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Item 2. Management’s Discussion and Analysis

2024-11-12 compared with 2024-08-07 · 172 added, 178 removed, 764 unchanged (31% 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, 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 June 30, 2024.

FORWARD-LOOKING STATEMENTS

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

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.

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

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

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At or for the Three Months Ended

At or for the Six Months Ended

At or for the Nine Months Ended

(In thousands, except per share data)

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At or for the Three Months Ended

At or for the Six 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 June 30, 2024 and June 30, 2023

Net income increased $1.9 million to $16.1 million for three months ended June 30, 2024, compared to $14.1 million for the same period in 2023.

This increase was partially due to positive valuation adjustments on the Bank’s MSRs during the second quarter of 2024 compared to negative adjustments during the second quarter of 2023.

Also, gains on the sale and valuations of OREO during the second quarter of 2024 compared favorably to losses on these sales and valuations during the second quarter of 2023.

Results of Operations for the Three Months Ended September 30, 2024 and September 30, 2023

Net income increased $1.8 million to $16.6 million for three months ended September 30, 2024, compared to $14.8 million for the same period in 2023.

This increase is primarily driven by the repricing of new and renewed loans in a higher rate environment, along with steady growth in interest-bearing assets.

In addition, due to tax legislation in the Company’s home state, the effective tax rate decreased from 24.7% for the third quarter of 2023 to 19.9% for the third quarter of 2024.

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 decreased by $1.3 million to $33.0 million for the three months ended June 30, 2024 compared to $34.3 million for three months ended June 30, 2023.

The decrease in net interest income was primarily due to increased cost of funding liabilities.

The momentum of these increases has begun to slow while average rates on earned on interest-earning assets continued a steady move higher.

Total average interest-earning assets were $3.70 billion for the three months ended June 30, 2024, up from $3.68 billion for the same period in 2023.

Net interest and dividend income increased by $1.8 million to $35.9 million for the three months ended September 30, 2024 compared to $34.1 million for three months ended September 30, 2023.

The increase in net interest income was primarily due to repricing of new and renewed loans in a higher interest rate environment, as well as steady growth in interest-bearing assets.

Total average interest-earning assets were $3.83 billion for the three months ended September 30, 2024, up from $3.67 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 $3.4 million, or 7.4%, to $49.3 million for the three months ended June 30, 2024 compared to $45.9 million for the same period in 2023.

Total interest income increased $7.0 million, or 15.0%, to $54.0 million for the three months ended September 30, 2024 compared to $47.0 million for the same period in 2023.

The increase in total interest income was primarily due to an increase in the average interest rate earned on interest-earning assets.

The average balance of interest-earning assets increased by $13.0 million during the three months ended June 30, 2024 compared to the same period in 2023 and the average interest rate earned on these assets increased by 0.36% in the year-over-year second quarters.

The average balance of interest-earning assets increased by $162.3 million during the three months ended September 30, 2024 compared to the same period in 2023 and the average interest rate earned on these assets increased by 0.53% in the year-over-year third quarters.

Further, a previously purchased loan with remaining

associated purchase accounting adjustments of $0.6 million was fully repaid before maturity during the third quarter of 2024, leading to an elevated impact of purchase accounting during the quarter.

Interest Expense.

Interest expense increased $4.7 million, or 40.2%, to $16.3 million for the three months ended June 30, 2024 compared to $11.7 million for the same period in 2023.

Interest expense increased $5.2 million, or 40.4%, to $18.1 million for the three months ended September 30, 2024 compared to $12.9 million for the same period in 2023.

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

Interest expense on interest-bearing deposits increased by $5.7 million to $15.8 million for the three months ended June 30, 2024 compared to $10.1 million for the same period in 2023.

The average balance and cost of interest-bearing deposits was $2.42 billion and 2.63% for the three months ended June 30, 2024, compared to $2.32 billion and 1.74% for the same period in 2023.

Interest expense on interest-bearing deposits increased by $4.9 million to $16.5 million for the three months ended September 30, 2024 compared to $11.6 million for the same period in 2023.

The average balance and rate of interest-bearing deposits was $2.44 billion and 2.69% for the three months ended September 30, 2024, compared to $2.32 billion and 1.99% for the same period in 2023.

Provision for Credit Losses.

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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 June 30, 2024 or 2023.

Economic forecasts, primarily US gross domestic product and unemployment projections, were little changed during the second quarter of 2024 resulting in consistent economic and qualitative factors in the Current Expected Credit Losses (“CECL”) methodology.

We recorded net recoveries of $0.2 million during the three months ended June 30, 2024 compared to net recoveries of $0.1 million during the three months ended June 30, 2023.

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

Also, due to a reduction in unfunded loan commitments and an increase in outstanding loans, the Bank moved $0.5 million from its ACL-Unfunded Commitments to its ACL – Loans during the second quarter of 2024.

We did not record a provision for credit loss during the three months ended September 30, 2024 or 2023.

Economic forecasts, primarily US gross domestic product and unemployment projections, were little changed during the third quarter of 2024 resulting in consistent economic and qualitative factors in the Current Expected Credit Losses (“CECL”) methodology.

We recorded net charge offs of $0.3 million during the three months ended September 30, 2024 compared to net recoveries of $0.1 million during the three months ended September 30, 2023.

Other than a $0.3 million charge-off during the third quarter of 2024, related to a single customer relationship, the Bank’s loan portfolio continues to exhibit very little credit stress.

Due to a reduction in unfunded loan commitments and an increase in outstanding loans, the Bank moved $0.4 million from its ACL-Unfunded Commitments to its ACL – Loans during the third quarter of 2024.

While this move had no impact on the Bank’s profitability for the quarter, it did increase the allowance for potential loan credit losses to correspond with the increase in overall loan portfolio balances.

The ACL - Loans was $45.1 million, or 1.32% of total loans, at June 30, 2024 compared to $43.4 million, or 1.31% of total loans at June 30, 2023.

The ACL - Loans was $45.2 million, or 1.30% of total loans, at September 30, 2024 compared to $43.4 million, or 1.29% of total loans at September 30, 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 $1.3 million to $5.9 million for the three months ended June 30, 2024 compared to $4.6 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 second quarter of 2024, compared to income of $0.8 million during the second quarter of 2023.

Service charges increased by 19.0% from the prior-year second quarter primarily due to a recently negotiated vendor incentive program related to the Bank’s credit and debit card payments processing.

Positive valuation adjustments to the Bank’s MSRs totaling $0.3 million during the second quarter of 2024 compared favorably to $0.5 million in negative valuation adjustments during the second quarter of 2023.

Noninterest income decreased $0.4 million to $4.9 million for the three months ended September 30, 2024 compared to $5.3 million for the same period in 2023.

Service charges increased by 20.0% from the prior-year third quarter primarily due to prepayment and referral fees on loans.

Net gains on the sales of mortgage loans increased by 52.0% from the third quarter of 2023 to the third quarter of 2024, attributed to a rise in secondary market loan origination activity resulting from declining interest rates.

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 third quarter of 2024, compared to income of $0.8 million during the third quarter of 2023.

Negative valuation adjustments to the Bank’s MSRs totaling $0.3 million during the third quarter of 2024 compared unfavorably to $0.2 million in positive valuation adjustments during the third quarter of 2023.

The major components of our noninterest income are listed below:

Three Months Ended June 30,

Three Months Ended September 30,

(In thousands)

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Noninterest Expense.

Noninterest expense decreased $0.9 million to $19.1 million for the three months ended June 30, 2024 compared to $19.9 million for the same period in 2023.

Salaries, commissions, employee benefits, occupancy and data processing expenses continue to be well managed which resulted in only slight increases year-over-year in the second quarter.

Outside service fees increased by $0.5 million, or 40.2%, during the second quarter of 2024 compared to the prior-year second quarter.

Included in outside service fees during the most recent quarter was $0.2 million paid to an advisory firm which assisted the Bank in negotiations with a vendor, estimated to result in savings for the Bank of $1.1 million over the next five years.

Also included in outside service fees during the most recent quarter was $0.3 million in commissions paid related to sales of former branch buildings which were no longer in use by the Bank.

These sales resulted in net gains on sale of OREO totaling $0.5 million during the quarter, comparing favorably to net losses totaling $0.5 million in the second quarter of 2023.

Noninterest expense increased $0.5 million to $20.1 million for the three months ended September 30, 2024 compared to $19.6 million for the same period in 2023.

Most noninterest expenses have remained well-controlled over the past five quarters.

However, occupancy, equipment, and office expenses increased this quarter, primarily due to $0.2 million in losses from disposing of outdated equipment.

Additionally, data processing expenses included $0.4 million in project-related costs tied to the Bank's ongoing upgrade of its online customer platform.

The major components of our noninterest expense are listed below:

Three Months Ended June 30,

Three Months Ended September 30,

(In thousands)

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Postage, stationary, and supplies

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

Net loss on sales and valuations of other real estate owned

Charitable contributions

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Income Tax Expense.

We recorded a provision for income taxes of $3.8 million for the three months ended June 30, 2024 compared to a provision of $4.7 million for the same period during 2023, reflecting effective tax rates of 19.0% and 25.1%, 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.

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.

Results of Operations for the Six months Ended June 30, 2024 and June 30, 2023

Net income increased $6.7 million to $31.5 million for six months ended June 30, 2024, compared to $24.8 million for the same period in 2023.

We recorded a provision for income taxes of $4.1 million for the three months ended September 30, 2024 compared to a provision of $4.9 million for the same period during 2023, reflecting effective tax rates of 19.9% and 24.7%, respectively.

As previously noted, the Company’s home state passed tax legislation during the third quarter of 2023 which exempted income from a significant portion of the Company’s loans from taxation in Wisconsin.

This change allowed the Company to reverse $2.4 million in state related income tax expense which had been recorded during the first two quarters of 2023.

As a result of the lower anticipated future effective tax rate, the Company determined that a $2.9 million allowance was required to be made against its deferred tax asset.

The net impact of these two items was an increase in income tax expenses of $0.5 million during the third quarter of 2023.

Results of Operations for the Nine Months Ended September 30, 2024 and September 30, 2023

Net income increased $8.4 million to $48.0 million for nine months ended September 30, 2024, compared to $39.6 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 six months of 2023 was also negatively impacted by $1.5 million in acquisition expenses and a $3.6 million provision for credit losses related to the acquired loans from Hometown.

Offsetting these factors was the absence of income from UFS during the first six months of 2024 compared to $1.7 million in income provided by UFS during the first six months of 2023.

Further, average rates on interest-earning assets have consistently risen, while the rise in rates paid on deposit accounts has started to decelerate.

The first nine months of 2023 was also negatively impacted by $1.8 million in acquisition expenses and a $3.6 million provision for credit losses related to the acquired loans from Hometown.

The absence of income from UFS during the first nine months of 2024 compared to $2.4 million in income provided by UFS during the first nine months of 2023.

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 decreased by $0.1 million to $66.4 million for the six months ended June 30, 2024 compared to $66.5 million for six months ended June 30, 2023.

The decrease in net interest income was primarily due to increases in rates paid on interest-bearing liabilities outpacing increasing rates earned on interest-earning assets over the last twelve months.

Comparing the first six months of 2024 to the first six months of 2023, rates earned on interest-earning assets increased by 0.48% while rates paid on interest-bearing liabilities increased by 0.89%.

Tax equivalent net interest margin decreased 0.14% to 3.62% for the six months ended June 30, 2024, down from 3.76% for the same period in 2023.

Net interest and dividend income increased by $1.6 million to $102.2 million for the nine months ended September 30, 2024 compared to $100.6 million for nine months ended September 30, 2023.

As discussed earlier, the rise in net interest income was mainly driven by the repricing of new and renewed loans in a higher interest rate environment and overall growth in interest-earning assets.

Comparing the first nine months of 2024 to the first nine months of 2023, rates earned on interest-earning assets increased by 0.49% while rates paid on interest-bearing liabilities increased by 0.81%.

Tax equivalent net interest margin decreased 0.07% to 3.67% for the nine months ended September 30, 2024, down from 3.74% 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 $11.8 million, or 13.6%, to $98.6 million for the six months ended June 30, 2024 compared to $86.8 million for the same period in 2023.

The increase in total interest income was primarily due to the aforementioned increase in rates earned on interest-earning assets over the last twelve months.

The average balance of interest-earning assets increased by $114.5 million during the first six months of 2024 compared to the same period in 2023 and the average interest rate earned on these assets increased from 4.89% for the first half of 2023 to 5.37% during the first half of 2024.

Total interest income increased $18.9 million, or 14.1%, to $152.7 million for the nine months ended September 30, 2024 compared to $133.8 million for the same period in 2023.

The increase in total interest income was primarily due to the aforementioned increase in rates earned on interest-earning assets over recent quarters.

The average balance of interest-earning assets increased by $130.5 million during the first nine months of 2024 compared to the same period in 2023 and the average interest rate earned on these assets increased from 4.97% for the first three quarters of 2023 to 5.46% during the first three quarters of 2024.

Interest Expense.

Interest expense increased $11.9 million, or 58.7%, to $32.3 million for the six months ended June 30, 2024 compared to $20.3 million for the same period in 2023.

Interest expense increased $17.1 million, or 51.6%, to $50.4 million for the nine months ended September 30, 2024 compared to $33.3 million for the same period in 2023.

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

The average balance of interest-bearing liabilities increased by $103.2 million during the first six months of 2024 compared to the same period in 2023 and the average interest rate paid on these balances was 1.72% for the first half of 2023 compared to 2.61% for the first half of 2024.

Interest expense on interest-bearing deposits totaled $31.2 million and $17.5 million for the six months ended June 30, 2024 and 2023, respectively.

The average cost of interest-bearing deposits was 2.57% for the six months ended June 30, 2024, compared to 1.55% for the same period in 2023.

The average balance of interest-bearing liabilities increased by $126.4 million during the first nine months of 2024 compared to the same period in 2023 and the average interest rate paid on these balances was 1.86% for the first three quarters of 2023 compared to 2.67% for the first three quarters of 2024.

Interest expense on interest-bearing deposits totaled $47.7 million and $29.2 million for the nine months ended September 30, 2024 and 2023, respectively.

The average cost of interest-bearing deposits was 2.61% for the nine months ended September 30, 2024, compared to 1.70% for the same period in 2023.

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.

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 recorded a provision for credit losses of $0.2 million for the six months ended June 30, 2024 compared to $4.2 million for the same period in 2023.

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

We recorded net recoveries of $0.8 million for the six months ended June 30, 2024 compared to net recoveries of $0.1 million for the same period in 2023.

The ACL was $45.1 million, or 1.32% of total loans, at June 30, 2024 compared to $43.4 million, or 1.31% of total loans at June 30, 2023.

We recorded a provision for credit losses of $0.2 million for the nine months ended September 30, 2024 compared to $4.2 million for the same period in 2023.

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

We recorded net recoveries of $0.5 million for the nine months ended September 30, 2024 compared to net recoveries of $0.1 million for the same period in 2023.

Also, due to a reduction in unfunded loan commitments and an increase in outstanding loans, the Bank moved $0.9 million from its ACL-Unfunded Commitments to its ACL – Loans during the first nine months of 2024.

The ACL was $45.2 million, or 1.30% of total loans, at September 30, 2024 compared to $43.4 million, or 1.29% of total loans at September 30, 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 decreased $0.1 million to $10.3 million for the six months ended June 30, 2024 compared to $10.4 million for the same period in 2023.

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

Service charges and income provided by the Bank’s member interest in Ansay increased $0.4 million and $0.3 million, respectively, for the first six months of 2024 compared to the same period in 2023.

Offsetting these increases, the sale of 100% of the Bank’s member interest in UFS on October 1, 2023, lead to no income from UFS being recorded in the half of 2024, compared to income of $1.7 million during the second quarter of 2023.

Noninterest income decreased $0.5 million to $15.2 million for the nine months ended September 30, 2024 compared to $15.7 million for the same period in 2023.

Service charges and income provided by the Bank’s member interest in Ansay increased $0.7 million and $0.6 million, respectively, for the first nine months of 2024 compared to the same period in 2023.

Offsetting these increases, the sale of 100% of the Bank’s member interest in UFS on October 1, 2023, lead to no income from UFS being recorded in the first three quarters of 2024, compared to income of $2.4 million during the first three quarters of 2023.

Negative valuation

adjustments to the Bank’s MSR totaling $0.3 million during the first nine months of 2024 also compared unfavorably to $0.5 million in positive valuation adjustments during the first nine months of 2023.

The major components of our noninterest income are listed below:

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

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Noninterest Expense.

Noninterest expense decreased $0.2 million to $39.4 million for the six months ended June 30, 2024 compared to $39.6 million for the same period in 2023.

Data processing expense increased by $0.5 million, or 13.8%, over the first half of 2024 compared to the first half of 2023 due to added scale from the acquisition of Hometown, which occurred during the first half of 2023.

Expenses related to this acquisition totaled $1.5 million during the first half of 2023.

The lack of a similar acquisition during the first half of 2024 caused decreases in the areas of postage, stationary, supplies and outside service fees expense period-over-period.

Finally, gains on sales and valuations of OREO totaling $0.5 million during the first half of 2024 compared favorably to losses of $0.5 million during the first half of 2023.

Noninterest expense increased $0.2 million to $59.5 million for the nine months ended September 30, 2024 compared to $59.3 million for the same period in 2023.

Data processing expense increased by $0.9 million, or 14.6%, over the first three quarters of 2024 compared to the first three quarters of 2023 due to the aforementioned project-related costs for upgrading the Bank’s online customer platform and the increased scale from the acquisition of Hometown, completed in February of 2023.

Expenses related to this acquisition totaled $1.8 million during the first nine months of 2023.

The lack of a similar acquisition during the first three quarters of 2024 caused decreases in the areas of postage, stationary, supplies and outside service fees expense period-over-period.

Finally, gains on sales and valuations of OREO totaling $0.5 million during the first three quarters of 2024 compared favorably to losses of $0.5 million during the first three quarters of 2023.

The major components of our noninterest expense are listed below:

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

10 unchanged sentences

Income Tax Expense.

We recorded a provision for income taxes of $5.6 million for the six months ended June 30, 2024 compared to a provision of $8.3 million for the same period during 2023, reflecting effective tax rates of 15.1% and 25.1%, 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.

We recorded a provision for income taxes of $9.7 million for the nine months ended September 30, 2024 compared to a provision of $13.2 million for the same period during 2023, reflecting effective tax rates of 16.8% and 24.9%, respectively.

As a result of the lower anticipated future effective tax rate, the Company determined that a $2.9 million allowance was required to be made against its deferred tax asset during the third quarter of 2023.

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 half of 2024.

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.

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Three Months Ended

June 30, 2024

June 30, 2023

September 30, 2024

September 30, 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 June 30, 2024 and 2023.

Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for the three months ended September 30, 2024 and 2023.

Nonaccrual loans are included in average amounts outstanding.

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

Six Months Ended

June 30, 2024

June 30, 2023

Nine Months Ended

September 30, 2024

September 30, 2023

(dollars in thousands)

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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 six months ended June 30, 2024 and 2023.

Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for the nine months ended September 30, 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 June 30, 2024

Six Months Ended June 30, 2024

Three Months Ended September 30, 2024

Nine Months Ended September 30, 2024

Compared with

Three Months Ended June 30, 2023

Six Months Ended June 30, 2023

Three Months Ended September 30, 2023

Nine Months Ended September 30, 2023

Increase/(Decrease) Due to Change in

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Total Assets.

Total assets decreased $76.0 million, or 1.8%, to $4.15 billion at June 30, 2024, from $4.22 billion at December 31, 2023.

Total assets increased $72.6 million, or 1.7%, to $4.29 billion at September 30, 2024, from $4.22 billion at December 31, 2023.

Cash and Cash Equivalents.

Cash and cash equivalents decreased by $148.5 million to $99.0 million at June 30, 2024, from $247.5 million at December 31, 2023.

Cash and cash equivalents decreased by $43.1 million to $204.4 million at September 30, 2024, from $247.5 million at December 31, 2023.

This decline was primarily the result of funds being invested in growth in the Bank’s loan portfolio as well as a reduction in deposits and 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.

These declines were partially offset by increases in notes payable through the first half of 2024.

These declines were partially offset by increases in notes payable through the first nine months of 2024.

Investment Securities.

The carrying value of total investment securities decreased by $6.9 million to $238.6 million at June 30, 2024, from $245.5 million at December 31, 2023.

Net loans increased by $84.2 million, totaling $3.38 billion at June 30, 2024 compared to $3.30 billion at December 31, 2023.

Deposits decreased $33.0 million, or 1.0%, to $3.40 billion at June 30, 2024 from $3.43 billion at December 31, 2023.

The Bank typically sees a seasonal decline in deposits during the first half of the year.

At June 30, 2024, borrowings consisted of advances from the FHLB of Chicago and subordinated debt to other banks and an individual.

FHLB borrowings increased $55.1 million, or 156.1%, to $90.3 million at June 30, 2024 from $35.3 million at December 31, 2023.

The carrying value of total investment securities decreased by $7.8 million to $237.7 million at September 30, 2024, from $245.5 million at December 31, 2023.

Net loans increased by $126.3 million, totaling $3.43 billion at September 30, 2024 compared to $3.30 billion at December 31, 2023.

Deposits increased $51.8 million, or 1.5%, to $3.48 billion at September 30, 2024 from $3.43 billion at December 31, 2023.

At September 30, 2024, borrowings consisted of advances from the FHLB of Chicago and subordinated debt to other banks and an individual.

FHLB borrowings increased $100.0 million, or 283.7%, to $135.3 million at September 30, 2024 from $35.3 million at December 31, 2023.

These additional borrowings are intended to provide liquidity to support near-term loan growth.

Subordinated debt remained stable at $12.0 million at June 30, 2024 and December 31, 2023.

Subordinated debt remained stable at $12.0 million at September 30, 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 decreased $5.2 million, or 0.8%, to $614.6 million at June 30, 2024 from $619.8 million at December 31, 2023.

Repurchases of the Company’s common stock totaling $30.2 million and dividends declared totaling $7.1 million offset the positive impact of earnings totaling $31.5 million during the first six months of the year.

Total stockholders’ equity increased $9.1 million, or 1.5%, to $628.9 million at September 30, 2024 from $619.8 million at December 31, 2023.

Repurchases of the Company’s common stock totaling $31.7 million and dividends declared totaling $11.1 million offset the positive impact of earnings totaling $48.0 million during the first nine months of the year.

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

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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 82.7% and 79.2% of our total assets as of June 30, 2024 and December 31, 2023, respectively.

Our loan portfolio is our most significant earning asset, comprising 80.9% and 79.2% of our total assets as of September 30, 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 $85.7 million, or 2.6%, to $3.43 billion as of June 30, 2024 as compared to $3.34 billion as of December 31, 2023.

This increase during the first six 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 $19.5 million or 4.0% in commercial and industrial loans, an increase of $25.9 million or 2.9% in owner occupied commercial real estate loans, stable non-owner occupied commercial real estate and multi-family loans, an increase of $29.1 million or 14.5% in construction and development loans, an increase of $8.4 million or 1.0% in residential 1-4 family loans and an increase of $2.0 million in consumer and other loans.

Loans increased $127.9 million, or 3.8%, to $3.47 billion as of September 30, 2024 as compared to $3.34 billion as of December 31, 2023.

This increase during the first nine 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 $29.9 million or 6.1% in commercial and industrial loans, an increase of $44.1 million or 4.9% in owner occupied commercial real estate loans, a decrease of $9.0 million or 1.9% in non-owner occupied commercial real estate, a decrease of $3.3 million or 1.0% in multi-family loans, an increase of $45.6 million or 22.7% in construction and development loans, an increase of $15.6 million or 1.8% in residential 1-4 family loans and an increase of $4.9 million or 7.5% in consumer and other loans.

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

June 30, 2024

September 30, 2024

December 31, 2023

June 30, 2023

September 30, 2023

(dollars in thousands)

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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 June 30, 2024 and December 31, 2023, total loans outstanding to such directors and officers and their associates were $75.7 million and $63.9 million, respectively.

During the six months ended June 30, 2024, $16.4 million in additions due to director and officer updates, $5.5 million of additions and $10.1 million of repayments were made to these loans.

At June 30, 2024 and December 31, 2023, all of the loans to directors and officers were performing according to their original terms.

At September 30, 2024 and December 31, 2023, total loans outstanding to such directors and officers and their associates were $79.8 million and $63.9 million, respectively.

During the nine months ended September 30, 2024, $17.7 million in additions due to director and officer updates, $41.9 million of additions and $43.7 million of repayments were made to these loans.

At September 30, 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 $507.4 million and $487.9 million at June 30, 2024 and December 31, 2023, respectively, and represented 15% of our total loans at both of those dates.

Our C&I portfolio totaled $517.8 million and $487.9 million at September 30, 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.

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Commercial Real Estate (CRE).

Our CRE loan portfolio totaled $1.73 billion and $1.70 billion at June 30, 2024 and December 31, 2023, respectively, and represented 51% of our total loans at both of those dates.

The growth in our CRE loan portfolio through the first six months of 2024 consisted primarily of owner occupied commercial real estate while nonowner occupied commercial real estate and multi-family real estate, typically perceived as containing a higher risk of credit losses, remained stable.

Our CRE loan portfolio totaled $1.73 billion and $1.70 billion at September 30, 2024 and December 31, 2023, respectively, and represented 50% of our total loans at both of those dates.

The growth in our CRE loan portfolio through the first nine months of 2024 consisted primarily of owner occupied commercial real estate while non-owner occupied commercial real estate and multi-family real estate, typically perceived as containing a higher risk of credit losses, declined slightly.

Management views owner occupied CRE as an extension of C&I lending as typically the primary repayment source on these loans is operating profits from the underlying business.

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.

Our CRE loans are secured by a variety of property types including multi-family 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.

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Construction and Development (C&D).

Our C&D loan portfolio totaled $229.9 million and $200.8 million at June 30, 2024 and December 31, 2023, respectively, and represented 7% and 6% of our total loans at June 30, 2024 and December 31, 2023, respectively.

It is typical for our C&D loans to increase through the middle of each year as this represents the primary construction season in our operating markets.

Our C&D loan portfolio totaled $246.4 million and $200.8 million at September 30, 2024 and December 31, 2023, respectively, and represented 7% and 6% of our total loans at September 30, 2024 and December 31, 2023, respectively.

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.

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Residential 1 – 4 Family.

Residential 1 – 4 family loans held in portfolio amounted to $897.1 million and $888.6 million at June 30, 2024 and December 31, 2023, respectively, and represented 26% and 27% of our total loans at those dates.

Residential 1 – 4 family loans held in portfolio amounted to $904.3 million and $888.6 million at September 30, 2024 and December 31, 2023, respectively, and represented 26% and 27% of our total loans at those dates.

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 $1.16 billion at June 30, 2024 and $1.18 billion at December 31, 2023.

We were servicing mortgage loans sold to others without recourse of approximately $1.17 billion at September 30, 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 at June 30, 2024 and December 31, 2023.

The net balance of capitalized servicing rights amounted to $13.4 million and $13.7 million at September 30, 2024 and December 31, 2023, respectively.

Consumer Loans.

Our consumer loan portfolio totaled $53.2 million and $51.0 million at June 30, 2024 and December 31, 2023, respectively, and represented 1% of our total loans at those dates.

Our consumer loan portfolio totaled $55.6 million and $51.0 million at September 30, 2024 and December 31, 2023, respectively, and represented 2% 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 $14.8 million and $15.0 million at June 30, 2024 and December 31, 2023, respectively, and are immaterial to the overall loan portfolio.

Our other loans totaled $15.2 million and $15.0 million at September 30, 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 June 30, 2024.

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, 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 June 30,

As of September 30,

As of December 31,

As of June 30,

As of September 30,

(dollars in thousands)

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In addition to the monitoring and review of loan performance internally, we have also contracted with an independent organization to review our commercial and retail loan portfolios.

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 six months of 2024 primarily related to one customer relationship, acquired as part of the Hometown acquisition, that was moved from accrual status during the first quarter.

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

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

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 June 30, 2024, the ACL - Loans was $45.1 million (representing 1.32% of period end loans).

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

At September 30, 2024, the ACL - Loans was $45.2 million (representing 1.30% 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 $0.8 million during the first half of 2024.

As previously mentioned, the Bank reallocated $0.9 million of ACL from unfunded commitments to ACL for loans in response to a decrease in unfunded loan commitments and an increase in loan balances.

The Company recorded net recoveries totaling $0.5 million during the first nine months of 2024.

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

Six months ended

Nine months ended

September 30,

(dollars in thousands)

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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 %)

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

As of June 30, 2024, deposit liabilities accounted for approximately 82.0% of our total liabilities and equity.

As of September 30, 2024, deposit liabilities accounted for approximately 81.1% 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.

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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 $3.40 billion and $3.43 billion as of June 30, 2024 and December 31, 2023, respectively.

Noninterest-bearing deposits at June 30, 2024 and December 31, 2023, were $975.8 million and $1.05 billion, respectively, while interest-bearing deposits were $2.42 billion and $2.38 billion at June 30, 2024 and December 31, 2023, respectively.

Total deposits were $3.48 billion and $3.43 billion as of September 30, 2024 and December 31, 2023, respectively.

Noninterest-bearing deposits at September 30, 2024 and December 31, 2023, were $1.02 billion and $1.05 billion, respectively, while interest-bearing deposits were $2.46 billion and $2.38 billion at September 30, 2024 and December 31, 2023, respectively.

Like most in the banking industry, the Bank has seen a shift in its deposit portfolio from noninterest-bearing deposits to interest-bearing deposits as prevailing interest rates have increased over the last several quarters.

At June 30, 2024, we had a total of $612.5 million in certificates of deposit, including $0.7 million of brokered deposits.

At September 30, 2024, we had a total of $649.7 million in certificates of deposit, including $20.1 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:

Six months ended

June 30, 2024

Nine months ended

September 30, 2024

December 31, 2023

June 30, 2023

September 30, 2023

(dollars in thousands)

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Brokered deposits

The following table provides information on maturities of certificates of deposits which exceed FDIC insurance limits of $250,000 as of June 30, 2024:

The following table provides information on maturities of certificates of deposits which exceed FDIC insurance limits of $250,000 as of September 30, 2024:

Time Deposits over FDIC

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

Six months ended

Nine months ended

(dollars in thousands)

June 30, 2024

September 30, 2024

December 31, 2023

June 30, 2023

September 30, 2023

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

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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 $90.3 million and $35.3 million of advances outstanding from the FHLB at June 30, 2024 and December 31, 2023, respectively.

The total loans pledged as collateral were $1.47 billion and $1.49 billion at June 30, 2024 and December 31, 2023.

There were no outstanding letters of credit from the FHLB at June 30, 2024 or December 31, 2023.

There were $135.3 million and $35.3 million of advances outstanding from the FHLB at September 30, 2024 and December 31, 2023, respectively.

The total loans pledged as collateral were $1.45 billion and $1.49 billion at September 30, 2024 and December 31, 2023.

There were no outstanding letters of credit from the FHLB at September 30, 2024 or December 31, 2023.

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

Six months ended

Nine months ended

(dollars in thousands)

June 30, 2024

September 30, 2024

December 31, 2023

June 30, 2023

September 30, 2023

Average daily amount of borrowings outstanding during the period

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

As of June 30, 2024 and December 31, 2023, outstanding balances under these agreements totaled $6.0 million.

As of September 30, 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 June 30, 2024 and December 31, 2023, outstanding balances under these agreements totaled $6.0 million.

As of September 30, 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.

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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 $128.0 million and included minimal gross unrealized gains and gross unrealized losses of $12.9 million at June 30, 2024.

The fair value of securities available for sale totaled $128.4 million and included $0.2 gross unrealized gains and gross unrealized losses of $9.4 million at September 30, 2024.

At December 31, 2023, the fair value of securities available for sale totaled $142.2 million and included gross unrealized gains of $0.1 million and gross unrealized losses of $12.2 million.

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

Securities held to maturity totaled $110.6 million at June 30, 2024 and $103.3 million at December 31, 2023.

The Company had recognized minimal net losses on sales of securities during the six months ended June 30, 2024.

The Company had recognized net losses on sales of securities of $0.1 million during the six months ended June 30, 2023.

The following tables set forth the composition and maturities of investment securities as of June 30, 2024 and December 31, 2023.

Securities held to maturity totaled $109.2 million at September 30, 2024 and $103.3 million at December 31, 2023.

The Company had recognized minimal net losses on sales of securities during the nine months ended September 30, 2024.

The Company had recognized net losses on sales of securities of $0.1 million during the nine months ended September 30, 2023.

The following tables set forth the composition and maturities of investment securities as of September 30, 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 June 30, 2024

At September 30, 2024

(dollars in thousands)

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Total held to maturity securities

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

As of June 30, 2024 and December 31, 2023, no allowance for credit losses on securities AFS was recognized.

Weighted Average Yield is shown on a fully taxable equivalent basis using a federal tax rate of 21% and includes the amortization of premiums and discounts.

As of September 30, 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 June 30, 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.

The Company does not believe there are any expected credit losses in its HTM securities portfolio at June 30, 2024 or December 31, 2023.

Furthermore, as of September 30, 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.

The Company does not believe there are any expected credit losses in its HTM securities portfolio at September 30, 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 June 30, 2024, 211 debt securities had gross unrealized losses, with an aggregate depreciation of 5.5% from our amortized cost basis.

As of September 30, 2024, 184 debt securities had gross unrealized losses, with an aggregate depreciation of 3.0% from our amortized cost basis.

The largest unrealized loss percentage of any single security was 20.1% (or $0.8 million) of its amortized cost.

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Capital Adequacy.

Total stockholders’ equity was $614.6 million at June 30, 2024 compared to $619.8 million at December 31, 2023.

Total stockholders’ equity was $628.9 million at September 30, 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.

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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 June 30, 2024, and brokered deposits are not restricted.

The Bank was well capitalized at September 30, 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 June 30, 2024

At September 30, 2024

Bank First Corporation:

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Tier I capital (to average assets)

As previously mentioned, the Company carried $12.0 million of subordinated debt as of June 30, 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.

As previously mentioned, the Company carried $12.0 million of subordinated debt as of September 30, 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.

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

Amounts of Commitments Expiring - By Period as of June 30, 2024

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