What changed in this filing

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Item 1. Financial Statements

2023-05-10 compared with 2022-11-09 · 309 added, 200 removed, 439 unchanged (54% of the section changed)

3 unchanged sentences

(In thousands) (Unaudited)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from financing activities, net of effects of business combination:

Net increase in deposits

Net increase (decrease) in deposits

Net decrease in securities sold under repurchase agreements

2 unchanged sentences

( 1,500,250 )

Proceeds from issuance of subordinated notes

Dividends paid

1 unchanged sentence

Repurchase of common stock

Net cash provided by (used in) financing activities

Net cash used in financing activities

Net increase (decrease) in cash and cash equivalents

5 unchanged sentences

MSR resulting from sale of loans

Amortization of unrealized holding gains on securities transferred from available for sale to held to maturity recognized in other comprehensive income, net of tax

Change in unrealized gains and losses on investment securities available for sale, net of tax

11 unchanged sentences

The Bank operates as a full-service financial institution with a primary market area including, but not limited to, the counties in which the Bank’s branches are located.

The Bank has twenty-six locations located in Manitowoc, Outagamie, Brown, Winnebago, Sheboygan, Shawano, Waupaca, Ozaukee, Monroe, and Jefferson counties in Wisconsin.

The Bank has twenty-eight locations located in Manitowoc, Outagamie, Brown, Winnebago, Sheboygan, Shawano, Waupaca, Ozaukee, Monroe, Fond du Lac, Waushara, Columbia and Jefferson counties in Wisconsin.

The Company and Bank are subject to the regulations of certain federal agencies and undergo periodic examinations by those regulatory authorities.

7 unchanged sentences

These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future.

Estimates are used in accounting for, among other items, the allowance for loan losses (“ALL”), valuation of loans in acquisition transactions, valuation of mortgage servicing rights, useful lives for depreciation and amortization, fair value of financial instruments, other-than-temporary impairment calculations, valuation of deferred tax assets, uncertain income tax positions and contingencies.

Estimates that are particularly susceptible to significant change for the Company include the determination of the ALL, the determination of the valuation of mortgage servicing rights, the determination and assessment of deferred tax assets and liabilities, and the valuation of loans acquired in acquisition transactions;

Estimates are used in accounting for, among other items, the allowance for credit losses on securities and loans, valuation of loans in acquisition transactions, valuation of mortgage servicing rights, useful lives for depreciation and amortization, fair value of financial instruments, valuation of deferred tax assets, uncertain income tax positions and contingencies.

Estimates that are particularly susceptible to significant change for the Company include the determination of the allowance for credit losses, the determination of the valuation of mortgage servicing rights, the determination and assessment of deferred tax assets and liabilities, and the valuation of loans acquired in acquisition transactions;

therefore, these are critical accounting policies.

2 unchanged sentences

Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period presented.

There have been no material changes or developments with respect to the assumptions or methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as previously disclosed in the Company’s Annual Report.

Updates to Significant Accounting Policies

On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), utilizing the modified retrospective method for financial assets measured at amortized cost.

Results for the periods beginning after January 1, 2023 are presented under ASU 2016-13 while prior period amounts are reported in accordance with the previously applicable accounting standards.

The Company recorded a reduction to retained earnings of approximately $ 10.1 million upon adoption of ASU 2016-13.

The transition adjustment included an increase to the ACL-Loans of $ 11.0 million and an increase in the Allowance for Credit Losses – Unfunded Commitments (“ACL – Unfunded Commitments”) of $ 3.3 million, offset by applicable deferred taxes.

The Company adopted ASU 2016-13 using the prospective transition approach for financial assets considered purchased credit deteriorated (“PCD”) that were previously classified as purchase credit impaired (“PCI”).

The amortized cost of the PCD assets were adjusted to reflect the addition of $ 0.3 million to the allowance for credit losses.

The remaining noncredit discount (based on the adjusted amortized cost) will be accreted into interest income at the effective interest rate over the remaining life of the assets.

The following table presents the changes in the allowance for credit losses required as a result of this adoption:

January 1, 2023 As

December 31, 2022

Reported After ASU

Pre-ASU 2016-13

Allowance for Credit Losses

2016-13 Adoption

Loans held for investments

Commercial/industrial

Commercial real estate - owner occupied

Commercial real estate - non-owner occupied

Construction and development

Residential 1-4 family

Loans held for investments, total

Unfunded commitments

As a result of adopting ASU 2016-13, certain of the Company’s accounting policies were updated as follows:

Securities are classified as held to maturity or available for sale at the time of purchase.

Investment securities classified as held to maturity, which management has the intent and ability to hold to maturity, are reported at amortized cost.

Investment securities classified as available for sale, which management has the intent and ability to hold for an indefinite period of time, but not necessarily to maturity, are carried at fair value, with unrealized gains and losses, net of related deferred income taxes, included in stockholders’ equity as a separate component of other comprehensive income.

The net carrying value of debt securities classified as held to maturity or available for sale is adjusted for amortization of premiums and accretion of discounts utilizing the effective interest method over the expected estimated maturity.

Such amortization and accretion is included as an adjustment to interest income from securities.

Interest and dividends are included in interest income from securities.

Transfers of debt securities into the held to maturity classification from the available for sale classification are made at fair value as of the date of transfer.

The unrealized holding gain or loss as of the date of transfer is retained in other comprehensive income and in the carrying value of the held to maturity securities, establishing the amortized cost of the security.

These unrealized holding gains and losses as of the date of transfer are amortized or accreted over the remaining life of the security.

Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings.

Prior to January 1, 2023, unrealized gains or losses considered temporary and the noncredit portion of unrealized losses deemed other-than-temporary were reported as an increase or decrease in accumulated other comprehensive income.

The credit related portion of unrealized losses deemed other-than-temporary were recorded in current period earnings.

Subsequent to January 1, 2023, the Bank evaluates securities for potential credit losses at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

As part of such monitoring, the credit quality of individual securities and their issuers are assessed.

If, based on information available such as the decline in the credit worthiness of the issuer, external market ratings or the anticipated or realized elimination of associated dividends, potential credit losses are identified on securities an allowance for credit losses would be established.

Loans and Related Interest Income – Originated :

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are carried at their amortized cost basis, which is the unpaid principal balance outstanding, net of deferred loan fees and costs and any direct principal charge-offs.

The Company made an accounting policy election to exclude accrued interest from the amortized cost basis of loans and report such accrued interest as part of other assets on the consolidated balance sheets.

Interest income is accrued on the unpaid principal balance using the simple interest method.

The accrual of interest income on loans is discontinued when, in the opinion of management, there is reasonable doubt as to the borrower’s ability to meet payment of interest or principal when due.

Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal, though may be placed in such status earlier.

Loans past due 90 days or more may continue on accrual only when they are well secured and/or in process of collection or renewal.

When interest accrual is discontinued, all previously accrued but uncollected interest is reversed against current period interest income.

Except in very limited circumstances, cash collections on nonaccrual loans are credited to the loan receivable balance and no interest income is recognized on those loans until the principal balance is paid in full.

Accrual of interest may be resumed when the customer is current on all principal and interest payments and has been paying on a timely basis for a sustained period of time.

See Note 5 for additional information and disclosures on loans.

Loans and Related Interest Income – Acquired:

Loans purchased in acquisition transactions are acquired loans, and are recorded at their estimated fair value at the acquisition date.

Prior to January 1, 2023, as described in further detail in the Company’s Annual Report, the Company initially classified acquired loans as either PCI loans (i.e., loans that reflect credit deterioration since origination and it is probable at acquisition that the Company will be unable to collect all contractually required payments) or purchased non-impaired loans (i.e., “performing acquired loans”).

The Company estimated the fair value of PCI loans based on the amount and timing of expected principal, interest and other cash flows for each loan.

The excess of the loan’s contractual principal and interest payments over all cash flows expected to be collected at acquisition was considered an amount that should not be accreted.

These credit discounts (“nonaccretable marks”) were included in the determination of the initial fair value for acquired loans;

therefore, no allowance for credit losses was recorded at the acquisition date.

Differences between the estimated fair values and expected cash flows of acquired loans at the acquisition date that were not credit-based (“accretable marks”) were subsequently accreted to interest income over the estimated life of the loans.

Subsequent to the acquisition date for PCI loans, increases in cash flows over those expected at the acquisition date resulted in a move of the discount from nonaccretable to accretable, while decreases in expected cash flows after the acquisition date were recognized through the provision for credit losses.

Subsequent to January 1, 2023, acquired loans that have evidence of more-than-insignificant deterioration in credit quality since origination are considered PCD loans.

At acquisition, an estimate of expected credit losses is made for PCD loans.

This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair value to establish the initial amortized cost basis of the PCD loans.

Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors, resulting in a discount or premium that is amortized to interest income.

For acquired loans not deemed PCD loans at acquisition, the difference between the initial fair value mark and the unpaid principal balance are recognized in interest income over the estimated life of the loans.

In addition, an initial allowance for expected credit losses is estimated and recorded as provision expense at the acquisition date.

The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans.

See Note 5 for additional information and disclosures on loans.

Allowance for Credit Losses - Loans:

The ACL-Loans represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date.

The Company estimates the ACL-Loans based on the amortized costs basis of the underlying loan and has made an accounting policy election to exclude accrued interest from the loan’s amortized cost basis and the related measurement of the ACL-Loans.

Estimating the amount of the ACL-Loans is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge-offs, trends in past due and nonaccrual loans, and the level of potential problem loans, all of which may be susceptible to significant change.

Prior to January 1, 2023, as described in further detail in the Company’s Annual Report, the Company used an incurred loss impairment model.

This methodology assessed the overall appropriateness of the allowance for credit losses and included allocations for specifically identified impaired loans and loss factors for all remaining loans, with a component primarily based on historical loss rates and another component primarily based on other qualitative factors.

Impaired loans were individually assessed and measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market

price or the fair value of the collateral if the loan was collateral dependent.

Loans that were determined not to be impaired were collectively evaluated for impairment, stratified by type and allocated loss ranges based on the Company’s actual historical loss ratios for each strata, and adjustments were also provided for certain environmental and other qualitative factors.

Subsequent to January 1, 2023, the Company uses a current expected loss model (“CECL”).

This methodology also considers historical loss rates and other qualitative adjustments, as well as a new forward-looking component that considers reasonable and supportable forecasts over the expected life of each loan.

To develop the ACL-Loans estimate under the current expected loss model, the Company segments the loan portfolio into loan pools based on loan type and similar credit risk elements;

performs an individual evaluation of PCD loans;

calculates the historical loss rates for the segmented loan pools;

applies the loss rates over the calculated life of the pooled loans;

adjusts for forecasted macro-level economic conditions;

and determines qualitative adjustments based on factors and conditions unique to the Bank's portfolio.

The Company further individually evaluates certain impaired loans based on the amount and timing of estimated future cash flows and collateral values and establishes specific reserves when these estimated future cash flows or collateral values do not justify the carrying value of the loan.

Allowance for Credit Losses - Unfunded Commitments :

In addition to the ACL-Loans, the Company has established an allowance for unfunded commitments, included in other liabilities on the consolidated balance sheets, representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit.

The ACL-Unfunded Commitments is maintained at a level that management believes is sufficient to absorb losses arising from unfunded loan commitments, and is determined quarterly based on methodology similar to the methodology for determining the ACL-Loans.

Other Recently Implemented Accounting Standards

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326):

Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures .

This ASU eliminated the accounting guidance for TDRs by creditors and enhanced the disclosure requirements for loan modifications to borrowers experiencing financial difficulty.

The ASU also requires public business entities to expand the vintage disclosures to include gross charge-offs by year of origination.

The updated guidance was effective for fiscal years beginning after December 15, 2022.

Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements;

however, it resulted in new disclosures.

See Note 5 for the new disclosures.

Recently Issued Not Yet Effective Accounting Standards

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.” Certain aspects of this ASU were updated in November 2018 by the issuance of ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”.

The main objective of the ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

To achieve this objective, the amendments in the ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

During 2019 FASB issued ASU 2019-10 which delayed the effective date of ASU 2016-13 for smaller, publicly traded companies, until interim and annual periods beginning after December 15, 2022.

This delay applies to the Company as it was classified as a “Smaller reporting company”

as defined in Rule 12b-2 of the Exchange Act as of the date ASU 2019-10 was enacted.

During the first half of 2019 the Company engaged a third-party partner to assist it in implementation of this standard.

Over the last three years significant progress has been made working through the assumptions, drivers, documentation and other mechanics for the calculation of the Company’s ALL under ASU 2016-13.

Throughout this process, Management has evaluated the impact of this update.

Management has begun running a calculation of its allowance under ASU 2016-13 parallel to its current modeling to assess the functioning of the ASU 2016-13 model while also documenting the controls that will be in place around the process when the Company implements this standard.

Results of these parallel calculations indicate that the Bank’s ALL to total loans coverage ratio would fall within a range of 1.00 % to 1.20 % under ASU 2016-13 in the current environment, compared to 0.81 % as of September 30, 2022 under the current methodology.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

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It provides optional expedients and exceptions for applying GAAP to contracts hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

The updated guidance is effective for all entities from March 12, 2020 through December 31, 2022.

In December 2022, the FASB issued ASU 2022-06, Reference rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848, which defers the sunset date of the original guidance from December 31, 2022 to December 31, 2024.

The Company has been diligent in responding to reference rate reform and does not anticipate a significant impact to its financial statements as a result.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures.

This ASU provides guidance on eliminating the requirement for classification of and disclosures around troubled debt restructurings.

The purpose of this guidance is to eliminate unnecessary and overly-complex disclosures of loans that are already incorporated into the allowance for credit losses and related disclosures.

This ASU further requires the disclosure of current-period gross charge-offs by year of origination.

The updated guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, for all entities which have implemented ASU 2016-13.

The Company has historically had very few credit relationships classified as troubled debt restructurings, and as such does not anticipate that the elimination of accounting for and disclosure of these types of credit relationships will have a significant impact to its financial statements upon implementation of ASU 2016-13 beginning with the first quarter of 2023.

NOTE 2 – ACQUISITIONS

On August 12, 2022, the Company completed a merger with Denmark, a bank holding company headquartered in Denmark, Wisconsin, pursuant to the Agreement and Plan of Bank Merger (“Merger Agreement”), dated as of January 18, 2022 by and among the Company and Denmark, whereby Denmark merged with and into the Company, and Denmark State Bank, Denmark’s wholly-owned banking subsidiary, merged with and into the Bank.

On February 10, 2023, the Company completed a merger with Hometown Bancorp, Ltd.

(“Hometown”), a bank holding company headquartered in Fond du Lac, Wisconsin, pursuant to the Agreement and Plan of Bank Merger (“Merger Agreement”), dated as of July 25, 2022 by and among the Company and Hometown, whereby Hometown merged with and into the Company, and Hometown Bank, Hometown’s wholly-owned banking subsidiary, merged with and into the Bank.

Hometown’s principal activity was the ownership and operation of Hometown Bank, a state-chartered banking institution that operated ten ( 10 ) branches in Wisconsin at the time of closing.

The merger consideration totaled approximately $ 130.5 million.

Pursuant to the terms of the Merger Agreement, Hometown shareholders could elect to receive either 0.3962 shares of the Company’s common stock or $ 29.16 in cash for each outstanding share of Hometown common stock, subject to a maximum of 30 % cash consideration in total, with cash paid in lieu of any remaining fractional share.

Company stock issued totaled 1,450,272 shares valued at approximately $ 115.1 million, with cash of $ 15.4 million comprising the remainder of merger consideration.

The fair value of the assets acquired and liabilities assumed on February 10, 2023 was as follows:

As Recorded by

Cash, cash equivalents and securities

Other investments

Premises and equipment, net

Core deposit intangible

Total assets acquired

Other borrowings

Junior subordinated debentures

Other liabilities

Total liabilities assumed

Excess of assets acquired over liabilities assumed

purchase price

The Company purchased loans through the acquisition of Hometown for which there was, at the date of acquisition, more than insignificant deterioration of credit quality since origination (PCD Loans).

The carrying amount of these loans at acquisition was as follows:

February 10, 2023

Purchase price of PCD loans at acquisition

Allowance for credit losses on PCD loans at acquisition

Par value of PCD acquired loans at acquisition

On August 12, 2022, the Company completed a merger with Denmark Bancshares, Inc.

(“Denmark”), a bank holding company headquartered in Denmark, Wisconsin, pursuant to the Merger Agreement, dated as of January 18, 2022 by and among the Company and Denmark, whereby Denmark merged with and into the Company, and Denmark State Bank, Denmark’s wholly-owned banking subsidiary, merged with and into the Bank.

Denmark’s principal activity was the ownership and operation of Denmark State Bank, a state-chartered banking institution that operated seven ( 7 ) branches in Wisconsin at the time of closing.

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Company stock issued totaled 1,579,530 shares valued at approximately $ 124.8 million, with cash of $ 4.0 million comprising the remainder of merger consideration.

The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of Denmark prior to the consummation date were not included in the accompanying consolidated financial statements.

The accounting required assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition.

The Company determined the fair value of core deposit intangibles, securities, premises and equipment, loans, other assets and liabilities and deposits with the assistance of third party valuations, appraisals and third party advisors.

The estimated fair values will be subject to refinement for up to one year after deal consummation as additional information becomes available relative to the closing date fair values.

The fair value of the assets acquired and liabilities assumed on August 12, 2022 was as follows:

12 unchanged sentences

purchase price

Goodwill (originally recorded)

Refinement to fair value estimates (1)

Goodwill (after refinement)

(1) Refinement consists of adjustments to the initial fair value estimates of other assets and liabilities, primarily related to accrued and deferred income taxes.

The following unaudited pro forma information is presented for illustrative purposes only.

The pro forma information should not be relied upon as being indicative of the historical results of operations the companies would have had if the merger had occurred before such periods or the future results of operations that the companies will experience as a result of the merger.

The pro forma information should not be relied upon as being indicative of the historical results of operations the Company would have had if the Denmark merger had occurred before such periods or the future results of operations that the Company will experience as a result of the merger.

The pro forma information, although helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the benefits of expected cost savings, opportunities to earn additional revenue, the impact of restructuring and merger-related expenses, or other factors that may result as a consequence of the merger and, accordingly, does not attempt to predict or suggest future results.

The unaudited pro forma information set forth below gives effect to the merger as if it had occurred on January 1, 2022, the beginning of the earliest period presented.

Nine Months Ended

Results for the three months ended March 31, 2023, would not be impacted as reported results already include the impacts of the Denmark Merger.

(in thousands, except per share data)

September 30, 2022

December 31, 2022

1 unchanged sentence

Diluted earnings per common share

On July 25, 2022, the Company entered into an Agreement and Plan of Merger with Hometown Bancorp, Ltd.

(“Hometown”), a Wisconsin Corporation, under which Hometown will merge with and into the Company and Hometown’s banking subsidiary, Hometown Bank, will merge with and into the Bank.

The transaction is expected to close during the first quarter of 2023 and is subject to, among other items, approval by the shareholders of Hometown and regulatory agencies.

Merger consideration will consist of up to 30 % cash and no less than 70 % common stock of the Company, and will total approximately $ 124 million, subject to the fair market value of the Company’s common stock on the date of closing.

Based on results as of September 30, 2022, the combined company would have total assets of approximately $ 4.26 billion, loans of approximately $ 3.25 billion and deposits of approximately $ 3.68 billion.

The Company accounted for these transactions under the acquisition method of accounting, and thus, the financial position and results of operations of Hometown and Demark prior to the consummation dates were not included in the accompanying consolidated financial statements.

The accounting required assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition.

The Company determined the fair value of core deposit intangibles, securities, premises and equipment, loans, other assets and liabilities and deposits with the assistance of third-party valuations, appraisals and third-party advisors.

The estimated fair values will be subject to refinement for up to one year after deal consummation as additional information becomes available relative to the closing date fair values.

For more information concerning the Company’s acquisitions, see “Note 2 – Acquisition” in the Company’s audited consolidated financial statements included in the Company’s Annual Report.

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Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings.

There were no anti-dilutive stock options for the nine months ended September 30, 2022 or 2021.

There were no anti-dilutive stock options for the three months ended March 31, 2023 or 2022.

The following table presents the factors used in the earnings per share computations for the period indicated:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands, except per share data)

Net income available to common shareholders

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The following is a summary of available for sale securities:

September 30, 2022

March 31, 2023

Treasury securities

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The following is a summary of held to maturity securities:

September 30, 2022

March 31, 2023

Treasury securities

2 unchanged sentences

December 31, 2022

Treasury securities

Obligations of states and political subdivisions

Total held to maturity securities

The following table shows the fair value and gross unrealized losses of securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

1 unchanged sentence

Greater Than 12 Months

September 30, 2022 - Available for Sale

March 31, 2023 - Available for Sale

Treasury securities

5 unchanged sentences

Certificate of Deposits

September 30, 2022 - Held to Maturity

March 31, 2023 - Held to Maturity

Treasury securities

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Corporate notes

As of September 30, 2022, the Company does not consider its securities with unrealized losses to be other-than-temporarily impaired, as the unrealized losses in each category have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration.

The Company has the intent and ability to hold its securities to maturity or until par is recovered.

There were no other-than-temporary impairments charged to earnings during the nine months ended September 30, 2022 or 2021.

The following is a summary of amortized cost and estimated fair value of securities by contractual maturity as of September 30, 2022.

Certificate of Deposits

December 31, 2022 - Held to Maturity

Treasury securities

Obligations of states and political subdivisions

As of March 31, 2023, no allowance for credit losses has been recognized on available for sale securities in an unrealized loss position as the Company does not believe any of the debt securities are credit impaired.

This is based on the Company’s analysis of the risk characteristics, including credit ratings, and other qualitative factors related to these securities.

The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities.

The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the debt securities before recovery of their amortized cost, which may be at maturity.

The unrealized losses have occurred as a result of changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration.

Furthermore, based on its analysis the Company has determined that held to maturity securities have zero expected credit losses.

Treasury securities have the full faith and credit backing of the United States Government and the amount of Obligations of states and political subdivisions at March 31, 2023 are not material to the financial statements.

The following is a summary of amortized cost and estimated fair value of securities by contractual maturity as of March 31, 2023.

Contractual maturities will differ from expected maturities for mortgage-backed securities because borrowers may have the right to call or prepay obligations without penalties.

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Mortgage-backed securities

There were no realized gains or losses on sales of securities available for sale or held to maturity for the nine months ended September 30, 2022.

The following is a summary of the proceeds from sales of securities available for sale and held to maturity, as well as gross losses for the nine months ended September 30, 2021.

Proceeds from sales of securities

Gross gains on sales

Gross losses on sales

NOTE 5 – LOANS, ALLOWANCE FOR LOAN LOSSES, AND CREDIT QUALITY

The following table presents total loans by portfolio segment and class of loan as of September 30, 2022 and December 31, 2021:

September 30,

As of March 31, 2023 and December 31, 2022, the carrying values of securities pledged to secure public deposits, securities sold under repurchase agreements, and for other purposes required or permitted by law were approximately $ 195.1 million and $ 226.9 million, respectively.

Sales of securities available for sale produced $ 34.2 million in proceeds, $ 0.1 million in gross gains and $ 0.2 million in gross losses for the three months ended March 31, 2023.

There were no sales of securities during the three months ended March 31, 2022.

NOTE 5 – LOANS, ALLOWANCE FOR CREDIT LOSSES, AND CREDIT QUALITY

The following table presents total loans by portfolio segment and class of loan as of March 31, 2023 and December 31, 2022:

Commercial/industrial

3 unchanged sentences

Residential 1‑4 family

Loans, net of ALL

Loans, net of ACL - Loans

Deferred loan fees and costs

A summary of the activity in the ALL by loan type as of September 30, 2022 and 2021 is summarized as follows:

The ACL - Loans is based on the Company’s evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay a loan, the estimated value of any underlying collateral, composition of the loan portfolio and other relevant factors.

Loans with similar risk characteristics are evaluated in pools and, depending on the nature of each identified pool, the Company utilizes a discounted cash flow (“DCF”), probability of default / loss given default (“PD/LGD”) or remaining life method.

The historical loss experience estimate by pool is then adjusted by forecast factors that are quantitatively related to the Company’s historical credit loss experience, such as national unemployment rates, gross domestic product and indexes which are indicative of the value of underlying collateral.

Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable period losses are reverted to long term historical averages.

The reasonable and supportable period and reversion period are re-evaluated each quarter by the Company and are dependent on the current economic environment among other factors.

The expected credit losses for each loan pool are then adjusted for changes in qualitative factors not inherently considered in the quantitative analyses.

The qualitative adjustments either increase or decrease the quantitative model estimation.

The Company considers factors that are relevant within the qualitative framework which include the following:

lending policy, changes in nature and volume of loans, staff experience, changes in volume and trends of problem loans, concentration risk, trends in underlying collateral values, external factors, quality of loan review system and other economic conditions.

Expected credit losses for loans that no longer share similar risk characteristics with the collectively evaluated pools are excluded from the collective evaluation and estimated on an individual basis.

Individual evaluations are performed for nonaccrual loans, loans rated substandard, and modified loans (previously classified as TDRs).

Specific allocations of the ACL for credit losses are estimated on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows.

A summary of the activity in the ACL - Loans by loan type as of March 31, 2023 is summarized as follows:

Real Estate -

ALL - January 1, 2022

ALL - September 30, 2022

ALL ending balance individually evaluated for impairment

ALL ending balance collectively evaluated for impairment

Loans outstanding - September 30, 2022

Loans ending balance individually evaluated for impairment

Loans ending balance collectively evaluated for impairment

ACL - Loans - January 1, 2023

Adoption of CECL

ACL - Loans on PCD loans acquired

ACL - Loans - March 31, 2023

A summary of the activity in the allowance for loan losses (“ALL”) by loan type as of March 31, 2022 is as follows:

Real Estate -

1 unchanged sentence

ALL - January 1, 2022

ALL - September 30, 2021

ALL March 31, 2022

ALL ending balance individually evaluated for impairment

ALL ending balance collectively evaluated for impairment

Loans outstanding - September 30, 2021

Loans outstanding - March 31, 2022

Loans ending balance individually evaluated for impairment

Loans ending balance collectively evaluated for impairment

The Company’s past due loans as of September 30, 2022 is summarized as follows:

In addition to the ACL-Loans, the Company has established an ACL-Unfunded Commitments, classified in other liabilities on the consolidated balance sheets.

This allowance is maintained to absorb losses arising from unfunded loan commitments, and is determined quarterly based on methodology similar to the methodology for determining the ACL-Loans.

The ACL - Unfunded Commitments was $ 3.5 million at March 31, 2023.

See Note 10 for further information on commitments.

The provision for credit losses is determined by the Company as the amount to be added to the ACL loss accounts for various types of financial instruments including loans, investment securities, and off-balance sheet credit exposures after net charge-offs have been deducted to bring the ACL to a level that, in management’s judgment, is necessary to absorb expected credit losses over the lives of the respective financial instruments.

The following table presents the components of the provision for credit losses.

Three Months Ended

March 31, 2023

March 31, 2022

December 31, 2022

Provision for credit losses on:

Unfunded Commitments

Total provision for credit losses

The Company’s past due and non-accrual loans as of March 31, 2023 is summarized as follows:

allocated ACL

Commercial/industrial

3 unchanged sentences

Residential 1‑4 family

The Company’s past due loans as of December 31, 2021 is summarized as follows:

The Company’s past due and non-accrual loans as of December 31, 2022 is summarized as follows:

Commercial/industrial

3 unchanged sentences

Residential 1‑4 family

Interest recognized on non-accrual loans is considered immaterial to the consolidated financial statements for the three months ended March 31, 2023 and 2022.

A loan is considered to be collateral dependent when, based upon management’s assessment, the borrower is experiencing financial

difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.

For collateral dependent loans, expected credit losses are based on the estimated fair value of the collateral at the balance sheet date, with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral.

The following table presents collateral dependent loans by portfolio segment and collateral type, including those loans with and without a related allowance allocation.

A significant portion of the loan balances in this table and essentially all of the allowance allocations relate to PCD loans which were acquired from Hometown.

Real estate collateral primarily consists of operating facilities of the underlying borrowers.

Other business assets collateral primarily consists of receivables and inventory of the underlying borrowers.

Collateral Type

As of March 31, 2023

Business Assets

Commercial/industrial

Commercial real estate - owner occupied

Commercial real estate - non-owner occupied

Construction and development

Residential 1‑4 family

Prior to the adoption of ASU 2016-13, the allowance included specific reserves for certain individually evaluated impaired loans.

Specific reserves reflected estimated losses on impaired loans from management’s analysis developed through specific credit allocations.

The following table shows a summary of impaired loans individually evaluated as of December 31, 2022:

Real Estate -

With an allowance recorded:

Recorded investment

Unpaid principal balance

Related allowance

With no related allowance recorded:

Recorded investment

Unpaid principal balance

Related allowance

Recorded investment

Unpaid principal balance

Related allowance

Average recorded investment

The Company utilizes a numerical risk rating system for commercial relationships.

14 unchanged sentences

collection or liquidation in full is not probable.

The breakdown of loans by risk rating as of September 30, 2022 is as follows:

The following table presents total loans by risk ratings and year of origination.

Loans acquired from Hometown, Denmark and other previously acquired institutions have been included in the table based upon the actual origination date.

Amortized Cost Basis by Origination Year

As of March 31, 2023

Commercial/industrial