What changed in this filing

/stocks — the workspaceLOADING

Item 1A. Risk Factors

2023-03-07 compared with 2022-03-02 · 72 added, 74 removed, 216 unchanged (40% of the section changed)

10 unchanged sentences

A significant decline in general economic conditions caused by inflation, recession, tariffs, unemployment, changes in securities markets, changes in housing market prices, geopolitical uncertainties, natural disasters, pandemics and election outcomes or other factors could impact economic conditions and, in turn, could have a material adverse effect on our financial condition and results of operations.

In particular, the COVID-19 pandemic, restrictions intended to prevent and mitigate its spread, challenges related to vaccination rollout and new variants of the virus has and is expected to continue to (and the future outbreak of other highly infectious or contagious diseases likely would) significantly and negatively impact financial markets and economic conditions in our markets, the United States and globally.

As a result, consumer confidence and consumer credit factors have been, and may be further, negatively impacted.

Consequently, our business, financial condition and results of operations have been and could be further significantly and adversely affected.

See also “ The COVID-19 pandemic may continue to cause adverse economic conditions and could have an adverse impact on our financial condition and our results of operations and other aspects of our business.

The COVID-19 pandemic may continue to cause adverse economic conditions and could have an adverse impact on our financial condition and our results of operations and other aspects of our business.

We are closely monitoring developments related to the COVID-19 pandemic to assess its impact on our business.

While still evolving, the COVID-19 pandemic has caused significant economic and financial turmoil both in the U.S.

and around the world, and has fueled concerns that it may lead to a global recession.

These conditions may continue and worsen in the near term.

At this time, it is not possible to estimate how long it will take to halt the spread of the virus or the long term effects that the COVID-19 pandemic could have on our business.

The extent to which the COVID-19 pandemic impacts our business, results of operations, financial condition, liquidity or prospects will depend on future developments which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic and the actions taken to contain or address its impact.

While we have implemented risk management and contingency plans and taken preventive measures and other precautions, no predictions of specific scenarios can be made with respect to the COVID-19 pandemic and such measures may not adequately predict the impact on our business from such events.

Currently, many of our employees have been working remotely for an extended period of time.

An extended period of remote work arrangements could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business.

Increased economic uncertainty and increased unemployment resulting from the economic impacts of the spread of COVID-19 may also adversely impact the ability of borrowers to repay outstanding loans, or could substantially weaken the value of collateral securing those loans.

In addition, any resulting downward pressure on real estate values could increase the potential for problem loans and thus have a direct impact on our consolidated results of operations.

We participate as an approved lender pursuant to the Paycheck Protection Program, which was established under the congressionally-approved Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S.

Small Business Administration (the “SBA”).

The Paycheck Protection Program gives small businesses and self-employed individuals guaranteed loans and loan forgiveness to stay in business during the COVID-19 pandemic, subject to certain requirements.

As an SBA-approved lender, we secured more than $194 million in authorized funding for our customers under the Paycheck Protection Program.

As a result of factors including the fact that the Paycheck Protection Program is a new program that was created urgently in response to the COVID-19 outbreak, lenders and customers have experienced, and may experience further, challenges in the administration and debt forgiveness process.

While governmental and non-governmental organizations are engaging in efforts to combat the spread and severity of the COVID-19 pandemic and related public health issues, these measures may not be effective.

We also cannot predict how legal and regulatory responses to concerns about the COVID-19 pandemic and related public health issues will impact our business.

Such events or conditions could result in regulation or restrictions affecting the conduct of our business in the future.

Inflation may have an adverse impact on our business and on our customers.

Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money.

The annual inflation rate in the United States increased during most of 2022, and, as of December 2022, was 6.5% measured by consumer price index.

As a result, the Federal Reserve has continued to increase the target federal funds rate, and has indicated its intention to continue to increase interest rates in an effort to combat inflation.

As inflation increases, the value of our investment securities, particularly those with longer maturities, would decrease, although this effect can be less pronounced for floating rate instruments.

In addition, inflation increases the cost of goods and services we use in our business operations, such as electricity and other utilities, which increases our non-interest expenses.

Furthermore, our customers are also affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us.

Acts or threats of terrorism and political or military actions by the United States or other governments could adversely affect general economic industry conditions.

1 unchanged sentence

Acts or threats of terrorism and political actions taken by the United States or other governments in response to terrorism, or similar activity, could adversely affect general or industry conditions and, as a result, our consolidated financial condition and results of operations.

Deterioration in the markets for residential real estate, including secondary residential mortgage loan markets, could reduce our net income and profitability.

During the severe recession that lasted from 2007 to 2009, softened residential housing markets, increased delinquency and default rates, and volatile and constrained secondary credit markets negatively impacted the mortgage industry.

Our financial results were adversely affected by these effects including changes in real estate values, primarily in Wisconsin and Minnesota, and our net income declined as a result.

Decreases in real estate values adversely affected the value of property used as collateral for loans as well as investments in our portfolio.

Continued slow growth in the economy since 2009 resulted in increased competition and lower rates, which has negatively impacted our net income and profits.

The foregoing changes could affect our ability to originate loans and deposits, the fair value of our financial assets and liabilities and the average maturity of our securities portfolio.

An increase in the level of interest rates may also adversely affect the ability of certain of our borrowers to repay their obligations.

If interest rates paid on deposits or other borrowings were to increase at a faster rate than the interest rates earned on loans and investments, our net income would be adversely affected.

The COVID-19 pandemic may continue to impact economic conditions and affect our financial condition, our results of operations and other aspects of our business.

The COVID-19 pandemic caused significant economic dislocation in the United States and internationally, resulting in a slow-down in economic activity, increased unemployment levels, and disruptions in global supply chains and financial markets.

The pandemic and related government actions to curb its spread also resulted in closures of many organizations and the institution of social distancing requirements in many states and communities.

In response to the pandemic, various state governments and federal agencies required lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees).

Federal banking agencies encouraged financial institutions to prudently work with affected borrowers and legislation provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak.

The spread of the coronavirus also caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences.

Given the ongoing dynamic nature of variants of COVID-19, it is difficult to predict the full impact of the COVID-19 pandemic outbreak on our business.

As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to a number of risks, any of which could have an adverse effect on our business, financial condition, liquidity, results of operations, ability to execute our growth strategy, and ability to pay dividends.

These risks include, but are not limited to:

changes in demand for our products and services;

increased loan losses or other impairments in our loan portfolios and increases in our allowance for loan losses;

a decline in collateral for our loans, especially real estate;

unanticipated unavailability of employees;

increased cyber security risks as employees work remotely;

a prolonged weakness in economic conditions resulting in a reduction of future projected earnings could necessitate a valuation allowance against our current outstanding deferred tax assets;

a triggering event leading to impairment testing on our goodwill or core deposit and customer relationships intangibles, which could result in an impairment charge;

and increased costs as the Company and our regulators, customers and vendors adapt to evolving pandemic-related conditions.

We are subject to higher lending risks with respect to our commercial and agricultural banking activities which could adversely affect our financial condition and results of operations.

Our loans include commercial and agricultural loans, which include loans secured by real estate as well as loans secured by personal property.

Commercial real estate lending, including agricultural loans, typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property or the business conducted on the property securing the loan.

Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

Agricultural operating loans carry significant risks as they may involve larger balances concentrated with a single borrower or group of related borrowers.

In addition, repayment of such loans depends on the successful operation or management of the farm property securing the loan for which an operating loan is utilized.

Farming operations may be affected by factors outside of the borrower’s control, including adverse weather conditions, such as drought, hail or floods that can severely limit crop yields and declines in market prices for agricultural products.

Although the Bank manages lending risks through its underwriting and credit administration policies, no assurance can be given that such risks will not materialize, in which event, our financial condition, results of operations, cash flows and business prospects could be materially adversely affected.

RISKS RELATED TO OUR BUSINESS AND OPERATIONS

2 unchanged sentences

Our net interest income will be adversely affected if market interest rates change such that the interest we pay on deposits and borrowings increase faster than the interest earned on loans and investments.

As a result of the economic impacts of the COVID-19 pandemic, interest rates in the United States have been reduced, and may be even further reduced.

The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time.

Market interest rates change over

time due to many factors that are beyond our control, including but not limited to:

Market interest rates change over time due to many factors that are beyond our control, including but not limited to:

general economic conditions and government policy decisions, especially policies of the Federal Reserve Bank.

2 unchanged sentences

In particular, reduced interest rates negatively impact our results of operations.

We are subject to lending risk.

2 unchanged sentences

Our exposure to lending risk is managed through the use of consistent underwriting standards, and we avoid highly leveraged transactions as well as excessive industry and other concentrations, but there can be no assurance that our risk mitigation measures will be effective in avoiding undue credit risk.

An increase in interest rates or weakening economic conditions (such as high levels of unemployment), including weakening economic conditions as a result of the COVID-19 pandemic, has and could further adversely impact the ability of borrowers to repay outstanding loans, or could substantially weaken the value of collateral securing those loans.

As of December 31, 2021, the Bank had $6.6 million of COVID-19 related modifications under Section 4013 of the CARES Act remaining.

See “Allowance for Loan Losses” for discussion of COVID-19 qualitative factors, and related provision for loan losses.

An increase in interest rates or weakening economic conditions (such as high levels of unemployment) could further adversely impact the ability of borrowers to repay outstanding

loans, or could substantially weaken the value of collateral securing those loans.

Downward pressure on real estate values could increase the potential for problem loans and thus have a direct impact on our consolidated results of operations.

1 unchanged sentence

Although we exercise prudent due diligence when making loans, we could be subject to environmental liabilities with respect to these properties.

We are subject to higher lending risks with respect to our commercial and agricultural banking activities which could adversely affect our financial condition and results of operations.

Our loans include commercial and agricultural loans, which include loans secured by real estate as well as loans secured by personal property.

Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

Agricultural operating loans carry significant risks as they may involve larger balances concentrated with a single borrower or group of related borrowers.

In addition, repayment of such loans depends on the successful operation or management of the farm property securing the loan for which an operating loan is utilized.

Our allowance for loan losses may be insufficient.

To address risks inherent in our loan portfolio, we maintain an allowance for loan losses that represents management’s best estimate of probable losses that exist within our loan portfolio.

The level of the allowance reflects management’s continuing evaluation of various factors, including specific credit risks, historical loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions, and unidentified losses inherent in the current loan portfolio.

Determining the appropriate level of the allowance for loan losses involves a high degree of subjectivity and requires us to make estimates of significant credit risks, which may undergo material changes.

In evaluating our impaired loans, we assess repayment expectations and determine collateral values based on all information that is available to us.

However, we must often make subjective decisions based on our assumption about the creditworthiness of the borrowers and the values of collateral securing these loans.

Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of our control, may require an increase in our allowance for loan losses.

In addition, bank regulatory agencies periodically examine our allowance for loan losses and may require an increase in the allowance or the recognition of further loan charge-offs, based on judgments different from those of our management.

If charge-offs in future periods exceed our allowance for loan losses, we will need to take additional loan loss provisions to increase our allowance for loan losses.

Any additional loan loss provision will reduce our net income or increase our net loss, which could have a direct material adverse effect on our financial condition and results of operations.

See also “ The COVID-19 pandemic may continue to impact economic conditions and affect our financial condition, our results of operations and other aspects of our business.

Changes in the fair value or ratings downgrades of our securities may reduce our stockholders’ equity, net earnings, or regulatory capital ratios.

At December 31, 2021, $203.1 million of our securities, were classified as available for sale and $71.1 million were classified as held to maturity.

The estimated fair value of our available for sale securities portfolio may increase or decrease depending on market conditions.

Our available for sale securities portfolio is comprised of fixed-rate, and

to a lesser extent, floating rate securities.

We increase or decrease stockholders’ equity by the amount of the change in unrealized gain or loss (the difference between the estimated fair value and amortized cost) of our available for sale securities portfolio, net of the related tax benefit or provision, under the category of accumulated other comprehensive income/loss.

Therefore, a decline in the estimated fair value of this portfolio will result in a decline in our reported stockholders’ equity, as well as our book value per common share and tangible book value per common share.

At December 31, 2022, $166.0 million of our securities, were classified as available for sale (AFS) and $96.4 million were classified as held to maturity (HTM).

The estimated fair value of our AFS securities portfolio may increase or decrease depending on market conditions.

Our AFS securities portfolio is comprised of fixed-rate, and to a lesser extent, floating rate securities.

We increase or decrease stockholders’ equity by the amount of the change in unrealized gain or loss (the difference between the estimated fair value and amortized cost) of our AFS securities portfolio, net of the related tax benefit or provision, under the category of accumulated other comprehensive income/loss.

Therefore, a decline in the estimated fair value of this portfolio due to interest rate changes will result in a decline in our reported stockholders’ equity, as well as our book value per common share and tangible book value per common share.

This decrease will occur even though the securities are not sold.

In the case of debt securities, if these securities are never sold, the decrease may be recovered over the life of the securities.

In the case of debt securities, if these securities are never sold, the decrease will be recovered over the life of the securities.

We conduct a periodic review and evaluation of our securities portfolio to determine if the decline in the fair value of any security below its cost basis is other-than-temporary.

2 unchanged sentences

If we deem such decline to be other-than-temporary related to credit losses, the security is written down to a new cost basis and the resulting loss is charged to earnings as a component of non-interest income in the period in which the decline in value occurs.

At December 31, 2022, U.S.

government issued or U.S.

agency issued securities were carried at $192.7 million or 73.4% of the combined AFS and HTM portfolio.

We have, in the past, recorded other than temporary impairment (“OTTI”) charges, principally arising from investments in non-agency mortgage-backed securities.

5 unchanged sentences

Therefore, ratings downgrades on our securities may also have a material adverse effect on our risk-based regulatory capital levels.

Deterioration in the markets for residential real estate, including secondary residential mortgage loan markets, could reduce our net income and profitability.

Our financial results were adversely affected by these effects including changes in real estate values, primarily in Wisconsin and Minnesota, and our net income declined as a result.

Decreases in real estate values adversely affected the value of property used as collateral for loans as well as investments in our portfolio.

Continued slow growth in the economy since 2009 resulted in increased competition and lower rates, which has negatively impacted our net income and profits.

The foregoing changes could affect our ability to originate loans and deposits, the fair value of our financial assets and liabilities and the average maturity of our securities portfolio.

An increase in the level of interest rates may also adversely affect the ability of certain of our borrowers to repay their obligations.

If interest rates paid on deposits or other borrowings were to increase at a faster rate than the interest rates earned on loans and investments, our net income would be adversely affected.

Our allowance for loan losses may be insufficient.

To address risks inherent in our loan portfolio, we maintain an allowance for loan losses that represents management’s best estimate of probable losses that exist within our loan portfolio.

In evaluating our impaired loans, we assess repayment expectations and determine collateral values based on all information that is available to us.

However, we must often make subjective decisions based on our assumption about the creditworthiness of the borrowers and the values of collateral securing these loans.

If charge-offs in future periods exceed our allowance for loan losses, we will need to take additional loan loss provisions to increase our allowance for loan losses.

Any additional loan loss provision will reduce our net income or increase our net loss, which could have a direct material adverse effect on our financial condition and results of operations.

Competition may affect our results.

21 unchanged sentences

Also, these and other capital investments in our business may not produce expected growth in earnings anticipated at the time of the expenditure.

We may not be successful in introducing new products and

services, achieving market acceptance of our products and services, or developing and maintaining loyal customers, which in turn, could adversely affect our results of operations and profitability.

We may not be successful in introducing new products and services, achieving market acceptance of our products and services, or developing and maintaining loyal customers, which in turn, could adversely affect our results of operations and profitability.

We may not have sufficient pre-tax net income in future periods to fully realize the benefits of our net deferred tax assets.

39 unchanged sentences

We rely on network and information systems and other technologies, and, as a result, we are subject to various Cybersecurity risks.

Cybersecurity refers to the combination of technologies, processes and procedures established to protect

information technology systems and data from unauthorized access, attack, or damage.

Cybersecurity refers to the combination of technologies, processes and procedures established to protect information technology systems and data from unauthorized access, attack, or damage.

Our business involves the storage and transmission of customers’ personal information.

6 unchanged sentences

Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, the outsourcing of some of our business operations and the continued uncertain global economic environment.

As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.

As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate

and remediate any information security vulnerabilities.

Furthermore, the storage and transmission of such data is regulated at the federal and state level.

43 unchanged sentences

The Bank may not be able to generate adequate cash flow to pay us dividends in the future.

The Company’s ability to pay dividends is also subject to the terms of its Subordinated Note Purchase Agreement dated August 27, 2020 and Business Note Agreement dated August 1, 2018, each of which prohibits the Company from declaring or paying dividends while an event of default has occurred and is continuing under each respective agreement.

The Company’s ability to pay dividends is also subject to the terms of its Subordinated Note Purchase Agreements dated August 27, 2020 and March 11, 2022 and Business Note Agreement dated June 26, 2019 each of which prohibits the Company from declaring or paying dividends while an event of default has occurred and is continuing under each respective agreement.

The Company has pledged 100% of Bank stock as collateral for the loan and credit facilities provided for by the Business Note Agreement.

24 unchanged sentences

Any change in such regulation and oversight, whether in the form of regulatory policy, new regulations or legislation, or additional deposit insurance premiums could have a material impact on our operations.

Failure to comply with applicable laws, regulations or policies could result in sanction by regulatory agencies, civil monetary penalties, and/or damage to our reputation, which could have a material adverse effect on our business, consolidated financial condition and results of operations.

effect on our business, consolidated financial condition and results of operations.

In addition, any change in government regulation could have a material adverse effect on our business or our ability to pay dividends.

3 unchanged sentences

On January 31, 2020, the Federal Reserve Board approved the issuance of a final rule (which became effective October 1, 2020) that clarified and codified the Federal Reserve’s standards for determining whether one company has control over another.

The final rule established four categories of tiered presumptions of noncontrol that are based on the percentage of voting shares held by the investor (less than 5%, 5-9.9%, 10-14.9% and 15-24.9%) and the presence of other indicia of control.

As the percentage of ownership increases, fewer indicia of control are permitted without falling outside of the presumption of noncontrol.

The final rule established four categories of tiered presumptions of non-control that are based on the percentage of voting shares held by the investor (less than 5%, 5-9.9%, 10-14.9% and 15-24.9%) and the presence of other indicia of control.

As the percentage of ownership increases, fewer indicia of control are permitted without falling outside of the presumption of non-control.

These indicia of control include nonvoting equity ownership, director representation, management interlocks, business relationship and restrictive contractual covenants.

24 unchanged sentences

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

What changed 10-K

Item 1A. Risk Factors