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Item 2. Management’s Discussion and Analysis

2024-05-09 compared with 2023-11-09 · 146 added, 317 removed, 659 unchanged (41% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2022, included in our Annual Report and with our unaudited condensed accompanying notes set forth in this Quarterly Report on Form 10-Q for the quarterly period September 30, 2023.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2023, included in our Annual Report and with our unaudited condensed accompanying notes set forth in this Quarterly Report on Form 10-Q for the quarterly period March 31, 2024.

FORWARD-LOOKING STATEMENTS

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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.

As of September 30, 2023, the Bank was a 49.8% member of a data processing subsidiary, UFS, which provides core data processing, endpoint management, private cloud services, cyber security and digital banking solutions for over 60 Midwest banks.

The Bank sold 100% of its member interest in UFS on October 1, 2023.

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

These unconsolidated subsidiary interests have historically contributed noninterest income to the Bank through their underlying annual earnings.

On August 12, 2022, the Company consummated its merger with Denmark pursuant to the Agreement and Plan of Bank Merger, dated as of January 18, 2022, by and among the Company and Denmark, whereby Denmark was merged with and into the Company, and Denmark State Bank, Denmark’s wholly owned banking subsidiary, was merged with and into the Bank.

The system integration was completed, and five branches of Denmark State Bank opened on August 15, 2022 as a branch of the Bank, expanding the Bank’s presence in Manitowoc, Brown, Outagamie and Shawano County.

On February 10, 2023, the Company consummated its merger with Hometown pursuant to the Agreement and Plan of Bank Merger, dated as of July 25, 2022, by and among the Company and Hometown, whereby Hometown was merged with and into the Company, and Hometown Bank, Hometown’s wholly owned banking subsidiary, was merged with and into the Bank.

The system integration was completed, and six branches of Hometown Bank opened on February 13, 2023 as branches of the Bank, expanding the Bank’s presence in Fond du Lac, Columbia, Dane and Waushara County.

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.

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

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

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At or for the Three Months Ended

At or for the Nine Months Ended

(In thousands, except per share data)

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Net gain on sales of mortgage loans

Gain on sale of UFS

Other noninterest income

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Allowance for credit losses - loans to total loans

(1) Prior to January 1, 2023, the incurred loss methodology was used to estimate credit losses.

Subsequent to that date, credit losses are estimated using the CECL methodology.

(1) These measures are not measures prepared in accordance with GAAP, and are therefore considered to be non-GAAP financial measures.

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At or for the Three Months Ended

At or for the Nine Months Ended

(In thousands, except per share data)

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RESULTS OF OPERATIONS

Results of Operations for the Three Months Ended September 30, 2023 and September 30, 2022

Net income increased $4.3 million to $14.8 million for three months ended September 30, 2023, compared to $10.5 million for the same period in 2022.

This increase was primarily due to the added scale of operations resulting from the Hometown acquisition during the first quarter of 2023.

The third quarter of 2022 was also negatively impacted by $4.6 million in acquisition related expenses, compared to $0.3 million during the third quarter of 2023.

Results of Operations for the Three Months Ended March 31, 2024 and March 31, 2023

Net income increased $4.7 million to $15.4 million for three months ended March 31, 2024, compared to $10.7 million for the same period in 2023.

This increase was partially due to the added scale of operations resulting from the Hometown acquisition during the first quarter of 2023.

The first quarter of 2023 was also negatively impacted by $1.3 million in acquisition related expenses and a $3.6 million provision for credit losses related to the acquired loans from Hometown.

Net Interest Income .

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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 and dividend income increased by $6.4 million to $34.1 million for the three months ended September 30, 2023 compared to $27.7 million for three months ended September 30, 2022.

The increase in net interest income was primarily due to growth in interest earning assets over the last twelve months, resulting from the acquisition of Hometown, as well as increasing net interest margin in the year-over-year third quarters.

Total average interest-earning assets were $3.67 billion for the three months ended September 30, 2023, up from $3.06 billion for the same period in 2022.

Tax equivalent net interest margin increased 0.08% to 3.71% for the three months ended September 30, 2023, up from 3.63% for the same period in 2022.

Net interest and dividend income increased by $1.1 million to $33.3 million for the three months ended March 31, 2024 compared to $32.2 million for three months ended March 31, 2023.

The increase in net interest income was primarily due to growth in interest earning assets over the last twelve months.

Total average interest-earning assets were $3.74 billion for the three months ended March 31, 2024, up from $3.52 billion for the same period in 2023.

Net interest margin and net interest income are influenced by internal and external factors.

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Interest Income.

Total interest income increased $16.2 million, or 52.9%, to $47.0 million for the three months ended September 30, 2023 compared to $30.7 million for the same period in 2022.

Total interest income increased $8.4 million, or 20.5%, to $49.3 million for the three months ended March 31, 2024 compared to $40.9 million for the same period in 2023.

The increase in total interest income was primarily due to the aforementioned growth in interest earnings assets over the last twelve months along with an increase in the average interest rate earned on these assets.

The average balance of interest-earning assets increased by $608.7 million during the three months ended September

30, 2023 compared to the same period in 2022 and the average interest rate earned on these assets increased by 1.08% in the year-over-year third quarters.

The average balance of interest-earning assets increased by $216.8 million during the three months ended March 31, 2024 compared to the same period in 2023 and the average interest rate earned on these assets increased by 0.59% in the year-over-year first quarters.

Interest Expense.

Interest expense increased $9.9 million, or 324.4%, to $12.9 million for the three months ended September 30, 2023 compared to $3.0 million for the same period in 2022.

Interest expense increased $7.2 million, or 83.7%, to $15.9 million for the three months ended March 31, 2024 compared to $8.7 million for the same period in 2023.

The increase in interest expense was primarily due to elevated interest-bearing liabilities and higher crediting interest rates on those liabilities.

Interest expense on interest-bearing deposits increased by $9.0 million to $11.6 million for the three months ended September 30, 2023 compared to $2.6 million for the same period in 2022.

The average balance and cost of interest-bearing deposits was $2.32 billion and 1.99% for the three months ended September 30, 2023, compared to $2.0 million and 0.52% for the same period in 2022.

Interest expense on interest-bearing deposits increased by $7.9 million to $15.4 million for the three months ended March 31, 2024 compared to $7.5 million for the same period in 2023.

The average balance and cost of interest-bearing deposits was $2.46 billion and 2.51% for the three months ended March 31, 2024, compared to $2.24 billion and 1.35% for the same period in 2023.

Provision for Credit Losses.

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

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

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 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 did not record a provision for credit loss during the three months ended September 30, 2023 or 2022.

Economic forecasts, primarily US gross domestic product and unemployment projections, were little changed during the third quarter of 2023 resulting in consistent qualitative factors in the CECL methodology.

We recorded negligible net recoveries during the three months ended September 30, 2023 compared to net recoveries of $0.3 million for the three months ended September 30, 2022.

We recorded a provision of $0.2 million for credit loss during the three months ended March 31, 2024 compared to a provision of $4.2 million for the same period in 2023.

A $3.6 million provision for credit losses related to the acquired loans from Hometown was the primary cause for the elevated expense during the first quarter of 2023.

Economic forecasts, primarily US gross domestic product and unemployment projections, were little changed during the first quarter of 2024 resulting in consistent economic and qualitative factors in the CECL methodology.

We recorded net recoveries of $0.6 million during the three months ended March 31, 2024 compared to minimal net recoveries during the three months ended March 31, 2023.

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

The ACL - Loans was $43.4 million, or 1.29% of total loans, at September 30, 2023 compared to $23.0 million, or 0.81% of total loans at September 30, 2022.

The increased ACL - Loans coverage was the result of adopting the CECL methodology as of January 1, 2023.

The ACL - Loans was $44.4 million, or 1.31% of total loans, at March 31, 2024 compared to $43.3 million, or 1.30% of total loans at March 31, 2023.

Noninterest Income.

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

Noninterest income increased $0.1 million to $5.3 million for the three months ended September 30, 2023 compared to $5.2 million for the same period in 2022.

While total noninterest income was little changed in the year-over-year third quarters, components of noninterest income did show variability.

Service charges and loan servicing income increased $0.4 million and $0.2 million, respectively, in the third quarter of 2023 compared to the third quarter of 2022 primarily due to the added scale from the acquisitions of Denmark and Hometown.

These increases were offset by a $0.7 million reduction in positive valuation adjustments of MSRs, from $0.9 million during the third quarter of 2022 to $0.2 million during the third quarter of 2023.

Noninterest income decreased $1.4 million to $4.4 million for the three months ended March 31, 2024 compared to $5.8 million for the same period in 2023.

Due to the sale of 100% of the Bank’s member interest in UFS on October 1, 2023, no income from UFS was recorded in the first quarter of 2024, compared to income of $0.9 million during the first quarter of 2023.

Negative valuation adjustments to the Bank’s MSRs totaling $0.3 million during the first quarter of 2024 also compared unfavorably to $0.8 million in positive valuation adjustments during the first quarter of 2023.

The major components of our noninterest income are listed below:

The major components of our noninterest income are listed below:The major components of our noninterest income are listed below:

Three Months Ended September 30,

(in thousands)

Three Months Ended March 31,

(In thousands)

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Noninterest Expense.

Noninterest expense increased $0.7 million to $19.6 million for the three months ended September 30, 2023 compared to $18.9 million for the same period in 2022.

Most areas of noninterest expense increased over the past four quarters as a result of added operational scale from the acquisition of Hometown, which increased the total assets, branch footprint and employee count of the Company.

In addition to this trend, core deposit intangible assets of $15.1 million and $16.5 million created by the Denmark and Hometown acquisitions, respectively, created a significant increase in amortization of intangible assets expense from the third quarter of 2022 to the third quarter of 2023.

Counteracting these increases were one-time acquisition costs related to the acquisition of Denmark during the third quarter of 2022, primarily in the areas of salaries and outside service fees, which existed in the third quarter of 2022 but were not repeated during the third quarter of 2023.

Noninterest expense increased $0.7 million to $20.3 million for the three months ended March 31, 2024 compared to $19.7 million for the same period in 2023.

Salaries, commissions, and employee benefits expenses, data processing and other noninterest expenses all increased year-over-year in the first quarter as a result of added operational scale from the acquisition of Hometown, which impacted slightly over half of the first quarter of 2023 compared to all of the first quarter of 2024.

Postage, stationary, and supplies expense as well as outside service fees were elevated during the first quarter of 2023 as a result of one-time expenses from the Hometown acquisition and saw a decline in comparable balances in the first quarter of 2024 due to no similar acquisitions occurring.

The major components of our noninterest expense are listed below:

Three Months Ended September 30,

Three Months Ended March 31,

(In thousands)

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Net loss on sales and valuations of other real estate owned

Charitable contributions

Outside service fees

Amortization of intangibles

Total noninterest expenses

Income Tax Expense.

We recorded a provision for income taxes of $4.9 million for the three months ended September 30, 2023 compared to a provision of $3.4 million for the same period during 2022, reflecting effective tax rates of 24.7% and 24.6%, respectively.

The effective tax rates were reduced from the statutory federal and state income tax rates during both periods as a result of tax-exempt interest income produced by certain qualifying loans and investments in the Bank’s portfolios.

On July 5, 2023, Wisconsin passed its 2023 state budget which included a provision exempting income earned from commercial loans of $5.0 million or less from state taxability.

As a result of this provision, which was retroactive to the beginning of 2023, the Company was able to reverse $2.4 million state related income tax expense which had been recorded during the first two quarters of 2023.

Also as a result of this provision, the Company’s lower anticipated future effective tax rate required an allowance to be made against the Bank’s deferred tax asset, which increased income tax expense by $2.9 million.

The net impact of these entries was a one-time increase to income tax expense of $0.5 million during the third quarter of 2023.

Results of Operations for the Nine months Ended September 30, 2023 and September 30, 2022

Net income increased $7.2 million to $39.6 million for nine months ended September 30, 2023, compared to $32.4 million for the same period in 2022.

This increase was primarily due to the added scale of operations resulting from the Denmark and Hometown acquisitions during the third quarter of 2022 and first quarter of 2023, respectively.

Net Interest Income .

The management of interest income and expense is fundamental to our financial performance.

Net interest income, the difference between interest income and interest expense, is the largest component of the Company’s total revenue.

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.

Net interest and dividend income increased by $27.1 million to $100.6 million for the nine months ended September 30, 2023 compared to $73.5 million for nine months ended September 30, 2022.

The increase in net interest income was primarily due to growth in interest earning assets over the last twelve months, resulting from the acquisitions of Denmark and Hometown, as well as increasing net interest margin in the first nine months of 2023 compared to the same period in 2022.

Total average interest-earning assets were $3.63 billion for the nine months ended September 30, 2023, up from $3.01 billion for the same period in 2022.

Tax equivalent net interest margin increased 0.44% to 3.74% for the nine months ended September 30, 2023, up from 3.30% for the same period in 2022.

Net interest margin and net interest income are influenced by internal and external factors.

Internal factors include balance sheet changes on both volume and mix and pricing decisions, and external factors include changes in market interest rates, competition and the shape of the interest rate yield curve.

Interest Income.

Total interest income increased $53.0 million, or 65.7%, to $133.8 million for the nine months ended September 30, 2023 compared to $80.8 million for the same period in 2022.

The average balance of interest-earning assets increased by $613.6 million during the first nine months of 2023 compared to the same period in 2022 and the average interest rate earned on these assets increased by 1.34% from 3.63% for the first three quarters of 2022 to 4.97% during the first three quarters of 2023.

Interest Expense.

Interest expense increased $26.0 million, or 354.5%, to $33.3 million for the nine months ended September 30, 2023 compared to $7.3 million for the same period in 2022.

The increase in interest expense was primarily due to elevated interest bearing liabilities and higher crediting interest rates on those liabilities.

The average balance of interest-bearing liabilities increased by $338.9 million during the first nine months of 2023 compared to the same period in 2022 and the average interest rate paid on these balances was 0.48% for the first three quarters of 2022 compared to 1.86% for the first three quarters of 2023.

Interest expense on interest-bearing deposits totaled $29.2 million and $5.9 million for the nine months ended September 30, 2023 and 2022, respectively.

The average cost of interest-bearing deposits was 1.70% for the nine months ended September 30, 2023, compared to 0.43% for the same period in 2022.

Provision for Credit Losses.

Credit risk is inherent in the business of making loans.

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

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

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

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

We recorded a provision for credit losses of $4.2 million for the nine months ended September 30, 2023 compared to $1.7 million for the same period in 2022.

The increased provision for the first nine months of 2023 was primarily related to loans acquired from Hometown.

Economic forecasts, primarily US gross domestic product and unemployment projections, were little changed during the first three quarters of 2023 resulting in consistent qualitative factors in the CECL methodology.

We recorded net recoveries of $0.1 million for the nine months ended September 30, 2023 compared to net recoveries of $1.0 million for the same period in 2022.

The ACL was $43.4 million, or 1.29% of total loans, at September 30, 2023 compared to $23.0 million, or 0.81% of total loans at September 30, 2022.

The increased ACL coverage was the result of CECL implementation.

Noninterest Income.

Noninterest income is an important component of our total revenues.

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

Noninterest income decreased $0.1 million to $15.7 million for the nine months ended September 30, 2023 compared to $15.8 million for the same period in 2022.

While total noninterest income was little changed in the year-over-year first nine months, components of noninterest income did show variability.

Service charges and loan servicing income increased $1.0 million and $0.7 million, respectively, for the first nine months of 2023 compared to the same period in 2022 primarily due to the added scale from the acquisitions of Denmark and Hometown.

These increases were offset by a $2.3 million reduction in positive valuation adjustments of MSRs, from $2.8 million during the first nine months of 2022 to $0.5 million during the first nine months of 2023.

Finally, net gains

on the sale of mortgage loans saw a significant decline period-over-period due to an industry wide slowdown in residential mortgage lending due in part to a higher interest rate environment during the first nine months of 2023 compared to the same period in 2022.

The major components of our noninterest income are listed below:

Nine Months Ended September 30,

(In thousands)

Noninterest Income

Service Charges

Income from Ansay

Income from UFS

Loan Servicing income

Valuation adjustment on MSR

Net gain on sales of mortgage loans

Total noninterest income

Noninterest Expense.

Noninterest expense increased $14.6 million to $59.3 million for the nine months ended September 30, 2023 compared to $44.7 million for the same period in 2022.

Most areas of noninterest expense increased over the past four quarters as a result of added operational scale from the acquisitions of Denmark and Hometown.

Expenses related to these acquisitions totaled $5.7 million during the first nine months of 2022 compared to $1.8 million during the first nine months of 2023 which muted the increase year-over-year in salaries and led to a slight decrease year-over-year in outside service fees.

Core deposit intangible assets of $15.1 million and $16.5 million created by the Denmark and Hometown acquisitions, respectively, created a significant increase in amortization of intangible assets expense from the first three quarters of 2022 to the first three quarters of 2023.

Finally, losses on sales of ORE totaling $0.5 million during the first three quarters of 2023 compared unfavorably to gains of $0.1 million during the first three quarters of 2022.

The major components of our noninterest expense are listed below:

Nine Months Ended September 30,

(In thousands)

Noninterest Expense

Salaries, commissions, and employee benefits

Data processing

Postage, stationary, and supplies

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

Net loss on sales of securities

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Income Tax Expense.

We recorded a provision for income taxes of $13.2 million for the nine months ended September 30, 2023 compared to a provision of $10.5 million for the same period during 2022, reflecting effective tax rates of 24.9% and 24.6%, respectively.

The 2023 Wisconsin state budget included a provision exempting income earned from commercial loans of $5.0 million or less from state taxability.

As a result of this provision, the Company’s lower anticipated future effective tax rate required an allowance to be made against the Bank’s deferred tax asset, which increased income tax expense by $2.9 million.

This required allowance offset the lower effective tax rate on current earnings, leading to comparable effective tax rates through the first nine months of 2023 and 2022.

We recorded a provision for income taxes of $1.8 million for the three months ended March 31, 2024 compared to a provision of $3.6 million for the same period during 2023, reflecting effective tax rates of 10.5% and 25.0%, respectively.

On July 5, 2023, Wisconsin passed its 2023 state budget which included a provision exempting income earned from certain commercial loans of $5.0 million or less from state taxability.

As a result of this legislation, income from a significant portion of the Company’s loans will no longer be subject to taxation in its home state.

Final rules relating to qualifying loans under this legislation were not published until the first quarter of 2024.

Based on these final rules, the Company was able to further reduce its estimated tax liability from 2023 by $1.3 million, resulting in the lower provision for income taxes and effective tax rate during the first quarter of 2024.

The effective tax rates were further reduced from the statutory federal and state income tax rates during both periods as a result of tax-exempt interest income produced by certain qualifying loans and investments in the Bank’s portfolios.

NET INTEREST MARGIN

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Three Months Ended

September 30, 2023

September 30, 2022

March 31, 2024

March 31, 2023

Rate Earned/ Paid

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Net interest margin (4)

Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for the three months ended September 30, 2023 and 2022.

Nonaccrual loans are included in average amounts outstanding.

Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

Net interest margin represents net interest income on a fully tax equivalent basis as a percentage of average interest-earning assets.

Nine Months Ended

September 30, 2023

September 30, 2022

(dollars in thousands)

Interest-earning assets

Taxable (available for sale)

Tax-exempt (available for sale)

Taxable (held to maturity)

Tax-exempt (held to maturity)

Cash and due from banks

Total interest-earning assets

Non interest-earning assets

Allowance for loan losses

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest-bearing deposits

Checking accounts

Savings accounts

Money market accounts

Certificates of deposit

Brokered deposits

Total interest-bearing deposits

Other borrowed funds

Total interest-bearing liabilities

Non-interest bearing liabilities

Demand deposits

Other liabilities

Total liabilities

Shareholders’ equity

Total liabilities & shareholders' equity

Net interest income on a fully taxable equivalent basis

Less taxable equivalent adjustment

Net interest income

Net interest spread (3)

Net interest margin (4)

Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for the nine months ended September 30, 2023 and 2022.

Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for the three months ended March 31, 2024 and 2023.

Nonaccrual loans are included in average amounts outstanding.

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(i) changes attributable to changes in volumes (changes in average balance multiplied by prior year average rate) and (ii) changes attributable to changes in rate (change in average interest rate multiplied by prior year average balance), while (iii) changes attributable to the combined impact of volumes and rates have been allocated proportionately to separate volume and rate categories.

Three Months Ended September 30, 2023

Nine Months Ended September 30, 2023

Compared with

Three Months Ended March 31, 2024

Compared with

Three Months Ended September 30, 2022

Nine Months Ended September 30, 2022

Increase/(Decrease) Due to Change in

Three Months Ended March 31, 2023

Increase/(Decrease) Due to Change in

(dollars in thousands)

Interest income

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Total Assets.

Total assets increased $427.1 million, or 11.7%, to $4.09 billion at September 30, 2023, from $3.66 billion at December 31, 2022.

Total assets decreased $121.9 million, or 2.9%, to $4.10 billion at March 31, 2024, from $4.22 billion at December 31, 2023.

Cash and Cash Equivalents.

Cash and cash equivalents decreased by $43.6 million to $75.8 million at September 30, 2023 from $119.4 million at December 31, 2022.

Cash and cash equivalents decreased by $164.1 million to $83.4 million at March 31, 2024, from $247.5 million at December 31, 2023.

This decline was primarily the result of funds being invested in growth in the loan portfolio as well as a reduction in securities sold under repurchase agreements.

Securities sold under repurchase agreements reported in prior periods related to one customer who discontinued this arrangement during the first quarter of 2024.

Investment Securities.

The carrying value of total investment securities decreased by $93.5 million to $256.2 million at September 30, 2023, from $349.7 million at December 31, 2022.

This decline was primarily the result of significant maturities of securities in the Bank’s portfolio, as well as sales of approximately $34.2 million of securities, during the first quarter of 2023.

Proceeds of these maturities and sales were utilized to fund loan growth and compensate for declining deposit balances through the first three quarters of 2023.

Net loans increased by $440.8 million, totaling $3.31 billion at September 30, 2023 compared to $2.87 billion at December 31, 2022.

The fair value of loans acquired as part of the acquisition of Hometown during the first quarter of 2023 totaled $395.8 million.

Bank-Owned Life Insurance.

At September 30, 2023, our investment in bank-owned life insurance was $60.9 million, an increase of $14.8 million from $46.1 million at December 31, 2022.

Deposits increased $338.1 million, or 11.0%, to $3.40 billion at September 30, 2023 from $3.06 billion at December 31, 2022.

The fair value of deposits acquired as part of the acquisition of Hometown during the first quarter of 2023 totaled $532.4 million.

At September 30, 2023, borrowings consisted of advances from the FHLB of Chicago, junior subordinated debentures, and subordinated debt to other banks and an individual.

FHLB borrowings increased to $35.8 million at September 30, 2023, from $1.9 million at December 31, 2022.

Junior subordinated debentures, all of which resulted from the acquisition of Hometown, totaled $11.0 million at September 30, 2023.

Subordinated debt remained stable with $23.5 million at September 30, 2023 and December 31, 2022.

The carrying value of total investment securities increased by $4.6 million to $250.2 million at March 31, 2024, from $245.5 million at December 31, 2023.

Net loans increased by $39.6 million, totaling $3.34 billion at March 31, 2024 compared to $3.30 billion at December 31, 2023.

Deposits decreased $16.9 million, or 0.5%, to $3.42 billion at March 31, 2024 from $3.43 billion at December 31, 2023.

Deposits have historically seen seasonal declines during prior year first quarter’s when not influenced by acquisitions.

At March 31, 2024, borrowings consisted of advances from the FHLB of Chicago and subordinated debt to other banks and an individual.

FHLB borrowings and subordinated debt remained stable at $35.3 million and $12.0 million, respectively, at March 31, 2024 and December 31, 2023.

A junior subordinated debenture totaling $4.1 million, which was part of the acquisition of Hometown, was repaid in full during the first quarter of 2024.

Stockholders’ Equity.

Total stockholders’ equity increased $124.2 million, or 27.4%, to $577.3 million at September 30, 2023, from $453.1 million at December 31, 2022.

The primary driver of this increase was the Hometown acquisition, which added $115.1 million to stockholders’ equity.

Our lending activities are conducted principally in Wisconsin.

Total stockholders’ equity decreased $10.5 million, or 1.7%, to $609.3 million at March 31, 2024, from $619.8 million at December 31, 2023.

Repurchases of the Company’s common stock totaling $22.3 million and dividends declared totaling $3.5 million offset the positive impact of earnings totaling $15.4 million during the quarter.

Our lending activities are principally conducted in the state of Wisconsin.

The Bank makes commercial and industrial loans, commercial real estate loans, construction and development loans, residential real estate loans, and a variety of consumer loans and other loans.

3 unchanged sentences

Repayment of the Bank’s residential loans are generally dependent on the health of the employment market in the borrowers’ geographic areas and that of the general economy with liquidation of the underlying real estate collateral being typically viewed as the primary source of repayment in the event of borrower default.

Our loan portfolio is our most significant earning asset, comprising 82.1% and 79.1% of our total assets as of September 30, 2023 and December 31, 2022, respectively.

Our loan portfolio is our most significant earning asset, comprising 82.5% and 79.2% of our total assets as of March 31, 2024 and December 31, 2023, respectively.

Our strategy is to grow our loan portfolio by originating quality commercial and consumer loans that comply with our credit policies and that produce revenues consistent with our financial objectives.

We believe our loan portfolio is well-balanced, which provides us with the opportunity to grow while monitoring our loan concentrations.

Loans increased $461.6 million, or 15.9%, to $3.36 billion as of September 30, 2023 as compared to $2.89 billion as of December 31, 2022.

This increase during the first nine months of 2023 was primarily driven by the acquisition of Hometown, which included approximately $395.8 million in loan balances, and has been comprised of an increase of $38.9 million or 7.9% in commercial and industrial loans, an increase of $180.5 million or 25.2% in owner occupied commercial real estate loans, an increase of $103.6 million or 15.2% in non-owner occupied commercial real estate, a decrease of $2.6 million or 1.3% in construction and development loans, an increase of $139.5 million or 18.9% in residential 1-4 family loans and an increase of $1.7 million in consumer and other loans.

The following table presents the balance and associated percentage of each major category in our loan portfolio at September 30, 2023, December 31, 2022, and September 30, 2022:

September 30,

Loans increased $40.4 million, or 1.2%, to $3.38 billion as of March 31, 2024 as compared to $3.34 billion as of December 31, 2023.

This increase during the first three months of 2024 was primarily driven by solid demand for new credit from our existing customer relationships.

This growth was comprised of an increase of $22.5 million or 4.6% in commercial and industrial loans, an decrease of $2.3 million or 0.3% in owner occupied commercial real estate loans, an increase of $30.1 million or 6.4% in non-owner occupied commercial real estate loans, a decrease of $9.7 million or 2.9% in multi-family loans an increase of $7.0 million or 3.5% in construction and development loans, a decrease of $8.4 million or 0.9% in residential 1-4 family loans and an increase of $1.2 million in consumer and other loans.

The following table presents the balance and associated percentage of each major category in our loan portfolio:

March 31, 2024

December 31, 2023

March 31, 2023

(dollars in thousands)

7 unchanged sentences

All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features.

At September 30, 2023 and December 31, 2022, total loans outstanding to such directors and officers and their associates were $64.3 million and $70.2 million, respectively.

During the nine months ended September 30, 2023, $21.0 million of additions and $26.9 million of repayments were made to these loans.

At September 30, 2023 and December 31, 2022, all of the loans to directors and officers were performing according to their original terms.

At March 31, 2024 and December 31, 2023, total loans outstanding to such directors and officers and their associates were $62.1 million and $63.9 million, respectively.

During the three months ended March 31, 2024, $3.2 million of additions and $5.0 million of repayments were made to these loans.

At March 31, 2024 and December 31, 2023, all of the loans to directors and officers were performing according to their original terms.

Loan categories

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Commercial and Industrial (C&I).

Our C&I portfolio totaled $531.4 million and $492.5 million at September 30, 2023 and December 31, 2022, respectively, and represented 16% and 17% of our total loans at those dates.

Our C&I portfolio totaled $510.4 million and $487.9 million at March 31, 2024 and December 31, 2023, respectively, and represented 15% of our total loans at both of those dates.

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.

4 unchanged sentences

Commercial Real Estate (CRE).

Our CRE loan portfolio totaled $1.68 billion and $1.40 billion at September 30, 2023 and December 31, 2022, respectively, and represented 50% and 48% of our total loans at those dates.

Our CRE loan portfolio totaled $1.72 billion and $1.70 billion at March 31, 2024 and December 31, 2023, respectively, and represented 51% of our total loans at both of those dates.

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.

4 unchanged sentences

Construction and Development (C&D).

Our C&D loan portfolio totaled $197.1 million and $199.7 million at September 30, 2023 and December 31, 2022, respectively, and represented 6% and 7% of our total loans at those dates.

Our C&D loan portfolio totaled $207.9 million and $200.8 million at March 31, 2024 and December 31, 2023, respectively, and represented 6% of our total loans at both of those dates.

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.

4 unchanged sentences

Residential 1 – 4 Family.

Residential 1 – 4 family loans held in portfolio amounted to $879.0 million and $739.5 million at September 30, 2023 and December 31, 2022, respectively, and represented 26% and 25% of our total loans at those dates.

Residential 1 – 4 family loans held in portfolio amounted to $880.2 million and $888.6 million at March 31, 2024 and December 31, 2023, respectively, and represented 26% and 27% of our total loans at those dates.

The reduction in residential 1 – 4 family loans during the quarter was the result of scheduled amortizing loan payments.

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

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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 $1.2 billion at September 30, 2023 and $866.9 million at December 31, 2022.

We were servicing mortgage loans sold to others without recourse of approximately $1.17 billion at March 31, 2024 and $1.18 billion at December 31, 2023.

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

Loan servicing rights are carried at fair value.

The net balance of capitalized servicing rights amounted to $13.7 million and $9.6 million at September 30, 2023 and December 31, 2022, respectively.

The net balance of capitalized servicing rights amounted to $13.4 million and $13.7 million at March 31, 2024 and December 31, 2023, respectively.

Consumer Loans.

Our consumer loan portfolio totaled $50.7 million and $45.0 million at September 30, 2023 and December 31, 2022, respectively, and represented 2% of our total loans at those dates.

Our consumer loan portfolio totaled $52.3 million and $51.0 million at March 31, 2024 and December 31, 2023, respectively, and represented 2% and 1% of our total loans at those dates.

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

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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 $14.7 million and $18.8 million at September 30, 2023 and December 31, 2022, respectively, and are immaterial to the overall loan portfolio.

Our other loans totaled $14.8 million and $15.0 million at March 31, 2024 and December 31, 2023, respectively, and are immaterial to the overall loan portfolio.

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

Loan Portfolio Maturities.

The following tables summarize the dollar amount of loans maturing in our portfolio based on their loan type, fixed or variable rate of interest, and contractual terms to maturity at September 30, 2023.

The following tables summarize the dollar amount of loans maturing in our portfolio based on their loan type, fixed or variable rate of interest, and contractual terms to maturity at March 31, 2024.

The tables do not include any estimate of prepayments, which can significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below.

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The composition of our nonperforming assets is as follows:

As of September 30,

As of March 31,

As of December 31,

As of September 30,

As of March 31,

(dollars in thousands)

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Acquired bank property real estate owned

Total nonperforming assets ("NPAs")

Accruing modified loans to borrowers experiencing financial difficulty (1)

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ACL - Loans to total loans

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

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.

The increase in nonaccrual loans during the first quarter of 2024 primarily related to one customer relationship, acquired as part of the Hometown acquisition, that was moved from accrual status during the quarter.

ALLOWANCE FOR CREDIT LOSSES - LOANS

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

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 forecasted over the expected life of the loan, first by predicting over a period of time determined to be reasonable and supportable (currently four calendar quarters), and at the end of the reasonable and supportable period reverting 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.

See Note 1 and Note 5 in the Notes to Unaudited Consolidated Financial Statements included in Item 1.

Financial Statements elsewhere in this report.

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.

At September 30, 2023, the ACL - Loans was $43.4 million (representing 1.29% 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-PCD loans and a $5.5 million reserve related to PCD loans.

Net charge-offs remain negligible.

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

At March 31, 2024, the ACL - Loans was $44.4 million (representing 1.31% of period end loans).

The ACL – Loans has remained consistent over recent quarters as economic conditions and the Company’s overall asset quality remain strong.

The Company recorded net recoveries totaling $0.6 million during the first quarter of 2024.

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

Nine months ended

September 30,

Three months ended

(dollars in thousands)

6 unchanged sentences

Commercial real estate - non-owner occupied

Commercial real estate - multi-family

Construction & Development

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

September 30,

(in thousands, except %)

2 unchanged sentences

Commercial real estate - non-owner occupied

Commercial real estate - multi-family

Construction & development

2 unchanged sentences

SOURCES OF FUNDS

Deposits traditionally have been our primary source of funds for our investment and lending activities.

Deposits have traditionally been our primary source of funds for our investment and lending activities.

We also borrow from the FHLB of Chicago to supplement cash needs, to lengthen the maturities of liabilities for interest rate risk management purposes and to manage our cost of funds.

1 unchanged sentence

Our current deposit products include non-interest bearing and interest-bearing checking accounts, savings accounts, money market accounts, and certificate of deposits.

As of September 30, 2023, deposit liabilities accounted for approximately 83.1% of our total liabilities and equity.

As of March 31, 2024, deposit liabilities accounted for approximately 83.3% of our total liabilities and equity.

We accept deposits primarily from customers in the communities in which our branches and offices are located, as well as from small businesses and other customers throughout our lending area.

1 unchanged sentence

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

Total deposits were $3.40 billion and $3.06 billion as of September 30, 2023 and December 31, 2022, respectively.

Noninterest-bearing deposits at September 30, 2023 and December 31, 2022, were $1.06 billion and $934.1 million, respectively, while interest-bearing deposits were $2.33 billion and $2.13 billion at September 30, 2023 and December 31, 2022, respectively.

At September 30, 2023, we had a total of $548.1 million in certificates of deposit, including $0.7 million of brokered deposits.

Total deposits were $3.42 billion and $3.43 billion as of March 31, 2024 and December 31, 2023, respectively.

Noninterest-bearing deposits at March 31, 2024 and December 31, 2023, were $990.5 million and $1.05 billion, respectively, while interest-bearing deposits were $2.43 billion and $2.38 billion at March 31, 2024 and December 31, 2023, respectively.

At March 31, 2024, we had a total of $598.3 million in certificates of deposit, including $0.7 million of brokered deposits.

Based on historical experience and our current pricing strategy, we believe we will retain a majority of these accounts upon maturity, although our long-term strategy is to minimize reliance on certificates of deposits by increasing relationship deposits in lower earning savings and demand deposit accounts.

The following tables set forth the average balances of our deposits for the periods indicated:

Nine months ended

September 30, 2023

Three months ended

March 31, 2024

December 31, 2023

September 30, 2022

March 31, 2023

(dollars in thousands)

5 unchanged sentences

Brokered deposits

The following table provides information on maturities of certificates of deposits which exceed FDIC insurance limits of $250,000 as of September 30, 2023:

The following table provides information on maturities of certificates of deposits which exceed FDIC insurance limits of $250,000 as of March 31, 2024:

Time Deposits over FDIC

8 unchanged sentences

Securities sold under repurchase agreements

The Company has securities sold under repurchase agreements which have contractual maturities up to one year from the transaction date with variable and fixed rate terms.

The agreements to repurchase require that the Company (seller) repurchase identical securities as those that are sold.

The securities underlying the agreements are under the Company’s control.

The Company had securities sold under repurchase agreements which had contractual maturities up to one year from the transaction date with variable and fixed rate terms.

The agreements to repurchase required that the Company (seller) repurchase identical securities as those that were sold.

The securities underlying the agreements were under the Company’s control.

The Company redeemed all securities sold under repurchase agreements during the first quarter of 2024.

The following table summarizes securities sold under repurchase agreements, and the weighted average interest rates paid:

Nine months ended

Three months ended

(dollars in thousands)

September 30, 2023

March 31, 2024

December 31, 2023

September 30, 2022

March 31, 2023

Average daily amount of securities sold under repurchase agreements during the period

4 unchanged sentences

The Company’s borrowings have historically consisted primarily of 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 $35.8 million of advances outstanding from the FHLB at September 30, 2023, and $1.9 million as of December 31, 2022.

The total loans pledged as collateral were $1.44 billion at September 30, 2023 and $1.15 billion at December 31, 2022.

There were no outstanding letters of credit from the FHLB at September 30, 2023 or December 31, 2022.

The following table summarizes borrowings, which consist of borrowings from the FHLB, and the weighted average interest rates paid:

Nine months ended

There were $35.3 million of advances outstanding from the FHLB at March 31, 2024 and December 31, 2023.

The total loans pledged as collateral were $1.49 billion at March 31, 2024 and December 31, 2023.

There were no outstanding letters of credit from the FHLB at March 31, 2024 or December 31, 2023.

The following table summarizes borrowings from the FHLB, and the weighted average interest rates paid:

Three months ended

(dollars in thousands)

September 30, 2023

March 31, 2024

December 31, 2023

September 30, 2022

March 31, 2023

Average daily amount of borrowings outstanding during the period

5 unchanged sentences

We maintain a $7.5 million line of credit with another commercial bank, which was entered into on May 15, 2022.

There were no outstanding balances on this note at September 30, 2023.

There were no outstanding balances on this note at March 31, 2024 or December 31, 2023.

Any future borrowings will required 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.

As of September 30, 2021 and December 31, 2020, outstanding balances under these agreements totaled $11.5 million.

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.

These note agreements were repaid in full on October 2, 2023.

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

As of September 30, 2023 and December 31, 2022, outstanding balances under these agreements totaled $6.0 million.

As of March 31, 2024 and December 31, 2023, outstanding balances under these agreements totaled $6.0 million.

These notes were issued with 10-year maturities, will carry interest at a fixed rate of 5.0% through June 30, 2025, and at a variable rate thereafter, payable quarterly.

1 unchanged sentence

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

As of September 30, 2023, outstanding balances under these agreements totaled $6.0 million.

As of March 31, 2024 and December 31, 2023, outstanding balances under these agreements totaled $6.0 million.

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

4 unchanged sentences

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

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

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

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

The trusts are not included in the 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, is liable for the distributions and other payments required on the trusts’ preferred securities.

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

Interest on all debentures is current.

Applicable discounts (initially recorded to carry the acquired debentures at their then estimated fair value) are being accreted to interest expense over the remaining life of the debentures, and total $1.4 million at September 30, 2023.

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 and Trust I during January 2024, resulting in these trusts’ 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

6 unchanged sentences

Securities available for sale consist of U.S.

treasury securities, obligations of states and political subdivision, mortgage-backed securities, and corporate notes.

government sponsored agencies, obligations of states and political subdivision, mortgage-backed securities, and corporate notes.

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 $179.0 million and included no gross unrealized gains and gross unrealized losses of $26.6 million at September 30, 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.

The fair value of securities available for sale totaled $138.4 million and included $17,000 gross unrealized gains and gross unrealized losses of $13.0 million at March 31, 2024.

At December 31, 2023, 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.

Securities classified as held to maturity consist of U.S.

1 unchanged sentence

These securities, which management has the intent and ability to hold to maturity, are reported at amortized cost.

Securities held to maturity totaled $77.2 million at September 30, 2023 and $45.1 million at December 31, 2022.

The Company had recognized net losses on sales of securities of $75,000 during the nine months ended September 30, 2023.

There were no sales of securities during the nine months ended September 30, 2022.

The following tables set forth the composition and maturities of investment securities as of September 30, 2023 and December 31, 2022.

Securities held to maturity totaled $111.7 million at March 31, 2024 and $103.3 million at December 31, 2023.

The Company had recognized net losses on sales of securities of $34,000 during the three months ended March 31, 2024.

The Company had recognized net losses on sales of securities of $75,000 during the three months ended March 31, 2023.

The following tables set forth the composition and maturities of investment securities as of March 31, 2024 and December 31, 2023.

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

5 unchanged sentences

After Ten Years

At September 30, 2023

At March 31, 2024

(dollars in thousands)

Available for sale securities

Treasury securities

Obligations of U.S.

3 unchanged sentences

Corporate notes

Certificates of deposit

Total available for sale securities

12 unchanged sentences

Available for sale securities

Treasury securities

Obligations of U.S.

10 unchanged sentences

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

The Company evaluates securities for potential credit losses 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 September 30, 2023 and December 31, 2022, no allowance for credit losses on securities AFS was recognized.

The Company does not consider its securities AFS with unrealized losses to be attributable to credit-related factors, as the unrealized losses

in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration.

Furthermore, as of September 30, 2023, the Company did not have the intent to sell any of these securities AFS and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost.

Furthermore, the Company does not believe there are any expected credit losses in its HTM securities portfolio at September 30, 2023 or December 31, 2022.

As of March 31, 2024 and December 31, 2023, no allowance for credit losses on securities AFS was recognized.

The Company does not consider its securities AFS with unrealized losses to be attributable to credit-related factors, as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration.

Furthermore, as of March 31, 2024, the Company did not have the intent to sell any of these securities AFS and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost.

Furthermore, the Company does not believe there are any expected credit losses in its HTM securities portfolio at March 31, 2024 or December 31, 2023.

Treasury securities have the full faith and credit backing of the United States government and the amount of obligations of states and political subdivisions in an unrealized loss position is immaterial to the financial statements.

As of September 30, 2023, 297 debt securities had gross unrealized losses, with an aggregate depreciation of 10.2% from our amortized cost basis.

As of March 31, 2024, 214 debt securities had gross unrealized losses, with an aggregate depreciation of 5.3% from our amortized cost basis.

The largest unrealized loss percentage of any single security was 24.4% (or $0.2 million) of its amortized cost.

25 unchanged sentences

Capital Adequacy.

Total stockholders’ equity was $577.3 million at September 30, 2023 compared to $453.1 million at December 31, 2022.

Total stockholders’ equity was $609.3 million at March 31, 2024 compared to $619.8 million at December 31, 2023.

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

The Bank is subject to various regulatory capital requirements administered by state and federal banking agencies, including the Federal Reserve and the

The Bank is subject to various regulatory capital requirements administered by state and federal banking agencies, including the Federal Reserve and the OCC.

Failure to meet minimum capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on our financial condition and results of operations.

24 unchanged sentences

All of the federal bank regulatory agencies have adopted regulations establishing relevant capital measures and relevant capital levels for federally insured depository institutions.

The Bank was well capitalized at September 30, 2023, and brokered deposits are not restricted.

The Bank was well capitalized at March 31, 2024, and brokered deposits are not restricted.

To be well-capitalized, the Bank must maintain at least a 6.5% CET1 to risk-weighted assets ratio, an 8.0% Tier 1 capital to risk-weighted assets ratio, a 10.0% Total capital to risk-weighted assets ratio, and a 5.0% leverage ratio.

23 unchanged sentences

(dollars in thousands)

At September 30, 2023

At March 31, 2024

Bank First Corporation:

19 unchanged sentences

Tier I capital (to average assets)

As previously mentioned, the Company carried $23.5 million of subordinated debt as of September 30, 2023 and December 31, 2022, and $11.0 million in junior subordinated debentures as of September 30, 2023, all of 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 as of March 31, 2024 and December 31, 2023, which qualifies as Tier II capital, and $4.0 million of junior subordinated debt as of December 31, 2023, which qualified as Tier I capital.

These amounts are included in total capital for the Company in the tables above.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

17 unchanged sentences

Our off-balance sheet arrangements at the dates indicated were as follows:

Amounts of Commitments Expiring - By Period as of September 30, 2023

Amounts of Commitments Expiring - By Period as of March 31, 2024

Less Than One

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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-Q

Item 2. Management’s Discussion and Analysis