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Item 7. Management’s Discussion and Analysis

2024-02-29 compared with 2023-03-10 · 176 added, 346 removed, 523 unchanged (50% of the section changed)

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In order to maximize the Bank’s net interest income, or the difference between the income on interest-earning assets and the expense of interest-bearing liabilities, the Bank must not only manage the volume of these balance sheet items, but also the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities.

To account for credit risk inherent in all loans, the Bank maintains an ALLL to absorb possible losses on existing loans that may become uncollectible.

The Bank establishes and maintains this allowance by charging a provision for loan losses against operating earnings.

To account for credit risk inherent in all loans, the Bank maintains an allowance for credit losses (“ACL – Loans”) to absorb possible losses on existing loans that may become uncollectible.

The Bank establishes and maintains this allowance by charging a provision for credit losses against operating earnings.

Beyond its net interest income, the Bank further receives income through the net gain on sale of loans held for sale as well as servicing income which is retained on those sold loans.

In order to maintain its operations and bank locations, the Bank incurs various operating expenses which are further described within the “Results of Operations” later in this section.

The Bank is a 49.8% member of a data processing subsidiary, UFS, LLC, which provides core data processing, endpoint management cloud services, cyber security and digital banking solutions for over 60 Midwest banks.

The Bank, through its 100% owned subsidiary TVG Holdings, Inc., also holds a 40% ownership interest in Ansay & Associates, LLC, an insurance agency providing clients primarily located in Wisconsin with insurance and risk management solutions.

The Bank, through its 100% owned subsidiary TVG Holdings, Inc., holds a 40% ownership interest in Ansay & Associates, LLC, an insurance agency providing clients primarily located in Wisconsin with insurance and risk management solutions.

The Bank owned 49.8% of UFS, LLC, which provides data processing solutions to over 60 banks in the Midwest, through October 1, 2023.

On that date it sold 100% of its member interest in UFS to a third party.

These unconsolidated subsidiary interests contribute noninterest income to the Bank through their underlying annual earnings.

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Recent acquisitions

Tomah Bancshares, Inc .

On May 15, 2020, the Company completed a merger with Timberwood, a bank holding company headquartered in Tomah, WI, pursuant to the Agreement and Plan of Bank Merger dated as of November 20, 2019, by and between the Company and Timberwood, whereby Timberwood was merged with and into the Company, and Timberwood Bank, Timberwood's wholly owned banking subsidiary, was merged with and into the Bank.

Timberwood's principal activity was the ownership and operation of Timberwood Bank, a state-chartered banking institution that operated one (1) branch in Wisconsin at the time of closing.

Hometown Bancorp, Ltd.

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 merger agreement, dated as of July 25, 2022, by and between 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, Timberwood shareholders received 5.1445 shares of the Company's common stock for each outstanding share of Timberwood common stock, and cash in lieu of any remaining fractional share.

Pursuant to the terms of the merger agreement, Hometown shareholders could elect to receive either 0.3962 of a share 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.

Denmark Bancshares, Inc.

On August 12, 2022, the Company completed a merger with Denmark, a bank holding company headquartered in Denmark, Wisconsin, pursuant to the merger agreement, dated as of January 18, 2022 by and between 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 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 between 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.

Hometown Bancorp, Ltd.

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, dated as of July 25, 2022, by and between 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 of a share 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, and cash 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.

At close, the combined company had total assets of approximately $4.2 billion, loans of approximately $3.3 billion and deposits of approximately $3.5 billion.

These values are based on initial fair value estimates and are subject to change.

The Company accounts for these transactions under the acquisition method of accounting, and thus, the financial position and results of operations of acquired institutions prior to the consummation date are not included in the accompanying consolidated financial statements.

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

CRITICAL ACCOUNTING POLICIES

CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES

The accounting and reporting policies of the Company conform to GAAP in the United States and general practices within the financial institution industry.

Significant accounting and reporting policies are summarized below.

Business Combinations

To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information.

These estimates, assumptions and judgments are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statement.

In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements.

The following is a discussion of the critical accounting policies and significant estimates that require us to make complex and subjective judgments.

Additional information about these policies can be found in Note 1 of our consolidated financial statements as of December 31, 2023, included elsewhere in this Annual Report on Form 10-K.

Business Combinations, Core Deposit Intangible and Acquired Loans.

We account for business combinations under the acquisition method of accounting in accordance with Accounting Standards Codification (ASC) 805, Business Combinations (ASC 805).

We recognize the full fair value of the assets acquired and liabilities assumed and immediately expense transaction costs.

There is no separate recognition of the acquired ALLL on the acquirer’s balance sheet as credit related factors are incorporated directly into the fair value of the net tangible and intangible assets acquired.

If the amount of consideration exceeds the fair value of assets purchased less the fair value of liabilities assumed, goodwill is recorded.

Alternatively, if the amount by which the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration paid, a gain (bargain purchase gain) is recorded.

Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relative to closing date fair values becomes available.

Results of operations of the acquired business are included in the statement of income from the effective date of the acquisition.

Allowance for Loan and Lease Losses — Originated

The ALLL is established through a provision for loan losses charged to expense as losses are estimated to have occurred.

Loan losses are charged against the allowance when management believes that the collectability of the principal is unlikely.

Subsequent recoveries, if any, are credited to the allowance.

Management regularly evaluates the ALLL using general economic conditions, our past loan loss experience, composition of the portfolio, credit worthiness of the borrowers, the estimated value of the underlying collateral, the assumptions about cash flow, determination of loss factors for estimating credit losses and other relevant factors.

This evaluation is inherently subjective since it requires material estimates that may be susceptible to significant change.

The ALLL consists of specific reserves for certain impaired loans and general reserves for non-impaired loans.

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

The specific credit reserves are based on regular analyses of impaired non-homogenous loans.

These analyses involve a high degree of judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values.

The general reserve is based on our historical loss experience which is updated quarterly.

The general reserve portion of the ALLL also includes consideration of certain qualitative factors such as (1) changes in lending policies and/or underwriting practices, (2) national and local economic conditions, (3) changes in portfolio volume and nature, (4) experience, ability and depth of lending management and other relevant staff, (5) levels of and trends in past-due and nonaccrual loans and quality, (6) changes in loan review and oversight, (7) impact and effects of concentrations and (8) other issues deemed relevant.

Management believes that the current ALLL is adequate.

While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the ALLL.

Such agencies may require us to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.

Allowance for Loan and Lease Losses — Acquired

The ALLL for acquired loans is calculated using a methodology similar to that described for originated loans.

Performing acquired loans are subsequently evaluated for any required allowance at each reporting date.

Such required allowance for each loan pool is compared to the remaining fair value discount for that pool.

If greater, the excess is recognized as an addition to the allowance through a provision for loan losses.

If less than the discount, no additional allowance is recorded.

Charge-offs and losses first reduce any remaining fair value discount for the loan pool and once the discount is depleted, losses are applied against the allowance established for that pool.

For purchase credit impaired loans after an acquisition, cash flows expected to be collected are recast for each loan periodically as determined appropriate by management.

If the present value of expected cash flows for a loan is less than its carrying value, impairment is reflected by an increase in the ALLL and a charge to the provision for loan losses.

If the present value of the expected cash flows for a loan is greater than its carrying value, any previously established ALLL is reversed and any remaining difference increases the accretable yield which will be taken into income over the remaining life of the loan.

Loans which were considered TDRs by the acquired institution prior to the acquisition are not required to be

classified as TDRs in our consolidated financial statements unless or until such loans would subsequently meet our criteria to be classified as such, since acquired loans were recorded at their estimated fair values at the time of the acquisition.

Impaired Investment Securities

Unrealized gains or losses considered temporary and the noncredit portion of unrealized losses deemed other-than-temporary are reported as an increase or decrease in accumulated other comprehensive income.

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

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

We evaluate securities for other-than-temporary impairment 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.

In addition, management considers the length of time and extent that fair value has been less than cost, the financial condition and near-term prospects of the issuer, and that the Company does not have the intent to sell the security and it is more likely than not that it will not have to sell the security before recovery of its cost basis.

Adjustments to market value that are considered temporary are recorded as a separate component of equity, net of tax.

If an impairment of security is identified as other-than-temporary 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, such impairments are further analyzed to determine if a credit loss exists.

If there is a credit loss, it will be recorded in the consolidated statement of income in the period of identification.

Intangible Assets and Goodwill

Intangible assets consist of the value of core deposits and mortgage servicing assets and the excess of purchase price over fair value of net assets (“goodwill”).

The value of core deposits is stated at cost less accumulated amortization and is amortized on a sum of the years digits basis over a period of one to ten years.

Mortgage servicing rights are recognized as separate assets when rights are acquired through purchase or through sale of mortgage loans with servicing retained.

Servicing rights acquired through sale of financial assets are recorded based on the fair value of the servicing right.

The determination of fair value is based on a valuation model and includes stratifying the mortgage servicing rights by predominant characteristics, such as interest rates and terms, and estimating the fair value of each stratum based on the present value of estimated future net servicing income.

The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, and prepayment speeds.

Changes in fair value are recorded as an adjustment to earnings.

We perform a “qualitative” assessment of goodwill to determine whether further impairment testing of indefinite-lived intangible assets is necessary on at least an annual basis.

If it is determined, as a result of performing a qualitative assessment over goodwill, that it is more likely than not that goodwill is impaired, management will perform an impairment test to determine if the carrying value of goodwill is realizable.

The primary identifiable intangible asset we typically record in connection with a whole bank or branch acquisition is the value of the core deposit intangible which represents the estimated value of the long-term deposit relationships acquired in the transaction.

Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions:

customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates.

Further, the valuation of acquired loans involves significant estimates and assumptions based on information available as of the acquisition date.

Loans acquired in a business combination are evaluated either individually or in pools of loans with similar characteristics;

including consideration of a credit component.

A number of factors are considered in determining the estimated fair value of purchased loans including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, contractual interest rates compared to market interest rates, and net present value of cash flows expected to be received.

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 cost basis of the underlying loan using a current expected credit loss methodology (“CECL”).

To estimate the amount of ACL-Loans, the Company considers historical loss rates and other qualitative adjustments, as well as a forward-looking component that considers reasonable and supportable forecasts over the expected life of each loan.

The Company’s ACL - Loans is calculated using collectively evaluated and individually evaluated loans.

This evaluation is inherently subjective as it requires material estimates that are susceptible to significant change including the amounts and timing of future cash flows expected to be received on loans.

Deferred Tax Assets.

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Provision (benefit) for deferred taxes is the result of changes in the DTAs and liabilities.

Deferred taxes are reviewed quarterly and would be reduced by a valuation allowance if, based upon the information available, it is more likely than not that some or all of the DTAs will not be realized.

Recent Accounting Developments

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 delated 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 in its 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 2022, management ran 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 runs indicate that the Bank’s ALL to total loans coverage ratio will increase from 0.78% as of December 31, 2022, to 1.10% - 1.20% upon implementation of ASU 2016-13 on January 1, 2023.

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

Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.

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 was originally effective for all entities from March 12, 2020 through December 31, 2022.

In December 2022, the FASB issued ASU 2022-06 which deferred the sunset date of Topic 848 from December 31, 2022 to December 31, 2024.

The Corporation 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.

Deferred taxes are reviewed quarterly and are reduced by a valuation allowance if, based upon the information available, it is more likely than not that some or all of the DTAs will not be realized.

Recent Accounting Pronouncements.

For a discussion of recent accounting pronouncements, see “Note 1 – Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements in Item 8 of this report on Form 10-K for further discussion.

RESULTS OF OPERATIONS

Results of Operations for the Years Ended December 31, 2022 and 2021

Net income decreased $0.2 million, or 0.1%, to $45.2 million for the year ended December 31, 2022, from $45.4 million for the year ended December 31, 2021.

During 2022, the Company experienced increased net interest income, a reduced provision for loan losses, a slowdown in retail mortgage lending which led to a large decrease in gains on sales of mortgage loans to the secondary market, and a significant increase in many noninterest expense areas as a result of the acquisition of Denmark which occurred during August 2022.

The following discussion and analysis presents the more significant factors that affected our financial condition as of December 31, 2023 and 2022 and results of operations for each of the years then ended.

Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K filed with the SEC on March 10, 2023 for a discussion and analysis of the more significant factors that affected periods prior to 2022.

Net income increased $29.3 million, or 64.8%, to $74.5 million for the year ended December 31, 2023, from $45.2 million for the year ended December 31, 2022.

During 2023, as a result of the acquisition of Hometown during February 2023 and the impact of the acquisition of Denmark impacting the full year of 2023 compared to less than five months of 2022, the Company experienced increased net interest income, a higher provision for credit losses, an increase in service charge and loan servicing income, and a significant increase in many noninterest expense areas.

Also during 2023 the Company sold 100% of its member interest in UFS, LLC, creating a pre-tax gain on sale of $38.9 million.

Finally, the Company sold its available for sale US Treasury securities during 2023, creating a pre-tax loss on sale of $7.9 million.

Net Interest Income.

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Management closely monitors both total net interest income and the net interest margin (net interest income divided by average earning assets).

We seek to maximize net interest income without exposing the Company to an excessive level of interest rate risk through our asset and liability policies.

Interest rate risk is managed by monitoring the

pricing, maturity and repricing options of all classes of interest-bearing assets and liabilities.

We seek to maximize net interest income without exposing the Company to an

excessive level of interest rate risk through our asset and liability policies.

Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest-bearing assets and liabilities.

Our net interest margin can also be adversely impacted by the reversal of interest on nonaccrual loans and the reinvestment of loan payoffs into lower yielding investment securities and other short-term investments.

Net interest income after provision for loan losses increased by $14.9 million to $101.9 million for the year ended December 31, 2022, from $87.0 million for the year ended December 31, 2021.

Net interest income after provision for credit losses increased by $26.9 million to $128.8 million for the year ended December 31, 2023, from $101.9 million for the year ended December 31, 2022.

Interest income on loans increased by $61.9 million, or 57.8%, from 2022 to 2023.

Total average interest-earning assets increased to $3.66 billion for the year ended December 31, 2023 from $3.09 billion for the year ended December 31, 2022.

The Bank’s net interest margin decreased six basis points to 3.41% for the year ended December 31, 2022, down from 3.47% for the year ended December 31, 2021.

The Bank’s net interest margin increased twenty-eight basis points to 3.69% for the year ended December 31, 2023, up from 3.41% for the year ended December 31, 2022.

Interest Income.

Total interest income increased $65.9 million, or 56.6%, to $182.5 million for the year ended December 31, 2023, up from $116.5 million for the year ended December 31, 2022.

This increase was primarily due to the $455.2 million increase in average earning assets during 2022 when compared to 2021.

Most of this growth was the result of the acquisition of Denmark in August 2022.

This increase was driven by an increase in average rates earned on interest-earning assets, rising from 3.82% during 2022 to 5.03% during 2023, and a $565.4 million increase in average interest-earning assets during 2023 when compared to 2022.

Most of the growth in average interest-earning assets was the result of the acquisitions of Denmark and Hometown.

Interest Expense.

Interest expense increased $36.6 million, or 293.6%, to $49.0 million for the year ended December 31, 2023, up from $12.4 million for the year ended December 31, 2022.

The increase was driven by a combination of increases in the average cost of interest-bearing liabilities, rising 12 basis points from 0.48% to 0.60%, and a $362.4 million increase in average interest-bearing liabilities.

The increase was driven by a combination of increases in the average rates paid on interest-bearing liabilities, rising from 0.60% during 2022 to 2.04% during 2023, and a $311.0 million increase in average interest-bearing liabilities.

Once again, most of the growth in average interest-bearing liabilities was the result of the acquisitions of Denmark and Hometown.

Interest expense on interest-bearing deposits increased by $32.1 million to $42.4 million for the year ended December 31, 2023, from $10.3 million for the year ended December 31, 2022.

This increase was due to the aforementioned higher interest rate environment and growth in average interest-bearing deposits totaling $240.6 million year-over-year.

The average cost of interest-bearing deposits was 0.54% for the year ended December 31, 2022, compared to 0.45% for the year ended December 31, 2021.

Provision for Loan Losses.

This increase was due to a higher interest rate environment driving an increase in average rates paid on interest-bearing deposits, rising from 0.54% during 2022 to 1.84% during 2023, and growth of $398.9 million year-over-year in average interest-bearing deposits.

Provision for Credit Losses.

Credit risk is inherent in the business of making loans.

We establish an ALLL through charges to earnings, which are shown in the statements of operations as the provision for loan losses.

We establish an allowance for credit losses through charges to earnings, which are shown in the statements of income as the provision for credit losses.

Specifically identifiable and quantifiable known losses are promptly charged off against the allowance.

The provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of our ALLL and charging the shortfall or excess, if any, to the current quarter’s expense.

The provision for credit losses is determined by conducting a quarterly evaluation of the adequacy of our allowance for credit losses and charging the shortfall or excess, if any, to the current quarter’s expense.

This has the effect of creating variability in the amount and frequency of charges to earnings.

The provision for loan losses and level of allowance for each period are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market area.

The provision for credit losses and level of allowance for each period are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market area.

The determination of the amount is complex and involves a high degree of judgment and subjectivity.

We recorded a provision for loan losses of $2.2 million for the year ended December 31, 2022, compared to $3.1 million for the year ended December 31, 2021.

Our asset quality metrics during the course of 2022 continued the trend of remaining strong from 2021 and allowed for a further reduction in provision expense during 2022.

The ALLL was $22.7 million, or 0.78% of total loans, at December 31, 2022 compared to $20.3 million, or 0.91% of total loans at December 31, 2021.

The decrease in ALLL coverage to total loans from December 31, 2021, to December 31, 2022, was primarily due to a significant increase in the percentage of the Company’s loan portfolio accounted for under purchase accounting year-over-year as a result of the Denmark acquisition.

Under the Company’s current allowance methodology, loans which are accounted for under purchase accounting do not require an ALLL reserve allocation.

We recorded a provision for credit losses of $4.7 million for the year ended December 31, 2023, compared to $2.2 million for the year ended December 31, 2022.

The increased provision for credit losses during 2023 was primarily result of ASU 2016-13, which was adopted at the beginning of 2023, requiring a provision to be recorded related to loans acquired from Hometown.

Metrics regarding the credit quality of the Bank’s loan portfolio continue to show very little in terms of credit stress during 2023 .

The ACL-Loans was $43.6 million, or 1.30% of total loans, at December 31, 2023 compared to $22.7 million, or 0.78% of total loans at December 31, 2022.

The increased ACL - Loans coverage was also the result of adopting ASU 2016-13 as of January 1, 2023.

Noninterest Income.

Noninterest income is an important component of our total revenues.

A significant portion of our noninterest income is associated with service charges and income from the Bank’s unconsolidated subsidiaries, Ansay and UFS.

Other sources of noninterest income include loan servicing fees and gains on sales of mortgage loans.

Noninterest income decreased by $3.7 million, or 15.7% to $19.8 million for 2022, down from $23.5 million during 2021.

The primary driver of the decrease in noninterest income was the slowdown in the retail mortgage lending market, which drove a $5.8 million decline in gains on sales of mortgage loans to the secondary market.

This same slowdown positively impacted the valuation of the Company’s mortgage servicing rights (“MSR”) as certain assumptions in the calculation of fair value of these rights adjusted to the new market conditions, leading to $1.6 more in positive valuation adjustments to MSRs in 2022 compared to 2021.

Finally, income from the Company’s investment in UFS saw a significant increase year-over-year as they continue to increase market share.

A significant portion of our noninterest income has historically been associated with service charges and income from the Bank’s unconsolidated subsidiaries, Ansay and UFS.

Other typical sources of noninterest income include loan servicing fees and gains on sales of mortgage loans.

Noninterest income increased by $38.4 million, or 195.0% to $58.1 million for 2023, up from $19.7 million during 2022.

The primary driver of the increase in noninterest income was the aforementioned $38.9 million pre-tax gain on sale of UFS during 2023.

This sale also led to a decrease in the income provided by UFS during 2023 as this revenue stream no longer existed during the final quarter.

The continued slowdown in the retail mortgage lending market during 2023 led to a $0.7 million decline in gains on sales of mortgage loans to the secondary market year-over-year.

While this slowdown continued from 2022, the positive impact it had on the valuation of the Company’s mortgage servicing rights (“MSR”) was less significant during 2023, leading to only $0.4 million in positive valuation adjustments to MSRs in 2023 compared to $2.9 million in 2022.

Finally, income from service charges and loan servicing saw a significant increase year-over-year as a result of added scale from the acquisitions of Denmark and Hometown.

The major components of our noninterest income are listed in the table below:

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Net gain on sales of mortgage loans

Net gain on sales and valuation of ORE

Gain on sale of UFS

Total noninterest income

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Noninterest expense increased $26.2 million to $88.1 million for the year ended December 31, 2023, up from $62.0 million for the year ended December 31, 2022.

Personnel expense increased $4.6 million, or 16.3%, primarily as a result of the severance payments and the added scale from the Denmark acquisition that occurred during 2022.

Occupancy expense increased $1.3 million, or 30.2%, data processing increased $1.0 million, or 18.3%, and outside service fees increased $3.7 million, or 118.7%, primarily as a result of the Company completing the Denmark acquisition during 2022 with no corresponding acquisition during 2021.

These areas of noninterest expense are typically elevated during years where acquisitions occur.

Amortization of intangibles increased by $0.9 million, or 65.0%, as the acquisition of Denmark led to a core deposit intangible of $15.1 million which began amortizing during August 2022.

The major components of our noninterest expense are listed in the table below:

One driver of this increase in noninterest expense was the aforementioned sale of a significant number of available for sale securities during 2023, resulting in a $7.9 million pre-tax loss during 2023.

These securities had an average yield of 1.36%.

Proceeds of these sales were reinvested in a combination of short and long-term investments with an average yield of 4.98%.

Personnel expense increased $7.2 million, or 21.7%, data processing expense increased $1.7 million, or 26.7%, postage, stationary and supplies expense increased $0.3 million, or 40.6%, charitable contributions expense increased by $0.2 million, or 31.5%, advertising expense increased $0.1 million, or 19.9%, and other noninterest expense increased $2.7 million, or 42.1%, all primarily as a result of the added scale from the Denmark and Hometown acquisitions.

Outside service fees decreased $0.4 million, or 5.6%, primarily as a result of nearly all legal and professional fees related to the Denmark acquisition and many of these same fees related to the Hometown acquisition occurring during 2022.

Amortization of intangibles increased by $4.0 million, or 172.8%, as the acquisitions of Denmark and Hometown created core deposit intangibles of $15.1 million and $16.5 million, respectively, which began amortizing on the date those transactions closed.

These acquisitions also resulted in several former bank branches of those institutions becoming other real estate owned, leading to the significant losses on sales and valuations of these buildings during 2023.The major components of our noninterest expense are listed in the table below:

For the Years Ended

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Postage, stationary, and supplies

Net loss on sales of securities

Charitable contributions

Outside service fees

Amortization of intangibles

Total noninterest expenses

Income Tax Expense.

We recorded a provision for income taxes of $14.4 million for the year ended December 31, 2022, compared to $14.5 million for the year ended December 31, 2021, reflecting effective tax rates of 24.2% for both 2022 and 2021, respectively.

Results of Operations for the Years Ended December 31, 2021 and 2020

Net income increased $7.4 million, or 19.4%, to $45.4 million for the year ended December 31, 2021, from $38.0 million for the year ended December 31, 2020.

The primary reasons for the increase in profitability were increased net interest, a reduced provision for loan losses during 2021, robust retail mortgage lending which led to a large increase in gains on sales of mortgage loans to the secondary market, reduced losses on sales and valuations of OREO and a significant penalty for the early extinguishment of debt during 2020 that did not recur during 2021.

This was offset by a small loss on sales of securities during 2021 that compared unfavorably to a gain of $3.2 million on these sales during 2020 as well as a $1.7 million gain on the sale of a branch location during 2020 with no similar gain during 2021.

Net Interest Income.

Net interest income after provision for loan losses increased by $7.3 million to $87.0 million for the year ended December 31, 2021, from $79.7 million for the year ended December 31, 2020.

Interest income on loans decreased by $1.9 million, or 1.9%, from 2020 to 2021.

Total average interest-earning assets increased to $2.63 billion for the year ended December 31, 2021 from $2.31 billion for the year ended December 31, 2020.

The Bank’s net interest margin decreased 37 basis points to 3.47% for the year ended December 31, 2021, down from 3.84% for the year ended December 31, 2020.

Interest Income.

Total interest income decreased $2.3 million, or 2.30%, to $98.4 million for the year ended December 31, 2021, down from $100.7 million for the year ended December 31, 2020.

This decrease was primarily due to yield on loans decreasing by 50 basis points from 4.75% during 2020 to 4.25% during 2021, which more than offset the $185.1 million increase in average balances of loans during 2021.

Interest Expense.

Interest expense decreased $5.6 million, or 40.1%, to $8.3 million for the year ended December 31, 2021, down from $13.9 million for the year ended December 31, 2020.

The decrease was driven by declines in the average cost of interest-bearing liabilities, falling 39 basis points from 0.87% to 0.48%.

This decline was primarily the result of a significantly lower interest rate environment that developed through the first half of 2020 and continued throughout 2021.

Interest expense on interest-bearing deposits decreased by $4.9 million to $7.5 million for the year ended December 31, 2021, from $12.5 million for the year ended December 31, 2020.

This decrease was primarily due to the aforementioned lower interest rate environment, allowing the Company to significantly reduce crediting interest rates on non-time, interest-bearing deposit accounts.

The average cost of interest-bearing deposits was 0.45% for the year ended December 31, 2021, compared to 0.83% for the year ended December 31, 2020.

Provision for Loan Losses.

We recorded a provision for loan losses of $3.1 million for the year ended December 31, 2021, compared to $7.1 million for the year ended December 31, 2020.

Provision expense was elevated during 2020 in response to uncertainty created by COVID-19 and society’s response to it.

Actual asset quality metrics during the course of 2021 remained strong, however, and allowed for a reduction in provision expense during that year.

The ALLL was $20.3 million, or 0.91% of total loans, at December 31, 2021 compared to $17.7 million, or 0.81% of total loans, at December 31, 2020.

The increase in ALLL coverage to total loans from December 31, 2020, to December 31, 2021, was primarily due to a smaller percentage of the Company’s loan portfolio accounted for under purchase accounting year-over-year.

Under the Company’s current allowance methodology, loans which are accounted for under purchase accounting do not require an ALLL reserve allocation.

Noninterest Income.

Noninterest income was $23.5 million for 2021, compared to $18.9 million during 2020.

Service charges increased by $1.1 million, or 22.5%, from 2020 to 2021, as a result of new markets and added scale from three acquisitions during the previous four years.

Net gain on sales of mortgage loans increased by $2.1 million from 2020 to 2021 as a result of a robust residential mortgage lending environment during 2021 spurred by historically low mortgage interest rates.

The Company had sales of two large foreclosed properties scheduled to close late in the first quarter of 2020 which would have resulted in modest losses.

Due to the economic turmoil that resulted during the last several weeks of the first quarter of 2020, terms of these sales were negatively impacted.

Rather than hold these properties heading into this time of uncertainty, the Company chose to accept the reduced terms, causing significant losses on these sales that were the primary components of $1.4 million in total losses on sales and valuations of other real estate owned during 2020.

During 2021 the Company experienced a small overall gain on these types of transactions, creating a very favorable year-over-year comparison.

Finally, the Company recorded a $1.7 million gain on the sale of a branch location during December

There was no similar sale during 2021, causing other noninterest income to decrease year-over-year.

The major components of our noninterest income are listed in the table below:

For the Years

Ended December 31,

(in thousands)

Noninterest Income

Service Charges

Income from Ansay

Income from UFS

Loan Servicing income

Valuation adjustment on mortgage servicing rights

Net gain on sales of mortgage loans

Net gain (loss) on other real estate owned

Total noninterest income

Noninterest Expense.

Noninterest expense increased $1.8 million to $50.6 million for the year ended December 31, 2021, up from $48.7 million for the year ended December 31, 2020.

Personnel expense increased $1.2 million, or 4.6%, primarily as a result of customary annual salary increases.

Occupancy expense decreased $0.5 million, or 11.0%, data processing decreased $0.2 million, or 3.1%, and outside service fees decreased $1.0 million, or 25.2%, primarily as a result of the Company completing an acquisition of another institution during 2020 with no corresponding acquisition during 2021.

These areas of noninterest expense are typically elevated during years where acquisitions occur.

Due to uncertainty about liquidity needs in financial markets during the early days of the COVID-19 pandemic, the Company sold approximately $34.0 million in U.S.

Treasury Securities during the second quarter of 2020, resulting in a gain on sale of securities of $3.2 million.

This compared favorably to small losses on sales of securities during 2021.

Finally, during the second quarter of 2020 the Company paid off $30.0 million in borrowings from the Federal Home Loan Bank of Chicago which had contractual maturities ranging from August 2022 through August 2024, resulting in prepayment penalties of $1.3 million, but saving the Company $1.7 million in interest over the next four years.

There was no similar action during 2021.

The major components of our noninterest expense are listed in the table below.

For the Years

Ended December 31,

(In thousands)

Noninterest Expense

Salaries, commissions, and employee benefits

Data Processing

Postage, stationary, and supplies

Charitable Contributions

Outside service fees

Net loss (gain) on sales and valuations of other real estate owned

Net loss on sales of securities

Amortization of intangibles

Penalty for early extinguishment of debt

Total noninterest expenses

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We recorded a provision for income taxes of $24.3 million for the year ended December 31, 2023, compared to $14.4 million for the year ended December 31, 2022, reflecting effective tax rates of 24.6% and 24.2%, respectively.

The income tax expense related to the gain on sale of UFS offset the impact of legislation passed as part of the 2023 Wisconsin state budget which exempts interest and fees earned on certain commercial loans of $5 million or less made to borrowers who reside or are located in the state of Wisconsin.

The expected future reduction in the Bank’s effective tax rate as a result of this legislation resulted in a valuation allowance on our deferred tax assets totaling $2.5 million, adding to income tax expense for 2023.

NET INTEREST MARGIN

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(dollars in thousands)

Interest income

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Total assets increased $561.4 million, or 15.3%, to $4.22 billion at December 31, 2023 from $3.66 billion at December 31, 2022.

The primary driver of this increase, as with most of the categories below, was our acquisition of Denmark, consisting of $685.8 million in assets, during 2022.

The primary driver of this increase, as with most of the categories below, was our acquisition of Hometown, consisting of $615.1 million in assets, during 2023.

Cash and Cash Equivalents.

Cash and cash equivalents decreased by $177.5 million, or 59.8%, to $119.4 million at December 31, 2022 from $296.9 million at December 31, 2021.

Cash and cash equivalents increased by $128.1 million, or 107.3%, to $247.5 million at December 31, 2023 from $119.4 million at December 31, 2022.

Investment Securities.

The carrying value of total investment securities increased by $131.1 million to $349.7 million at December 31, 2022 from $218.6 million at December 31, 2021.

The carrying value of total investment securities decreased by $104.2 million to $245.5 million at December 31, 2023 from $349.7 million at December 31, 2022.

This decrease was the result of sales of available for sale securities during 2023 as well as maturities of securities for which we chose to retain the funds in cash and cash equivalents rather than reinvest in securities.

Net loans increased by $428.1 million, or 14.9%, to $3.30 billion at December 31, 2023 from $2.87 billion at December 31, 2022.

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Deposits increased $372.7 million, or 12.2%, to $3.43 billion at December 31, 2023 from $3.06 billion at December 31, 2022.

At December 31, 2022 and 2021, borrowings consisted of advances from the FHLB of Chicago and subordinated debt to other banks.

At December 31, 2023 and 2022, borrowings consisted of advances from the FHLB of Chicago, subordinated debt to other banks and a junior subordinated debenture related to the Hometown Bancorp, Ltd.

Capital Trust I.

FHLB borrowings totaled $35.3 million and $1.9 million at December 31, 2023 and 2022, respectively.

Subordinated debt increased $6.0 million, or 34.3% to $23.5 million at December 31, 2022 from $17.5 million at December 31, 2021.

Subordinated debt decreased from $23.5 million at December 31, 2022 to $12.0 million at December 31, 2023.

The junior subordinated debenture, which resulted from the acquisition of Hometown, totaled $4.1 million at December 31, 2023.

Stockholders’ Equity.

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Total loans increased $449.0 million, or 15.5%, to $3.34 billion as of December 31, 2023 as compared to $2.89 billion as of December 31, 2022.

Our loan growth during the year ended December 31, 2022 has been comprised of an increase of $126.3 million, or 34.5%, in commercial and industrial loans, an increase of $287.1 million, or 25.8%, in commercial real estate loans, an increase of $67.3 million, or 50.8%, in construction and development loans, an increase of $167.7 million, or 29.3%, in residential 1-4 family loans and an increase of $10.1 million, or 18.9%, in consumer and other loans.

Total loans increased $44.1 million, or 2.0%, to $2.24 billion as of December 31, 2021 as compared to $2.19 billion as of December 31, 2020.

Our loan growth during the year ended December 31, 2021 has been comprised of a decrease of $78.8 million, or 17.7%, in commercial and industrial loans, an increase of $119.2 million, or 12.0%, in commercial real

estate loans, a decrease of $7.6 million, or 5.4%, in construction and development loans, an increase of $26.0 million, or 4.8%, in residential 1-4family loans and a decrease of $14.7 million, or 21.6%, in consumer and other loans.

Our loan growth during the year ended December 31, 2023 has been comprised of a decrease of $4.5 million, or 0.9%, in commercial and industrial loans, an increase of $301.1 million, or 21.5%, in commercial real estate loans, an increase of $1.1 million, or 0.6%, in construction and development loans, an increase of $149.1 million, or 20.2%, in residential 1-4 family loans and an increase of $2.2 million, or 3.5%, in consumer and other loans.

The following table presents the balance and associated percentage of each major category in our loan portfolio at December 31, 2023, 2022, and 2021:

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At December 31, 2023 and December 31, 2022, all of the loans to directors and officers were performing according to their original terms.

Loan categories

The principal categories of our loan portfolio are discussed below:

Loan segments

Changes in the principal segments of our loan portfolio are discussed below.

Descriptions of and risks related to these segments can be found in the consolidated financial statements and footnotes presented elsewhere in this report.

Commercial and Industrial (C&I).

Our C&I portfolio totaled $492.5 million, $366.2 million and $445.0 million at December 31, 2022, 2021 and 2020, respectively, and represented 17%, 16% and 20% of our total loans, respectively.

Our C&I portfolio totaled $487.9 million and $492.5 million at December 31, 2023 and 2022, respectively, and represented 15% and 17% of our total loans, respectively.

C&I loans decreased 0.9% during 2023, as a result of exiting a few nonperforming borrowers and borrowers from acquired institutions that did not fit the Bank ’ s lending philosophy.

C&I loans increased 34.5% during 2022 primarily as a result of loans acquired from Denmark during 2022, slightly offset by significant levels of PPP loans being forgiven during the year.

C&I loans decreased 17.7% during 2021, primarily as a result of significant levels of PPP loans being forgiven during the year.

C&I loans increased 47.2% in 2020, primarily as a result of loans made through PPP and secondarily as a result of the Timberwood acquisition.

Our C&I loan customers represent various small and middle-market established businesses involved in professional services, accommodation and food services, health care, financial services, wholesale trade, manufacturing, distribution, retailing and non-profits.

Most clients are privately owned with markets that range from local to national in scope.

Many of the loans to this segment are secured by liens on corporate assets and the personal guarantees of the principals.

The regional economic strength or weakness impacts the relative risks in this loan category.

There is little concentration in any one business sector, and loan risks are generally diversified among many borrowers.

Commercial Real Estate (CRE).

Our CRE loan portfolio totaled $1.40 billion, $1.11 billion and $992.2 million at December 31, 2022, 2021 and 2020, respectively, and represented 48%, 50% and 45% of our total loans, respectively.

Our CRE loan portfolio totaled $1.70 billion and $1.40 billion at December 31, 2023 and 2022, respectively, and represented 51% and 48% of our total loans, respectively.

Our CRE loans increased 21.5% during 2023, primarily as a result of loans acquired from Hometown during 2023.

Our CRE loans increased 25.8% during 2022, primarily as a result of loans acquired from Denmark during 2022.

Our CRE loans increased 12.0% during 2021, primarily as a result of a backlog from 2020 when developers were cautious to start projects during the early stages of COVID-19.

Our CRE loans increased 22.0% during 2020 due primarily to the Timberwood acquisition.

Our CRE loans are secured by a variety of property types including multifamily dwellings, retail facilities, office buildings, commercial mixed use, lodging and industrial and warehouse properties.

We do not have any specific industry or customer concentrations in our CRE portfolio.

Our commercial real estate loans are generally for terms up to twenty years, with loan-

to-values that generally do not exceed 85%.

Amortization schedules are long term and thus a balloon payment is generally due at maturity.

Under most circumstances, the Bank will offer to rewrite or otherwise extend the loan at prevailing interest rates.

Construction and Development (C&D).

Our C&D loan portfolio totaled $199.7 million, $132.5 million and $140.1 million at December 31, 2022, 2021 and 2020, respectively, and represented 7%, 6% and 6% of our total loans, respectively.

Our C&D loan portfolio totaled $200.8 million and $199.7 million at December 31, 2023 and 2022, respectively, and represented 6% and 7% of our total loans, respectively.

C&D loans increased 0.6% during 2023, as a result of management making a strategic decision to limit growth in this area.

C&D loans increased 50.8% during 2022, primarily as a result of loans acquired from Denmark during 2022.

C&D loans decreased 5.4% during 2021 and increased 6.0% during 2020.

Our C&D loans are generally for the purpose of creating value out of real estate through construction and development work, and also include loans used to purchase recreational use land.

Borrowers typically provide a copy of a construction or development contract which is subject to bank acceptance prior to loan approval.

Disbursements are handled by a title company.

Borrowers are required to inject their own equity into the project prior to any note proceeds being disbursed.

These loans are, by their nature, intended to be short term and are refinanced into other loan types at the end of the construction and development period.

Residential 1-4 Family.

Our residential 1-4 family loan portfolio totaled $739.5 million, $571.8 million and $545.8 million at December 31, 2022, 2021 and 2020, respectively, and represented 25%, 26% and 25% of our total loans, respectively.

Our residential 1-4 family loan portfolio totaled $888.6 million and $739.5 million at December 31, 2023 and 2022, respectively, and represented 27% and 25% of our total loans, respectively.

Residential 1-4 family loans increased 20.2% during 2023, primarily as a result of loans acquired from Hometown during 2023.

Residential 1-4 family loans increased 29.3% during 2022, primarily as a result of loans acquired from Denmark during 2022.

Residential 1-4 family loans increased 4.8% during 2021.

Residential 1-4 family loans increased 21.7% during 2020 primarily as a result of the Timberwood transaction.

We offer fixed and adjustable rate residential mortgage loans with maturities up to 30 years.

One-to-four family residential mortgage loans are generally underwritten according to Fannie Mae guidelines, and we refer to loans that conform to such guidelines as “ conforming loans.

” We generally originate both fixed and adjustable rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency.

In addition, we also offer loans above conforming lending limits typically referred to as “ jumbo ” loans.

These loans are typically underwritten to the same guidelines as conforming loans;

however, we may choose to hold a jumbo loan within its portfolio with underwriting criteria that does not exactly match conforming guidelines.

We do not offer reverse mortgages nor do we offer loans that provide for negative amortization of principal, such as “ Option ARM ” loans, where the borrower can pay less than the interest owed on his loan, resulting in an increased principal balance during the life of the loan.

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Servicing rights are retained on all loans sold to the secondary market.

We were servicing mortgage loans sold to others without recourse of approximately $866.9 million, $705.5 million and $612.7 million at December 31, 2022, 2021 and 2020, respectively.

We were servicing mortgage loans sold to others without recourse of approximately $1.18 billion and $866.9 million at December 31, 2023 and 2022, respectively.

Loans sold with the retention of servicing assets result in the capitalization of servicing rights.

Loan servicing rights are subsequently amortized as an offset to other income over the estimated period of servicing.

The net balance of capitalized servicing rights amounted to $9.6 million, $5.0 million and $3.7 million at December 31, 2022, 2021 and 2020, respectively.

The net balance of capitalized servicing rights amounted to $13.7 million and $9.6 million at December 31, 2023 and 2022, respectively.

Consumer Loans.

Our consumer loan portfolio totaled $45.0 million, $32.1 million and $30.5 million at December 31, 2022, 2021 and 2020, respectively, and represented 2%, 1%, and 1% of our total loans, respectively.

Our consumer loan portfolio totaled $51.0 million and $45.0 million at December 31, 2023 and 2022, respectively, and represented 1% and 2% of our total loans, respectively.

Consumer loans include secured and unsecured loans, lines of credit and personal installment loans.

Our consumer loans increased by 13.3% and 39.9% during 2023 and 2022, respectively.

Consumer loans generally have greater risk compared to longer-term loans secured by improved, owner-occupied real estate, particularly consumer loans that are secured by rapidly depreciable assets.

In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance.

As a result, consumer loan repayments are dependent on the borrower ’ s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

Our other loans totaled $18.8 million, $21.5 million and $37.9 million at December 31, 2022, 2021 and 2020, respectively, and are immaterial to the overall loan portfolio.

Our other loans totaled $15.0 million and $18.8 million at December 31, 2023 and 2022, respectively, and are immaterial to the overall loan portfolio.

The other loans category consists primarily of overdrawn depository accounts, loans utilized to purchase or carry securities and loans to nonprofit organizations.

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Residential real estate owned

Bank property real estate owned

Total nonperforming assets ("NPAs")

Accruing troubled debt restructured loans

Acquired bank property real estate owned

Total nonperforming assets ("NPAs")

Accruing modified loans to borrowers experiencing financial difficulty (1)

Nonaccrual loans to total loans

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NPAs to total assets

ALL to nonaccrual loans

ALL to total loans

At December 31, 2022, 2021 and 2020, impaired loans had specific reserves of $8,000, $964,000 and $900,000, respectively.

ACL - Loans to nonaccrual loans

ACL - Loans to total loans

(1) Amounts prior to January 1, 2023 represent accruing troubled debt restructured loans.

At December 31, 2023, 2022 and 2021, loans individually evaluated had specific reserves of $4,245,000, $8,000 and $964,000, respectively.

Levels of specific reserves are dependent on the specific underlying impaired loans at any given time.

Management has evaluated the aforementioned loans and other loans classified as nonperforming and believes that all nonperforming loans have been adequately reserved for in the allowance for loan losses at December 31, 2022.

Nonaccrual Loans

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The status of delinquent loans, as well as situations identified as potential problems, is reviewed on a regular basis by senior management.

Troubled Debt Restructurings

A troubled debt restructuring includes a loan modification where a borrower is experiencing financial difficulty and we grant a concession to that borrower that we would not otherwise consider except for the borrower’s financial difficulties.

These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions.

Debt may be bifurcated with separate terms for each tranche of the restructured debt.

Restructuring a loan in lieu of aggressively enforcing the collection of the loan may benefit the Company by increasing the ultimate probability of collection.

A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability.

If a TDR is placed on nonaccrual status, which would occur based on the same criteria as non-TDR loans, it remains there until a sufficient period of performance under the restructured terms has occurred at which it returned to accrual status, generally 6 months.

As of December 31, 2022 and 2021, the Company had specific reserves of $8,000 and $7,000 for TDRs, respectively, and none of them have subsequently defaulted.

ALLOWANCE FOR LOAN AND LEASE LOSSES

ALLL represents management’s estimate of probable and inherent credit losses in the loan portfolio.

Estimating the amount of the ALLL require the exercise of significant judgment and the use of estimates related to the amount and timing of expected future cash flows or impaired loans, estimated losses on pools of homogenous loans based on historical loss experience, and consideration of other qualitative factors such as current economic trends and conditions, all of which may be susceptible to significant change.

The loan portfolio also represents the largest asset on the consolidated balance sheets.

Loan losses are charged off against the ALLL, while recoveries of amounts previously charged off are credited to the ALLL.

A provision for loan losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

The ALLL consists of specific reserves for certain individually evaluated impaired loans and general reserves for collectively evaluated non-impaired loans.

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

The specific reserves are based on regular analyses of impaired, non-homogenous loans greater than $250,000.

The general reserve is based in part on the Bank’s historical loss experience which is updated quarterly.

There are many factors affecting the ALLL;

some are quantitative while others require qualitative judgment.

The process for determining the ALLL (which management believes adequately considers potential factors which might possibly result in credit losses) includes subjective elements and, therefore, may be susceptible to significant change.

To the extent actual outcomes differ from management estimates, additional provision for loan losses could be required that could adversely affect our earnings or financial position in future periods.

Allocations of the ALLL may be made for specific loans but the entire ALLL is available for any loan that, in management’s judgment, should be charged off or for which an actual loss is realized.

As an integral part of their examination process, various regulatory agencies review the ALLL as well.

Such agencies may require that changes in the ALLL be recognized when such regulators’ credit evaluations differ from those of management based on information available to the regulators at the time of their examinations.

The following table summarizes the changes in our ALLL for the years indicated:

ALLOWANCE FOR CREDIT LOSSES - LOANS

The Company assesses the adequacy of its ACL - Loans at the end of each calendar quarter.

The level of 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.

The ACL - Loans is increased by a provision for credit losses, which is charged to expense, when the analysis shows that an increase is warranted.

The ACL – Loans is reduced by charge-offs, net of recoveries, when they occur.

The ACL is believed adequate to absorb all expected future losses to be recognized over the contractual life of the loans in the portfolio.

For further details on the Company’s ACL – Loans, refer to the footnotes presented along with the consolidated financial statements elsewhere in this report.

At December 31, 2023, the ACL - Loans was $43.6 million (representing 1.30% of period end loans).

The Company adopted CECL as of January 1, 2023, which increased the ACL - Loans by $11.0 million.

In addition, the ACL - Loans increased due to the acquisition of Hometown, which required a $3.6 million provision for credit losses on non-Purchase Credit Deteriorated (“PCD”) loans and a $5.5 million reserve related to PCD loans.

The reserve related to PCD loans was recorded as an adjustment to the acquisition date fair values on these loans and was not included in the provision for credit losses.

Net charge-offs remain negligible.

The following table summarizes the changes in our ACL - Loans for the years indicated:

(dollars in thousands)

Balance of ALL at the beginning of period

Balance of ACL - Loans at the beginning of period

Adoption of CECL

ACL - Loans on PCD loans acquired

Net loans charged-off (recovered):

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Commercial real estate - non-owner occupied

Commercial real estate - multi-family

Construction & Development

Residential 1-4 family

Total net loans charged-off

Total net loans recovered

Provision charged to operating expense

Balance of ALL at end of period

Balance of ACL - Loans at end of period

Ratio of net charge-offs (recoveries) to average loans by loan composition

2 unchanged sentences

Commercial real estate - non-owner occupied

Commercial real estate - multi-family

Construction & Development

Residential 1-4 family

Total net charge-offs to average loans

Total net charge-offs (recoveries) to average loans

The level of charge-offs depends on many factors, including the national and regional economy.

Cyclical lagging factors may result in charge-offs being higher than historical levels.

The dollar amount of the ALLL increased primarily as a result of loan growth and changes in the portfolio composition.

The dollar amount of the ACL - Loans increased primarily as a result of loan growth and changes in the portfolio composition.

Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories.

Management believes that the ALLL is adequate.

The following table summarizes an allocation of the ALLL and the related percentage of loans outstanding in each category for the periods below.

Management believes that the ACL - Loans is adequate.

The following table summarizes an allocation of the ACL - Loans and the related percentage of loans outstanding in each category for the periods below.

As of December 31

(in thousands, except %)

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Commercial real estate - non-owner occupied

Commercial real estate - multi-family

Construction & development

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Deposit rates and terms are based primarily on current business strategies, market interest rates, liquidity requirements and our deposit growth goals.

Total deposits were $3.06 billion, $2.53 billion and $2.32 billion as of December 31, 2022, 2021 and 2020, respectively.

Noninterest-bearing deposits at December 31, 2022, 2021 and 2020 were $934.1 million, $799.9 million and $715.6 million, respectively, while interest-bearing deposits were $2.13 billion, $1.73 billion and $1.61 billion at December 31, 2022, 2021 and 2020, respectively.

Total deposits were $3.43 billion and $3.06 billion as of December 31, 2023 and 2022, respectively.

Noninterest-bearing deposits at December 31, 2023 and 2022 were $1.05 billion and $934.1 million, respectively, while interest-bearing deposits were $2.38 billion and $2.13 billion at December 31, 2023 and 2022, respectively.

At December 31, 2023, we had a total of $582.0 million in certificates of deposit, including $0.7 million of brokered deposits, of which $0.7 million had remaining maturities of one year or less.

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The Company’s other borrowings have historically consisted primarily of short-term FHLB of Chicago advances collateralized by a blanket pledge agreement on the Company’s FHLB capital stock and retail and commercial loans held in the Company’s portfolio.

There were $1.9 million, $8.0 million and $23.3 million of advances outstanding from the FHLB at December 31, 2022, 2021, and 2020.

The total loans pledged as collateral were $1.15 billion, $915.5 million and $825.3 million at December 31, 2022, 2021 and 2020, respectively.

There were no outstanding letters of credit from the FHLB at December 31, 2022 and December 31, 2021, respectively.

Outstanding letters of credit from the FHLB totaled $0.8 million at December 31, 2020.

The following table summarizes short-term borrowings (borrowings with maturities of one year or less), which consist of borrowings from the FHLB, and the weighted average interest rates paid:

Year ended December 31,

(dollars in thousands)

Average daily amount of borrowings outstanding during the period

Weighted average interest rate on average daily borrowing

Maximum outstanding borrowings at any month-end

Borrowing outstanding at period end

Weighted average interest rate on borrowing at period end

The Corporation maintains a $7.5 million line of credit with a commercial bank, which was entered into on May 15, 2021, and renewed on May 15, 2022.

There were $35.3 million and $1.9 million of advances outstanding from the FHLB at December 31, 2023 and 2022, respectively.

See Note 14 “Notes Payable” of the Notes to Consolidated Financial Statements under Part II, Item 8 for additional disclosures.

The total loans pledged as collateral were $1.49 billion and $1.15 billion at December 31, 2023 and 2022, respectively.

The Company maintains a $7.5 million line of credit with a commercial bank, which was entered into on May 15, 2022.

There were no outstanding balances on this note at December 31, 2023 or 2022.

Any future borrowings will require monthly payments of interest at a variable rate, and will be due in full on May 15, 2024.

During September 2017, the Company entered into subordinated note agreements with three separate commercial banks.

The Company had up to twelve months from entering these agreements to borrow funds up to a maximum availability of $22.5 million.

As of December 31, 2022 and 2021, the Company had borrowed $11.5 million under these agreements.

These notes were all issued with 10-year maturities, carry interest at a variable rate payable quarterly, are callable on or after the sixth anniversary of their issuance dates, and qualify for Tier 2 capital for regulatory purposes.

During September 2017, the Company entered into subordinated note agreements with three separate commercial banks under which it borrowed $11.5 million.

These notes were all issued with 10-year maturities, carried interest at a variable rate payable quarterly, were callable on or after the sixth anniversary of the issuance dates, and qualified for Tier 2 capital for regulatory purposes.

These notes were repaid in full during October 2023.

On July 22, 2020, the Company entered into subordinated note agreements with two separate commercial banks.

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During August 2022, the Company entered into subordinated note agreements with an individual.

The Company had outstanding balances of $6.0 million under these agreements as of December 31, 2022.

The Company had outstanding balances of $6.0 million under these agreements as of December 31, 2023 and 2022.

These notes were issued with 10-year maturities, carry interest at a fixed rate of 5.25% through August 6, 2027, and at a variable rate thereafter, payable quarterly.

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The individual associated with these subordinated note agreements is not a related party of the Company.

As a result of the acquisition of Hometown during February 2023, the Company acquired all of the common securities of Hometown’s wholly-owned subsidiaries, Hometown Bancorp, Ltd.

Capital Trust I (“Trust I”) and Hometown Bancorp, Ltd.

Capital Trust II (“Trust II”).

The Company also assumed adjustable rate junior subordinated debentures issued to these trusts.

The junior subordinated debentures issued to Trust I and Trust II totaled $4.1 million and $8.2 million, respectively, carried interest at floating rates resetting on each quarterly payment date, and were due on January 7, 2034 and December 15, 2036, respectively.

Applicable discounts originally totaling $1.5 million were recorded to carry the assumed debentures at their then estimated fair value and were being accreted to interest expense over the remaining life of the debentures.

Both junior subordinated debentures were redeemable by the Company, subject to prior approval by the Federal Reserve Bank, on any quarterly payment date.

The junior subordinated debentures represented the sole asset of Trust I and Trust II.

The trusts were not included in the Company’s consolidated financial statements.

The net effect of all agreements assumed with respect to Trust I and Trust II is that the Company, through payments on its debentures, was liable for the distributions and other payments required on the trusts’ preferred securities.

Trust I and Trust II also provided the Company with $12.0 million in Tier 1 capital for regulatory capital purposes.

The Company redeemed the junior subordinated debenture related to Trust II during December 2023, resulting in Trust II’s dissolution.

The Company redeemed the junior subordinated debenture related to Trust I on January 8, 2024, resulting in Trust I’s dissolution.

As a result of the redemption of the junior subordinated debenture related to Trust II and notification of the Company’s intent to redeem the junior subordinated debenture of Trust I prior to December 31, 2023, the Company amortized the remaining original fair value discounts into interest expense during 2023.

INVESTMENT SECURITIES

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Treasury securities, obligations of states and political subdivision, agency mortgage-backed securities, corporate notes, and certificates of deposits.

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 fair value of securities available for sale totaled $304.6 million and included gross unrealized gains of $0.5 million and gross unrealized losses of $21.8 million at December 31, 2022.

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 fair value of securities available for sale totaled $142.2 million and included gross unrealized gains of $86,000 and gross unrealized losses of $12.2 million at December 31, 2023.

At December 31, 2022, the fair value of securities available for sale totaled $304.6 million and included gross unrealized gains of $0.5 million and gross unrealized losses of $21.8 million.

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Securities held to maturity as of December 31, 2023 and 2022, are carried at their amortized cost of $103.3 million and $45.1 million, respectively.

The Company recognized a net loss on sale of investment securities of $7.9 million during the year ended December 31, 2023.

The Company did not sell any securities in 2022.

The Company recognized a net loss on sale of investment securities of $3,000 during the year ended December 31, 2021.

The Company recognized a net gain on sale of investment securities of $3.2 million during the year ended December 31, 2020.

The following tables set forth the composition and maturities of investment securities as of December 31, 2023 and December 31, 2022.

9 unchanged sentences

Available for sale securities

Treasury securities

Obligations of U.S.

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Held to maturity securities

Treasury securities

Obligations of states and political subdivisions

Total held to maturity securities

(1) Weighted Average Yield is shown on a fully taxable equivalent basis using a federal tax rate of 21%.

The Company evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluation.

Consideration is given to (1) credit quality of individual securities and their issuers are assessed;

(2) the length of time and the extent to which the fair value has been less than cost;

(3) the financial condition and near-term prospects of the issuer;

and (4) that the Company does not have the intent to sell the security and it is more likely than not that it will not have to sell the security before recovery of its cost basis.

As of December 31, 2022, 267 debt securities had gross unrealized losses, with an aggregate depreciation of 6.85% from our amortized cost basis.

The largest unrealized loss percentage of any single security was 30.37% (or $606,000) of its amortized cost.

The largest unrealized dollar loss of any single security was $1.49 million (or 15.4%).

As of December 31, 2021, 26 debt securities had gross unrealized losses, with an aggregate depreciation of 0.98% from our amortized cost basis.

The largest unrealized loss percentage of any single security was 5.31% (or $256,000) of its amortized cost.

This was also the largest unrealized dollar loss of any single security.

LIQUIDITY AND CAPITAL RESOURCES

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Borrowings and brokered deposits are considered short-term supplements to our overall liquidity but are not intended to be relied upon for long-term needs.

We believe that our present position is adequate

to meet our current and future liquidity needs, and management knows of no trend or event that will have a material impact on the Company’s ability to maintain liquidity at satisfactory levels.

We believe that our present position is adequate to meet our current and future liquidity needs, and management knows of no trend or event that will have a material impact on the Company’s ability to maintain liquidity at satisfactory levels.

Management further believes that our present position is adequate to assure that securities classified as held to maturity will not need to be sold prior to maturity.

Capital Adequacy.

Total shareholders’ equity was $453.1 million at December 31, 2022, compared to $322.7 million at December 31, 2021, and $294.9 million at December 31, 2020.

Total shareholders’ equity was $619.8 million at December 31, 2023, compared to $453.1 million at December 31, 2022.

Our total shareholders’ equity increased during 2023 and 2022 as a result of our profitability, reduced by dividends paid and common share repurchases.

Growth in shareholders’ equity during 2022 and 2020 was further stimulated by the acquisitions of Denmark and Timberwood in these years, respectively.

Growth in shareholders’ equity was further stimulated by the acquisitions of Hometown during 2023 and Denmark during 2022.

Our capital management consists of providing adequate equity to support our current and future operations.

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Tier I capital (to average assets)

As previously mentioned, the Company carried $23.5 million of subordinated debt as of December 31, 2022 and $17.5 million of subordinated debt as of December 31, 2021, which is included in total capital for the Company in the tables above.

As previously mentioned, the Company carried $12.0 million of subordinated debt and $4.0 million of junior subordinated debt as of December 31, 2023 and $23.5 million of subordinated debt as of December 31, 2022, which is included in total capital for the Company in the tables above.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

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The effect of inflation on a financial institution differs significantly from the effect on an industrial company.

While a financial institution’s operating expenses, particularly salary and employee benefits, are affected by general inflation, the asset and

liability structure of a financial institution consists largely of monetary items.

While a financial institution’s operating expenses, particularly salary and employee benefits, are affected by general inflation, the asset and liability structure of a financial institution consists largely of monetary items.

Monetary items, such as cash, investments, loans, deposits and other borrowings, are those assets and liabilities which are or will be converted into a fixed number of dollars regardless of changes in prices.

As a result, changes in interest rates have a more significant impact on a financial institution’s performance than does general inflation.

For additional information regarding interest rates and changes in net interest income see “Quantitative and Qualitative Disclosures about Market Risk—Interest Rate Sensitivity.” Inflation may have impacts on the Bank’s customers, on businesses and consumers and their ability or willingness to invest, save or spend, and perhaps on their ability to repay loans.

spend, and perhaps on their ability to repay loans.

As such, there would likely be impacts on the general appetite of banking products and the credit health of the Bank’s customer base.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis