# FARMERS NATIONAL BANC CORP /OH/ (FMNB) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from FARMERS NATIONAL BANC CORP /OH/'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/709337/000095017025034480/fmnb-20241231.htm
Accession: 0000950170-25-034480
Filing date: 2025-03-06
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/FMNB/
All MD&A years: /company/FMNB/mda/
Previous year: /company/FMNB/mda/fy2023/ (FY 2023)
Next year: /company/FMNB/mda/fy2025/ (FY 2025)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following presents a discussion and analysis of Farmers’ financial condition and results of operations by its management. The review highlights the principal factors affecting earnings and the significant changes in balance sheet items for the years 2024, 2023 and 2022. Financial information for prior years is presented when appropriate. The objective of this financial review is to enhance the reader’s understanding of the accompanying tables and charts, the consolidated financial statements, notes to financial statements and financial statistics appearing elsewhere in this Annual Report on Form 10-K. Where applicable, this discussion also reflects management’s insights of known events and trends that have or may reasonably be expected to have a material effect on Farmers’ business, financial condition or results of operations.

Cautionary Note Regarding Forward Looking Statements

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of historical fact, but rather statements based on Farmers’ current expectations, beliefs and assumptions regarding the future of Farmers’ business, future plans and strategies, projections, anticipated events and trends, its intended results and future performance, the economy and other future conditions. Forward-looking statements are preceded by terms such as “will,” “would,” “should,” “could,” “may,” “expect,” “estimate,” “believe,” “anticipate,” “intend,” “plan” “project,” or variations of these words, or similar expressions. Forward-looking statements are not a guarantee of future performance, and actual future results could differ materially from those contained in forward-looking information. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Numerous uncertainties, risks, and changes could cause or contribute to Farmers’ actual results, performance, and achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detailed from time to time in Farmers’ filings with the Commission, including without limitation the risk factors disclosed in Item 1A, “Risk Factors” of this Annual Report on Form 10-K.

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

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

•
the length and extent of the economic impacts of the ongoing conflict in Ukraine;

•
actions by the Federal Reserve Board, U.S. Treasury and other government agencies, including those that impact money supply, market interest rates and inflation;

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

•
general business conditions in the banking industry;

•
the regulatory environment;

•
general fluctuations in interest rates;

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

•
rapidly changing technology and evolving banking industry standards;

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

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

•
new service and product offerings by competitors and price pressures.

28

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

Results of Operations

Comparison of Operating Results for the Years Ended December 31, 2024 and 2023.

The Company recorded net income of $45.9 million for the year ended December 31, 2024, compared to $49.9 million for the year ended December 31, 2023. The Company reported $1.22 per diluted common share in 2024 compared to $1.33 per diluted common share in 2023.

Net Interest Income

The Company recognized net interest income of $128.4 million for the year ended December 31, 2024, compared to $137.8 million for the year ended December 31, 2023. The tax-equivalent net interest margin declined from 2.91% for 2023 to 2.69% for 2024. The margin declined due to increased funding costs associated with the Federal Reserve's aggressive rate increases in 2022 and 2023 along with an inverted U.S treasury yield curve which caused deposit funding costs to rise faster than the yields being earned on loans and securities.

Total interest income increased from $213.3 million in 2023 to $227.7 million for 2024. The increase was primarily due to an increase in the yield on loans and securities associated with the higher interest rate environment.

Interest income on loans increased to $185.7 million for the year ended December 31, 2024, compared to $171.8 million for the year ended December 31, 2023. This increase was due to better yields on loans which increased from 5.46% in 2023 to 5.76% in 2024.

The income on federal funds sold and other interest income increased by $1.3 million in 2024 to $3.7 million compared to $2.5 million in 2023 primarily due to a volume increase of $21.3 million in 2024 and an increase of 57 basis points in the yield on the portfolio.

Interest expense increased $23.8 million in 2024 to $99.4 million from $75.5 million in 2023. The increase was primarily due to a 59 basis point increase in the yield on interest-bearing deposits and an increase in the volume of average borrowed funds which increased from $249.4 million in 2023 to $381.2 million in 2024. The increase in deposit costs was driven by the movement of lower cost checking and savings deposits into certificates of deposit while the increase in borrowed funds was due a lower level of brokered CDs utilized in 2024.

29

Average Balance Sheets and Related Yields and Rates

(Table Dollar Amounts in Thousands except Per Share Data)

[[GREPCENT_TABLE]]
[["Years ended December 31,","","2024","","","2023","","","2022"],["","","AVERAGE","","","","","","","","","AVERAGE","","","","","","","","","AVERAGE"],["","","BALANCE","","","INTEREST","","","RATE","","","BALANCE","","","INTEREST","","","RATE","","","BALANCE","","","INTEREST","","","RATE"],["EARNING ASSETS"],["Loans (1) (2)","","$","3,227,384","","","$","186,032","","","","5.76","%","","$","3,155,858","","","$","172,161","","","","5.46","%","","$","2,358,724","","","$","108,100","","","","4.58","%"],["Taxable securities","","","1,110,905","","","","26,838","","","","2.42","","","","1,143,547","","","","26,231","","","","2.29","","","","1,081,966","","","","20,843","","","","1.93"],["Tax-exempt securities (1)","","","386,643","","","","12,165","","","","3.15","","","","419,557","","","","13,283","","","","3.17","","","","465,855","","","","14,952","","","","3.21"],["Other investments","","","35,402","","","","1,450","","","","4.10","","","","39,559","","","","1,986","","","","5.02","","","","33,153","","","","871","","","","2.63"],["Federal funds sold and other cash","","","96,288","","","","3,727","","","","3.87","","","","74,950","","","","2,476","","","","3.30","","","","76,253","","","","684","","","","0.90"],["Total earning assets","","","4,856,622","","","","230,212","","","","4.74","","","","4,833,471","","","","216,137","","","","4.47","","","","4,015,951","","","","145,450","","","","3.62"],["NONEARNING ASSETS"],["Noninterest-earning assets","","","234,297","","","","","","","","","","205,683","","","","","","","","","","128,757"],["Total Assets","","$","5,090,919","","","","","","","","","$","5,039,154","","","","","","","","","$","4,144,708"],["INTEREST-BEARING LIABILITIES"],["Time deposits","","$","745,945","","","$","29,329","","","","3.93","%","","$","654,717","","","$","19,462","","","","2.97","%","","$","360,687","","","$","3,044","","","","0.84","%"],["Brokered time deposits","","","25,389","","","","1,108","","","","4.36","","","","132,895","","","","6,204","","","","4.67","","","","56,965","","","","1,240","","","","2.18"],["Savings deposits","","","1,095,470","","","","16,144","","","","1.47","","","","1,113,561","","","","9,899","","","","0.89","","","","846,418","","","","1,352","","","","0.16"],["Demand deposits - interest bearing","","","1,396,193","","","","34,588","","","","2.48","","","","1,415,425","","","","27,541","","","","1.95","","","","1,392,058","","","","7,449","","","","0.54"],["Total interest-bearing deposits","","","3,262,997","","","","81,169","","","","2.49","","","","3,316,598","","","","63,106","","","","1.90","","","","2,656,128","","","","13,085","","","","0.49"],["Short term borrowings","","","293,488","","","","14,105","","","","4.81","","","","160,964","","","","8,357","","","","5.19","","","","55,668","","","","1,408","","","","2.53"],["Long term borrowings","","","87,749","","","","4,090","","","","4.66","","","","88,439","","","","4,086","","","","4.62","","","","87,972","","","","3,427","","","","3.90"],["Total borrowed funds","","","381,237","","","","18,195","","","","4.77","","","","249,403","","","","12,443","","","","4.99","","","","143,640","","","","4,835","","","","3.37"],["Total Interest-Bearing Liabilities","","","3,644,234","","","","99,364","","","","2.73","","","","3,566,001","","","","75,549","","","","2.12","","","","2,799,768","","","","17,920","","","","0.64"],["NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS' EQUITY"],["Demand deposits - noninterest bearing","","","981,115","","","","","","","","","","1,065,389","","","","","","","","","","959,294"],["Other Liabilities","","","58,134","","","","","","","","","","50,302","","","","","","","","","","34,180"],["Stockholders' equity","","","407,436","","","","","","","","","","357,462","","","","","","","","","","351,466"],["Total Liabilities and"],["Stockholders' Equity","","$","5,090,919","","","","","","","","","$","5,039,154","","","","","","","","","$","4,144,708"],["Net interest income and interest rate spread","","","","","$","130,848","","","","2.01","%","","","","","$","140,588","","","","2.35","%","","","","","$","127,530","","","","2.98","%"],["Net interest margin","","","","","","","","","2.69","%","","","","","","","","","2.91","%","","","","","","","","","3.18","%"]]
[[/GREPCENT_TABLE]]

(1)
Interest on certain tax-exempt loans and tax-exempt securities in 2024, 2023 and 2022 is not taxable for Federal income tax purposes. In order to compare the tax-exempt yields on these assets to taxable yields, the interest earned on these assets is adjusted to a pre-tax equivalent amount based on the marginal corporate federal income tax rate of 21%.

(2)
Nonaccrual loans are included in the average balance totals.

30

RATE AND VOLUME ANALYSIS

(Table Dollar Amounts in Thousands except Per Share Data)

The following table analyzes by rate and volume the dollar amount of changes in the components of the interest differential:

[[GREPCENT_TABLE]]
[["","","2024 change from 2023","","","2023 change from 2022"],["","","Net","","","Change Due","","","Change Due","","","Net","","","Change Due","","","Change Due"],["","","Change","","","To Volume","","","To Rate","","","Change","","","To Volume","","","To Rate"],["Tax Equivalent Interest Income"],["Loans","","$","13,871","","","$","3,902","","","$","9,969","","","$","64,061","","","$","36,533","","","$","27,528"],["Taxable securities","","","607","","","","(749",")","","","1,356","","","","5,388","","","","1,186","","","","4,202"],["Tax-exempt securities","","","(1,118",")","","","(1,042",")","","","(76",")","","","(1,669",")","","","(1,486",")","","","(183",")"],["Other investments","","","(536",")","","","(209",")","","","(327",")","","","1,115","","","","168","","","","947"],["Funds sold and other cash","","","1,251","","","","705","","","","546","","","","1,792","","","","(12",")","","","1,804"],["Total interest income","","$","14,075","","","$","2,607","","","$","11,468","","","$","70,687","","","$","36,389","","","$","34,298"],["Interest Expense"],["Time deposits","","$","9,867","","","$","2,712","","","$","7,155","","","$","16,418","","","$","2,481","","","$","13,937"],["Brokered time deposits","","","(5,096",")","","","(5,019",")","","","(77",")","","","4,964","","","","1,653","","","","3,311"],["Savings deposits","","","6,245","","","","(161",")","","","6,406","","","","8,547","","","","427","","","","8,120"],["Demand deposits","","","7,047","","","","(374",")","","","7,421","","","","20,092","","","","125","","","","19,967"],["Short term borrowings","","","5,748","","","","6,880","","","","(1,132",")","","","6,949","","","","2,663","","","","4,286"],["Long term borrowings","","","4","","","","(32",")","","","36","","","","659","","","","18","","","","641"],["Total interest expense","","$","23,815","","","$","4,006","","","$","19,809","","","$","57,629","","","$","7,367","","","$","50,262"],["Increase (decrease) in tax equivalent net interest income","","$","(9,740",")","","$","(1,399",")","","$","(8,341",")","","$","13,058","","","$","29,022","","","$","(15,964",")"]]
[[/GREPCENT_TABLE]]

The amount of change not solely due to rate or volume changes was allocated between the change due to rate and the change due to volume based on the relative size of the rate and volume changes.

Noninterest Income

Noninterest income declined slightly to $41.7 million for the year ended December 31, 2024 compared to $41.9 million for the year ended December 31, 2023. The major categories of noninterest income are discussed below.

Service charges on deposit accounts increased to $7.3 million for 2024 compared to $6.3 million in 2023. The increase was primarily due to the Company undertaking a review of all service charges in late 2023 and early 2024 and implementing fee increases across deposit product lines in the second quarter of 2024.

Bank owned life insurance income increased by $217,000 in 2024 to $2.7 million, compared to $2.4 million for the twelve months ended December 31, 2023. The increase was due to an increase of $241,000 from earnings on the policies offset by a decline in death benefits received from the policies.

Trust fees increased to $10.1 million for the twelve months ended December 31, 2024, compared to $9.0 million for the twelve months ended December 31, 2023. The trust business continued to grow in 2024 as the value of assets under management increased.

Insurance agency commissions were $5.5 million in 2024 compared to $5.4 million in 2023. The increase was driven by better income from fixed annuity sales offset by declines in property and casualty commissions.

Retirement plan consulting fees increased to $2.6 million for 2024 compared to $2.5 million for 2023. The Company picked up additional business in 2024 and with the acquisition of Crest in December of 2024, revenue from this business should continue to increase in 2025.

31

Security losses increased to $2.6 million during the year ended December 31, 2024, from $471,000 for the year ended December 31, 2023. The losses increased in 2024 due to the Company restructuring more securities in order to reinvest the proceeds into securities with a higher yield than those sold.

The net gains on the sale of loans declined by $889,000 from 2023 at $2.5 million to $1.5 million in 2024. The primary reason for this decrease was the sale of nonaccrual commercial loans in 2023 that generated a gain of $915,000. There was no sale of commercial loans in 2024. Gains on the sale of loans continues to be negatively impacted by a lower level of saleable mortgage volume due to the higher interest rate environment and the lack of supply of homes for sale.

Other mortgage banking income declined by $276,000 in 2024 compared to 2023. The decrease was driven by lower servicing income and faster amortization of the mortgage servicing rights.

Debit card fees increased to $7.5 million in 2024 compared to $7.1 million in 2023. The increase was primarily due to higher volumes.

Other operating income increased to $4.7 million for the twelve months ended December 31, 2024, from $4.5 million for the twelve months ended December 31, 2023. This increase was primarily due to decreased losses on the sale of assets offset by higher Small Business Investment Company (“SBIC”) income in 2024 compared to 2023.

Noninterest Expenses

Noninterest expense totaled $106.7 million for the year ended December 31, 2024 compared to $111.8 million for the year ended December 31, 2023. The decline was primarily driven by merger related costs which fell from $5.5 million in 2023 to $92 thousand in 2024.

Salaries and employee benefits increased by $1.6 million to $58.9 million for the year ended December 31, 2024 from $57.4 million for the year ended December 31, 2023. This increase was primarily due to salary increases and greater incentive compensation.

FDIC insurance and state and local taxes decreased to $5.0 million in 2024 from $5.8 million in 2023. The decline was due to lower FDIC expense as the Company had higher capital levels in 2024 resulting in lower expense.

Advertising costs declined to $1.5 million in 2024 from $1.8 million in 2023. This decrease was due to a few marketing campaigns being reduced in 2024.

Intangible amortization expense decreased by $573,000 to $2.9 million for the year ended December 31, 2024 compared to $3.4 million for the year ended December 31, 2023. The decline was primarily driven by the runoff of intangibles from older acquisitions.

Other operating expenses increased by $306,000 to $13.8 million in 2024 compared to $13.5 million in 2023. The increase was spread across several categories of expense.

Income Taxes

Income tax expense increased from $8.8 million for the year ended December 31, 2023, to $9.5 million for the year ended December 31, 2024. The increase was primarily due to a higher effective tax rate and less benefit from low income housing tax credits. Income taxes are computed using the appropriate effective tax rates for each period. The effective tax rates are less than the statutory tax rate primarily due to nontaxable interest and dividend income. The effective income tax rate was 17.1% in 2024 and 14.9% for 2023. Refer to Note 18 to the consolidated financial statements for additional information regarding the effective tax rate.

32

Comparison of Operating Results for the Years Ended December 31, 2023 and 2022.

The Company recorded net income of $49.9 million for the year ended December 31, 2023, compared to $60.6 million for the year ended December 31, 2022. The Company reported $1.33 per diluted common share in 2023 compared to $1.79 per diluted common share in 2022. The results for 2023 include a full year of income and expense from the Emclaire acquisition which closed on January 1, 2023.

Net Interest Income

The Company recognized net interest income of $137.8 million for the twelve months ended December 31, 2023, compared to $124.2 million for the twelve months ended December 31, 2022. The tax-equivalent net interest margin declined from 3.18% for 2022 to 2.91% for the year ended December 31, 2023. The margin declined due to increased funding costs associated with the Federal Reserve's aggressive rate increases in 2022 and 2023 along with an inverted U.S treasury yield curve which caused deposit funding costs to rise faster than the yields being earned on loans and securities.

Total interest income increased $71.2 million from $142.1 million in 2022 to $213.3 million for the twelve months ended December 31, 2023. The increase was primarily due to an increase in the average balance of loans and securities from the acquisition of Emclaire. In addition, the yields received on the various categories of earning assets increased year over year due to rising rates being received.

Interest income on loans increased to $171.8 million for the year ended December 31, 2023, compared to $107.8 million for the year ended December 31, 2022. This increase was due to the average loan balances increasing $797.1 million in 2023 primarily due to the acquisition of Emclaire. The yield on loans increased to 5.46% in 2023 from 4.58% in 2022.

Income on taxable securities increased by $5.4 million in 2023 due to the average balance being higher by $61.6 million. Yields on taxable securities were also higher by 36 basis points ("bp") in 2023 compared to 2022. The increased balance was due to the Emclaire acquisition. Income on tax exempt securities decreased $1.7 million in 2023 as the average balance of this category declined $46.3 million and the yield on the portfolio declined by 4 bp year over year.

The income on federal funds sold and other interest income increased by $1.8 million in 2023 compared to 2022 primarily due to an increase of 239 bp in the yield on the portfolio. This portfolio is heavily impacted by the actions of the Federal Reserve.

Interest expense increased $57.6 million in 2023 compared to 2022 due to an increase of $766.2 million in the volume of interest-bearing liabilities and an increase in the rates paid on deposits and borrowings of 148 bp year over year. The increase in the volume of interest-bearing liabilities was due to the merger with Emclaire while the increase in rates paid was due to the higher interest rate environment that existed in 2023 compared to 2022. The average balance of interest-bearing deposits increased $660.5 million in 2023 primarily due to the Emclaire acquisition while the cost of interest-bearing deposits increased by 141 bp year over year. Interest expense related to interest-bearing deposits was $63.1 million in 2023 compared to $13.1 million in 2022.

Interest expense on short-term borrowings was $8.4 million in 2023 compared to $1.4 million in 2022. The increase was due to the increased usage of short term borrowings and an increase in the cost of those borrowings due to the Federal Reserve increasing the fed funds rate. Interest on long-term borrowings increased to $4.1 million in 2023 from $3.4 million in 2022. This increase was primarily due to the increased cost of some of the long term borrowings that are tied to variable rates and which continued to increase in 2023.

Noninterest Income

Noninterest income declined to $41.9 million for the year ended December 31, 2023 compared to $44.2 million for the year ended December 31, 2022. The major categories of noninterest income are discussed below.

33

Service charges on deposit accounts totaled $6.3 million in 2023 compared to $4.7 million in 2022. The increase was due to the acquisition of Emclaire.

Bank owned life insurance income increased by $632,000 to $2.4 million for the twelve months ended December 31, 2023, compared to $1.8 million for the twelve months ended December 31, 2022. The increase was due to the addition of Emclaire offset by a decline of $79,000 on the proceeds from death benefits received from the policies.

Trust fees increased to $9.0 million in 2023 from $8.5 million in 2022. The trust business continued to expand in 2023 as the Company added revenue producers in the new Pennsylvania markets.

Insurance agency commissions increased by $1.0 million to $5.4 million in 2023 from $4.4 million in 2022. The increase was driven by better margins in the insurance industry in 2023 along with increased sales of annuity products as rates on these products were very attractive to customers. Investment commissions declined slightly to $2.0 million in 2023 from $2.2 million in 2022. This line of business was down due to the heavy demand for annuities in lieu of traditional investment products.

The net gains on the sale of loans increased by $329,000 between 2022 and 2023. The primary reason for this increase was the sale of nonaccrual commercial loans that generated a gain of $915,000 in 2023 offset by lower gain on sale figures on the sale of 1-4 family mortgage loans. Mortgage volume continues to be negatively impacted by the higher interest rate environment and the lack of supply of homes for sale.

Other mortgage banking income was up $420,000 in 2023 compared to 2022. The increase was driven by slower prepayment speeds on the mortgage servicing portfolio in 2023 due to the higher level of interest rates.

Debit card fees increased to $7.1 million in 2023 compared to $5.8 million in 2022. The increase was primarily due to the addition of Emclaire.

The Company recorded an $8.4 million gain related to a legal settlement in 2022. No gain was recorded in 2023.

Other operating income increased by $495,000 to $4.5 million for the twelve months ended December 31, 2023, from $4.0 million for the twelve months ended December 31, 2022. This increase was primarily due to increased non-recurring income associated with recoveries on Emclaire and Cortland loans that were charged off prior to acquisition. This increase was offset by lower SBIC income in 2023 compared to 2022.

Noninterest Expenses

Noninterest expense totaled $111.8 million for the twelve months ended December 31, 2023 compared to $94.4 million for the twelve months ended December 31, 2022. The increase is primarily due to the merger with Emclaire and normal increases in operating expenses.

Salaries and employee benefits increased to $57.4 million for the year ended December 31, 2023, an increase of $12.4 million, from $45.0 million for the year ended December 31, 2022. This increase was primarily due to the Company having a higher level of employees due to the addition of Emclaire along with normal raise activity.

Occupancy and equipment expense increased by $4.0 million to $15.4 million for the twelve months ended December 31, 2023 compared to $11.4 million for the twelve months ended December 31, 2022. The increase was due to the higher level of depreciation and facilities maintenance costs associated with the additional Emclaire properties.

FDIC insurance and state and local taxes increased to $5.8 million in 2023 from $4.0 million in 2022. The Emclaire acquisition along with higher FDIC assessment rates in 2023 drove the increase.

34

Professional fees decreased by $1.7 million in 2023 to $4.4 million from $6.1 million for the twelve months ended December 31, 2022. The decrease was due to legal expenses associated with the legal settlement income in 2022 discussed above that did not reoccur in 2023. This amounted to approximately $2.1 million of additional expense in 2022 compared to 2023. Offsetting this somewhat was additional expense associated with the Emclaire acquisition.

Merger related costs increased to $5.5 million in 2023 from $4.1 million in 2022. This increase was due to the acquisition of Emclaire at the beginning of 2023.

Intangible amortization expense increased by $1.4 million in 2023 to $3.4 million compared to $2.0 million for the year ended December 31, 2022. The increase was primarily driven by the acquisition of Emclaire.

Core processing charges increased to $4.6 million in 2023 compared to $3.3 million in 2022. The increase was due to the acquisition of Emclaire.

An additional, special charitable donation of $6.0 million was made during 2022 with no such contribution made in 2023. The donation was made possible in 2022 by the $8.4 million legal settlement income discussed above.

Other operating expenses increased by $2.8 million to $13.4 million in 2023 compared to $10.6 million in 2022. The increase was primarily due to the acquisition of Emclaire but 2023 also included $785,000 for the settlement of a lawsuit whereas 2022 did not have any of this expense.

Income Taxes

Income tax expense decreased to $8.8 million for the year ended December 31, 2023, from $12.2 million for the year ended December 31, 2022. The decrease was primarily due to a $14.1 million decrease in income before income taxes. Income taxes are computed using the appropriate effective tax rates for each period. The effective tax rates are less than the statutory tax rate primarily due to nontaxable interest and dividend income. The effective income tax rate was 14.9% in 2023 and 16.8% for 2022. Refer to Note 18 to the consolidated financial statements for additional information regarding the effective tax rate.

Loan Portfolio

Maturities and Sensitivities of Loans to Interest Rates

The following schedule shows the composition of loans and the percentage of loans in each category at the dates indicated. Balances include unamortized loan origination fees and costs.

[[GREPCENT_TABLE]]
[["Years Ended December 31,","","2024","","","2023","","","2022","","","2021","","","2020"],["Commercial Real Estate","","$","1,381,573","","","","42.2","%","","$","1,334,600","","","","41.6","%","","$","1,026,822","","","","42.6","%","","$","1,010,674","","","","43.3","%","","$","712,818","","","","34.3","%"],["Commercial","","","351,533","","","","10.8","","","","347,819","","","","10.9","","","","294,406","","","","12.2","","","","312,532","","","","13.4","","","","401,003","","","","19.3"],["Residential Real Estate","","","1,003,678","","","","30.8","","","","986,032","","","","30.8","","","","607,557","","","","25.3","","","","580,242","","","","24.9","","","","523,340","","","","25.2"],["Consumer","","","268,533","","","","8.2","","","","267,875","","","","8.4","","","","228,794","","","","9.5","","","","195,343","","","","8.4","","","","208,842","","","","10.0"],["Agricultural","","","263,029","","","","8.0","","","","261,801","","","","8.2","","","","247,171","","","","10.3","","","","232,291","","","","10.0","","","","232,041","","","","11.1"],["Total Loans","","$","3,268,346","","","","100.0","%","","$","3,198,127","","","","100.0","%","","$","2,404,750","","","","100.0","%","","$","2,331,082","","","","100.0","%","","$","2,078,044","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

35

The following schedule sets forth maturities based on remaining scheduled repayments of principal for loans listed above as of December 31, 2024:

[[GREPCENT_TABLE]]
[["Types of Loans","","1 Year or less","","","1 to 5 Years","","","5 to 15 Years","","","Over 15 Years"],["Commercial","","$","19,713","","","$","181,984","","","$","97,994","","","$","51,842"],["Commercial Real Estate","","$","124,311","","","$","514,111","","","$","630,941","","","$","112,211"],["Residential Real Estate","","$","9,782","","","$","48,963","","","$","215,293","","","$","729,639"],["Consumer","","$","4,076","","","$","107,972","","","$","132,043","","","$","24,442"],["Agricultural","","$","4,105","","","$","36,625","","","$","49,288","","","$","173,011"]]
[[/GREPCENT_TABLE]]

The amounts of loans as of December 31, 2024, based on remaining scheduled repayments of principal, are shown in the following table:

[[GREPCENT_TABLE]]
[["Loan Sensitivities","","1 Year or less","","","Over 1 Year","","","Total"],["Floating or Adjustable Rates of Interest","","$","99,059","","","$","1,524,346","","","$","1,623,405"],["Fixed Rates of Interest","","","62,928","","","","1,582,013","","","","1,644,941"],["Total Loans","","$","161,987","","","$","3,106,359","","","$","3,268,346"]]
[[/GREPCENT_TABLE]]

Total loans were $3.27 billion at December 31, 2024, compared to $3.20 billion at December 31, 2023, an increase of $70.2 million. Loans comprised 66.5% of the Bank’s average earning assets in 2024, compared to 65.3% in 2023.

Management recognizes that while the loan portfolio holds some of the Bank’s’ highest yielding assets, it is inherently the most risky portfolio. Accordingly, management attempts to balance credit risk versus return with conservative credit standards. Management has developed and maintains comprehensive underwriting guidelines and a loan review function that monitors credits during and after the approval process. To minimize risks associated with changes in the borrower’s future repayment capacity, the Bank generally requires scheduled periodic principal and interest payments on all types of loans and normally requires collateral.

Commercial real estate loans increased to $1.38 billion at December 31, 2024 from $1.33 billion at December 31, 2023. The Company’s commercial real estate loan portfolio includes loans for owner occupied and non-owner occupied real estate. These loans are made to finance properties such as office and industrial buildings, hotels and retail shopping centers.

36

The following tables present the amortized cost basis of the Company's commercial real estate portfolio segment by industry, inclusive of farmland, as of December 31, 2024 and 2023:

[[GREPCENT_TABLE]]
[["(In Thousands of Dollars)","","Amortized Cost","","","% of Commercial Real Estate","","","% of Total Portfolio","","","Weighted Average Loan-to-Value","","","Weighted Average Occupancy"],["December 31, 2024"],["Commercial real estate"],["Retail","","$","345,354","","","","21.75","%","","","10.57","%","","","53.93","%","","","85.07","%"],["Farmland","","","206,600","","","","13.01","%","","","6.32","%","","","49.63","%","","","100.00","%"],["Warehouse/Industrial","","","186,316","","","","11.73","%","","","5.70","%","","","54.26","%","","","72.23","%"],["Office","","","192,269","","","","12.11","%","","","5.88","%","","","53.70","%","","","74.06","%"],["Multifamily","","","158,168","","","","9.96","%","","","4.84","%","","","61.16","%","","","85.75","%"],["Medical","","","147,353","","","","9.28","%","","","4.51","%","","","46.27","%","","","92.60","%"],["Hotel","","","44,301","","","","2.79","%","","","1.36","%","","","45.24","%","","","79.65","%"],["Special Purpose","","","85,361","","","","5.37","%","","","2.61","%","","","51.83","%","","","98.53","%"],["Restaurant","","","50,990","","","","3.21","%","","","1.56","%","","","51.36","%","","","100.00","%"],["Multifamily - Construction","","","73,857","","","","4.65","%","","","2.26","%","","","53.28","%","","","29.61","%"],["All Other","","","97,605","","","","6.14","%","","","2.99","%","","","48.05","%","","","94.97","%"],["Total","","$","1,588,174","","","","100.00","%","","","48.60","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(In Thousands of Dollars)","","Amortized Cost","","","% of Commercial Real Estate","","","% of Total Portfolio","","","Weighted Average Loan-to-Value","","","Weighted Average Occupancy"],["December 31, 2023"],["Commercial real estate"],["Retail","","$","354,953","","","","23.09","%","","","11.10","%","","","55.16","%","","","85.26","%"],["Farmland","","","202,726","","","","13.19","%","","","6.34","%","","","51.24","%","","","100.00","%"],["Warehouse/Industrial","","","166,291","","","","10.82","%","","","5.20","%","","","56.04","%","","","70.99","%"],["Office","","","175,020","","","","11.38","%","","","5.47","%","","","53.91","%","","","75.04","%"],["Multifamily","","","153,410","","","","9.98","%","","","4.80","%","","","63.10","%","","","85.79","%"],["Medical","","","154,890","","","","10.08","%","","","4.84","%","","","51.51","%","","","92.64","%"],["Hotel","","","49,695","","","","3.23","%","","","1.55","%","","","48.64","%","","","79.59","%"],["Special Purpose","","","99,152","","","","6.45","%","","","3.10","%","","","55.10","%","","","99.88","%"],["Restaurant","","","56,460","","","","3.67","%","","","1.77","%","","","53.17","%","","","100.00","%"],["Multifamily - Construction","","","27,860","","","","1.81","%","","","0.87","%","","","59.02","%","","","22.06","%"],["All Other","","","96,869","","","","6.30","%","","","3.03","%","","","47.10","%","","","95.30","%"],["Total","","$","1,537,326","","","","100.00","%","","","48.07","%"]]
[[/GREPCENT_TABLE]]

Residential real estate mortgage loans increased to $1.00 billion at December 31, 2024, from $986.0 million at December 31, 2023. Farmers originated both fixed rate and adjustable rate mortgages during 2024. Fixed rate terms are offered with terms between fifteen and thirty years while adjustable rate products are offered with maturities up to thirty years. The Company sells all fixed rate loans that are secondary market eligible.

Commercial loans at December 31, 2024, totaled $351.5 million compared to $347.8 million at December 31, 2023. The Bank’s commercial loans are granted to customers within the immediate trade area of the Bank. The mix is diverse, covering a wide range of borrowers, business types and local municipalities. The Bank monitors and controls concentrations within a particular industry or segment of the economy. These loans are made for purposes such as equipment purchases, capital and leasehold improvements, the purchase of inventory, general working capital and small business lines of credit.

37

Agricultural loans increased from $261.8 million in 2023 to $263.0 million in 2024. The Company’s agricultural loan portfolio contains a diverse mix of dairy, crops, land, poultry and cattle loans.

Consumer loans increased to $268.5 million at December 31, 2024, from $267.9 million at December 31, 2023. The consumer loan portfolio includes indirect auto loans and other consumer loan products.

Summary of Credit Loss Experience

The following is an analysis of the allowance for credit losses for the years 2020 through 2024. During the years 2021-2024, the Company used the CECL methodology while the incurred loss methodology was used in 2020:

[[GREPCENT_TABLE]]
[["Years Ended December 31,","","2024","","","2023","","","2022","","","2021","","","2020"],["Balance at Beginning of Year","","$","34,440","","","$","26,978","","","$","29,386","","","$","22,144","","","$","14,487"],["Charge-Offs:"],["Commercial Real Estate","","","(4,619",")","","","(349",")","","","(300",")","","","(70",")","","","(122",")"],["Commercial","","","(1,742",")","","","(1,272",")","","","(2,042",")","","","(388",")","","","(412",")"],["Residential Real Estate","","","(155",")","","","(384",")","","","(92",")","","","(297",")","","","(172",")"],["Consumer","","","(1,471",")","","","(932",")","","","(870",")","","","(912",")","","","(1,347",")"],["Total Charge-Offs","","","(7,987",")","","","(2,937",")","","","(3,304",")","","","(1,667",")","","","(2,053",")"],["Recoveries on Previous Charge-Offs:"],["Commercial Real Estate","","","22","","","","1","","","","3","","","","33","","","","31"],["Commercial","","","520","","","","103","","","","75","","","","199","","","","11"],["Residential Real Estate","","","177","","","","81","","","","89","","","","162","","","","85"],["Consumer","","","447","","","","496","","","","479","","","","411","","","","483"],["Total Recoveries","","","1,166","","","","681","","","","646","","","","805","","","","610"],["Net Charge-Offs","","","(6,821",")","","","(2,256",")","","","(2,658",")","","","(862",")","","","(1,443",")"],["Impact of CECL adoption","","","0","","","","0","","","","0","","","","2,160","","","","0"],["Provision For Credit Losses and Day One Purchase entry","","","8,244","","","","9,718","","","","250","","","","5,944","","","","9,100"],["Balance at End of Year","","$","35,863","","","$","34,440","","","$","26,978","","","$","29,386","","","$","22,144"],["Ratio of Net Commercial Real Estate Charge-offs To Average Loans Outstanding","","","0.14","%","","","0.01","%","","","0.01","%","","","0.00","%","","","0.00","%"],["Ratio of Net Commercial Charge-offs To Average Loans Outstanding","","","0.04","%","","","0.04","%","","","0.08","%","","","0.01","%","","","0.02","%"],["Ratio of Net Residential Real Estate Charge-offs To Average Loans Outstanding","","","0.00","%","","","0.01","%","","","0.00","%","","","0.01","%","","","0.00","%"],["Ratio of Net Consumer Charge-offs To Average Loans Outstanding","","","0.03","%","","","0.01","%","","","0.02","%","","","0.02","%","","","0.04","%"],["Allowance for Credit Losses/Total Loans","","","1.10","","","","1.08","","","","1.12","","","","1.26","","","","1.07"]]
[[/GREPCENT_TABLE]]

The provision for credit losses, which includes the provision for unfunded commitments, declined to $8.0 million in 2024 compared to $9.2 million in 2023. In 2023, the Company recognized a day one purchase entry for the Emclaire loans of $7.7 million while there was no day one purchase entry recognized in 2024. Offsetting this was an increase in net charge-offs in 2024 of $4.6 million to $6.8 million compared to net charge-offs of $2.3 million in 2023. The increased net charge-off figure in 2024 was driven by a charge-off of $4.4 million for a single commercial credit backed by office space.

The Company adopted ASU 2016-13 in 2021, to calculate the allowance for credit losses (“ACL”) which requires estimating credit losses over the life of the credits. The ACL is adjusted through the provision for credit losses and reduced by net charge offs of loans. Although the Company has a diversified loan portfolio, the credit risk in the loan portfolio is largely influenced by general economic conditions and trends of the counties and markets in which the debtors operate, and the resulting impact on the operations of borrowers or on the value of any underlying collateral.

38

The credit loss estimation process involves procedures that consider the unique characteristics of the Company’s loan portfolio segments. These segments are disaggregated into the loan pools for monitoring. A model of risk characteristics, such as loss history and delinquency experience, trends in past due and non-performing loans, as well as existing economic conditions and supportable forecasts are used to determine credit loss assumptions.

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

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

The allowance for credit losses to total loans increased to 1.10% at December 31, 2024, compared to 1.08% at December 31, 2023. Nonperforming loans to total loans increased from 0.47% at December 31, 2023 to 0.70% at December 31, 2024. Nonperforming loans to total loans increased in 2024 primarily due to a single commercial real estate credit totaling $8.8 million moving into nonaccrual status.

The provision for credit losses is based on management’s judgment after taking into consideration all factors connected with the collectability of the existing loan portfolio. Management evaluates the loan portfolio in light of economic conditions, changes in the nature and volume of the loan portfolio, industry standards and other relevant reasonable and supportable forecasts. Specific factors considered by management in determining the amounts charged to operating expenses include previous charge-off experience, the status of past due interest and principal payments, the quality of financial information supplied by loan customers and the general condition of the industries in the community to which loans have been made.

The allowance for credit losses increased to $35.9 million at December 31, 2024, compared to $34.4 million at December 31, 2023. The increase was primarily driven by growth in the loan portfolio.

Typically, commercial and commercial real estate loans are identified as collateral dependent when they become ninety days past due, or earlier if management believes it is probable that the Company will not collect all amounts due under the terms of the loan agreement. When Farmers identifies a loan and concludes that the loan is collateral dependent, Farmers performs an internal collateral valuation as an interim measure. Farmers typically obtains an external appraisal to validate its internal collateral valuation as soon as is practical and adjusts the associated loss reserve, if necessary.

39

The following table summarizes the Company’s nonperforming loans and nonperforming assets for the years ending 2020 through 2024:

[[GREPCENT_TABLE]]
[["Nonperforming Assets"],["December 31,","","2024","","","2023","","","2022","","","2021","","","2020"],["Nonaccrual loans:"],["Commercial Real Estate","","$","10,642","","","$","5,852","","","$","4,057","","","$","3,004","","","$","389"],["Commercial","","","3,858","","","","1,802","","","","3,840","","","","7,190","","","","3,789"],["Residential Real Estate","","","4,983","","","","3,807","","","","3,438","","","","4,280","","","","5,783"],["Consumer","","","600","","","","461","","","","494","","","","682","","","","864"],["Agricultural","","","2,120","","","","2,486","","","","2,482","","","","314","","","","680"],["Total Nonaccrual Loans","","$","22,203","","","$","14,408","","","$","14,311","","","$","15,470","","","$","11,505"],["Loans Past Due 90 Days or More","","","615","","","","655","","","","492","","","","725","","","","2,330"],["Total Nonperforming Loans","","$","22,818","","","$","15,063","","","$","14,803","","","$","16,195","","","$","13,835"],["Repossessed assets","","","33","","","","166","","","","73","","","","0","","","","0"],["Total Nonperforming Assets","","$","22,851","","","$","15,229","","","$","14,876","","","$","16,195","","","$","13,835"],["Percentage of Nonperforming Loans to Total Loans","","","0.70","%","","","0.47","%","","","0.62","%","","","0.69","%","","","0.67","%"],["Percentage of Nonperforming Assets to Total Assets","","","0.45","%","","","0.30","%","","","0.36","%","","","0.39","%","","","0.45","%"],["Loans Delinquent 30-89 days","","$","13,032","","","$","16,705","","","$","9,605","","","$","8,891","","","$","9,297"],["Percentage of Loans Delinquent 30-89 days to Total Loans","","","0.40","%","","","0.52","%","","","0.40","%","","","0.38","%","","","0.45","%"],["Percentage of Nonaccrual Loans to Total Loans","","","0.68","%","","","0.45","%","","","0.60","%","","","0.66","%","","","0.55","%"],["Percentage of Allowance for Credit Losses to Nonaccrual Loans","","","161.52","%","","","239.03","%","","","188.51","%","","","189.94","%","","","192.49","%"]]
[[/GREPCENT_TABLE]]

The following table summarizes the Company’s allocation of the allowance for credit losses under CECL for the years 2021 through 2024 and the allowance for loan losses in 2020:

[[GREPCENT_TABLE]]
[["December 31,","","2024","","","2023","","","2022","","","2021","","","2020"],["","","","","","Loans to","","","","","","Loans to","","","","","","Loans to","","","","","","Loans to","","","","","","Loans to"],["","","Amount","","","Total Loans","","","Amount","","","Total Loans","","","Amount","","","Total Loans","","","Amount","","","Total Loans","","","Amount","","","Total Loans"],["Commercial Real Estate","","$","19,259","","","","48.6","%","","$","18,150","","","","48.1","%","","$","14,840","","","","50.5","%","","$","15,879","","","","51.0","%","","$","10,775","","","","43.1","%"],["Commercial","","","4,628","","","","12.4","","","","5,086","","","","12.6","","","","4,186","","","","14.6","","","","4,949","","","","15.7","","","","5,022","","","","21.6"],["Residential Real Estate","","","7,271","","","","30.7","","","","6,917","","","","30.8","","","","4,374","","","","25.3","","","","4,870","","","","24.9","","","","3,684","","","","25.2"],["Consumer","","","4,705","","","","8.3","","","","4,287","","","","8.5","","","","3,578","","","","9.6","","","","3,688","","","","8.4","","","","2,663","","","","10.0"],["","","$","35,863","","","","100.0","%","","$","34,440","","","","100.0","%","","$","26,978","","","","100.0","%","","$","29,386","","","","100.0","%","","$","22,144","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

The allowance allocated to each of the four loan categories should not be interpreted as an indication that charge-offs in 2024 occurred in the same proportions or that the allocation indicates future charge-off trends. The allowance allocated to the one-to-four family real estate loan category and the consumer loan category is based upon the Company’s allowance methodology for homogeneous loans, and increases and decreases in the balances of those portfolios. For the commercial real estate and commercial categories, which represent 42.2% and 10.8% of the total loan portfolio in 2024, respectively, management relies on the Bank’s internal loan review procedures and allocates accordingly based on loan classifications. The gross charge-offs in the commercial real estate portfolio, were $4.6 million for 2024, which represented approximately 57.8% of the gross losses for the entire loan portfolio.

There were no loans other than those identified above, that management has known information about possible credit problems of borrowers and their ability to comply with the loan repayment terms. Management is actively monitoring certain borrowers’ financial condition and loans which management wants to more closely monitor due to special circumstances. These loans and their potential loss exposure have been considered in management’s analysis of the adequacy of the allowance for credit losses.

40

Loan Commitments and Lines of Credit

In the normal course of business, the Bank has extended various commitments for credit. Commitments for mortgages, revolving lines of credit and letters of credit generally are extended for a period of one month up to one year. Normally, no fees are charged on any unused portion, but an annual fee of two percent is charged for the issuance of a letter of credit.

As of December 31, 2024, there were no concentrations of loans exceeding 10% of total loans that are not disclosed as a category of loans. As of that date, there were also no other interest-earning assets that are either nonaccrual, past due, restructured or non-performing.

Investment Securities

The debt securities available for sale decreased $33.1 million in 2024 to $1.27 billion at December 31, 2024, from $1.30 billion at December 31, 2023. For additional information regarding Farmers’ investment securities see Note 3 to the Consolidated Financial Statements.

The following table shows the carrying value of investment securities by type of obligation at the dates indicated:

[[GREPCENT_TABLE]]
[["December 31,","","2024","","","2023"],["U.S. Treasury securities","","$","52,606","","","$","53,210"],["U.S. government sponsored enterprise debt securities","","","62,501","","","","74,745"],["Mortgage-backed securities - residential and collateralized mortgage obligations","","","626,643","","","","594,385"],["Small Business Administration","","","2,475","","","","2,917"],["Obligations of states and political subdivisions","","","504,880","","","","556,169"],["Corporate bonds","","","17,448","","","","18,275"],["Debt securities available for sale","","$","1,266,553","","","$","1,299,701"],["Other investments","","","14,736","","","","15,114"],["Total securities","","$","1,281,289","","","$","1,314,815"]]
[[/GREPCENT_TABLE]]

41

A summary of debt securities held at December 31, 2024 classified according to maturity and including weighted average yield for each range of maturities is set forth below:

[[GREPCENT_TABLE]]
[["","","December 31, 2024"],["Type and Maturity Grouping","","Fair Value","","","Weighted Average Yield"],["U.S. Treasury securities"],["Maturing within one year","","$","99","","","","2.18","%"],["Maturing after one year but within five years","","","35,629","","","","1.04","%"],["Maturing after five years but within ten years","","","16,878","","","","1.21","%"],["Maturing after ten years","","","0","","","","0.00","%"],["Total U.S. Treasury securities","","$","52,606","","","","1.10","%"],["U.S. government sponsored enterprise debt securities"],["Maturing within one year","","$","248","","","","3.11","%"],["Maturing after one year but within five years","","","12,776","","","","1.43","%"],["Maturing after five years but within ten years","","","48,154","","","","2.71","%"],["Maturing after ten years","","","1,323","","","","4.37","%"],["Total U.S. government sponsored enterprise debt securities","","$","62,501","","","","2.47","%"],["Mortgage-backed securities - residential and collateralized mortgage obligations (1)"],["Maturing within one year","","$","0","","","","0.00","%"],["Maturing after one year but within five years","","","6,518","","","","2.45","%"],["Maturing after five years but within ten years","","","26,785","","","","2.35","%"],["Maturing after ten years","","","593,340","","","","2.50","%"],["Total mortgage-backed securities","","$","626,643","","","","2.49","%"],["Small Business Administration"],["Maturing within one year","","$","0","","","","0.00","%"],["Maturing after one year but within five years","","","0","","","","0.00","%"],["Maturing after five years but within ten years","","","1,846","","","","2.15","%"],["Maturing after ten years","","","629","","","","1.98","%"],["Total small business administration","","$","2,475","","","","2.11","%"],["Obligations of states and political subdivisions"],["Maturing within one year","","$","867","","","","3.61","%"],["Maturing after one year but within five years","","","7,604","","","","3.17","%"],["Maturing after five years but within ten years","","","81,557","","","","3.10","%"],["Maturing after ten years","","","414,852","","","","2.84","%"],["Total obligations of states and political subdivisions","","$","504,880","","","","2.89","%"],["Corporate bonds"],["Maturing within one year","","$","1,163","","","","9.25","%"],["Maturing after one year but within five years","","","4,882","","","","6.72","%"],["Maturing after five years but within ten years","","","11,403","","","","6.49","%"],["Maturing after ten years","","","0","","","","0.00","%"],["Total corporate bonds","","$","17,448","","","","6.74","%"]]
[[/GREPCENT_TABLE]]

(1)
Payments based on contractual maturity.

Premises and Equipment

Premises and equipment increased $7.9 million from $44.4 million at December 31, 2023, to $52.3 million at December 31, 2024. This increase was primarily due to the construction of additional office space at the Company's headquarters in Canfield, OH, partially offset by depreciation.

Bank Owned Life Insurance

The Company owns bank owned life insurance policies on the lives of certain members of management. The purpose of this investment is to help offset the costs of employee benefit plans. The cash surrender value of these policies increased to $101.4 million at December 31, 2024, compared to $99.5 million at December 31, 2023. The increase was due to earnings on the policies in 2024 offset slightly by proceeds from a death benefit.

42

Deposits

Total deposits increased to $4.3 billion at December 31, 2024, from $4.2 billion at December 31, 2023, an increase of $89.4 million. Noninterest bearing deposits declined $61.1 million during 2024 to $965.5 million from $1.03 billion. This decline was primarily due to the migration of noninterest bearing deposits into interest bearing deposits as customers looked to take advantage of the increase in interest rates. Interest-bearing deposits increased $75.5 million to $3.2 billion at December 31, 2024, compared to $3.15 billion at December 31, 2023. The increase was primarily due to the migration of noninterest bearing deposits discussed above. Brokered time deposits increased $75.0 million for the year ended December 31, 2024, due to the Company using brokered time deposits to pay off short-term borrowings.

Average balances and average rates paid on deposits are as follows:

[[GREPCENT_TABLE]]
[["","","Years Ended December 31"],["","","2024","","","2023","","","2022"],["","","Amount","","","Rate","","","Amount","","","Rate","","","Amount","","","Rate"],["Noninterest-bearing demand","","$","981,115","","","","0.00","%","","$","1,065,389","","","","0.00","%","","$","959,294","","","","0.00","%"],["Interest-bearing demand","","","1,396,193","","","","2.48","%","","","1,415,425","","","","1.95","%","","","1,392,058","","","","0.54","%"],["Money market","","","659,807","","","","2.43","%","","","602,445","","","","1.62","%","","","389,036","","","","0.14","%"],["Savings","","","435,663","","","","0.03","%","","","511,116","","","","0.03","%","","","457,382","","","","0.02","%"],["Brokered time deposits","","","25,389","","","","4.36","%","","","132,895","","","","4.67","%","","","56,965","","","","2.18","%"],["Certificates of deposit","","","745,945","","","","3.93","%","","","654,717","","","","2.97","%","","","360,687","","","","0.84","%"],["Total","","$","4,244,112","","","","1.91","%","","$","4,381,987","","","","1.44","%","","$","3,615,422","","","","0.64","%"]]
[[/GREPCENT_TABLE]]

The following table sets forth the maturities of retail certificates of deposit having principal amounts $250,000 or greater at December 31, 2024 (in thousands):

[[GREPCENT_TABLE]]
[["Retail certificates of deposit maturing in quarter ending:"],["March 31, 2025","","$","136,533"],["June 30, 2025","","","112,131"],["September 30, 2025","","","12,207"],["December 31, 2025","","","13,115"],["After December 31, 2025","","","11,025"],["Total retail certificates of deposit with balances $250,000 or greater","","$","285,011"]]
[[/GREPCENT_TABLE]]

Uninsured deposits for bank and savings and loan registrants are U.S. federally insured depository institutions as the portion of deposit accounts in U.S. offices that exceed the FDIC insurance limit or similar state deposit insurance regimes and amounts in any other uninsured investment or deposit account that are classified as deposits and not subject to any federal or state deposit insurance regimes. Deposits in amounts in excess of the FDIC insurance limit were $1.42 billion at December 31, 2024.

Short-Term Borrowings

The Company's short-term borrowings decreased by $50.0 million from $355.0 million at December 31, 2023, to $305.0 million at December 31, 2024. This decrease was due to proceeds from the issuance of brokered time deposits being used to pay down short term borrowings. The Company uses short term borrowings to manage the ongoing fluctuations with loans and deposits, when necessary.

Long-Term Borrowings

Total long-term borrowings decreased $2.5 million to $86.2 million at December 31. 2024, from $88.7 million at December 31, 2023. The decline was primarily due to the Company purchasing $3.0 million of its subordinated debt during 2024 and recording a gain of $444 thousand. See Note 13 within Item 8 of this Annual report on Form 10-K for additional detail.

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Stockholders’ Equity

Total stockholders’ equity increased $1.6 million from $404.4 million at December 31, 2023, to $406.0 million at December 31, 2024. The increase was primarily due to net income of $45.9 million offset by an increase in accumulated other comprehensive loss of $20.7 million and dividends paid on common stock of $25.5 million.

Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements

The following table presents, as of December 31, 2024, the Company’s significant fixed and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts or other similar carrying value adjustments. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.

[[GREPCENT_TABLE]]
[["Commitments"],["12/31/2024"],["","","Note"],["","","Ref.","","2025","","","2026","","","2027","","","2028","","","2029","","","Thereafter"],["Deposits without maturity","","","","$","3,429,116"],["Certificates of deposit and brokered time deposits","","11","","","790,004","","","$","21,574","","","$","9,018","","","$","4,098","","","$","6,550","","","$","6,419"],["Long-term borrowings","","13","","","0","","","","0","","","","0","","","","0","","","","0","","","","90,000"],["Leases","","9","","","1,393","","","","1,279","","","","1,198","","","","1,214","","","","1,110","","","","5,652"]]
[[/GREPCENT_TABLE]]

There are also $17.1 million of commitments to various partnership investment funds. The Company invests in these funds, consisting of affordable housing tax credit investments and SBIC funds, in efforts to comply with CRA regulations. The commitments have no predetermined due dates but are expected to be funded sporadically over the next ten years. Note 14 to the consolidated financial statements discusses in greater detail other commitments and contingencies and the various obligations that exist under those agreements. Examples of these commitments and contingencies include commitments to extend credit and standby letters of credit.

Management’s policy is to not engage in derivatives contracts for speculative trading purposes. The Company does utilize interest-rate swaps as a way of helping manage interest rate risk and not as derivatives for trading purposes. See Note 22 within Item 8 of this Annual report on Form 10-K for additional detail.

Liquidity

The principal sources of funds for the Bank are deposits, loan and security repayments, borrowings from financial institutions, repurchase agreements and other funds provided by operations. The Bank also has the ability to borrow from the FHLB. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan prepayments are more influenced by interest rates, general economic conditions and competition. Investments in liquid assets maintained by the Company and the Bank are based upon management’s assessment of (1) the need for funds, (2) expected deposit flows, (3) yields available on short-term liquid assets, and (4) objectives of the asset and liability management program.

The Bank’s Asset/Liability Committee (“ALCO”) is responsible for monitoring liquidity guidelines, policies and procedures. ALCO uses a variety of methods to monitor the liquidity position of the Bank including a liquidity analysis that measures potential sources and uses of funds over future time periods. ALCO also performs contingency funding analyses to determine the Bank’s ability to meet potential liquidity needs under stress scenarios that cover varying time horizons ranging from immediate to long-term.

Capital Resources

The Bank, as a national chartered bank, is subject to the dividend restrictions set forth by the OCC. The OCC must approve declaration of any dividends in excess of the sum of profits for the current year and retained net profits for the preceding two years (as defined). Farmers and Farmers Bank are required to maintain minimum amounts of capital to total “risk weighted” assets, as defined by the banking regulators. At December 31, 2024, under the

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minimum capital requirements associated with the Basel III, Farmers Bank and Farmers are required to have actual and minimum capital ratios, which are detailed in Note 16 of the Consolidated Financial Statements. Farmers Bank and Farmers had capital ratios above the minimum levels at December 31, 2024 and 2023. At year-end 2024 and 2023, the most recent regulatory notifications categorized Farmers Bank as well capitalized under the regulatory framework for prompt corrective action.

During 2013, the Federal banking regulators approved a final rule to implement revised capital adequacy standards of the Basel Committee on Banking Supervision, commonly called Basel III, and to address relevant provisions of the Dodd-Frank Act. The final rule strengthens the definition of regulatory capital, increases risk-based capital requirements, makes selected changes to the calculation of risk-weighted assets, and adjusts the prompt corrective action thresholds. The Bank has retained, through a one-time election, the prior treatment for most accumulated other comprehensive income, such that unrealized gains and losses on securities available for sale that did not affect regulatory capital amounts and ratios. As mentioned in the prior paragraph, the Bank falls within the new regulatory capital ratio guidelines.

Critical Accounting Policies

The Company follows financial accounting and reporting policies that are in accordance with generally accepted accounting principles in the United States of America and conform to general practices within the banking industry. Some of these accounting policies are considered to be critical accounting policies. Critical accounting policies are those policies that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has identified three accounting policies that are critical accounting policies and an understanding of these policies is necessary to understand the financial statements. These policies relate to determining the adequacy of the allowance for credit losses, if there is any impairment of goodwill and other intangibles, and estimating the fair value of assets acquired and liabilities assumed in connection with any merger activity. Additional information regarding these policies is included in the notes to the consolidated financial statements, including Note 1 (Summary of Significant Accounting Policies), Note 4 (Loans) and Note 2 (Business Combinations), and the section above captioned “Loan Portfolio.” Management believes that the judgments, estimates and assumptions used in the preparation of the consolidated financial statements are appropriate given the factual circumstances at the time.

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

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

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

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

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

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

•
U.S. civilian unemployment rate.

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

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

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

For example, compared to the Company’s central scenario that is based on a four-quarter forecasted change in U.S. real GDP of 2.10% from 4Q2024 to 4Q2025, U.S. PCE inflation of 2.50%, and U.S. unemployment of 4.30%, the Company’s relative adverse scenario assumes a four-quarter forecast with a contraction of U.S. real GDP, a PCE inflation between 5.00% and 7.00% and an elevated U.S. unemployment rate between 6.00% and 7.00%. This analysis is not intended to estimate expected future changes in the allowance for credit losses, for a number of reasons, including:

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

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

To demonstrate the sensitivity of credit loss estimates to macroeconomic forecasts as of December 31, 2024, the Company compared the modeled estimates under its relative adverse scenario for two of the Company’s largest loan pools to its central scenario for the same loan pools. Without considering offsetting or correlated effects in other qualitative components of the Company’s allowance for credit losses, the comparison between these two scenarios for the exposures below reflect the following differences:

•
An increase of approximately $650 thousand for residential real estate loans and lending-related commitments

•
An increase of approximately $1.16 million for commercial real non-owner occupied loans and lending-related commitments

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

Recognizing that forecasts of macroeconomic conditions are inherently uncertain, the Company believes that its process to consider the available information and associated risks and uncertainties is appropriately governed and that its estimates of expected credit losses were reasonable and appropriate for the period ended December 31, 2024.

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

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

Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. GAAP establishes standards for the amortization of acquired intangible assets and the impairment assessment of goodwill. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. The Company’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of the Company’s subsidiaries to provide quality, cost-effective services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods. GAAP requires an annual evaluation of goodwill for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The fair value of the goodwill is estimated by reviewing the past and projected operating results for the subsidiaries and comparable industry information. At December 31, 2024, on a consolidated basis, Farmers had intangibles of $20.8 million subject to amortization and $167.5 million in goodwill, which was not subject to periodic amortization.

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

Recent Accounting Pronouncements and Developments

Note 1 to the consolidated financial statements discusses new accounting policies adopted by Farmers during 2024 and 2023 and the expected impact of accounting policies recently issued or proposed but not yet required to be adopted. To the extent the adoption of new accounting standards materially affects financial condition, results of operations or liquidity, the impacts are discussed in the applicable sections of this financial review and notes to the consolidated financial statements.

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