What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-03 compared with 2023-08-03 · 174 added, 169 removed, 657 unchanged (34% of the section changed)

5 unchanged sentences

Such forward-looking statements are inherently subject to many uncertainties in the Company’s operations and business environment.

Factors that could affect actual results or outcomes include the matters described under the caption “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 7, 2023 (“2022 10-K”), the matters described in “Risk Factors” in Item 1A for the quarter ended March 31, 2023 and in Item 1A of this Form 10-Q, and the following:

Factors that could affect actual results or outcomes include the matters described under the caption “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 7, 2023 (“2022 10-K”), the matters described in “Risk Factors” in Item 1A for the quarters ended March 31, 2023 and June 30, 2023 and in Item 1A of this Form 10-Q, and the following:

• conditions in the financial markets and economic conditions generally;

31 unchanged sentences

The forward-looking statements made herein are only made as of the date of this filing and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances occurring after the date of this report.

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of June 30, 2023, and our consolidated results of operations for the three and six months ended June 30, 2023, compared to the same periods in the prior fiscal year for the three and six months ended June 30, 2022.

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of September 30, 2023, and our consolidated results of operations for the three and nine months ended September 30, 2023, compared to the same periods in the prior fiscal year for the three and nine months ended September 30, 2022.

This discussion should be read in conjunction with the interim consolidated financial statements and the condensed notes thereto included with this report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes related thereto included in our 2022 10-K.

15 unchanged sentences

The allowance is based on ongoing, quarterly assessments of the estimated lifetime losses in our loan portfolio.

In evaluating the level of the allowance for loan loss, we consider the types of loans and the amount of loans in our loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, prevailing economic conditions and other relevant factors determined by management.

In evaluating the level of the allowance for credit losses, we consider the types of loans and the amount of loans in our loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, prevailing economic conditions and other relevant factors determined by management.

We follow all applicable regulatory guidance, including the “Interagency Policy Statement on Allowances for Credit losses,” issued by the Office of the Comptroller of the Currency, Department of the Treasury, Federal Deposit Insurance Corporation, and National Credit Union Administration.

19 unchanged sentences

A reporting unit is defined as any distinct, separately identifiable component of the Company’s one operating segment for which complete, discrete financial information is available and reviewed regularly by the segment’s management.

The Company has one reporting unit as of June 30, 2023, which is related to its banking activities.

The Company has one reporting unit as of September 30, 2023, which is related to its banking activities.

The Company performed the required goodwill impairment test and determined that goodwill was not impaired as of December 31, 2022.

22 unchanged sentences

We believe that the deferred tax assets and liabilities are adequate and properly recorded in the accompanying consolidated financial statements.

As of June 30, 2023, management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary.

The Wisconsin state budget, signed July 5, 2023, and effective January 1, 2023, made originated loans in Wisconsin for business purposes up to $5 million non-taxable.

This change resulted in the Company reducing its estimated future effective tax rate at which it will likely recognize its deferred tax asset arising from

unrealized losses on AFS securities.

As a result, the Company recorded a $1.8 million valuation allowance against this deferred tax asset in the quarter ended September 30, 2023.

STATEMENT OF OPERATIONS ANALYSIS

6 unchanged sentences

Net interest margin currently exceeds interest rate spread because non-interest-bearing sources of funds (“net free funds”), principally demand deposits and stockholders’ equity, also support interest earning assets.

The narrative below discusses net interest income, interest rate spread, and net interest margin for the three and six-month periods ended June 30, 2023, and June 30, 2022, respectively.

Net interest income was $11.7 million and $24.5 million for the three and six months ended June 30, 2023, respectively, compared to $14.3 million and $27.4 million for the three and six months ended June 30, 2022, respectively.

Net interest income for the three months ended June 30, 2023, decreased from the same period one year ago due to:

The narrative below discusses net interest income, interest rate spread, and net interest margin for the three and nine-month periods ended September 30, 2023, and September 30, 2022, respectively.

Net interest income was $12.1 million and $36.6 million for the three and nine months ended September 30, 2023, respectively, compared to $14.5 million and $41.9 million for the three and nine months ended September 30, 2022, respectively.

Net interest income for the three months ended September 30, 2023, decreased from the same period one year ago due to:

1) higher deposit and borrowing balances and costs and 2) a $0.3 million reduction in the accretion on purchased loans.

This was partially offset by:

1) positive loan volume variance due to growth in loans outstanding and 2) increases in loan and investment yields due to both contractual repricing and higher coupons on new loans and investments in excess of portfolio yield.

The net interest margin for the three-month period ended June 30, 2023, was 2.72%, compared to 3.46% for the three-month period ended June 30, 2022.

The net interest margin for the three-month period ended September 30, 2023, was 2.79%, compared to 3.43% for the three-month period ended September 30, 2022.

The net interest margin decrease was due to:

2) the impact of higher short-term interest rates which increased FHLB advance and other borrowing costs;

and 3) a 13-basis point decrease in accretion on purchased loans.

This was partially offset by increases in loan and investment yields due to contractual repricing and rates on new loans and investments exceeding the portfolio as a whole.

Net interest income for the six months ended June 30, 2023, decreased from the same period one year ago due to:

1) higher deposit and borrowing balances and related costs;

2) $0.8 million reduction in the accretion on purchased loans;

and 3) $0.3 million of lower SBA PPP accretion, as the last SBA PPP loan was repaid in second quarter 2022.

1) higher deposit costs due to strategic increases in deposit rates to maintain a strong deposit base and customers moving from lower cost savings and money market accounts to higher yielding certificate accounts, 2) the impact of higher short-term interest rates which increased FHLB advance and other borrowing costs, and 3) a six-basis point decrease in accretion on purchased loans.

This was partially offset by:

1) increases in loan and investment yields due to contractual repricing, 2) rates on new loans and investments exceeding the portfolio as a whole, and 3) a ten-basis point increase in yield due to income realized on the payoff of a nonaccrual loan.

Net interest income for the nine months ended September 30, 2023, decreased from the same period one year ago due to:

1) higher deposit and borrowing balances and related costs, 2) $1.0 million reduction in the accretion on purchased loans, and 3) $0.3 million of lower SBA PPP accretion, as the last SBA PPP loan was repaid in second quarter 2022.

This was partially offset by:

The net interest margin for the six-month period ended June 30, 2023, was 2.88%, compared to 3.35% for the six-month period ended June 30, 2022.

The net interest margin for the nine-month period ended September 30, 2023, was 2.85%, compared to 3.38% for the nine-month period ended September 30, 2022.

The net interest margin decrease was due to:

1) higher deposit and FHLB borrowing costs;

2) an 8- basis point decrease in accretion on purchased loans;

3) a 3-basis point decrease on SBA PPP accretion;

and 4) the impact of additional interest expense of the subordinated debt issued in March 2022.

1) higher deposit and FHLB borrowing costs, 2) a seven-basis point decrease in accretion on purchased loans, 3) a two-basis point decrease on SBA PPP accretion, and 4) the impact of additional interest expense of the subordinated debt issued in March 2022.

These decreases were partially offset by increases in loan and investment yields, due to both contractual repricing and higher coupons on new loans and investments in excess of portfolio yield.

1 unchanged sentence

The following net interest income analysis table presents interest income from average interest earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates on a tax equivalent basis.

Shown below is the weighted average tax equivalent yield on interest earning assets, rates paid on interest-bearing liabilities and the resultant spread at or during the three-month and six-month periods ended June 30, 2023 and June 30, 2022.

Shown below is the weighted average tax equivalent yield on interest earning assets, rates paid on interest-bearing liabilities and the resultant spread at or during the three-month and nine-month periods ended September 30, 2023 and September 30, 2022.

Non-accruing loans have been included in the table as loans carrying a zero yield.

1 unchanged sentence

(Dollar amounts in thousands)

Three months ended June 30, 2023 compared to the three months ended June 30, 2022:

Three months ended June 30, 2023

Three months ended June 30, 2022

Three months ended September 30, 2023 compared to the three months ended September 30, 2022:

Three months ended September 30, 2023

Three months ended September 30, 2022

Balance Interest

23 unchanged sentences

(1) Fully taxable equivalent (FTE).

The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the quarters ended June 30, 2023, and June 30, 2022.

The FTE adjustment to net interest income included in the rate calculations totaled $0 and $0 thousand for the three months ended June 30, 2023, and June 30, 2022, respectively.

The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the quarters ended September 30, 2023, and September 30, 2022.

The FTE adjustment to net interest income included in the rate calculations totaled $0 and $0 thousand for the three months ended September 30, 2023, and September 30, 2022, respectively.

NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS

(Dollar amounts in thousands)

Six months ended June 30, 2023 compared to the six months ended June 30, 2022:

Six months ended June 30, 2023 Six months ended June 30, 2022

Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022:

Nine months ended September 30, 2023 Nine months ended September 30, 2022

Balance Interest

23 unchanged sentences

(1) Fully taxable equivalent (FTE).

The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the six months ended June 30, 2023 and June 30, 2022.

The FTE adjustment to net interest income included in the rate calculations totaled $0 and $1 thousand for the six-month periods ended June 30, 2023 and June 30, 2022, respectively.

The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the nine months ended September 30, 2023 and September 30, 2022.

The FTE adjustment to net interest income included in the rate calculations totaled $0 and $1 thousand for the nine-month periods ended September 30, 2023 and September 30, 2022, respectively.

Rate/Volume Analysis.

3 unchanged sentences

Rate changes have been discussed previously in the net interest income section above.

For the three and six months ended June 30, 2023, compared to the same period in 2022, the loan volume increased due to strong organic growth.

The increase in certificate volumes is due to CD growth, with some of this growth moving from money market accounts.

Investment securities volume decreases for the three and six months ended June 30, 2023, compared to the three and six months ended June 30, 2022, are primarily due to:

1) principal repayments and sales, net of purchases and 2) unrealized losses in the available for sale securities portfolio.

For the three and nine months ended September 30, 2023, compared to the same period in 2022, the loan volume increased due to strong organic growth.

The increase in certificate volumes is due to CD growth, with some of this growth moving from non-maturity deposits and to a lesser extent, brokered CD growth.

Investment securities volume decreases for the three and nine months ended September 30, 2023, compared to the three and nine months ended September 30, 2022, are primarily due to:

1) principal repayments and sales, net of purchases and 2) unrealized losses in the available for sale securities portfolio, partially offset by modest floating-rate purchases in the first quarter of 2023.

RATE / VOLUME ANALYSIS

(Dollar amounts in thousands)

Three months ended June 30, 2023 compared to the three months ended June 30, 2022.

Three months ended September 30, 2023 compared to the three months ended September 30, 2022.

Increase (decrease) due to

16 unchanged sentences

Net interest income $ 305 $ (2,641) $ (2,336)

Six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

Increase (decrease) due to

24 unchanged sentences

Lifetime losses on these loans are estimated based on the loans’ individual characteristics.

Total provision for credit losses for the three months ended June 30, 2023, was $0.45 million, compared to $0.40 million for the three months ended June 30, 2022.

The total provision for credit losses for the 6-month period ending June 30, 2023 was $0.5 million, compared to $0.4 million for the same period in the prior year.

The current year’s provision is primarily the result of growth in the loan portfolio, partially offset by minimal net recoveries of $0.03 million and reductions in reserves on individually evaluated loans.

Based on loan growth and changes in economic conditions, the provision would have been $1.4 million in the second quarter of 2023.

This was offset by a reduction in specific reserves of $0.95 million with reduction approximately evenly split between payoffs of nonaccrual loans and improvement in the collateral position on substandard and nonaccruals.

Continued improving economic conditions in our markets, as evidenced by unemployment rates below the national average in our two largest population centers, have resulted in improving overall economic trends for businesses, with the impact of higher interest rates and the impact of an inverted yield forecast in our third-party model of economic condition to result in economic slowdown.

Total benefit, i.e.

negative provision, for credit losses for the three months ended September 30, 2023, was $0.325 million, compared to provision of $0.375 million for the three months ended September 30, 2022.

The decrease in provision for credit losses was primarily due to net recoveries from the payoff of a nonaccrual agricultural loan and the impact of the payoff of two larger loans.

The total provision for credit losses for the nine-month period ending September 30, 2023 was $0.175 million, compared to $0.775 million for the same period in the prior year.

The current year’s provision is primarily the result of growth in the loan portfolio, which partially offset the combined positive impact of net recoveries of $0.187 million, reductions in reserves on individually evaluated loans and third quarter loan payoffs.

Note that in discussing ACL allocations, the entire ACL balance is available for any loan that, in management’s judgment, should be charged off.

Management believes that the provision recorded for the current year’s three and six-month periods is adequate in view of the present condition of our loan portfolio and the sufficiency of collateral supporting our non-performing loans.

Management believes that the provision recorded for the current year’s three and nine-month periods is adequate in view of the present condition of our loan portfolio and the sufficiency of collateral supporting our non-performing loans.

We continually monitor non-performing loan relationships and will adjust our provision, as necessary, if changing facts and circumstances require a change in the ACL.

2 unchanged sentences

Non-interest Income .

The following table reflects the various components of non-interest income for the three and six- month periods ended June 30, 2023 and 2022, respectively.

Three months ended June 30, Six months ended June 30,

The following table reflects the various components of non-interest income for the three and nine- month periods ended September 30, 2023 and 2022, respectively.

Three months ended September 30, Nine months ended September 30,

2023 2022 % Change 2023 2022 % Change

8 unchanged sentences

Total non-interest income $ 2,565 $ 2,472 3.76 % $ 7,770 $ 7,557 2.82 %

Loan servicing income decreased due to reduced capitalization of mortgage servicing rights resulting from lower mortgage loan origination volume in both the three and six-month periods ended June 30, 2023, compared to the same prior year periods, along with lower mortgage servicing income due to servicing a smaller portfolio.

Gain on sale of loans increased in the current three-month period ended June 30, 2023, compared to the three months ended June 30, 2022, due to increased SBA gains, modestly offset by lower mortgage gains.

For the six months ended June 30, 2023, compared June 30, 2022, increased SBA gains more that offset lower mortgage gains.

Loan fees and services charges are lower for the three and six-month periods ended June 30, 2023, compared to the same periods in 2022 due to lower customer activity .

The change in net gains (losses) on investment securities between the three and six months ended June 30, 2023, and the three and six months ended June 30, 2022, is primarily due to the change in valuations of equity securities and a small gain on the sale of available for sale securities in the second quarter of 2023 .

Loan servicing income decreased due to reduced capitalization of mortgage servicing rights resulting from lower mortgage loan origination volume for the nine-month period ended September 30, 2023, compared to the same prior year period, along with lower mortgage servicing income due to servicing a smaller portfolio.

For the three-month period ended September 30, 2023, compared to the same prior year period, lower loan servicing income was offset by higher capitalization of mortgage servicing rights.

Gain on sale of loans increased in the current three-month period ended September 30, 2023, compared to the three months ended September 30, 2022, due to modestly higher SBA gains and higher mortgage gains.

For the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, increased SBA gains more than offset lower mortgage gains.

Loan fees and services charges are lower for the three and nine-month periods ended September 30, 2023, compared to the same periods in 2022 due to lower customer activity.

The change in net gains (losses) on investment securities between the three and nine months ended September 30, 2023, and the three and nine months ended September 30, 2022, is primarily due to the change in valuations of equity securities and a small gain on the sale of available for sale securities in the second quarter of 2023.

Non-interest Expense.

The following table reflects the various components of non-interest expense for the three and six-month periods ended June 30, 2023 and 2022, respectively.

Three months ended June 30, Six months ended June 30,

The following table reflects the various components of non-interest expense for the three and nine-month periods ended September 30, 2023 and 2022, respectively.

Three months ended September 30, Nine months ended September 30,

2023 2022 % Change 2023 2022 % Change

13 unchanged sentences

Non-interest expense (annualized) / Average assets 2.15 % 2.51 % (14.34) % 2.18 % 2.38 % (8.40) %

Amortization of intangible assets for three and six months ended June 30, 2023, decreased from the same prior year periods, as intangible assets related to certain acquisitions have been fully amortized.

Mortgage servicing rights expense, net decreased for the three months ended June 30, 2023, compared to the comparable prior year period due to lower forecasted prepayments and the impact of a lower balance of loans serviced for others.

Amortization expense increased for the six-month period ended June 30, 2023 due to the impact of a $566 thousand of impairment reversal recorded in the comparable prior year period, partially offset by lower amortization due to lower forecasted prepayments and the impact of a lower balance of loans serviced for others.

Advertising, marketing and public relations expense decreased for the three and six months ended June 30, 2023, compared to the prior year periods, as the timing of related spending is expected to be more heavily weighted more toward the last half of 2023 such that 2023 and 2022 yearly expenses are expected to be approximately equal .

The FDIC insurance premium increased for the three and six-month period ended June 30, 2023, from the comparable prior year period due to an increase in the FDIC assessment rate.

Compensation expense for the three and nine months ended September 30, 2023, decrease from the prior year period is largely due to lower incentive compensation due to lower production volumes and lower net income.

Amortization of intangible assets for three and nine months ended September 30, 2023, decreased from the same prior year periods, as intangible assets related to certain acquisitions have been fully amortized .

Mortgage servicing rights expense, net decreased for the three months ended September 30, 2023, compared to the comparable prior year period due to lower forecasted prepayments and the impact of a lower balance of loans serviced for others.

Amortization expense increased for the nine-month period ended September 30, 2023, due to the impact of a $566 thousand impairment reversal recorded in the comparable prior year period, partially offset by lower amortization due to lower forecasted prepayments and the impact of a lower balance of loans serviced for others.

Advertising, marketing and public relations expense decreased for the three and nine months ended September 30, 2023, compared to the prior year periods, due to management’s intentional decision to limit expenditures.

The FDIC insurance premium increased for the three and nine-month periods ended September 30, 2023, from the comparable prior year periods due to an increase in the FDIC assessment rate.

This was partially offset by the favorable impact of increased bank capital ratios, largely due to both a $15 million capital injection following the Company’s subordinated debt issuance in March of 2022, and the impact of growth in the Bank’s retained earnings .

Professional services costs decreased during the three months ended June 30, 2023, from the comparable prior year period due to a decrease in the use of outside professionals as projects needing outside professionals decreased.

For the six-month period ended June 30, 2023, professional services costs increased due to slightly higher professional services costs in the first quarter of 2023 compared to first quarter 2022, partially offset by the second quarter decrease in 2023.

In the first quarter of 2022, the Bank invested $4.1 million in a New Market Tax Credit.

3 unchanged sentences

Under ASU 2023-02, the amortization of the investment is now included in income tax expense.

The increase in other expenses during the three and six months ended June 30, 2023, from the comparable prior year periods is largely related to costs related to expenses to support new products and product expansion.

The decrease in other expenses during the three and nine months ended September 30, 2023, from the comparable prior year periods is largely related to branch closure costs incurred in the third quarter of 2022.

Income Taxes.

Income tax expense was $1.1 and $2.4 million for the three and six months ended June 30, 2023, respectively, compared to $1.4 and $2.9 million for the three and six months ended June 30, 2022.

The effective tax rate was 25.5% for the three and six-month periods ended June 30, 2023, compared to 24.4% and 24.3% for the comparable prior year periods.

The higher effective tax rate is due to the impact of the New Market Tax Credit investment depletion, now being included in income tax expense, partially offset by the impact of lower pre-tax income.

Income tax expenses were $2.544 million and $4.895 million for the three and nine months ended September 30, 2023, respectively, compared to $1.284 million and $4.201 million for the three and nine months ended September 30, 2022.

The effective tax rate was 50.5% and 34.3% for the three and nine-month periods ended September 30, 2023, compared to 24.3% for both of the comparable prior year periods.

The Wisconsin state budget, signed by Governor Evers on July 5, 2023, provides financial institutions a tax exemption on income earned on Wisconsin commercial and agricultural loans up to $5 million retroactive to January 1, 2023.

This change reduces the Company’s 2023 Wisconsin state income tax rate and thus, its overall effective tax rate.

The third quarter ended September 30, 2023, reflects three quarters of the related 2023 tax benefit, retroactive to January 1, 2023, as a reduction of income tax expense.

This positive impact was more than offset by a one-time tax expense of $1.8 million reflecting the impact of the lower 2023 Wisconsin state tax rate on the future realization of existing net deferred tax assets.

In addition, the impact of the New Market Tax Credit investment depletion, now being included in income tax expense, increased the income tax rate, while lower pre-tax income reduced current period income tax expense.

BALANCE SHEET ANALYSIS

Cash and Cash Equivalents.

Our cash balances increased $7.6 million to $43.0 million compared to $35.4 million at December 31, 2022, as we increased our interest-bearing cash deposits at the Federal Reserve by $12.4 million at June 30, 2023, compared to December 31, 2022.

Our cash balances decreased $2.9 million to $32.5 million compared to $35.4 million at December 31, 2022, as we increased our interest-bearing cash deposits at the Federal Reserve by $6.8 million and cash items in process decreased $9.7 million from December 31, 2022, to September 30, 2023.

Investment Securities.

1 unchanged sentence

Our investment portfolio is comprised of securities available for sale and securities held to maturity.

Securities available for sale, which represent the majority of our investment portfolio, were $161.1 million at June 30, 2023, compared with $166.0 million at December 31, 2022.

Securities available for sale, which represent the majority of our investment portfolio, were $153.4 million at September 30, 2023, compared with $166.0 million at December 31, 2022.

The decrease in the available for sale portfolio is primarily due to the sale of $5.1 million of floating-rate SBA backed pass-through securities, principal repayments, and an increase in the unrealized loss of $5.3 million arising during the period, partially offset by the purchases of $11.0 million of primarily floating rate SBA backed pass-through securities.

Securities held to maturity decreased to $93.8 million at June 30, 2023, compared to $96.4 million at December 31, 2022.

Securities held to maturity decreased to $92.3 million at September 30, 2023, compared to $96.4 million at December 31, 2022.

This decrease was due to principal repayments.

The unrealized loss on the held to maturity portfolio decreased by $0.5 million in the first half of 2023, to $19.1 million.

The unrealized loss on the held to maturity portfolio increased by $4.0 million in the first three quarters of 2023, to $23.6 million.

The amortized cost and market values of our available for sale securities by asset categories as of the dates indicated below were as follows:

Available for sale securities Amortized

June 30, 2023

September 30, 2023

government agency obligations $ 17,452 $ 17,318

11 unchanged sentences

Held to maturity securities Amortized

June 30, 2023

September 30, 2023

Obligations of states and political subdivisions $ 600 $ 552

6 unchanged sentences

The composition of our available for sale portfolios by credit rating as of the dates indicated below was as follows:

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Available for sale securities Amortized

8 unchanged sentences

The composition of our held to maturity portfolio by credit rating as of the dates indicated was as follows:

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Held to maturity securities Amortized

3 unchanged sentences

Total $ 92,336 $ 68,752 $ 96,379 $ 76,779

At June 30, 2023, the Bank has pledged mortgage-backed securities with a carrying value of $30.0 million as collateral against a borrowing line of credit with the Federal Reserve Bank with no borrowings outstanding on this line of credit.

As of June 30, 2023, the Bank has pledged U.S.

At September 30, 2023, the Bank has pledged mortgage-backed securities with a carrying value of $29.5 million as collateral against a borrowing line of credit with the Federal Reserve Bank with no borrowings outstanding on this line of credit.

As of September 30, 2023, the Bank has pledged U.S.

Government Agency securities with a carrying value of $0.5 million and mortgage-backed securities with a carrying value of $1.9 million as collateral against specific municipal deposits.

As of June 30, 2023, the Bank also has mortgage-backed securities with a carrying value of $0.2 million pledged as collateral to the Federal Home Loan Bank of Des Moines.

As of September 30, 2023, the Bank also has mortgage-backed securities with a carrying value of $0.7 million pledged as collateral to the Federal Home Loan Bank of Des Moines.

At December 31, 2022, the Bank had pledged certain of its mortgage-backed securities with a carrying value of $5.4 million as collateral to secure a line of credit with the Federal Reserve Bank with no borrowings outstanding on this line of credit.

2 unchanged sentences

As of December 31, 2022, the Bank also had mortgage-backed securities with a carrying value of $0.1 million pledged as collateral to the Federal Home Loan Bank of Des Moines.

Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, increased by $13.2 million, to $1.42 billion as of June 30, 2023, from $1.41 billion at December 31, 2022.

The following table reflects the composition, of our loan portfolio at June 30, 2023, and December 31, 2022:

June 30, 2023 December 31, 2022

Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, increased by $35.7 million, to $1.45 billion as of September 30, 2023, from $1.41 billion at December 31, 2022.

The following table reflects the composition, of our loan portfolio at September 30, 2023, and December 31, 2022:

September 30, 2023 December 31, 2022

Amount Percent Amount Percent

58 unchanged sentences

In addition, various regulatory agencies periodically review the ACL.

These agencies may require the company to make additions to the ACL or may require that certain loan balances be charged off or downgraded into classified loan categories when the agencies’s evaluation differs from management’s evaluation based on their judgments of collectability from the information available to them at the time of examination.

These agencies may require the Company to make additions to the ACL or may require that certain loan balances be charged off or downgraded into classified loan categories when the agencies’ evaluation differs from management’s evaluation based on their judgments of collectability from the information available to them at the time of examination.

The Allowance for Credit Losses - Unfunded Commitments is a liability for expected future credit losses on the Company’s commitments to lend.

4 unchanged sentences

The increase in transition ACL is primarily due to the interaction of change from an incurred loss model to a lifetime loss model and the duration of our portfolio.

Since transition, the ACL- Loans modestly increased $0.5 million to $23.2 million at June 30, 2023, representing 1.63% of loans receivable.

Since transition, the ACL- Loans modestly increased $0.3 million to $23.0 million at September 30, 2023, representing 1.59% of loans receivable.

The allowance for loan losses, prior to the ASU 2016-13 transition, was $17.9 million at December 31, 2022, representing 1.27% of loans receivable.

The increase in the ACL - Loans, was due to a provision of $0.5 million and a small amount of net recoveries.

The ACL - Unfunded Commitments, established under ASU 2016-13, was $1.5 million at June 30, 2023.

During the six months ended June 30, 2023, the ACL - Unfunded Commitments increased $0.01 million due to an increase in projected loss rates.

The increase in the ACL - Loans, was due to a provision of $0.2 million and net recoveries.

The ACL - Unfunded Commitments, established under ASU 2016-13, was $1.6 million at September 30, 2023.

During the nine months ended September 30, 2023, the ACL - Unfunded Commitments increased $0.03 million due to an increase in projected loss rates.

Allowance for Credit Losses - Loans Roll Forward

(in thousands, except ratios)

June 30, 2023 and Three Months Ended March 31, 2023 and Three Months Ended December 31, 2022 and Twelve Months Ended

Three Months Ended Nine Months Ended

September 30,

2023 September 30,

2022 September 30,

2023 September 30,

Allowance for Credit Losses (“ACL”)

13 unchanged sentences

Total recoveries of loans previously charged off:

218 74 341 146

Net loan recoveries/(charge-offs) (“NCOs”) 161 17 187 (471)

Additions to ACL - Loans via provision for credit losses charged to operations 436 57 1,475

(Reversals)/additions to ACL - Loans via provision for credit losses charged to operations (352) 375 141 775

ACL - Loans, at end of period $ 22,973 $ 17,217 $ 22,973 $ 17,217

4 unchanged sentences

Commercial/Agricultural Real Estate C&I/Agricultural operating Residential Mortgage Consumer Installment Unallocated Total

Three months ended June 30, 2023

Three months ended Septemeber 30, 2023

Allowance for Credit Losses - Loans:

2 unchanged sentences

Recoveries 206 10 — 2 — 218

Additions to ACL - Loans via provision for credit losses charged to operations 424 (406) 426 (8) — 436

(Reversals)/additions to ACL - Loans via provision for credit losses charged to operations (284) (279) 235 (24) — (352)

ACL - Loans, at end of period $ 18,855 $ 1,189 $ 2,633 $ 296 $ — $ 22,973

Commercial/Agricultural Real Estate C&I/Agricultural operating Residential Mortgage Consumer Installment Unallocated Total

Six months ended June 30, 2023

Nine months ended September 30, 2023

Allowance for Credit Losses - Loans:

3 unchanged sentences

Recoveries 236 41 40 24 — 341

Additions to ACL - Loans via provision for credit losses charged to operations 354 (560) 718 (19) — 493

Additions/(reversals) to ACL - Loans via provision for credit losses charged to operations 70 (839) 953 (43) — 141

ACL - Loans, at end of period $ 18,855 $ 1,189 $ 2,633 $ 296 $ — $ 22,973

1 unchanged sentence

(in thousands, except ratios)

September 30,

2023 December 31,

4 unchanged sentences

(in thousands)

In addition to the ACL - Loans, the Company has established an ACL - Unfunded Commitments of $1.5 million at June 30, 2023 and $0 at December 31, 2022, classified in other liabilities on the consolidated balance sheets.

June 30, 2023 and Three Months Ended June 30, 2023 and Six Months Ended

In addition to the ACL - Loans, the Company has established an ACL - Unfunded Commitments of $1.571 million at September 30, 2023 and $0 at December 31, 2022, classified in other liabilities on the consolidated balance sheets.

September 30, 2023 and Three Months Ended September 30, 2023 and Nine Months Ended

ACL - Unfunded Commitments - beginning of period $ 1,544 $ —

14 unchanged sentences

Prior to the elimination of the special accounting rules, TDR loans were accounted for under ASC 310-40.

A TDR typically involved granting some concession to the borrower involving a loan modification, such as modifying the payment schedule or making interest rate changes.

A TDR is typically involved granting some concession to the borrower involving a loan modification, such as modifying the payment schedule or making interest rate changes.

TDR loans may have involved loans that had a charge-off taken against the loan to reduce the carrying amount of the loan to fair market value as determined pursuant to ASC 310-10.

The following table identifies the various components of nonperforming assets and other balance sheet information as of the dates indicated below and changes in the ACL for the periods then ended:

June 30, 2023 and Six Months Then Ended (1) December 31, 2022 and Twelve Months Then Ended (2)

September 30, 2023 and Nine Months Then Ended (1) December 31, 2022 and Twelve Months Then Ended (2)

Nonperforming assets:

44 unchanged sentences

Quarter Ended

2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30,

September 30,

2023 June 30,

2023 March 31, 2023 December 31, 2022 September 30, 2022

Balance, beginning of period $ 15,663 $ 10,410 $ 11,204 $ 10,772 $ 10,434

7 unchanged sentences

Balance, end of period $ 13,456 $ 15,663 $ 10,410 $ 11,204 $ 10,772

Nonaccrual loans increased by $4.5 million at June 30, 2023, from $11.2 million at December 31, 2022, largely due to adding a $5.4 million hotel loan from special mention to substandard in the second quarter of 2023, partially offset by payments received.

Nonperforming assets increased to $17.4 million or 0.95% of total assets at June 30, 2023, compared to $12.7 million, or 0.70% of total assets at December 31, 2022 due to increases in nonaccrual loans.

Nonaccrual loans increased by $2.3 million at September 30, 2023, from $11.2 million at December 31, 2022, largely due to adding a $5.4 million hotel loan from special mention to substandard in the second quarter of 2023, partially offset by payments received, including a third quarter $1.2 million loan payoff.

Nonperforming assets increased to $15.5 million or 0.85% of total assets at September 30, 2023, compared to $12.7 million, or 0.70% of total assets at December 31, 2022, due to increases in nonaccrual loans.

Refer to the “Allowance for Credit Losses - Loans” and “Nonperforming Loans, Potential Problem Loans and Foreclosed Properties” sections above for more information related to nonperforming loans.

Below is a summary of loan modifications made to borrowers experiencing financial difficulty during the six months ended June 30, 2023.

Below is a summary of loan modifications made to borrowers experiencing financial difficulty during the nine months ended September 30, 2023.

Term Extension

Loan Class Amortized Cost Basis at

June 30, 2023 % of Total Class of Financing Receivables

September 30, 2023 % of Total Class of Financing Receivables

Commercial real estate $ 4,826 0.65 %

Commercial and industrial $ 8 0.01 %

Agricultural operating $ 179 0.73 %

Residential mortgage $ 36 0.03 %

1 unchanged sentence

Loan Class Amortized Cost Basis at

June 30, 2023 % of Total Class of Financing Receivables

September 30, 2023 % of Total Class of Financing Receivables

Residential mortgage $ 69 0.06 %

12 unchanged sentences

The table below shows a summary of criticized loans, split by special mention and substandard for the past five quarters.

A $5.4 million commercial real estate loan secured by a hotel (50% LTV at origination) was included in special mention at March 31, 2023, and in the second quarter of 2023 this loan was moved to substandard.

A $10.4 million fully secured working capital C&I loan was included in special mention at June 30, 2022.

In the third quarter of 2022, this C&I loan balance increased by $2.4 million due to a draw on a secured line of credit.

In the fourth quarter of 2022, repayments were made on this C&I loan and in the first quarter of 2023, this C&I loan was paid off.

In the second quarter of 2023, a loan relationship of approximately $9 million was added to special mention.

Since the issuance of our earnings press release on July 24, 2023, a separate relationship of approximately $9 million was also added to special mention.

The increase in substandard loan balances in the June 2023 quarter is due to the hotel loan mentioned above moving from special mention to substandard.

See Note 3, “Loans and Allowance for Credit Losses” for additional information.

Since September 30, 2022, a large special mention credit paid off and a $5 million relationship moved to substandard with two relationships, each totaling $9 million added in the second quarter.

Substandard changes largely reflect payoffs, partially offset with the addition of a $5 million relationship in the second quarter moving from special mention.

In addition to our discussion of criticized, special mention, and substandard loans above, the following information provides further insights about our loans to certain industries.

As of June 30, 2023, hotel loans totaled $91 million with a weighted average LTV of 56% and average balance of $3.4 million.

Restaurant loans totaled $51 million, at June 30, 2023.

As of September 30, 2023, hotel loans totaled $94 million with a weighted average LTV of 60% and average balance of $3.9 million.

Restaurant loans totaled $52 million, at September 30, 2023.

The weighted-average LTV percentage on these restaurant loans was 49% and the average loan balance was $721 thousand.

Approximately $39 million of restaurant loans are to franchise quick-service restaurants.

At June 30, 2023 we have $45 million of office loans with a weighted average LTV of 66% and average loan balance of $618 thousand.

98% of the related office properties are located outside of large cities.

At September 30, 2023, we have $41 million of office loans with a weighted average LTV of 64% and average loan balance of $552 thousand.

A large percentage of the related office properties are located outside of large cities.

(in thousands)

(Loan balance at unpaid principal balance) June 30,

(Loan balance at unpaid principal balance) September 30,

2023 June 30,

2023 March 31,

1 unchanged sentence

2022 September 30,

2022 June 30,

Special mention loan balances $ 20,043 $ 20,507 $ 6,636 $ 12,170 $ 20,178

10 unchanged sentences

Although management believes that the assumptions used to evaluate the MSRs for impairment are reasonable, future adjustment may be necessary if future economic conditions differ substantially from the economic assumptions used to determine the value of MSRs.

The fair market value of the Company’s MSR asset remained stable at $5.7 million at both December 31, 2022, and June 30, 2023 as a higher fair value percentage offset the lower balance of loans serviced.

At June 30, 2023 and December 31, 2022, the Company did not have an MSR impairment, or related valuation allowance.

The unpaid balances of one-to-four family residential real estate loans serviced for others as of June 30, 2023, and December 31, 2022, were $503.0 million and $523.7 million, respectively.

The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at June 30, 2023, and December 31, 2022, was 1.13% and 1.08%, respectively.

From a quarter-end perspective, deposits have grown since both December 31, 2022 and March 31, 2023.

The fair market value of the Company’s MSR asset was $5.7 million at both September 30, 2023, and December 31, 2022, as a higher fair value percentage offset the lower balance of loans serviced.

At September 30, 2023, and December 31, 2022, the Company did not have an MSR impairment, or related valuation allowance.

The unpaid balances of one-to-four family residential real estate loans serviced for others as of September 30, 2023, and December 31, 2022, were $449.5 million and $523.7 million, respectively.

The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at September 30, 2023, and December 31, 2022, was 1.14% and 1.08%, respectively.

From a quarter-end perspective, deposits have grown each quarter since December 31, 2022.

From March 7, 2023 to March 31, 2023, a period closely monitored for unusual withdrawal activity, balances remained stable.

Deposit composition changed during the six months ended June 30, 2023, as both business and retail depositors sought higher yields on deposit accounts.

For the six months ended June 30, 2023, retail deposits decreased slightly, with customers returning to higher yielding certificates with their money moving from money market and savings accounts to certificate accounts.

In January 2023, commercial non-interest-bearing deposits fell as commercial customers decreased their cash balances to support the needs of their businesses.

These commercial deposits have modestly recovered at June 30, 2023.

Modest brokered deposit growth supplemented deposit growth, with $54.3 million of brokered certificate net growth and $3.2 million new growth of brokered money market accounts.

Total deposits increased $8.6 million during the quarter ended September 30, 2023, to $1.47 billion.

During the current quarter:

1) commercial deposits grew $28.3 million, largely due to growth in non-interest-bearing checking;

2) retail deposits grew $4.6 million;

brokered deposits decreased $12.2 million, primarily due to CD maturities not replaced due to organic deposit growth;

and 4) public deposits declined $12.1 million from the previous quarter, due to seasonal outflows.

Deposit composition changed during the third quarter, as both business and retail depositors sought higher yields on deposit accounts.

Consumer, commercial and government deposits have been stable since January 31, 2023, and since the two large coastal bank failures in early March.

1 unchanged sentence

A decrease in deposits during January occurred as commercial customers decreased their cash balances to support the needs of their businesses.

September 30,

2023 June 30,

2023 March 31,

5 unchanged sentences

Total deposits $ 1,473,235 $ 1,464,682 $ 1,436,793 $ 1,424,720

At June 30, 2023 our deposit portfolio composition was 54% consumer, 27% commercial, 12% public and 7% brokered deposits.

At September 30, 2023 our deposit portfolio composition was 54% consumer, 29% commercial, 11% public and 6% brokered deposits.

At December 31, 2022 our deposit portfolio composition was 57% consumer, 28% commercial, 12% public and 3% brokered deposits.

September 30,

2023 June 30,

2023 March 31,

6 unchanged sentences

Total deposits $ 1,473,235 $ 1,464,682 $ 1,436,793 $ 1,424,720

Uninsured and uncollateralized deposits were $268.1 million, or 18% of total deposits, at June 30, 2023 and $298.8 million, or 21% of total deposits, at December 31, 2022.

Uninsured deposits at June 30, 2023 were $413.0 million, or 28% of total deposits, and $441.2 million, or 31% of total deposits at December 31, 2022, with the difference from the above sentence being fully secured government deposits.

On-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability totaled $611.1 million, or 228% of uninsured and uncollateralized deposits at June 30, 2023.

Uninsured and uncollateralized deposits were $277.9 million, or 19% of total deposits at September 30, 2023, and $298.8 million, or 21% of total deposits, at December 31, 2022.

Uninsured deposits at September 30, 2023, were $412.9 million, or 28% of total deposits, and $441.2 million, or 31% of total deposits at December 31, 2022, with the difference from the above sentence being fully secured government deposits.

On-balance sheet liquidity, collateralized new borrowing capacity and uncommitted federal funds borrowing availability totaled $604.9 million, or 218% of uninsured and uncollateralized deposits at September 30, 2023.

At December 31, 2022 on-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability totaled $570.0 million, or 191% of uninsured and uncollateralized deposits.

Federal Home Loan Bank (FHLB) advances and Other Borrowings.

A summary of Federal Home Loan Bank (FHLB) advances and other borrowings at March 31, 2023 and December 31, 2022 is as follows:

June 30, 2023 December 31, 2022

A summary of Federal Home Loan Bank (FHLB) advances and other borrowings at September 30, 2023 and December 31, 2022 is as follows:

September 30, 2023 December 31, 2022

Stated Maturity Amount Range of Stated Rates Stated Maturity Amount Range of Stated Rates

11 unchanged sentences

Totals $ 181,937 $ 214,939

(1) The FHLB advances bear fixed rates, require interest-only monthly payments, and are collateralized by a blanket lien on pre-qualifying first mortgages, home equity lines, multi-family loans and certain other loans which had a pledged balance of $1,040.5 million and $984.9 million at June 30, 2023 and December 31, 2022, respectively.

At June 30, 2023, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $294.4 million compared to $256.8 million as of December 31, 2022.

(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $217.5 million and $157.5 million, during the six months ended June 30, 2023 and the twelve months ended December 31, 2022, respectively.

(3) The weighted-average interest rate on FHLB borrowings maturing within twelve months as of June 30, 2023 and December 31, 2022 were 4.58% and 4.09%, respectively.

(1) The FHLB advances bear fixed rates, require interest-only monthly payments, and are collateralized by a blanket lien on pre-qualifying first mortgages, home equity lines, multi-family loans and certain other loans which had a pledged balance of $1,065.9 million and $984.9 million at September 30, 2023 and December 31, 2022, respectively.

At September 30, 2023, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $314.5 million compared to $256.8 million as of December 31, 2022.

(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $217.5 million and $157.5 million, during the nine months ended September 30, 2023 and the twelve months ended December 31, 2022, respectively.

(3) The weighted-average interest rate on FHLB borrowings maturing within twelve months as of September 30, 2023 and December 31, 2022 were 4.58% and 4.09%, respectively.

(4) FHLB term notes totaling $15.0 million, with 2028 maturity dates, are callable once by the FHLB in December of 2023.

13 unchanged sentences

Interest-only payments are due semi-annually each year during the fixed interest period and quarterly during the floating interest period.

FHLB advances decreased $20.0 million to $122.5 million as of June 30, 2023, compared to $142.5 million as of December 31, 2022.

FHLB advances decreased $28.0 million to $114.5 million as of September 30, 2023, compared to $142.5 million as of December 31, 2022.

The decrease is a result of decreased funding needs due to increases in deposits partially offset by loan growth, as well as the Bank’s desire to manage its liquidity and increase cash on hand in response to recent events.

At June 30, 2023, short-term FHLB advances consisted of $47 million maturing overnight and an additional $30 million of short-term advances maturing in July 2023.

At September 30, 2023, short-term FHLB advances consisted of $54 million maturing in October 2023.

The Bank has an irrevocable Standby Letter of Credit Master Reimbursement Agreement with the Federal Home Loan Bank.

This irrevocable standby letter of credit (“LOC”) is supported by loan collateral as an alternative to directly pledging investment securities on behalf of a municipal customer as collateral for their interest-bearing deposit balances.

The Bank’s current unused borrowing capacity, supported by loan collateral as of June 30, 2023, is approximately $294.4 million.

At June 30, 2023 and December 31 2022, the Bank had the ability to borrow $23.9 million and $4.1 million from the Federal Reserve Bank of Minneapolis.

The ability to borrow is based on mortgage-backed securities pledged with a carrying value of $30.0 million and $5.4 million as of June 30, 2023 and December 31, 2022, respectively.

There were no related Federal Reserve borrowings outstanding as of June 30, 2023, or December 31, 2022.

The Bank’s current unused borrowing capacity, supported by loan collateral as of September 30, 2023, is approximately $314.5 million.

At September 30, 2023, and December 31, 2022, the Bank had the ability to borrow $22.1 million and $4.1 million from the Federal Reserve Bank of Minneapolis.

The ability to borrow is based on mortgage-backed securities pledged with a carrying value of $23.2 million and $5.4 million as of September 30, 2023, and December 31, 2022, respectively.

There were no related Federal Reserve borrowings outstanding as of September 30, 2023, or December 31, 2022.

In addition, The Bank has been approved to obtain funding from the Federal Reserve’s new Bank Term Funding Program (“BTFP”).

As of June 30, 2023, the Bank has not borrowed from this facility and has not pledged any collateral to this facility.

As of September 30, 2023, the Bank has not borrowed from this facility and has not pledged any collateral to this facility.

The Bank maintains two unsecured federal funds purchased lines of credit with banking partners which total $70 million.

These lines bear interest at the lender banks announced daily federal funds rate, mature daily, and are revocable at the discretion of the lending institution.

There were no borrowings outstanding on these lines of credit as of June 30, 2023, or December 31, 2022.

There were no borrowings outstanding on these lines of credit as of September 30, 2023, or December 31, 2022.

Additionally, we have a $5.0 million revolving line of credit which is available as needed for general liquidity purposes.

See Note 7, “Federal Home Loan Bank Advances and Other Borrowings” for more information.

At June 30, 2023, the Bank has pledged $1.04 billion of loans to secure the current FHLB outstanding advances and letters of credit and to provide the unused borrowing capacity, compared to $0.98 billion of loans pledged at December 31, 2022.

At September 30, 2023, the Bank has pledged $1.066 billion of loans to secure the current FHLB outstanding advances and letters of credit and to provide the unused borrowing capacity, compared to $0.98 billion of loans pledged at December 31, 2022.

Stockholders’ Equity.

Total stockholders’ equity was $165.6 million at June 30, 2023, compared to $167.1 million at December 31, 2022.

Total stockholders’ equity was $165.4 million at September 30, 2023, compared to $167.1 million at December 31, 2022.

The decrease in stockholder’s equity was attributable to:

1 unchanged sentence

2) the payment of the annual cash dividend paid in February to common stockholders of $0.29 per share, or $3.0 million;

and 3) an increase in the unrealized loss on available for sale securities of $1.2 million.

These reductions to equity were partially offset by:

1) net income of $6.9 million and 2) the $0.1 million cumulative effect adjustment from the adoption of ASU 2023-02.

and 3) an increase in the unrealized loss due to interest rates on available for sale securities of $4.1 million, net of tax.

These reductions to equity were partially offset by 1) net income of $9.4 million;

and 2) the $0.1 million cumulative effect adjustment from the adoption of ASU 2023-02.

On July 23, 2021, the Board of Directors adopted a share repurchase program.

Approximately 14 thousand shares were repurchased under this program in the second quarter of 2023.

There were no shares repurchased during the first quarter of 2023.

As of June 30, 2023, an additional 229 thousand shares remain available for repurchase.

There were 14 thousand shares repurchased in the second quarter of 2023 and no shares repurchased during the first and third quarters of 2023.

As of September 30, 2023, an additional 229 thousand shares remain available for repurchase.

Liquidity and Asset / Liability Management .

2 unchanged sentences

A key metric we monitor is our liquidity ratio, calculated as cash and unpledged securities portfolio divided by total assets.

At June 30, 2023, our on-balance sheet liquidity ratio decreased to 12.2% percent from 13.0% at December 31, 2022.

This was largely due to an increase in pledges of held-to-maturity securities and reductions in the value of available-for-sale securities, partially offset by increases in interest-bearing cash.

Consumer, commercial and government deposits have been stable since January 31, 2023, and since the two large coastal bank failures in early March.

There are no material customer or industry deposit concentrations.

At September 30, 2023, our on-balance sheet liquidity ratio decreased to 11.4% percent from 13.0% at December 31, 2022.

This was largely due reductions in the AFS and HTM investment portfolios.

There are no material customers or industry deposit concentrations.

A decrease in deposits during January occurred as commercial customers decreased their cash balances to support the needs of their businesses.

At June 30, 2023 our deposit portfolio composition was 54% consumer, 27% commercial, 12% public and 7% brokered deposits.

At September 30, 2023, our deposit portfolio composition was 54% consumer, 29% commercial, 11% public and 6% brokered deposits.

At December 31, 2022, our deposit portfolio composition was 57% consumer, 28% commercial, 12% public and 3% brokered deposits.

Uninsured and uncollateralized deposits were $268.1 million, or 18% of total deposits, at June 30, 2023 and $298.8 million, or 21% of total deposits, at December 31, 2022.

Uninsured deposits alone at June 30, 2023 were $413.0 million, or 28% of total deposits, and $441.2 million, or 31% of total deposits at December 31, 2022, with the difference being fully secured government deposits.

On-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability was $611.1 million, or 228% of uninsured and uncollateralized deposits at June 30, 2023.

Uninsured and uncollateralized deposits were $277.9 million, or 19% of total deposits, at September 30, 2023, and $298.8 million, or 21% of total deposits, at December 31, 2022.

Uninsured deposits alone at September 30, 2023, were $412.9 million, or 28% of total deposits, and $441.2 million, or 31% of total deposits at December 31, 2022, with the difference being fully secured government deposits.

On-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability was $604.9 million, or 218% of uninsured and uncollateralized deposits at September 30, 2023.

At December 31, 2022, on-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability was $570.0 million, or 191% of uninsured and uncollateralized deposits.

11 unchanged sentences

Our borrowing arrangement with the FHLB calls for pledging certain qualified real estate, commercial and industrial loans, and borrowing up to 75% of the value of those loans, not to exceed 35% of the Bank’s total assets.

Currently, we have approximately $294.4 million available to borrow under this arrangement, supported by loan collateral as of June 30, 2023.

Currently, we have approximately $314.5 million available to borrow under this arrangement, supported by loan collateral as of September 30, 2023.

We also had borrowing capacity of $22.1 million at the Federal Reserve Bank and have been approved to access the Bank Term Funding Program (“BTFP”) if the need should arise.

1 unchanged sentence

In addition, the Company has a $5.0 million revolving line of credit which is available as needed for general liquidity purposes.

While the Bank does not have formal brokered certificate lines of credit with counter parties at June 30, 2023, we believe that the Bank could access this market, which provides an additional potential source of liquidity, as evidenced by access to this market during the past four quarters.

While the Bank does not have formal brokered certificate lines of credit with counter parties at September 30, 2023, we believe that the Bank could access this market, which provides an additional potential source of liquidity, as evidenced by access to this market during the past four quarters.

See Note 7, “Federal Home Loan Bank and Other Borrowings” of “Notes to Consolidated Financial Statements” which are included in Part I, Item 1, “Financial Statements and Supplementary Data” of this Form 10-Q, for further detail.

5 unchanged sentences

These instruments include unused commitments for lines of credit, overdraft protection lines of credit and home equity lines of credit, as well as commitments to extend credit.

As of June 30, 2023, the Company had approximately $278.2 million in unused loan commitments, compared to approximately $243.0 million in unused commitments as of December 31, 2022.

In addition, there are $4.4 million of commitments for contributions of capital to an SBIC and an investment company at June 30, 2023.

As of September 30, 2023, the Company had approximately $260.7 million in unused loan commitments, compared to approximately $243.0 million in unused commitments as of December 31, 2022.

In addition, there are $4.1 million of commitments for contributions of capital to an SBIC and an investment company at September 30, 2023.

These commitments totaled $4.7 million at December 31, 2022.

Capital Resources.

As of June 30, 2023, and December 31, 2022, as shown in the table below, the Bank’s Tier 1 and Risk-based capital levels exceeded levels necessary to be considered “Well Capitalized” under Prompt Corrective Action provisions.

As of September 30, 2023, and December 31, 2022, as shown in the table below, the Bank’s Tier 1 and Risk-based capital levels exceeded levels necessary to be considered “Well Capitalized” under Prompt Corrective Action provisions.

Below are the amounts and ratios for our capital levels as of the dates noted below for the Bank:

4 unchanged sentences

Amount Ratio Amount Ratio Amount Ratio

As of June 30, 2023 (Unaudited)

As of September 30, 2023 (Unaudited)

Total capital (to risk weighted assets) $ 229,007 14.6 % $ 125,736 > = 8.0 % $ 157,170 > = 10.0 %

7 unchanged sentences

Tier 1 leverage ratio (to adjusted total assets) 203,422 11.5 % 70,610 > = 4.0 % 88,262 > = 5.0 %

At June 30, 2023, and December 31, 2022, the Bank was categorized as “Well Capitalized” under Prompt Corrective Action Provisions, as determined by the OCC, our primary regulator.

At September 30, 2023, and December 31, 2022, the Bank was categorized as “Well Capitalized” under Prompt Corrective Action Provisions, as determined by the OCC, our primary regulator.

Below are the amounts and ratios for our capital levels as of the dates noted below for the Company:

1 unchanged sentence

Amount Ratio Amount Ratio

As of June 30, 2023 (Unaudited)

As of September 30, 2023 (Unaudited)

Total capital (to risk weighted assets) $ 226,800 14.4 % $ 125,736 > = 8.0 %

8 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-Q

Item 2. Management’s Discussion and Analysis