necessary, to quantify the likely impairment of the value of the mortgage servicing rights to the Company.
Changes are reflected in the following quarter’s analysis related to the loan servicing asset. In addition, based upon the independent third party’s valuations of the Company’s loan servicing rights, management then establishes a valuation allowance by each strata, if necessary, to quantify the likely impairment of the value of the loan servicing rights to the Company.
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. 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.
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.
Interest rate modification to reflect a decrease in market interest rates or maintain a relationship with the debtor, where the debtor is not experiencing financial difficulty and can obtain funding from other sources, is not considered a troubled debt restructuring.
Interest rate modification to reflect a decrease in market interest rates or maintain a relationship with the debtor, where the debtor is not experiencing financial difficulty and can obtain funding from other sources, is not considered a troubled debt restructuring. Updated appraisals are required on all collateral dependent loans once they are deemed impaired.
ATM expense increased $371.2 thousand over 2021 while 2021 increased $156.0 thousand from 2020. Included in this line are the debit card fees incurred which offset the debit card income as discussed above. The FDIC assessment decreased from 2021 due to a decreased assessment rate that has offset an increased assessment base while 2021 increased as compared to 2020.
Included in this line are the debit card fees incurred which offset the debit card income as discussed above. 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.
Net charge-offs in the commercial and industrial portfolio were $325 and $557 thousand in 2022 and 2021, respectively while the consumer portfolio net charge-offs were $240 for 2020. Total net charge-offs were $529, $874 and $537 thousand for 2022, 2021 and 2020, 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.
The floors provide yield protection in a lower rate environment while the rising rates will not benefit the asset yield until the spread plus prime is higher than the floor. The challenge is to increase the spread during renewals and on new loans. With the rate decreases in 2020, many loans reverted back to the floors.
The floors provide yield protection in a lower rate environment while the rising rates will not benefit the asset yield until the spread plus prime is higher than the floor. The challenge is to increase the spread during renewals and on new loans. After the rate hikes in 2022 and 2023, the majority of loans have increased over the floors.
Of the aggregate watch list loan balances, as of December 31, 2020, 31.2% of the watch list was classified as special mention, with an additional 66.8% classified as substandard and a small 2.0% or $1.1 million of the $56.3 million watch list was classified as doubtful.
Of the aggregate watch list loan balances, as of December 31, 2023, 75.8% of the watch list was classified as special mention, with an additional 23.8% classified as substandard and a small 0.2% or $257 thousand of the $104.9 million watch list was classified as doubtful.
The majority, approximately 59.7%, of the increased expense of 2022 and approximately 160.0%, of the decreased expense of 2021 was influenced by rates rather than due to additional cost associated with deposit growth.
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.
In a rising rate environment, the challenge is to hold the cost steady while allowing time for the asset portfolio to rise. Floors and ceilings on variable products also impact the level of increase in either scenario.
It becomes increasingly challenging as the asset yield gets closer to the prime lending rate, or the break-even point, of operations. In a rising rate environment, the challenge is to hold the cost steady while allowing time for the asset portfolio to rise. Floors and ceilings on variable products also impact the level of increase in either scenario.
This compares to $7.6 million of troubled debt restructurings, of which $6.5 million are included in nonaccrual loans for 2021 and $6.5 million of troubled debt restructuring, of which $5.6 million are included in nonaccrual loans for 2020. Updated appraisals are required on all collateral dependent loans once they are deemed impaired.
This compares to $7.6 million of troubled debt restructurings, of which $6.5 million are included in nonaccrual loans for 2021 and $6.5 million of troubled debt restructuring, of which $5.6 million are included in nonaccrual loans for 2020.
Because noninterest bearing sources of funds such as demand deposits and stockholders’ equity also support earning assets, the net interest margin exceeds the net interest spread. The largest factor of the record earnings for 2022 was the $17.3 million improvement in net interest income as compared to 2021. In 2021, net interest income increased $9.7 million as compared to 2020.
Because noninterest bearing sources of funds such as demand deposits and stockholders’ equity also support earning assets, the net interest margin exceeds the net interest spread. 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.
The last line items with significant variation in noninterest expense to discuss is “consulting fees” and “other general and administrative.” Consulting fees decreased by $332.8 thousand in 2022 from 2021 and increased $666.0 thousand in 2021 compared to 2020. Acquisition expenses included in the other general and administrative line were $590.3 thousand for 2022 and $743.3 thousand for 2020.
The last line items with significant variation in noninterest expense to discuss is “consulting fees” and “other general and administrative.” Consulting fees decreased by $469.9 thousand in 2023 from 2022 and decreased $332.8 thousand in 2022 compared to 2021.
Securities sold under agreement to repurchase were $31.6 million. Short term debt consisted of a line of credit secured for the acquisition of Peoples Federal Savings and Loan Bank of $10.0 million and federal funds purchased of $22.6 million.
Securities sold under agreement to repurchase were $28.2 million. Short term debt, which consisted of a line of credit secured for the acquisition of Peoples Federal Savings and Loan Bank of $10.0 million, was paid off during the first quarter of 2023. There were no federal funds purchased as of December 31, 2023.
Therefore, in an attempt to reflect an accurate expected value to the Company of the mortgage servicing rights, the Company receives a valuation of its mortgage servicing rights from an independent third party.
Therefore, in an attempt to reflect an accurate expected value to the Company of the loan servicing rights, the Company receives a valuation of its loan servicing rights from an independent third party. The Company utilizes separate third party vendors to value 1-4 family real estate loan servicing rights and agricultural loan servicing rights.
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. Data processing expense increased by $1.7 million during 2021 as compared to 2020 of which $1.4 million was acquisition related.
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. ATM expense increased $394.1 thousand over 2022 while 2022 increased $371.2 thousand from 2021.
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 2022 and 2021 at $418 and $814 thousand, respectively. The consumer portfolio had the highest levels of charge-off activity in 2020 at $380 thousand.
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.
The effect of tax-exempt interest from holding tax-exempt securities and Industrial Development Bonds (IDBs) was $137, $119 and $150 thousand for 2022, 2021 and 2020, respectively less the TEFRA adjustments of $5, $3 and $4 thousand respectively. One of the benefits from the establishment of the Captive subsidiary was a lower effective tax rate.
The effect of tax-exempt interest from holding tax-exempt securities and Industrial Development Bonds (IDBs) was $149, $137 and $119 thousand for 2023, 2022 and 2021, respectively less the TEFRA adjustments of $20, $5 and $3 thousand respectively.
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 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.
However, on a quarterly basis as part of its normal operations, the Bank’s senior management and the Loan Review Committee will meet to review all commercial credits either deemed to be impaired or on the Bank’s watch list.
However, on a quarterly basis as part of its normal operations, the Bank’s senior management and the Credit Analyst Department will meet to review all commercial credits either deemed to be impaired or on the Bank’s watch list. An external review by an independent firm of 35% of our larger credits is also completed annually.
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 Loan and Lease Losses (ALLL) and the valuation of its Mortgage Servicing Rights (MSR) and Other Real Estate Owned (OREO) and goodwill as the accounting areas that requires the most subjective or complex judgments, and as such could be the most subject to revision as new information becomes available.
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. 22 OREO, which is comprised of assets acquired by the Bank, through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure.
The yield on tax-exempt investment securities shown in the following charts were computed on a tax equivalent basis. The yield on loans has been tax adjusted for the portion of tax-exempt IDB loans included in the total.
The average cost of funds for 2023 was 2.53%, 179 basis points higher than 2022’s 0.74%. 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.
The Company’s mortgage servicing rights relating to loans serviced for others represent an asset of the Company. This asset is initially capitalized and included on the Company’s consolidated balance sheet. The mortgage servicing rights are then amortized as noninterest expense in proportion to, and over the period of, the estimated future net servicing income of the underlying mortgage servicing rights.
Amortization is determined in proportion to and over the period of estimated net servicing income using the level yield method. The Company’s loan servicing rights relating to loans serviced for others represent an asset of the Company. This asset is initially capitalized and included on the Company’s consolidated balance sheets.
The tax-exempt interest income was $614, $551 and $694 thousand for 2022, 2021 and 2020, respectively which resulted in a federal income tax savings of $129, $116, and $146 thousand, respectively. 25 2022 (In Thousands) Average Interest/ Balance Dividends Yield/Rate ASSETS Interest Earning Assets: Loans $ 2,073,737 $ 94,264 4.55 % Taxable investment securities 424,229 5,621 1.32 % Tax-exempt investment securities 23,472 337 1.82 % Federal funds sold & other 95,301 927 0.97 % Total Interest Earning Assets 2,616,739 $ 101,149 3.87 % Non-Interest Earning Assets: Cash and cash equivalents 35,696 Other assets 122,665 Total Assets $ 2,775,100 LIABILITIES AND SHAREHOLDERS' EQUITY Interest Bearing Liabilities: Savings deposits $ 1,335,271 $ 6,378 0.48 % Other time deposits 451,013 3,505 0.78 % Other borrowed money 74,379 2,160 2.90 % Federal funds purchased and securities sold under agreement to repurchase 45,314 1,197 2.64 % Subordinated notes 34,524 1,122 3.25 % Total Interest Bearing Liabilities 1,940,501 $ 14,362 0.74 % Non-Interest Bearing Liabilities: Non-interest bearing demand deposits 480,389 Other 66,342 Total Liabilities 2,487,232 Shareholders' Equity 287,868 Total Liabilities and Shareholders' Equity $ 2,775,100 Interest/Dividend income/yield $ 101,149 3.87 % Interest Expense/cost 14,362 0.74 % Net Interest Spread $ 86,787 3.13 % Net Interest Margin 3.32 % 26 2021 (In Thousands) Average Interest/ Balance Dividends Yield/Rate ASSETS Interest Earning Assets: Loans $ 1,522,088 $ 71,645 4.71 % Taxable investment securities 377,887 4,514 1.19 % Tax-exempt investment securities 18,365 326 2.25 % Federal funds sold & other 187,003 355 0.19 % Total Interest Earning Assets 2,105,343 $ 76,840 3.66 % Non-Interest Earning Assets: Cash and cash equivalents 31,829 Other assets 92,820 Total Assets $ 2,229,992 LIABILITIES AND SHAREHOLDERS' EQUITY Interest Bearing Liabilities: Savings deposits $ 1,145,636 $ 2,467 0.22 % Other time deposits 306,600 2,951 0.96 % Other borrowed money 29,479 785 2.66 % Federal funds purchased and securities sold under agreement to repurchase 29,831 649 2.18 % Subordinated notes 14,777 490 3.32 % Total Interest Bearing Liabilities 1,526,323 $ 7,342 0.48 % Non-Interest Bearing Liabilities: Non-interest bearing demand deposits 400,801 Other 44,343 Total Liabilities 1,971,467 Shareholders' Equity 258,525 Total Liabilities and Shareholders' Equity $ 2,229,992 Interest/Dividend income/yield $ 76,840 3.66 % Interest Expense/cost 7,342 0.48 % Net Interest Spread $ 69,498 3.18 % Net Interest Margin 3.31 % 27 2020 (In Thousands) Average Interest/ Balance Dividends Yield/Rate ASSETS Interest Earning Assets: Loans $ 1,313,675 $ 65,317 4.98 % Taxable investment securities 219,044 4,136 1.89 % Tax-exempt investment securities 24,958 454 2.30 % Federal funds sold & interest bearing deposits 99,304 262 0.26 % Total Interest Earning Assets 1,656,981 $ 70,169 4.25 % Non-Interest Earning Assets: Cash and cash equivalents 25,276 Other assets 88,027 Total Assets $ 1,770,284 LIABILITIES AND SHAREHOLDERS' EQUITY Interest Bearing Liabilities: Savings deposits $ 879,669 $ 3,942 0.45 % Other time deposits 264,827 4,696 1.77 % Other borrowed money 21,245 980 4.61 % Federal funds purchased and securities sold under agreement to repurchase 32,363 775 2.39 % Subordinated notes - - 0.00 % Total Interest Bearing Liabilities 1,198,104 $ 10,393 0.87 % Non-Interest Bearing Liabilities: Non-interest bearing demand deposits 304,276 Other 28,206 Total Liabilities 1,530,586 Shareholders' Equity 239,698 Total Liabilities and Shareholders' Equity $ 1,770,284 Interest/Dividend income/yield $ 70,169 4.25 % Interest Expense/cost 10,393 0.87 % Net Interest Spread $ 59,776 3.38 % Net Interest Margin 3.62 % The following tables show changes in interest income, interest expense and net interest resulting from changes in volume and rate variances for major categories of earnings assets and interest bearing liabilities. 2022 vs 2021 (In Thousands) Net Change Due to Change Due to Change Volume Rate Interest Earning Assets: Loans $ 22,619 $ 25,988 $ (3,369 ) Taxable investment securities 1,107 554 553 Tax-exempt investment securities 11 115 (104 ) Federal funds sold & other 572 (174 ) 746 Total Interest Earning Assets $ 24,309 $ 26,483 $ (2,174 ) Interest Bearing Liabilities: Savings deposits $ 3,911 $ 408 $ 3,503 Other time deposits 554 1,390 (836 ) Other borrowed money 1,375 1,196 179 Federal funds purchased and securities sold under agreement to repurchase 548 337 211 Subordinated notes 632 655 (23 ) Total Interest Bearing Liabilities $ 7,020 $ 3,986 $ 3,034 28 2021 vs 2020 (In Thousands) Net Change Due to Change Due to Change Volume Rate Interest Earning Assets: Loans $ 6,328 $ 10,373 $ (4,045 ) Taxable investment securities 378 2,999 (2,621 ) Tax-exempt investment securities (128 ) (152 ) 24 Federal funds sold & interest bearing deposits 93 231 (138 ) Total Interest Earning Assets $ 6,671 $ 13,451 $ (6,780 ) Interest Bearing Liabilities: Savings deposits $ (1,475 ) $ 1,192 $ (2,667 ) Other time deposits (1,745 ) 741 (2,486 ) Other borrowed money (195 ) 380 (575 ) Federal funds purchased and securities sold under agreement to repurchase (126 ) (61 ) (65 ) Subordinated notes 490 490 - Total Interest Bearing Liabilities $ (3,051 ) $ 2,742 $ (5,793 ) Non-Interest Income The discussion now focuses on the noninterest income and expense generated by the Company for the years ended 2020 through 2022.
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. 27 2023 (In Thousands) Average Interest/ Balance Dividends Yield/Rate ASSETS Interest Earning Assets: Loans $ 2,491,502 $ 129,344 5.19 % Taxable investment securities 394,424 6,204 1.57 % Tax-exempt investment securities 24,686 366 1.88 % Federal funds sold & other 85,018 3,894 4.58 % Total Interest Earning Assets 2,995,630 $ 139,808 4.67 % Non-Interest Earning Assets: Cash and cash equivalents 40,021 Other assets 157,705 Total Assets $ 3,193,356 LIABILITIES AND SHAREHOLDERS' EQUITY Interest Bearing Liabilities: Savings deposits $ 1,376,318 $ 27,424 1.99 % Other time deposits 640,390 19,499 3.04 % Other borrowed money 220,175 8,876 4.03 % Federal funds purchased and securities sold under agreement to repurchase 35,421 1,474 4.16 % Subordinated notes 34,640 1,138 3.29 % Total Interest Bearing Liabilities 2,306,944 $ 58,411 2.53 % Non-Interest Bearing Liabilities: Non-interest bearing demand deposits 493,820 Other 87,111 Total Liabilities 2,887,875 Shareholders' Equity 305,481 Total Liabilities and Shareholders' Equity $ 3,193,356 Interest/Dividend income/yield $ 139,808 4.67 % Interest Expense/cost 58,411 2.53 % Net Interest Spread $ 81,397 2.14 % Net Interest Margin 2.72 % 28 2022 (In Thousands) Average Interest/ Balance Dividends Yield/Rate ASSETS Interest Earning Assets: Loans $ 2,073,737 $ 94,264 4.55 % Taxable investment securities 424,229 5,621 1.32 % Tax-exempt investment securities 23,472 337 1.82 % Federal funds sold & other 95,301 927 0.97 % Total Interest Earning Assets 2,616,739 $ 101,149 3.87 % Non-Interest Earning Assets: Cash and cash equivalents 35,696 Other assets 122,665 Total Assets $ 2,775,100 LIABILITIES AND SHAREHOLDERS' EQUITY Interest Bearing Liabilities: Savings deposits $ 1,335,271 $ 6,378 0.48 % Other time deposits 451,013 3,505 0.78 % Other borrowed money 74,379 2,160 2.90 % Federal funds purchased and securities sold under agreement to repurchase 45,314 1,197 2.64 % Subordinated notes 34,524 1,122 3.25 % Total Interest Bearing Liabilities 1,940,501 $ 14,362 0.74 % Non-Interest Bearing Liabilities: Non-interest bearing demand deposits 480,389 Other 66,342 Total Liabilities 2,487,232 Shareholders' Equity 287,868 Total Liabilities and Shareholders' Equity $ 2,775,100 Interest/Dividend income/yield $ 101,149 3.87 % Interest Expense/cost 14,362 0.74 % Net Interest Spread $ 86,787 3.13 % Net Interest Margin 3.32 % 29 2021 (In Thousands) Average Interest/ Balance Dividends Yield/Rate ASSETS Interest Earning Assets: Loans $ 1,522,088 $ 71,645 4.71 % Taxable investment securities 377,887 4,514 1.19 % Tax-exempt investment securities 18,365 326 2.25 % Federal funds sold & interest bearing deposits 187,003 355 0.19 % Total Interest Earning Assets 2,105,343 $ 76,840 3.66 % Non-Interest Earning Assets: Cash and cash equivalents 31,829 Other assets 92,820 Total Assets $ 2,229,992 LIABILITIES AND SHAREHOLDERS' EQUITY Interest Bearing Liabilities: Savings deposits $ 1,145,636 $ 2,467 0.22 % Other time deposits 306,600 2,951 0.96 % Other borrowed money 29,479 785 2.66 % Federal funds purchased and securities sold under agreement to repurchase 29,831 649 2.18 % Subordinated notes 14,777 490 3.32 % Total Interest Bearing Liabilities 1,526,323 $ 7,342 0.48 % Non-Interest Bearing Liabilities: Non-interest bearing demand deposits 400,801 Other 44,343 Total Liabilities 1,971,467 Shareholders' Equity 258,525 Total Liabilities and Shareholders' Equity $ 2,229,992 Interest/Dividend income/yield $ 76,840 3.66 % Interest Expense/cost 7,342 0.48 % Net Interest Spread $ 69,498 3.18 % Net Interest Margin 3.31 % The following tables show changes in interest income, interest expense and net interest resulting from changes in volume and rate variances for major categories of earnings assets and interest bearing liabilities. 2023 vs 2022 (In Thousands) Net Change Due to Change Due to Change Volume Rate Interest Earning Assets: Loans $ 35,080 $ 19,005 $ 16,075 Taxable investment securities 583 (395 ) 978 Tax-exempt investment securities 29 22 7 Federal funds sold & other 2,967 (100 ) 3,067 Total Interest Earning Assets $ 38,659 $ 18,532 $ 20,127 Interest Bearing Liabilities: Savings deposits $ 21,046 $ 196 $ 20,850 Other time deposits 15,994 1,472 14,522 Other borrowed money 6,716 4,234 2,482 Federal funds purchased and securities sold under agreement to repurchase 277 (261 ) 538 Subordinated notes 16 4 12 Total Interest Bearing Liabilities $ 44,049 $ 5,645 $ 38,404 30 2022 vs 2021 (In Thousands) Net Change Due to Change Due to Change Volume Rate Interest Earning Assets: Loans $ 22,619 $ 25,988 $ (3,369 ) Taxable investment securities 1,107 554 553 Tax-exempt investment securities 11 115 (104 ) Federal funds sold & interest bearing deposits 572 (174 ) 746 Total Interest Earning Assets $ 24,309 $ 26,483 $ (2,174 ) Interest Bearing Liabilities: Savings deposits $ 3,911 $ 408 $ 3,503 Other time deposits 554 1,390 (836 ) Other borrowed money 1,375 1,196 179 Federal funds purchased and securities sold under agreement to repurchase 548 337 211 Subordinated notes 632 655 (23 ) Total Interest Bearing Liabilities $ 7,020 $ 3,986 $ 3,034 Non-Interest Income The discussion now focuses on the noninterest income and expense generated by the Company for the years ended 2021 through 2023.
Maturities (Amounts in Thousands) After One Year Within One Year Within Five Years Amount Yield Amount Yield U.S. Treasury $ 11,810 0.89 % $ 51,673 0.82 % U.S.
Maturities (Amounts in Thousands) After One Year Within One Year Within Five Years Amount Yield Amount Yield U.S. Treasury $ 19,062 0.82 % $ 61,208 0.88 % U.S.
When making the same analysis for 2021 as compared to 2020, 2021’s costs increased $1.7 million or 9.2%.
When making the same analysis for 2022 as compared to 2021, 2022’s costs increased $2.5 million or 12.5%.
Treasury $ 31,195 1.00 % $ - 0.00 % U.S.
Treasury $ - 0.00 % $ - 0.00 % U.S.
For 2022, building rent as generated from FM Investments was higher by $106.5 thousand. Rent is received in lieu of commissions. This increase of revenue was able to partially offset increased building repair and maintenance expenses 30 of $14.0 thousand and lease expense of $46.9 thousand and increased automobile expense of $123.3 thousand.
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 32 as generated by FM Investments was higher by $106.5 thousand in 2022 which offset building repair and maintenance expenses of $14.0 thousand.
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. In February of 2020, the Bank completed security swap transactions that resulted in a gain of $270 thousand.
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.
The large revenue gain in loan interest was aided by the increased earnings in securities of $1.1 million. The overall asset yield in 2022 increased by 26 basis points over 2021.
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.
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. Auditing and exam fees increased $103.1 thousand which included $77.3 thousand of acquisition related costs over 2021 and 2021 increased $210.3 thousand over 2020 which included $81.1 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.
As of December 31, 2022, the Bank had $60.0 million of loans which it considers to be “potential problem loans” in that the borrowers are experiencing financial difficulties which are not reflected in the table above.
As of December 31, 2023, the Bank had $102.8 million of loans which it considers to be “potential problem loans” in that the borrowers are experiencing financial difficulties which are not reflected in the table above. Commercial real estate, agricultural real estate, commercial and agricultural loans comprised $69.2 million, $18.7 million, $8.7 million and $6.2 million respectively.
Under Basel III, the common equity Tier 1 Capital to risk-weighted assets ratio is also well above the required 4.50% and the 6.50% well capitalized levels with the Bank at 11.15%.
The Bank’s leverage ratio of 8.66% is also in excess of regulatory guidelines. Under Basel III, the common equity tier I capital to risk weighted assets ratio is also well above the required 4.5% and 6.5% well capitalized levels with the Bank at 10.77%.
December 31, 2021 had the lowest loans past due 30+ day percentage at 0.09% in the last ten years. December 31, 2020 and 2022 were still at respectable lows of 0.29% and 0.26%. Please see Note 4 in the consolidated financial statement for additional tables regarding the composition of the ACL.
December 31, 2021 had the lowest loans past due 30+ day percentage at 0.09% in the last ten years. December 31, 2020 and 2022 were at respectable lows of 0.29% and 0.26%. At December 31, 2023, the loans past due 30+ day percentage was slightly higher but still respectable at 0.45%.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

3 edited+4 added−3 removed2 unchanged
Biggest changeBoth directional changes are well within risk exposure guidelines. The effect of the rate shocks may be mitigated to the extent that not all lines of business are directly tied to an external index and actual balance sheet composition may differ from prediction. 43
Biggest changeThe effect of the rate shocks may be mitigated to the extent that not all lines of business are directly tied to an external index and actual balance sheet composition may differ from our prediction. 47
The majority of our interest rate risk arises from the instruments, positions and transactions entered into for purposes other than trading such as loans, available for sale securities, interest bearing deposits, short term borrowings and long term borrowings. Interest rate risk occurs when interest bearing assets and liabilities re-price at different times as market interest rates change.
Much of our interest rate risk arises from the instruments, positions and transactions entered into for purposes other than trading such as loans, available for sale securities, interest bearing deposits, short term borrowings and long-term borrowings. Interest rate risk occurs when interest bearing assets and liabilities re-price at different times as market interest rates change.
Funding positions are kept within predetermined limits designed to ensure that risk-taking is not excessive and that liquidity is properly managed. In the event that our asset/liabilities management strategies are unsuccessful, our profitability may be adversely affected. The Company employs a sensitivity analysis utilizing interest rate shocks to help in this analysis.
Funding positions are kept within predetermined limits designed to ensure that risk-taking is not excessive and that liquidity is effectively managed. If our asset/liabilities management strategies are unsuccessful, our profitability may be adversely affected. The Company employs a sensitivity analysis utilizing interest rate shocks to help in this analysis.
Removed
At December 31, 2022, the shocks presented below assume an immediate change of rate in the percentages and directions shown: Interest Rate Shock on Interest Rate Shock on Net Interest Margin Net Interest Income Net Interest % Change Rate Rate Cumulative % Change Margin (Ratio) to Flat Rate Direction changes by Total ($000) to Flat Rate 3.55% 2.70% Rising 3.00% 108,158 2.85% 3.56% 3.04% Rising 2.00% 108,465 3.14% 3.56% 2.89% Rising 1.00% 108,249 2.94% 3.46% 0.00% Flat 0.00% 105,163 0.00% 3.24% -6.31% Falling -1.00% 98,500 -6.34% 3.07% -11.07% Falling -2.00% 93,466 -11.12% 2.92% -15.42% Falling -3.00% 88,872 -15.49% The shock chart currently shows a widening in net interest margin over the next twelve months in an increasing rate environment and a tightening in a falling rate environment.
Added
The Bank’s balance sheet is liability sensitive which has resulted in a steep decline of net interest margin as rates rose over 2023. The level of long-term assets represents elevated risk and will continue to be an interest income anchor as those assets are at much lower rates when compared to current market rates.
Removed
The basis rising rates scenarios are predicted to expand the net interest margin and produce higher levels of net interest income. This would indicate that the assets yield is predicted to increase faster than the cost of funds will rise. In a rising 300 basis point increase, the model is indicating our deposit costs are rising more than asset yields.
Added
The Bank has utilized an interest rate hedge as protection against rising rates and is receiving some benefit, see Note 18 for disclosure. Additionally, the deposit growth was funded by a substantial portion of CDs in 2023, many of which were shorter term CD specials.
Removed
The Bank continues to enhance its use of the software model and performs additional stress tests whose results management and the director’s review. The Bank also monitors and adjusts the assumptions for decay rates and key rate ties on certain deposit accounts and continues to review and modify those rates as the index rates change.
Added
As these CD specials come due in 2024, the Bank’s cost of funds may rise as the replacement rates for theses CDs currently are higher than their maturing rates in a flat rate environment. In a falling rate environment, this should provide a benefit based on the duration of the portfolio.
Added
Management continues to review and is using external assistance to monitor and adjust our assumptions concerning decay rates, key rate ties on deposit accounts and prepayment speeds on loans for 2024. Both directional changes are within the Bank's risk tolerance.

Other FMAO 10-K year-over-year comparisons