Preferred StockThe Company's Articles of Incorporation authorize 10,000,000 shares of $0.01 par value preferred stock available for issuance with such rights and preferences, including liquidation, dividend, conversion, and voting rights, as the Board of Directors may determine.Series BDuring 1993, the Board established a Series B preferred stock, consisting of 750,000 shares.  The Series B preferred stock has preference over the Company's common stock and Series A preferred stock; has no voting rights (absent default in payment of declared dividends); and is entitled to cumulative dividends of $0.01 per share per year, payable if and when declared by the Board of Directors.  In the event of dissolution or liquidation of the Company, the preferential amount payable to Series B preferred stockholders is $1.00 per share plus dividends in arrears. No dividends have been declared or paid with respect to the Series B preferred stock. The Series B Preferred stock is no longer convertible to shares of the Company’s common stock.  At December 31, 2012 and 2011, cumulative dividends in arrears on the outstanding Series B shares were $135,000 and $127,500, respectively.Series CDuring 2000, the Board established a Series C preferred stock, consisting of 205,996 shares.  In 2002, 28,092 shares were converted to common stock and cancelled, leaving 177,904 Series C preferred shares authorized and outstanding.  The Series C preferred stock has preference over the Company’s common stock and has voting rights equal to that number of shares outstanding, but no conversion or dividend rights.  In the event of dissolution or liquidation of the Company, the preferential amount payable to Series C preferred stockholders is $0.55 per share.

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United States Antimony Corporation and SubsidiariesNotes to Consolidated Financial StatementsDecember 31, 2012, 2011 and 20108.    Stockholders' Equity, continuedSeries DDuring 2002, the Board established a Series D preferred stock, authorizing the issuance of up to 2,500,000 shares.  The Series D preferred stock has preference over the Company’s common stock but is subordinate to the liquidation preferences of the holders of the Company’s outstanding Series A, Series B and Series C preferred stock.  Series D preferred stock carries voting rights and is entitled to annual dividends of $0.0235 per share.  The dividends are cumulative and payable after payment and satisfaction of the Series A, B and C preferred stock dividends.  No dividends have been declared or paid with respect to the Series D preferred stock.  At December 31, 2012 and 2011, cumulative dividends in arrears on the 1,751,005 outstanding Series D shares were $ 378,069 and $336,920, respectively, payable if and when declared by the Board of Directors.  In the event of dissolution or liquidation of the Company, the preferential amount payable to Series D preferred stockholders is $2.50 per share.  At December 31, 2012 and 2011, the liquidation preference for Series D preferred stock was $4,755,069 and $4,377,513, respectively.  Holders of the Series D preferred stock have the right, subject to the availability of authorized but unissued common stock, to convert their shares into shares of the Company's common stock on a one-to-one basis without payment of additional consideration and are not redeemable unless by mutual consent.   The majority of Series D preferred shares are held by John Lawrence, president of the Company.9.    2000 Stock PlanIn January 2000, the Company's Board of Directors resolved to create the United States Antimony Corporation 2000 Stock Plan ("the Plan").  The purpose of the Plan is to attract and retain the best available personnel for positions of substantial responsibility and to provide additional incentive to employees, directors and consultants of the Company to promote the success of the Company's business. The maximum number of shares of common stock or options to purchase common stock that may be issued pursuant to the Plan is 500,000.  At December 31, 2012 and 2011, 300,000 shares of the Company's common stock had been issued under the Plan.  There were no issuances under the Plan during 2012 and 2011.10.  Income TaxesThe Company’s income tax provision (benefit) for the years ending December 31, 2012, 2011, and 2010, are as follows:


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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United States Antimony Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012, 2011 and 2010


At December 31, 2012 and 2011, the Company had net deferred tax assets as follows:


Existing and forecasted pretax earnings for financial reporting purposes are sufficient to generate the estimated required future taxable income required to realize the recognized federal net deferred tax asset as of December 31, 2012.


(1)  Meals and entertainment, effect of state taxes, change of prior year estimate, and rate differential, as management has refined their estimate to 38.5% in 2011.
During the years ended December 31, 2012, 2011, and 2010, there were no material uncertain tax positions taken by the Company.  The Company United States income tax filings are subject to examination for the years 2010 through 2012, and 2011 and 2012 in Mexico. In the event that the Company is assessed penalties and or interest, penalties will be charged to other operating expense and interest will be charged to interest expense.11.  Related-Party TransactionsAmounts due to (due from) related parties at December 31, 2012 and 2011 were as follows:


(1)Transactions affecting the payable to Mr. Lawrence during 2012, 2011 and 2010 were as follows:


In addition to transactions described above, during 2012, 2011, and 2010, the Company had the following transactions with related parties:Members of the audit committee received $24,000 in cash for 2011.During 2012, 2011, and 2010, the Company paid $89,204, $107,359, and $55,469, respectively, to a director for development of Mexican mill sites and consulting fees.A director of the Company acted on behalf of the Company as laison to Mexican officials through the year ended 2011. During the years ended December 31, 2011 and 2010, fees and expenses to this director were $37,083 and $32,000, respectively.

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United States Antimony Corporation and SubsidiariesNotes to Consolidated Financial StatementsDecember 31, 2012, 2011 and 201013.  Business Segments, continued


ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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.


As mentioned in the discussion earlier, in reviewing years 2014 to 2013, the change in volume is the main driver for the
improved ratio which is opposite of the change between 2013 to 2012 the largest impact was due to rate. The strategy since 2010 has been to extend the maturities of time deposit specials to over 24 months to prepare for a rising rate
environment. The other strategy employed since 2011 was to increase core deposits by offering innovative products focused on customer needs, such as higher interest rates and fraud notification. In exchange for these accounts, customers were asked to utilize services that benefited both the Bank and themselves. Smaller time
deposit rate shoppers had an option to perhaps change their behavior of banking or allow those deposits to run off. The new core deposit products were indeed embraced by our customers and have helped to attain the deposit portfolio mix sought by the
Bank. Non-Interest Income The discussion now turns
to the noninterest activity of 2015 operations, beginning with the revenue portion. In comparing line items of the consolidated statements of income for years ended 2013 through 2015, it can be seen where the Company has been spending its time and
the impact of the recession and slow recovery. This section will focus on the significant noninterest items that impacted the operations of the Company. The Company has concerns with the increased costs associated with regulatory compliance such as the possible loss of revenue from new regulations stemming
from the Dodd-Frank Act. History has proven the concern is justified. One area of revenue impacted was overdraft fees. Updated Regulation E guidelines were implemented on August 15, 2010 and the Bank has ended each year since with a lower
revenue stream from overdraft fees. This has occurred in spite of the addition of the new offices since 2010. Each year, the number of checking accounts increased along with the balances; however average collected overdraft fees per account
decreased. Overdraft fees in 2015 accounted for $2.4 million in noninterest income, compared to $2.5 million in 2014 and $2.7 million for 2013. The Bank had made this an area of focus for 2015 as this revenue stream remains under intense regulator
review. In 2015, the Bank adjusted its overdraft program and renamed it Courtesy Pay. Courtesy Pay establishes dynamic limits based on a customers behavior and likelihood of repayment. The Bank has sought to better service the
customers needs while decreasing the need for collections and improving profitability. At the current time, profitability has not been impacted. Service charges on checking accounts, excluding Health Savings Accounts, were up $120 thousand for
2015 and $208.7 thousand for 2014. This improvement is credited to the new checking accounts mentioned previously. The Bank has long promoted the use of
debit cards by its customers and continued that philosophy with the introduction of additional new products. 2015 revenue improved $142.9 thousand and 2014 revenue improved $250.5 from ATM/debit card usage as compared to 2014 and 2013, respectively.
The Bank receives interchange revenue from each use by a customer of the card. In 2011, this revenue stream was at risk of being reduced by the Federal Reserve regulation of the interchange fee. The establishment by the Federal Reserve of a tiered
pricing for banks under $10 billion has helped to protect the profitability from such fees, although the concern remains as to how long this tiered pricing will remain in effect. While this revenue stream continues to improve with more depositors
using electronic methods for purchasing, the expense of fraud has offset a portion of the revenue gain. Further discussion can be found in the non-interest expense section regarding the net effect of debit card activity. Noninterest income from net gain on sales of loans decreased for both 2015 and 2014 as compared to 2013. Unfortunately, this has become a trend mainly due to
the duration of the flat rate interest environment. The net gain on sale of loans is derived from sales of real estate loans into the secondary market. Of these loan types, the Bank sells 100% of the residential loans and 90% of the agricultural
loans into the secondary market. 2014 or 2015 activity did not reach the same high levels as 2013. Gains of $559.6 and $140.8 thousand were recorded for residential and agricultural real estate respectively for 2015 along with gains of $452.7 and
$194.3 thousand were recorded for residential and agricultural real estate respectively for 2014. In conjunction with these sales, the Bank maintains servicing rights and those income amounts during all three years are included in the customer
service fees line item and account for over $300 thousand in revenue each year. The last line item in the noninterest income section as was discussed
previously is the net gain on sale of investments. The Bank has taken advantage of this opportunity the last three years and expects to continue as long as the rates remain low and the yield curve is favorable to the transaction. The Bank will not
increase short-term gains at the sacrifice of long-term profitability. All of the sales of securities in 2015 and 2014 of $47.0 and $57.9 million respectively were used to fund loan growth while only some of the $91 million in proceeds realized on
the sale of securities in 2013 were used to fund loan growth. This is a source of funds that will continue to be analyzed for use in the coming year. Gains of $451 thousand were recorded for 2015, $494 thousand for 2014 as compared to $775 thousand
for 2013. Customer service fees show a nice improvement of $623 thousand collected in 2015 as compared to 2014. Almost $200 thousand can be attributed to
classifying foreign ATM fees out of service charges into miscellaneous fees in 2015. An additional $104.7 thousand comes from servicing those sold secondary loans mentioned in gain on sale of loans, as the volume increased in 2015 as compared to
2014. Total loan service fees collected in 2015 was $1.2 million compared to $1.1 million in 2014. Overall, noninterest income increased $604 thousand in 2015 following a year where it had decreased $654
thousand. Some of the revenue may not be easily duplicated as it is dependent on economic and market conditions to provide the opportunity. However, the increased revenue amounts from deposit and loan services should continue to provide improved
profitability in the future. Gains on sales should also continue in the near term though when it will change is unknown at this time. Non-Interest
Expense Noninterest expense increased 3.4% in 2015 as compared to 2014 and was preceded by a 4.2% increase in 2014 as compared to 2013. Represented in
dollars, 2015 was $854 thousand higher than 2014 and 2014 was $1 million higher than 2013. The largest factor behind both years increase was the expense of employee salaries and wages. During 2015, an additional $721 thousand was spent over 2014
which correlates to a 7.1% increase. When making the same analysis for 2014 as compared to 2013, 2014s costs increased $633 thousand or 6.6%. Three main components flow into salaries and wages: base salary, deferred costs, and incentives
composed of the expense of restricted stock awards and performance incentives. Base pay has increased with the addition of the three offices of Waterville, Custar and Sylvania, the Captive and through normal yearly increases to the remainder of the
employees. Base pay was up $559.3 thousand for 2015 over the previous year and 2014 was up $474.1 thousand over 2013. The full time equivalent number of employees at each yearend increased to 265 for 2015, to 260 for 2014 compared to 2013s
251. Incentive pay as it related to performance was up $209.5 thousand in 2014 over 2013. Both measurements used to award incentive pay had improved in
2015 and 2014 and employees benefited accordingly. These followed 2013, a year in which the incentive performance pay was down $110.1 thousand from 2012. The expense for the restricted stock awards has also increased each of the last three years as
more shares have been granted to a larger number of employees. 2015s cost for this program was $82 thousand higher than 2014 and 2014 was $20.9 thousand higher than 2013. The awards incorporate a three year vesting period so the increase of
any one year carries forward through the next two years. This expense should continue to increase as the Company continues its expansion strategy. (For further discussion in incentive pay and restricted stock awards, see note 11 of the consolidated
financial statements.) Employee benefits increased by similar percentages as the salaries and wages for 2015 increased by 6.9% over 2014 and 2014
increased by 3.3% over 2013. The cost of the 401-K retirement plan increased each year as the profit share component increased along with the number of employees participating. The Company has been able to hold steady the expense of the
employees group insurance while paying higher premiums. Being partially self-insured has helped with lower claim experience though it is an unknown each year what that experience will be. For 2014 and 2015, a switch in the medical provider and
comparison pricing also assisted to control the cost. Employees do participate in any premium increases. Net occupancy expense typically increases as the
Company expands, with 2014 being an exception due to an increase in building rent. Building rent is netted out to offset occupancy expense. The greatest contributor to building rent comes from the division of FM Investments within the Bank. This
division experienced a strong 2014; however the department was short staffed most of 2015. This has been remedied in 2016 and performance is expected to improve. While net loss on sale of other assets owned, mainly ORE property, does not represent income for the years presented, the decrease in the amount of the loss
for 2015 as compared to 2014, does contribute to improved profitability. Loss on sale of assets included any write downs in the carrying values of ORE property on the Banks balance sheet. In 2015 and 2014, the number of properties and the
corresponding carrying values decreased as compared to 2013. The Bank also sold its St. Joe, Indiana property during 2015. While taking a loss for the sale, the Bank eliminated the continued maintenance expense of an unoccupied building. An easement
was agreed upon to enable the ATM located on the property to remain operational. The mortgage refinancing activity has been lower over the last three
years. A correlating expense to that activity is the amortization of mortgage servicing rights. The amortization is the expense that offsets the income recognized when the loan is first made. Income is recorded when the mortgage loan is first sold
with servicing retained and is therefore recognized within one year. The amortization, however, is calculated over the life of the loan and accelerated as loans are paid off early. An increase in this expense can be driven by two activities: an
increase in the number of sold loans and/or by the acceleration of the expense from payoff and refinance activity. The best picture of the bottom line impact is achieved by netting the income with the expense each year. 2015 had net income of $33
thousand, a switch from 2014 which had net expense of $42.7 thousand and 2013 had a net income of $2 thousand. Of course, the value (or
income) of the mortgage servicing right when sold also impacts the net position. 2015 had higher additions and lower amortization expense from refinanced loans. 2013 had new loan activity and lower refinance activity making the additions and
amortization almost equal. The number of loans and balances also indicates this as the levels have remained fairly constant. 2014 was a year with limited sales and the amortization expense was therefore higher than the capitalized additions. As of
December 2015, 3,598 loans are being serviced with balances of $275.7 million. As of December 31, 2014, there were 3,638 loans serviced with balances of $275.4 million and as of December 2013, there were 3,684 loans serviced with balances of
$282.1 million. The impact of mortgage servicing rights to both noninterest income and expense is shown in the following table:


Furniture and equipment steadily increases as we continue to add facilities and invest in technology. Annual maintenance costs
continue to grow and become a greater piece of the overall cost. As new services are provided to our customers, the backroom cost to supply them continues to rise. The Company accepts it is an expected cost of doing business and keeping our services
relevant to the industry. Data processing expense increased $50 thousand during 2015 and by $38 thousand in 2014. The Company continues to investigate
ways to reduce this expense. The pricing on many services, however, is based on number of accounts and the Bank fully expects those to increase with the growth from the newer offices and overall Bank growth. The last line item with significant variation in noninterest expense to discuss is other general and administrative. The decrease of $348 thousand
for 2015 as compared to 2014 can be mainly attributed to a $195.7 thousand reduction in marketing and consulting costs. A renegotiation of one service provider contract along with the maturity of another during 2015 lead to the decrease. Another
contributor to the reduction was lower losses due to NSF and fraud. The Bank applauds the work of our front-line staff to recognize possible fraud and scams attempted on our customers and stopping them before they can occur. An investment in
additional fraud detection software has also helped our back office personnel to detect possible digital fraud. This was down $60.2 thousand in 2015 compared to an increase in 2014 of $40.9 thousand. Other general and administrative was higher by $461 thousand in 2014. The fluctuation was not isolated to a single source. The primary factors impacting this
fluctuation in 2014 are increases in both ATM expense and core deposit intangible expenses. The increased expense of $52.7 thousand relating to ATM and debit cards in 2015 and 2014 over the previous year is caused by many factors. Increased usage
during both years corresponds to increases in both revenue and cost. Finally, fraud increases cost as new cards have to be issued to limit the risk exposure. The fraud losses themselves are not recognized in this breakout, however the cost of
replacement cards is. The Bank is currently deploying chip technology within its cards; the Bank is aware the adoption of embedded chips will increase this expense in the coming years. 2014 experienced additional expense over 2013 in consulting
($161.7 thousand), audit and accounting fees ($166.5 thousand) and advertising ($101.3 thousand). Allowance for Credit Losses Provision expense decreased by $566 thousand for 2015, following an increase of $333 thousand for 2014. The decrease for 2015 was due to the consistent strong
asset quality of the Banks loan portfolio as evidenced by low levels of both net charge-offs and delinquencies. The increase for 2014 was needed to account for the loan growth and the net charge-off activity of 2014. Sustained strong asset
quality kept the provision expense lower than the growth alone would have warranted. Net charge-offs were $473, $480 and $888 thousand for 2015, 2014 and 2013, respectively. Commercial and Industrial loans had the largest charge-off activity in 2015
and 2013, while 2014 was impacted with higher levels in the consumer portfolios. The Company segregates its Allowance for Credit Losses (ACL) into two reserves: The ACL and the Allowance for
Unfunded Loan Commitments and Letters of Credit (AULC). When combined, these reserves constitute the total ACL. The AUCL is included in other liabilities on the consolidated balance sheets. The Banks ALLL methodology captures trends in leading, current, and lagging indicators which will directly affect the Banks allocation amount. The
Bank monitors trends in such leading indicators as delinquency, unemployment changes in the Banks service area, experience and ability of staff, regulatory trends, and credit concentrations. A current indicator such as the total watch list
loan amount to Capital, and a lagging indicator such as the charge off amount are referenced as well. A matrix formed by loan type from these indicators is used in making ALLL adjustments. Watch list loan balances are comprised of loans graded 5-8. These loan balances decreased 53.6% or $7.2 million from December 31, 2014 to
December 31, 2015. The balances decreased mainly due to successful results from collection efforts. Given the size of the decrease, it is no surprise it is attributed mainly to the commercial real estate portfolio decreasing by $5.9 million.
Three customers made up the bulk of the balances with one of three finding funding elsewhere. Commercial loans (non-real estate) on the Banks watch list also had a nice decrease during 2015, though just not as high at $1.9 million. Of the aggregate watch list loan balances, as of December 31, 2015, special mention accounted for 36.6% with substandard comprising 49.1% and doubtful
accounting for the final 14.3%. In comparison to 2014, special mention was down $7.2 million, substandard up slightly by $161 thousand and doubtful down almost exactly the same amount at $162 thousand. Special mention loan balances increased 21.2% or $1.7 million overall as of yearend 2014 compared to same date 2013. The increase was in the commercial and
commercial real estate portfolios. The largest increase of $2.1 million was in the commercial real estate, which was caused mainly by one large relationship being downgraded. Agricultural real estate decreased $618 thousand, thereby offsetting the
above-referenced increase. For 2014, the increase in special mention is offset by significant decreases in the substandard classifications of those same
commercial related portfolios. Overall, substandard and doubtful loans decreased 42.5% or $2.9 million as compared to yearend 2013. In response to these fluctuations and loan growth during 2014 and 2015, the Bank changed ALLL to outstanding loan
coverage percentage changed to 0.88% as of December 31, 2015, 0.95% as of December 31, 2014 from and 0.90% as of December 31, 2013. The
above indicators are reviewed quarterly. Some of the indicators are quantifiable and, as such, will automatically adjust the ALLL once calculated. These indicators include the ratio of past due loans to total loans, loans past due greater than 30
days, and the ration of watch list loans to capital, with the watch list made up of loans graded 5, 6 or 7 on a scale of 1 (best) to 7 (worst). Other indicators use more subjective data to the extent possible to evaluate the potential for inherent
losses in the Banks loan portfolio. For example, the economic indicator uses the unemployment statistics from the communities in our market area to help determine whether the ALLL should be adjusted. At the end of each of 2013, 2014 and 2015,
a slight improvement was noted in unemployment figures. All aggregate commercial and agricultural credits including real estate loans of $250,000 and
over are reviewed annually by both credit committees and internal loan review to look for 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. The discounting percentage used for real estate mirrors the discounting of real estate as provided for in the Banks Loan Policy.
However, unique or unusual circumstances may be present which will affect the real estate value and, when appropriately identified, can adjust the discounting percentage at the discretion of management. The ACL increased $153 and $755 thousand during 2015 and 2014 respectively, which was preceded by a $29 thousand decrease during 2013. The large increase in
2014 directly correlates to the large increase in loan balances. With the improved asset quality, the metrics upon which the ACL is calculated did not support a larger increase in 2015 even though loan growth occurred. The percentage of ACL to the
total loan portfolio was 0.93% as of December 31, 2013, 0.98% as of December 31, 2014 and 0.91% as of December 31, 2015. December 31, 2013 had the lowest loans past due 30+ day percentage at 0.25% in the Banks known
history, December 31, 2014 and 2015 were still at respectable lows of 0.37% and 0.32%. Please see Note 4 in the consolidated financial statement for additional tables regarding the composition of the
ACL. Federal Income Taxes Effective tax rates were
26.97%, 28.64% and 28.53% for 2015, 2014 and 2013 respectively. The effect of tax-exempt interest from holding tax-exempt securities and Industrial Development Bonds (IDBs) was $554, $634, and $640 thousand for 2015, 2014, and 2013, respectively.
All years included an increase into a higher tax bracket for income over $10 million. Behind the decrease in 2015 is one of the benefits from the establishment of the Captive subsidiary. Material Changes in Financial Condition The shifts in
the balance sheet during 2015 and 2014 have positioned the Company for continued improvement in profitability. On the asset side, the Company experiences an increase in interest income due to loan growth with funding provided by a decrease in the
investment portfolio, core deposit growth and 2015 also utilized other borrowings. The cost of funds was impacted by the shift of interest bearing liabilities to noninterest and the decrease in time deposits and other borrowed money as borrowings
didnt increase until December 2015. Both contributed to improved profitability in 2015 and 2014 and leads to expected liabilities improvement in future years. Average earning assets increased throughout 2015 and 2014. Loan growth in both years was the main factor. 2014 was also aided by the Custar acquisition which
took place in December 2013 and brought in $29 million in deposits. 2015 also had the addition of the Sylvania office for a full year along with the growth in the other newer offices. Securities The investment portfolio is primarily used to
provide overall liquidity for the Bank. It is also used to provide required collateral for pledging to the Banks Ohio public depositors for amounts on deposit in excess of the FDIC coverage limits. It may also be used to pledge for additional
borrowings from third parties. Investments are made with the above criteria in mind while still seeking a fair market rate of return, and looking for maturities that fall within the projected overall strategy of the Bank. The possible need to fund
growth is also a consideration. All of the Banks security portfolio is categorized as available for sale and as such is recorded at market value.
Security balances as of December 31 are summarized below:


The following table sets forth the maturities of investment securities as of December 31, 2015 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. Tax-equivalent adjustments, using a thirty-four percent rate, have been made in yields on obligations of state and
political subdivisions. Stocks of domestic corporations have not been included.


As of December 31, 2015 the Bank did not hold a large block of any one investment security in excess of 10% of
stockholders equity. The largest segment of holdings is in US Governments. The Bank also holds stock in the Federal Home Loan Bank of Cincinnati at a cost of $3.7 million. This is required in order to obtain Federal Home Loan Bank loans. The
Bank also owns stock of Farmer Mac with a carrying value of $37.4 thousand which is required to participate loans in the program. Loan Portfolio
The Banks various loan portfolios are subject to varying levels of credit risk. Management mitigates these risks through portfolio
diversification and through standardization of lending policies and procedures. Risks are mitigated through an adherence to the Banks loan
policies, with any exception being recorded and approved by senior management or committees comprised of senior management. The Banks loan policies define parameters to essential underwriting guidelines such as loan-to-value ratio, cash flow
and debt-to-income ratio, loan requirements and covenants, financial information tracking, collection practice and others. The maximum loan amount to any one borrower is limited by the Banks legal lending limits and is stated in policy. On a
broader basis, the Bank restricts total aggregate funding in comparison to Bank capital to any one business or agricultural sector by an approved sector percentage to capital limitation. The following table shows the Banks loan portfolio by category of loan as of December 31st of each year, including loans held for sale:


The following table shows the maturity of loans as of December 31, 2015:


The following table presents the total of loans due after one year which has either 1) predetermined interest rates (fixed) or
2) floating or adjustable interest rates (variable):


The following table summarizes the Companys nonaccrual, past due 90 days or more and still accruing loans,
and accruing troubled debt restructurings as of December 31 for each of the last five years:


Although loans may be classified as non-performing, some pay on a regular basis, and many continue to pay interest irregularly
or at less than original contractual rates. Interest income that would have been recorded under the original terms of these loans would have aggregated $117.1 thousand for 2015, $52.3 thousand for 2014 and $139.1 thousand for 2013. 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. 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 $76 thousand for 2015, $87 thousand for 2014 and $60 thousand for 2013. $20.6 thousand of interest collected in 2015 was applied to reduce the
specific allocation and was applied for the same reason in 2014. Loans are placed on nonaccrual status in the event that the loan is in past due status
for more than 90 days or payment in full of principal and interest is not expected. The Bank had nonaccrual loan balances of $2.1 million at December 31, 2015 compared to balances of $3.3 and $1.7 million as of year-end 2013 and 2014,
respectively. All of the balances of nonaccrual loans for the past three years were collaterally secured. As of December 31, 2015 the Bank had $7.0
million of loans which it considers to be potential problem loans in that the borrowers are experiencing financial difficulties. At December 31, 2014, the Bank had $13.5 million of these loans. These loans are subject to constant
management attention and are reviewed at least monthly. The amount of the potential problem loans was considered in managements review of the loan loss reserve at December 31, 2015 and 2014. 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. This expense is determined by management based on a detailed monthly review of the risk factors affecting the loan portfolio, including general economic conditions, changes in the portfolio mix, past due
loan-loss experience and the financial condition of the banks borrowers. As of December 31, 2015, the Bank had loans outstanding to
individuals and firms engaged in the various fields of agriculture in the amount of $82.8 million with an additional $58.5 million in agricultural real estate loans these compared to $74.6 and $50.9 million respectively as of December 31, 2014.
The ratio of this segment of loans to the total loan portfolio is not considered unusual for a bank engaged in and servicing rural communities. 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. As of December 31, 2015, the Bank had $1.1 million of its loans that were classified as troubled debt restructurings, of which $182.4 thousand are included in non-accrual loans. This compares to $797.2 thousand as of same date
2014 and the Bank had almost $911.2 thousand classified as such as of December 31, 2013. Updated appraisals are required on all collateral dependent
loans once they are deemed impaired. The Bank may also require an updated appraisal of a watch list loan which the Bank monitors under their loan policy. On a quarterly basis, Bank management reviews properties supporting asset dependent loans to
consider market events that may indicate a change in value has occurred. To determine observable market price, collateral asset values securing an
impaired loan are periodically evaluated. Maximum time of re-evaluation is every 12 months for chattels and titled vehicles and every two years for real estate. In this process, third party evaluations are obtained and heavily relied upon. Until
such time that updated appraisals are received, the Bank may discount the existing collateral value used. Performing non-watch list loans secured in whole or in part by real estate, do not require an updated
appraisal unless the loan is rewritten and additional funds advanced. 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 Banks loan
policies irrespective of their grade. The Banks watch list is reviewed on a quarterly basis by management and any questions to value are addressed at that time. The majority of the Banks loans are made in the market by lenders who live and work in the market. Thus, their evaluation of the independent valuation
is also valuable and serves as a double check. On extremely rare occasions, the Bank will make adjustments to the recorded values of collateral securing
commercial real estate loans without acquiring an updated appraisal for the subject property. The Bank has no formalized policy for determining when collateral value adjustments between regularly scheduled appraisals are necessary, nor does it use
any specific methodology for applying such adjustments. However, on a quarterly basis as part of its normal operations, the Banks senior management and the Loan Review Committee will meet to review all commercial credits either deemed to be
impaired or on the Banks watch list. 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. In each of these situations, any information available to
management regarding market conditions impacting a specific property or other relevant factors are considered, and lenders familiar with a particular commercial real estate loan and the underlying collateral may be present to provide their opinion
on such factors. If the available information leads management to conclude a valuation adjustment is warranted, such an adjustment may be applied on the basis of the information available. If management concludes that an adjustment is warranted but
lacks the specific information needed to reasonably quantify the adjustment, management will order a new appraisal on the subject property even though one may not be required under the Banks general policies for updating appraisal. Note 4 of the Consolidated Financial Statements may also be reviewed for additional tables dealing with the Banks loans and ALLL. ALLL is evaluated based on an assessment of the losses inherent in the loan portfolio. This assessment results in an allowance consisting of two components,
allocated and unallocated. Management considers several different risk assessments in determining ALLL. The allocated component of ALLL reflects expected
losses resulting from an analysis of individual loans, developed through specific credit allocations for individual loans and historical loss experience for each loan category. For those loans where the internal credit rating is at or below a
predetermined classification and management can reasonably estimate the loss that will be sustained based upon collateral, the borrowers operating activity and economic conditions in which the borrower operates, a specific allocation is made. For
those borrowers that are not currently behind in their payment, but for which management believes, based on economic conditions and operating activities of the borrower, the possibility exists for future collection problems, a reserve is
established. The amount of reserve allocated to each loan portfolio is based on past loss experiences and the different levels of risk within each loan portfolio. The historical loan loss portion is determined using a historical loss analysis by
loan category. The unallocated portion of the reserve for loan losses is determined based on managements assessment of general economic conditions
as well as specific economic factors in the Banks marketing area. This assessment inherently involves a higher degree of uncertainty. It represents estimated inherent but undetected losses within the portfolio that are probable due to
uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrowers financial condition and other current risk factors that may not have yet manifested themselves in the Banks
historical loss factors used to determine the allocated component of the allowance. Actual charge-off of loan balances is based upon periodic evaluations
of the loan portfolio by management. These evaluations consider several factors, including, but not limited to, general economic conditions, financial condition of the borrower, and collateral. As presented below, charge-offs increased to $1.0 million for 2015, preceded by a decrease to $778 thousand for
2014, an increase to $1.3 million for 2013, decreased to $891 thousand for 2012 and 2011 recorded $2.7 million. The provision expense also decreased in 2012 and 2011 and increased for 2013 and 2014. 2015 had the lowest provision expense of all years
presented at $625 thousand. 2014 and 2013 had provision expense of $1.2 million and $858 thousand respectively. 2012 had provision expense of $738 thousand with 2011 having provision expense of $1.7 million. The Commercial and Industrial portfolio
had the largest net charge-off position in 2011 through 2015. The improvement in asset quality during the periods shown is reflected in the increased percentage of the allowance for loan loss to nonperforming loans. In reviewing the bigger picture of the allowance for credit loss, the years with the higher percentage of ACL to total nonperforming loans ratio account for
the lower level of nonaccrual and watch list loans. This demonstrates the extended time period with which it has taken to achieve resolution and/or collection of these loans. In 2012, the provision expense was to offset the higher year-end watch
list values. A smaller portion of the allowance was needed to fund the impaired loans as collateral remained sufficient to cover the outstanding amounts in most cases. 2014s significant and continued loan growth since fourth quarter 2013 was
the reason behind 2014s higher balances as asset quality remained strong. The ratio of ACL to nonperforming loans increased significantly in 2014 which is why provision loan expense was lower in 2015 in comparison. The ACL to nonperforming
loans for 2015 remained more than adequate and emphasizes the existing strong level of credit quality. The following table presents a reconciliation of the allowance for credit losses for the years ended
December 31, 2015, 2014, 2013, 2012 and 2011:


*
Nonperforming loans are defined as all loans on nonaccrual, plus any loans past due 90 days not on nonaccrual. Allocation of ALLL per Loan Category in terms of dollars and percentage of loans in each category to total loans
is as follows:


Deposits The amount of
outstanding time certificates of deposits and other time deposits in amounts of $100,000 or more by maturity as of December 31, 2015 are as follows:

(In Thousands)

UnderThree Months

Over ThreeMonthsLess thanSix Months

Over SixMonths LessThan OneYear

OverOneYear

 Time Deposits

$
8,904

$
13,404

$
20,513

$
38,040

The following table presents the average amount of and average rate paid on each deposit category:


Liquidity Liquidity remains adequate though down from prior years as the Bank has decreased the investment portfolio to fund loans. The Bank has access to $58 million of
unsecured borrowings through correspondent banks and $29.4 million of unpledged securities which may be sold or used as collateral. An additional $4.1 million is also available from the Federal Home Loan Bank based on current collateral pledging
with up to $118.5 million available provided adequate collateral is pledged. Maintaining sufficient funds to meet depositor and borrower needs on a daily
basis continues to be among managements top priorities. This is accomplished not only by immediate liquid resources of cash, due from banks and federal funds sold, but also by the Banks available for sale securities portfolio. The
average aggregate balance of these assets was $262.1 for 2015 and $296.5 million for 2014, and $387.7 million for 2013. This represented 28.0%, 31.8% and 42.5% of total average assets, respectively. Of the almost $218.7 million of debt securities in
the banks portfolio as of December 31, 2015, $12.7 million, or 5.8% of the portfolio, is expected to receive payments or mature in 2016. The availability of the funds may be reduced by the need to utilize securities for pledging purposes
on public deposits. This liquidity provides the opportunity to fund loan growth by analysis of the lowest cost and source of funds whether by increasing deposits, sales or runoff of investments or utilizing debt. In addition to the Banks investment portfolio, the Company has $16.4 million held in the holding companys investment portfolio. $1.5 million of
those investments will mature or receive payments in the next twelve months. These funds provide liquidity to the Company. The Bank has been declaring additional dividends each quarter to provide this liquidity to the Company. In future years, the
Captive will also upstream dividends to the Company once reserve levels are adequately provided for. This will also provide additional liquidity for Company activities. Historically, the primary source of liquidity has been core deposits that include noninterest bearing and interest bearing demand deposits, savings, money
market accounts and time deposits of individuals. Core deposit balances as of year-end 2015 increased in all categories with the exception of time deposits. Overall deposits increased an average of $2.6 million in 2015, $913 thousand in 2014 and
$4.7 million during 2013. The Bank also utilized Federal Funds purchased at times during 2013 through 2015. The average balance for 2015 and 2014 was $1.2 million and $1.4 million respectively. The Bank began using this temporary funding source
heavier in December 2015 while it secured more permanent funding. Historically, the primary use of new funds is placing the funds back into the community
through loans for the acquisition of new homes, consumer products and for business development. The use of new funds for loans is measured by the loan to deposit ratio. The Banks average loan to deposit ratio was 80.7% for 2015, 76.4% for 2014
and 66.2% for 2013. The lower ratio in 2013 was due to the success of the deposit gathering function, the residential mortgage loans being sold in the secondary market and the lack of loan demand. The Banks goal is for this ratio to be higher
in the 80-90 percent range with loan growth being the driver. The Bank ended the year 2015 at an 88.1% loan to deposit ratio. Short-term debt such as
federal funds purchased and securities sold under agreement to repurchase also provides the Company with liquidity. Short-term debt for both federal funds purchased and securities sold under agreement to repurchase amounted to $78.8 million at the
end of 2015 compared to $56.0 million at the end of 2014 and $69.8 million at the end of 2013. These accounts are used to provide a sweep product to the Banks commercial customers. Other borrowings are also a source of funds. Other borrowings consist of loans from the Federal Home Loan Bank of Cincinnati. These funds are then
used to provide loans in our community. The Bank utilized this funding source in December 2015 by borrowing $10 million. Prior borrowings from this source had decreased by $4.5 million to none at December 31, 2014. This compares to decreased
borrowings during 2013 of $7.1 million. The decreased borrowings were payoffs of matured notes in 2013 and 2014. Asset/Liability Management The primary functions of asset/liability management are to assure adequate liquidity and maintain an appropriate balance between interest earning assets and
interest bearing liabilities. It involves the management of the balance sheet mix, maturities, re-pricing characteristics and pricing components to provide an adequate and stable net interest margin with an acceptable level of risk. Interest rate
sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. Changes in net income, other than those related to volume arise when interest rates on assets re-price in a time
frame or interest rate environment that is different from that of the re-pricing period for liabilities. Changes in net interest income also arise from changes in the mix of interest-earning assets and interest-bearing liabilities. Historically, the Bank has maintained liquidity through cash flows generated in the normal course of business, loan repayments, maturing earning assets, the
acquisition of new deposits, and borrowings. The Banks 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. Interest rate
sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. Overnight federal funds on which rates change daily and loans that are tied to the market rate differ considerably from long-term investment
securities and fixed rate loans. Similarly, time deposits over $100,000 and money market certificates are much more interest rate sensitive than passbook savings accounts. The Bank utilizes shock analysis to examine the amount of exposure an instant
rate change of 100, 200, 300 and 400 basis points in both increasing and decreasing directions would have on the financials. Acceptable ranges of earnings and equity at risk are established and decisions are made to maintain those levels based on
the shock results. Impact of Inflation and Changing Prices The consolidated financial statements and notes thereto presented herein have been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Companys operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Companys performance than
do the effects of general levels of inflation. 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 $252.1 million as of December 31, 2015. Time deposits represent contractual agreements for certificates of deposits held by its customers. Long term debt represents the borrowings with the Federal Home Loan Bank and is further
defined in Note 4 and 9 of the Consolidated Financial Statements.


Capital Resources Stockholders equity was $120.1 million as of December 31, 2015 compared to $114.5 million at December 31, 2014. Dividends declared during 2015
were $0.87 per share totaling $3.99 million and during 2014 were $0.84 per share totaling $3.86 million. During 2015, the Company purchased 30,685 shares and awarded 16,000 shares of restricted stock to 67 employees. During 2014, the Company
purchased 23,570 shares and awarded 13,250 restricted shared to 61 employees. For a summary of activity as it relates to the Companys restricted stock awards, please refer to Note 11: Employee Benefit Plans in the consolidated financial
statements. At yearend 2015, the Company held 587,466 shares in Treasury stock and 38,995 unvested shares of restricted stock. At yearend 2014, the Company held 572,662 shares in Treasury stock and 33,390 unvested shares of restricted stock. On
January 15, 2016 the Company announced the authorization by its Board of Directors for the Companys repurchase, either on the open market, or in privately negotiated transactions, of up to 200,000 shares of its outstanding common stock
commencing January 15, 2016 and ending December 31, 2016. The Company has a history of approving a similar resolution to be in effect each year for at least the last five years. The Company continues to have a strong capital base and maintains regulatory capital ratios that are above the
defined regulatory capital ratios. At December 31, 2015, the Bank and the Company had total risk-based capital ratios of 12.64% and 14.95%, respectively. Core capital to risk-based asset ratios of 11.87% and 14.18% for the Bank and the Company,
respectively, are well in excess of regulatory guidelines. The Banks leverage ratio of 10.12% is also substantially in excess of regulatory guidelines, as is the Companys at 11.91%. Under Basel III, the common equity Tier 1 Capital to
risk-weighted assets ratios are also well above the required 4.50% and the 6.50% well capitalized levels with the Company at 14.18% and the Bank at 11.87%. For further discussion and analysis of regulatory capital requirements, refer to Note 15 of
the Audited Financial Statements. The Companys 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.


Net Interest Income

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.


Non-Interest Expense

Furniture and equipment steadily increase as we continue to add facilities and invest in technology. Annual maintenance costs continue to grow and become a greater piece of the overall cost. As new services are provided to our customers, the backroom cost to supply them continues to rise. The Company accepts it is an expected cost of doing business and keeping our services relevant to the industry. Data processing costs were higher in 2019 as compared to 2018 by $1.3 million of which $867.6 thousand was acquisition related for termination fees.  Overall, data processing expense for 2019 was expected to be higher with the addition of the six acquired Indiana offices. Data processing expense increased $104.4 thousand during 2018 as compared to 2017.  As the pricing on many services is based on number of accounts and the Bank fully expects those to increase with the growth from the newer offices and overall Bank growth, this line item is expected to also increase.The FDIC assessment has a decreasing cost trend over the years shown. This line item speaks to the health of the Bank and the financial industry. The assessment for 2019 was down $143.5 thousand compared to 2018 as a result of the Small Bank Assessment Credits applied to 3rd and 4th quarter’s invoices.  The assessment for 2018 was down $4 thousand from 2017.The last line items with significant variation in noninterest expense to discuss is “consulting fees” and “other general and administrative.” Two main events are behind the increase of $865 thousand in 2018 as compared to 2017 in this line item.  Both events incurred one-time costs which required the use of outside consultants.   First related to the use of an executive recruiter firm to conduct a search for a CEO due to an upcoming retirement.  The second related to the costs of researching, analyzing and negotiating possible mergers and acquisition opportunities.  The consulting fees were beneficial in both instances as a new CEO was hired and a merger was closed on January 1, 2019.  Consulting fees increased by $551.2 thousand in 2018 over 2017 while decreasing $259.9 thousand in 2019 compared to 2018.  During 2019, consultants were used to complete a pay study review, assist with developing a three year strategic plan and to identify profit enhancement initiatives.  Acquisition costs incurred in 2019 and 2018 total $1.28 million and $742.1 thousand respectively with expenses being recorded in multiple line items.  Core deposit intangible expense which is included in the other general and administrative line decreased in 2018 as compared to 2017 by $77.7 thousand; however, increased in 2019 compared to 2018 by $560 thousand with the acquisition.  Advertising and public relations increased also in 2019 by $682 thousand following an increase of $129.9 thousand in 2018. With the addition of new offices in both years behind the increases, 2019 was expected to increase due to additional offices being added.  The Bank also celebrates the anniversary of office openings with a special event in each community.


Securities

The following table sets forth the maturities of investment securities as of December 31, 2019 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.  Tax-equivalent adjustments, using a twenty-one percent rate, have been made in yields on obligations of state and political subdivisions.  Stocks of domestic corporations have not been included. Maturities of mortgage-backed securities are based on the stated maturity date of the security. Due to prepayments, actual maturities may be different.


Securities

As of December 31, 2019, the Bank did not hold a large block of any one investment security in excess of 10% of stockholders’ equity. The largest segment of holdings is in U.S. Government agencies. The Bank also holds stock in the Federal Home Loan Bank of Cincinnati and Indianapolis at a cost of $5.8 million. This is required in order to obtain Federal Home Loan Bank loans.


Loan Portfolio

The following table shows the maturity of loans excluding fair value adjustments as of December 31, 2019:


Loan Portfolio

The following table presents the total of loans excluding fair value adjustments due after one year which has either 1) predetermined interest rates (fixed) or 2) floating or adjustable interest rates (variable):


Loan Portfolio

The following table summarizes the Company’s nonaccrual, past due 90 days or more and still accruing loans, and accruing troubled debt restructurings as of December 31 for each of the last five years:


Loan Portfolio

Although loans may be classified as non-performing, some pay on a regular basis, and many continue to pay interest irregularly or at less than original contractual rates.  Interest income that would have been recorded under the original terms of these loans would have aggregated $193 thousand for 2019, $99 for 2018 and $205.4 thousand for 2017. 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.  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 $117 thousand for 2019, $69 thousand for 2018 and $57 thousand for 2017. Loans are placed on nonaccrual status in the event that the loan is in past due status for more than 90 days or payment in full of principal and interest is not expected.  The Bank had nonaccrual loan balances of $3.4 million at December 31, 2019 compared to balances of $542 thousand and $1.0 million as of year-end 2018 and 2017. All of the balances of nonaccrual loans for the past three years were collaterally secured. As of December 31, 2019, the Bank had $60.2 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. At December 31, 2018, the Bank had $7.9 million of these loans. At December 31, 2017, the Bank had $21.2 million of these loans.  These loans are subject to constant management attention and are reviewed at least monthly. The amount of the potential problem loans was considered in management’s review of the loan loss reserve at December 31, 2019 and 2018.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. This expense is determined by management based on a detailed monthly review of the risk factors affecting the loan portfolio, including general economic conditions, changes in the portfolio mix, past due loan-loss experience and the financial condition of the bank’s borrowers.As of December 31, 2019, the Bank had loans outstanding to individuals and firms engaged in the various fields of agriculture in the amount of $111.8 million with an additional $199.1 million in agricultural real estate loans these compared to $108.5 and $68.6 million respectively as of December 31, 2018.  The ratio of this segment of loans to the total loan portfolio is not considered unusual for a bank engaged in and servicing rural communities.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. As of December 31, 2019, the Bank had $1.03 million of its loans that were classified as troubled debt restructurings, of which $50.3 thousand are included in non-accrual loans.  This compares to $178.1 thousand of troubled debt restructurings, of which $74.4 thousand are included in non-accrual loans for 2018 and $712.0 thousand of troubled debt restructuring, of which $124.8 thousand are included in non-accrual loans for 2017. Updated appraisals are required on all collateral dependent loans once they are deemed impaired.  The Bank may also require an updated appraisal of a watch list loan which the Bank monitors under their loan policy. On a quarterly basis, Bank management reviews properties supporting asset dependent loans to consider market events that may indicate a change in value has occurred.To determine observable market value, collateral asset values securing an impaired loan are periodically evaluated. Maximum time of re-evaluation is every 12 months for chattels and titled vehicles and every two years for real estate.  In this process, third party evaluations are obtained and heavily relied upon. Until such time that updated appraisals are received, the Bank may discount the existing collateral value used.Performing “non-watch list” loans secured in whole or in part by real estate, do not require an updated appraisal unless the loan is rewritten and additional funds advanced.  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. The majority of the Bank’s loans are made in the market by lenders who live and work in the market.  Thus, their evaluation of the independent valuation is also valuable and serves as a double check.  On extremely rare occasions, the Bank will make adjustments to the recorded values of collateral securing commercial real estate loans without acquiring an updated appraisal for the subject property. The Bank has no formalized policy for determining when collateral value adjustments between regularly scheduled appraisals are necessary, nor does it use any specific methodology for applying such adjustments. 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. 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. In each of these situations, any information available to management regarding market conditions impacting a specific property or other relevant factors are considered, and lenders familiar with a particular commercial real estate loan and the underlying collateral may be present to provide their opinion on such factors. If the available information leads management to conclude a valuation adjustment is warranted, such an adjustment may be applied on the basis of the information available. If management concludes that an adjustment is warranted but lacks the specific information needed to reasonably quantify the adjustment, management will order a new appraisal on the subject property even though one may not be required under the Bank’s general policies for updating appraisal. Note 4 of the Consolidated Financial Statements may also be reviewed for additional tables dealing with the Bank’s loans and ALLL. ALLL is evaluated based on an assessment of the losses inherent in the loan portfolio.  This assessment results in an allowance consisting of two components, allocated and unallocated. Management considers several different risk assessments in determining ALLL. The allocated component of ALLL reflects expected losses resulting from an analysis of individual loans, developed through specific credit allocations for individual loans and historical loss experience for each loan category.  For those loans where the internal credit rating is at or below a predetermined classification and management can reasonably estimate the loss that will be sustained based upon collateral, the borrowers operating activity and economic conditions in which the borrower operates, a specific allocation is made.  For those borrowers that are not currently behind in their payment, but for which management believes, based on economic conditions and operating activities of the borrower, the possibility exists for future collection problems, a reserve is established.  The amount of reserve allocated to each loan portfolio is based on past loss experiences and the different levels of risk within each loan portfolio.  The historical loan loss portion is determined using a historical loss analysis by loan category.The unallocated portion of the reserve for loan losses is determined based on management’s assessment of general economic conditions as well as specific economic factors in the Bank’s marketing area.  This assessment inherently involves a higher degree of uncertainty.  It represents estimated inherent but undetected losses within the portfolio that are probable due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower’s financial condition and other current risk factors that may not have yet manifested themselves in the Bank’s historical loss factors used to determine the allocated component of the allowance.Actual charge-off of loan balances is based upon periodic evaluations of the loan portfolio by management.  These evaluations consider several factors, including, but not limited to, general economic conditions, financial condition of the borrower, and collateral.As presented in the table on the next page, charge-offs increased to $841 thousand for 2019.  70.1% of the charge-offs stemmed from the consumer related portfolios. Charge-offs were $580 thousand for 2018, $288 thousand for 2017, preceded by $550 thousand for 2016 and $1.0 million for 2015.  Recoveries were $156 thousand in 2019 compared to $163, $150, $156, and $557 thousand for 2018, 2017, 2016 and 2015, respectively. The net charge-offs for the last five years were all under $1 million. 2017 was the lowest at $138 thousand. Higher provision expense was used to fund the ALLL for loan growth in 2016. For 2015 and 2017, the provision was used to replenish the balance decreased by the net charge-off activity. Overall, the ALLL increased from $6.3 million at yearend 2015 to $7.2 million at yearend 2019. After adding the allowance for unfunded loan commitments, the ACL ended 2019 $7.7 million. As the ratios on the bottom of the following table show, the trends for each have continually improved over the five years shown. Asset quality and the ACL are both strong and emphasize the level of credit quality. In reviewing the bigger picture of the allowance for credit loss, the years with the higher percentage of ACL to total nonperforming loans ratio account for the lower level of nonaccrual and watch list loans. This demonstrates the extended time period with which it has taken to achieve resolution and/or collection of these loans.  The ratio of ACL to nonperforming loans increased beginning in 2015 with a significant drop in 2019. 2019’s provision expense was the highest of the five years shown largely due to an increase in watch list loans.  Loan growth occurred in 2019 reaching a double-digit percentage increase like 2016.  The ACL to nonperforming loans for all years remained more than adequate and emphasizes the existing strong level of credit quality.  The following table presents a reconciliation of the allowance for credit losses for the years ended December 31, 2019, 2018, 2017, 2016 and 2015:


Loan Portfolio

*Nonperforming loans are defined as all loans on nonaccrual, plus any loans past due 90 days not on nonaccrual.Allocation of ALLL per Loan Category in terms of dollars and percentage of loans in each category to total loans is as follows:


Net Interest Income


Non-Interest Expense

Furniture and equipment steadily increases as we continue to add facilities and invest in technology. Annual maintenance costs continue to grow and become a greater piece of the overall cost. As new services are provided to our customers, the backroom cost to supply them continues to rise. The Company accepts it is an expected cost of doing business and keeping our services relevant to the industry. Data processing costs were actually lower in 2017 as compared to 2016 by $196 thousand. Two reasons for the improvement was the negotiation of an extended contract with our core processor and 2016 had the additional cost of upgrading Bank customer debit cards to incorporate EMV chip card technology.  Both already better align with our future strategies while controlling costs.  Data processing expense increased $105 thousand during 2018 as compared to 2017.  As we continue to expand this line item is expected to also increase.As the pricing on many services, however, is based on number of accounts and the Bank fully expects those to increase with the growth from the newer offices and overall Bank growth.  Overall, data processing expense for 2019 will be higher than 2018 with the addition of the six Indiana offices. The FDIC assessment has a decreasing cost trend over the years shown. This line item speaks to the health of the Bank and the financial industry. The assessment for 2018 was down only $4 thousand from 2017 and the assessment for 2017 was down $77 thousand from 2016.The last line items with significant variation in noninterest expense to discuss is “consulting fees” and “other general and administrative.” Two main events are behind the increase of $865 thousand in 2018 as compared to 2017 in this line item.  Both events incurred one-time costs which required the use of outside consultants.   First related to the use of an executive recruiter firm to conduct a search for a CEO due to an upcoming retirement.  The second related to the costs of researching, analyzing and negotiating possible mergers and acquisition opportunities.  The consulting fees were beneficial in both instances as a new CEO was hired and a merger was closed on January 1, 2019.  Consulting fees increased by $551.2 thousand in 2018 over 2017.  Acquisition costs incurred in 2018 total $742.1 thousand with expenses being recorded in multiple line items.  Though 2017 did not increase by as large an amount as 2016 had when compared to 2015, it was still an increase of $207 thousand. The two main reasons behind the increase in 2017 were the costs associated with listing on the NASDAQ stock market and the cost of offering the Insured Cash Sweep product.  Both of these costs have been previously explained along with the benefits that have been provided by incurring said costs.   Advertising and public relations increased also in 2018 by $129.9 thousand following an increase of $113 thousand in 2017. With the addition of new offices in both years behind the increases, 2019 is also expected to increase due to additional offices being added.  The Bank also celebrates the anniversary of office openings with a special event in each community.


Securities

The following table sets forth the maturities of investment securities as of December 31, 2018 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.  Tax-equivalent adjustments, using a twenty-one percent rate, have been made in yields on obligations of state and political subdivisions.  Stocks of domestic corporations have not been included. Maturities of mortgage-backed securities are based on the stated maturity date of the security. Due to prepayments, actual maturities may be different.


Securities

As of December 31, 2018, the Bank did not hold a large block of any one investment security in excess of 10% of stockholders’ equity. The largest segment of holdings is in U.S. Government agencies. The Bank also holds stock in the Federal Home Loan Bank of Cincinnati at a cost of $3.7 million. This is required in order to obtain Federal Home Loan Bank loans.


Loan Portfolio

The following table shows the maturity of loans as of December 31, 2018:


Loan Portfolio

The following table presents the total of loans due after one year which has either 1) predetermined interest rates (fixed) or 2) floating or adjustable interest rates (variable):


Loan Portfolio


Loan Portfolio

Although loans may be classified as non-performing, some pay on a regular basis, and many continue to pay interest irregularly or at less than original contractual rates.  Interest income that would have been recorded under the original terms of these loans would have aggregated $99 thousand for 2018, $205.4 for 2017 and $116.1 thousand for 2016. 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.  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 $69 thousand for 2018, $57 thousand for 2017 and $64 thousand for 2016. Loans are placed on nonaccrual status in the event that the loan is in past due status for more than 90 days or payment in full of principal and interest is not expected.  The Bank had nonaccrual loan balances of $542 thousand at December 31, 2018 compared to balances of $1.0 and $1.4 million as of year-end 2017 and 2016. All of the balances of nonaccrual loans for the past three years were collaterally secured. As of December 31, 2018, the Bank had $7.9 million of loans which it considers to be “potential problem loans” in that the borrowers are experiencing financial difficulties. At December 31, 2017, the Bank had $21.2 million of these loans. The decrease is largely attributed to the payoff of one relationship.  At December 31, 2016, the Bank had $20.4 million of these loans.  These loans are subject to constant management attention and are reviewed at least monthly. The amount of the potential problem loans was considered in management’s review of the loan loss reserve at December 31, 2018 and 2017.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. This expense is determined by management based on a detailed monthly review of the risk factors affecting the loan portfolio, including general economic conditions, changes in the portfolio mix, past due loan-loss experience and the financial condition of the bank’s borrowers.As of December 31, 2018, the Bank had loans outstanding to individuals and firms engaged in the various fields of agriculture in the amount of $108.5 million with an additional $68.6 million in agricultural real estate loans these compared to $95.1 and $64.1 million respectively as of December 31, 2017.  The ratio of this segment of loans to the total loan portfolio is not considered unusual for a bank engaged in and servicing rural communities.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. As of December 31, 2018, the Bank had $178.1 thousand of its loans that were classified as troubled debt restructurings, of which $74.4 thousand are included in non-accrual loans.  This compares to $0.7 million as of same date 2017 and 2016. Updated appraisals are required on all collateral dependent loans once they are deemed impaired.  The Bank may also require an updated appraisal of a watch list loan which the Bank monitors under their loan policy. On a quarterly basis, Bank management reviews properties supporting asset dependent loans to consider market events that may indicate a change in value has occurred.To determine observable market value, collateral asset values securing an impaired loan are periodically evaluated. Maximum time of re-evaluation is every 12 months for chattels and titled vehicles and every two years for real estate.  In this process, third party evaluations are obtained and heavily relied upon. Until such time that updated appraisals are received, the Bank may discount the existing collateral value used.Performing “non-watch list” loans secured in whole or in part by real estate, do not require an updated appraisal unless the loan is rewritten and additional funds advanced.  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. The majority of the Bank’s loans are made in the market by lenders who live and work in the market.  Thus, their evaluation of the independent valuation is also valuable and serves as a double check.  On extremely rare occasions, the Bank will make adjustments to the recorded values of collateral securing commercial real estate loans without acquiring an updated appraisal for the subject property. The Bank has no formalized policy for determining when collateral value adjustments between regularly scheduled appraisals are necessary, nor does it use any specific methodology for applying such adjustments. 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. 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. In each of these situations, any information available to management regarding market conditions impacting a specific property or other relevant factors are considered, and lenders familiar with a particular commercial real estate loan and the underlying collateral may be present to provide their opinion on such factors. If the available information leads management to conclude a valuation adjustment is warranted, such an adjustment may be applied on the basis of the information available. If management concludes that an adjustment is warranted but lacks the specific information needed to reasonably quantify the adjustment, management will order a new appraisal on the subject property even though one may not be required under the Bank’s general policies for updating appraisal. Note 4 of the Consolidated Financial Statements may also be reviewed for additional tables dealing with the Bank’s loans and ALLL. ALLL is evaluated based on an assessment of the losses inherent in the loan portfolio.  This assessment results in an allowance consisting of two components, allocated and unallocated. Management considers several different risk assessments in determining ALLL. The allocated component of ALLL reflects expected losses resulting from an analysis of individual loans, developed through specific credit allocations for individual loans and historical loss experience for each loan category.  For those loans where the internal credit rating is at or below a predetermined classification and management can reasonably estimate the loss that will be sustained based upon collateral, the borrowers operating activity and economic conditions in which the borrower operates, a specific allocation is made.  For those borrowers that are not currently behind in their payment, but for which management believes, based on economic conditions and operating activities of the borrower, the possibility exists for future collection problems, a reserve is established.  The amount of reserve allocated to each loan portfolio is based on past loss experiences and the different levels of risk within each loan portfolio.  The historical loan loss portion is determined using a historical loss analysis by loan category.The unallocated portion of the reserve for loan losses is determined based on management’s assessment of general economic conditions as well as specific economic factors in the Bank’s marketing area.  This assessment inherently involves a higher degree of uncertainty.  It represents estimated inherent but undetected losses within the portfolio that are probable due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower’s financial condition and other current risk factors that may not have yet manifested themselves in the Bank’s historical loss factors used to determine the allocated component of the allowance.Actual charge-off of loan balances is based upon periodic evaluations of the loan portfolio by management.  These evaluations consider several factors, including, but not limited to, general economic conditions, financial condition of the borrower, and collateral.As presented in the table on the next page, charge-offs increased to $580 thousand for 2018.  61.9% of the charge-offs stemmed from the consumer related portfolios. Charge-offs were $288 thousand for 2017, $550 thousand for 2016, preceded by $1.0 million for 2015 and $778 thousand for 2014.  Recoveries were $163 thousand in 2018 compared to $150, $156, $557, and $298 thousand for 2017, 2016, 2015 and 2014, respectively. The net charge-offs for the last five years were all under $1 million. 2017 was the lowest at $138 thousand. Higher provision expense was used to fund the ALLL for loan growth in 2014 and 2016. For 2015 and 2017, the provision was used to replenish the balance decreased by the net charge-off activity. Overall, the ALLL increased from $5.9 million at yearend 2014 to $6.8 million at yearend 2018. After adding the allowance for unfunded loan commitments, the ACL ended 2018 just over $7.0 million. As the ratios on the bottom of the following table show, the trends for each have continually improved over the five years shown. Asset quality and the ACL are both strong and emphasize the level of credit quality. In reviewing the bigger picture of the allowance for credit loss, the years with the higher percentage of ACL to total nonperforming loans ratio account for the lower level of nonaccrual and watch list loans. This demonstrates the extended time period with which it has taken to achieve resolution and/or collection of these loans. 2014’s significant and continued loan growth since fourth quarter 2013 was the reason behind 2014’s higher balances as asset quality remained strong. The ratio of ACL to nonperforming loans increased significantly in 2014 which is why provision loan expense was lower in 2015 in comparison. The ACL to nonperforming loans for 2015 remained more than adequate and emphasizes the existing strong level of credit quality.  2018 did not warrant a large provision as the asset quality continued to strengthen.  Loan growth occurred, though not at the double-digit percentage increases of 2015 and 2016.The following table presents a reconciliation of the allowance for credit losses for the years ended December 31, 2018, 2017, 2016, 2015 and 2014:


ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.


Non-Interest Income The discussion now turns to the noninterest activity of 2016 operations, beginning with the revenue portion. In comparing line items of the consolidated
statements of income for years ended 2014 through 2016, it can be seen where the Company has been spending its time and the impact of the recession and slow recovery. This section will focus on the significant noninterest items that impacted the
operations of the Company. The Company has concerns with the increased costs associated with regulatory compliance such as the possible loss
of revenue from new regulations stemming from the Dodd-Frank Act. History has proven the concern is justified. One area of revenue impacted was overdraft fees. The Bank has ended each of the last 3 years with a lower revenue stream from overdraft
fees. This has occurred in spite of the addition of the new offices. Each year, the number of checking accounts has increased along with the balances; however average collected overdraft fees per account decreased. Overdraft fees in 2016 and 2015
accounted for $2.4 million in noninterest income, compared to $2.5 million in 2014 and $2.7 million for 2013. The Bank had made this an area of focus for 2015 as this revenue stream remains under intense regulator review. In 2015, the
Bank adjusted its overdraft program and renamed it Courtesy Pay. Courtesy Pay establishes dynamic limits based on a customers behavior and likelihood of repayment. The Bank has sought to better service the customers needs
while decreasing the need for collections and improving profitability. At the current time, profitability has not been impacted and in 2016 it only slowed the amount of decrease. Service charges on checking accounts also leveled off in 2016.
Excluding Health Savings Accounts, service charges were up $120 thousand for 2015 and $208.7 thousand for 2014. This improvement is credited to the new checking accounts mentioned previously. The Bank has long promoted the use of debit cards by its customers and continued that philosophy with the introduction of additional new products. 2016
revenue improved $122.4 thousand, 2015 revenue improved $142.9 thousand and 2014 revenue improved $250.5 from ATM/debit card usage as compared to each of the respective prior years. The Bank receives interchange revenue from each use by a
customer of a Bank issued ATM/debit the card. In 2011, this revenue stream was at risk of being reduced by the Federal Reserve regulation of the interchange fee. The establishment by the Federal Reserve of a tiered pricing for banks under
$10 billion has helped to protect the profitability from such fees, although the concern remains as to how long this tiered pricing will remain in effect. While this revenue stream continues to improve with more depositors using electronic
methods for purchasing, the expense attributable to card fraud has offset a portion of the revenue gain. Further discussion can be found in the non-interest expense section regarding the net effect of debit
card activity. Noninterest income from net gain on sales of loans increased for 2016 after having decreased for both 2015 and 2014. The change may be
related to the increase in rates after the long duration of the flat rate interest environment. The net gain on sale of loans is derived from sales of real estate loans into the secondary market. Of these loan types, the Bank sells 100% of the
residential loans and 90% of the agricultural loans into the secondary market. Gains of $683.7 and $204.0 thousand were recorded for residential an agricultural real estate respectively for 2016. Gains of $559.6 and $140.8 thousand were
recorded for residential and agricultural real estate respectively for 2015 compared to gains of $452.7 and $194.3 thousand respectively for 2014. In conjunction with these sales, the Bank maintains servicing rights and those income amounts
during all three years are included in the customer service fees line item and accounted for over $400 thousand in revenue for 2016 and 2015. The
last line item in the noninterest income section is the net gain on sale of investments. The Bank has taken advantage of this opportunity the last three years and expects to continue as long as the rates remain low and the yield curve is favorable
to the transaction. The Bank will not increase short-term gains at the sacrifice of long-term profitability. All of the sales of securities in 2016, 2015 and 2014 of $85.7, $47.0 and $57.9 million respectively were used to fund loan growth.
This is a source of funds that will continue to be analyzed for use in the coming year. Gains of $588 thousand were recorded for 2016, $451 thousand for 2015 as compared to $494 thousand for 2014. Customer service fees show an improvement of $271 thousand collected in 2016 as compared to 2015. 2015 experienced an even higher increase in customer
service fees of $623 thousand over 2014. Almost $200 thousand can be attributed to classifying foreign ATM fees out of service charges into miscellaneous fees in 2015. Other fees included in this line item are the interchange fee mentioned
previously, fees for wire activity, safe deposit box rent and profit on sales of checks to name a few. Overall, noninterest income increased
$580 thousand in 2016 preceded by a year where it had increased $604 thousand. Some of the revenue may not be easily duplicated as it is dependent on economic and market conditions to provide the opportunity. However, the increased revenue
amounts from deposit and loan services should continue to provide improved profitability in the future. Management expects gains on sales to continue in the near term. Non-Interest Expense Noninterest expense increased 5.2% in 2016 as compared to 2015 and was preceded by a 3.4% increase in 2015 as compared to 2014. Represented in dollars, 2016
was $1.4 million higher than 2015 and 2015 was $854 thousand higher
than 2014. The largest factor behind the increase both years was the expense of employee salaries and wages. During 2016, an additional $713 thousand was spent over 2015 which correlates to
a 6.5% increase. When making the same analysis for 2015 as compared to 2014, 2015s costs increased $721 thousand or 7.1%. Three main components flow into salaries and wages: base salary, deferred costs, and incentives composed of the
expense of restricted stock awards and performance incentives. Base pay has increased with the addition of the three offices of Huntertown, Bowling Green and Sylvania, as well as from the operations of the Captive and through normal yearly increases
to the remainder of the employees. Base pay was up $669.7 thousand for 2016 over the previous year and 2015 was up $559.3 thousand over 2014. The full time equivalent number of employees at each yearend increased to 273 for 2016, to 265
for 2015 compared to 2014s 260. Incentive pay as it related to performance was up $177.4 thousand in 2016 over 2015. Measurements used for
award incentive pay had improved in 2016 and 2015 and employees benefited accordingly. The expense for the restricted stock awards has also increased each of the last three years as more shares have been granted to a larger number of employees and
the market value of the shares has increased. 2016s cost for this program was $87.9 thousand higher than 2015 and 2015 was $82 thousand higher than 2014. The awards incorporate a three year vesting period so the increase of any one
year carries forward through the next two years. This expense should continue to increase as the Company continues its expansion strategy. For further discussion in incentive pay and restricted stock awards, see note 11 of the consolidated financial
statements. Employee benefits decreased in 2016 which correlated directly to a lower level of medical expense. As the Bank is partially self-insured,
lower claims during 2016 decreased the expense. Employee group insurance was down $266.9 thousand for 2016. Overall, employee benefits were down $232 thousand or 6.5% from 2015. Employee benefits increased by a similar percentage as the salaries and wages for 2015 increased by 6.9% over 2014. The cost of the 401-K retirement plan increased each year as the profit share component increased along with the number of employees participating. Being partially self-insured has helped with lower claim experience though it is an
unknown each year what that experience will be. For 2014 and 2015, a switch in the medical provider and comparison pricing also assisted to control the cost. Employees do participate in any premium increases. Net occupancy expense typically increases as the Company expands, which is what has occurred for 2016 and 2015. 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. This division experienced a strong 2014; however the
department was short staffed most of 2015 and 2016. This has been remedied in 2017 and performance is expected to improve. While net loss on sale of
other assets owned, mainly ORE property, does not represent income for the years presented, the decrease in the amount of the loss for 2015 as compared to 2014, did contribute to improved profitability. For 2016, the loss was higher at
$81 thousand than 2015s $47 thousand. Loss on sale of assets included any write downs in the carrying values of ORE property on the Banks balance sheet. In 2016 and 2015, the number of properties and the corresponding carrying
values decreased as compared to 2014. The Bank also sold its St. Joe, Indiana property during 2015. While taking a loss for the sale, the Bank eliminated the continued maintenance expense of an unoccupied building. An easement was agreed upon to
enable the ATM located on the property to remain operational. The 1-4 family mortgage refinancing activity has
been slow over the last three years though increasing slightly each year. A correlating expense to that activity is the amortization of mortgage servicing rights. The amortization is the expense that offsets the income recognized when the loan is
first made. Income is recorded when the mortgage loan is first sold with servicing retained and is therefore recognized within one year. The amortization, however, is calculated over the life of the loan and accelerated as loans are paid off early.
An increase in this expense can be driven by two activities: an increase in the number of sold loans and/or by the acceleration of the expense from payoff and refinance activity. The best picture of the bottom line impact is achieved by netting the
income with the expense each year. 2015 had net income of $33 thousand, a switch from 2014 which had net expense of $42.7 thousand. Of course, the value (or income) of the mortgage servicing right when sold also impacts the net position.
2016 has net income of $136 thousand and 2015 had higher additions and lower amortization expense from refinanced loans. The number of loans and balances also indicates this as the levels have remained fairly constant. 2014 was a year with
limited sales and the amortization expense was therefore higher than the capitalized additions. As of December 31, 2016, 3,599 loans are being serviced with corresponding balances of $279.4 million. This is almost identical to the
December 31, 2015 number and balance of loans 1-4 family being serviced. As of December 2015, 3,598 loans are being serviced with balances of $275.7 million. As of December 31, 2014, there were
3,638 loans serviced with balances of $275.4 million. The impact of mortgage servicing rights to both noninterest income and expense is shown in the following table: