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Item 7. Management’s Discussion and Analysis

2024-03-05 compared with 2023-03-07 · 352 added, 351 removed, 562 unchanged (56% of the section changed)

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PERFORMANCE SUMMARY

The following is a brief summary of some of the significant factors that affected our operating results for the twelve months ended December 31, 2022 and 2021.

In 2022, net interest income was favorably impacted by the following:

(1)growth in the loan portfolio and related growth in loan interest income;

(2) the positive impact of higher interest rates on loan yields on new, renewing and repricing loans, which was more than offset by a reduction in the accretion of the Small Business Administration Paycheck Protection Program (“SBA PPP”) loan fees of $5.9 million;

and (3) growth in the investment securities portfolio.

These positive additions were offset by higher interest expense on subordinated debt due to (a) the issuance of $35 million with a coupon of 4.75%, partially offset by the call and redemption of $15 million of 6.75% subordinated debt issued in 2017 and (b) the impact of higher interest rates on FHLB advances and deposits.

The Company recorded $1.5 million of provision for loan losses in 2022, largely due to loan growth and net charge-offs, partially offset by a reduction in specific reserves.

No provision for loan losses was recorded in 2021 largely due to qualitative factor decreases to reflect greater certainty and improvement in current general economic conditions, offsetting the impact of organic loan growth.

In 2022’s higher interest rate and tight housing supply environment, the Company experienced fewer mortgage loans originated for sale, which decreased gain on sale and income recorded in loan servicing income from the capitalization of mortgage servicing rights.

Non-interest expense increased modestly in 2022, largely due to the cost of closing branches.

When comparing year-over-year results, changes in net interest income, provision for loan losses, non-interest income and non-interest expense are primarily due to the items discussed above.

The following is a summary of some of the significant factors that affected our operating results for the twelve months ended December 31, 2023, and 2022.

In 2023, net interest income decreased, primarily due to the impact of higher short-term interest rates on the Bank’s liability-sensitive balance sheet, i.e., higher deposit costs, and customer account shifts to higher-cost certificates, along with increased borrowing costs, partially offset by higher yields on assets.

The Company recorded $0.475 million of negative provision for credit losses in 2023, largely due to net recoveries of $0.451 million.

In 2023, the allowance for credit losses (“ACL”) impact of loan growth was offset by favorable changes in overall economic factors and a modest reduction in specific ACL.

A provision for loan losses of $1.475 million was recorded in 2022.

Fiscal 2023’s higher interest rate and tight housing supply environment, led the Company to originate fewer mortgage loans for sale, which decreased gain on sale and income recorded in loan servicing income from the capitalization of mortgage servicing rights.

Non-interest expense decreased modestly in 2023, largely due to lower compensation expense due to lower production incentives and lower net income and higher branch closing costs incurred in 2022.

When comparing year-over-year results, changes in net interest income, provision for credit losses, non-interest income and non-interest expense are primarily due to the items discussed above.

See the remainder of this section for a more thorough discussion.

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Below is a discussion of our critical accounting estimates.

Allowance for Loan Losses.

We maintain an allowance for loan losses to absorb probable and inherent losses in our loan portfolio.

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

In evaluating the level of the allowance for loan 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 the Allowance for Loan and Lease Losses,” issued by the Federal Financial Institutions Examination Council (FFIEC).

We believe that the Bank’s Allowance for Loan Losses Policy conforms to all applicable regulatory requirements.

However, based on periodic examinations by regulators, the amount of the allowance for loan losses recorded during a particular period may be adjusted.

Our determination of the allowance for loan losses is based on (1) specific allowances for specifically identified and evaluated impaired loans and their corresponding estimated loss based on likelihood of default, payment history and net realizable value of underlying collateral.

Specific allocations for collateral dependent loans are based on the fair value of the underlying collateral relative to the unpaid principal balance of individually impaired loans.

Allowance for Credit Losses

We adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), “Measurement of Credit Losses on Financial Instruments” through a cumulative-effect adjustment on January 1, 2023.

We have selected a loss estimation methodology, utilizing a third-party model.

See also Notes 1 and 3 to the audited consolidated financial statements for further discussion of our adoption of ASU 2016-13.

Allowance for Credit Losses – Held-to-Maturity Securities.

Currently, all of the Company’s held-to-maturity securities are backed by governments or government agencies, for which the risk of credit loss is minimal.

Accordingly, the Company does not record an allowance for credit losses on held-to-maturity securities.

Allowance for Credit Losses - Loans - We maintain an allowance for credit losses to absorb probable and inherent losses in our loan portfolio.

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 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.

We believe that the Bank’s Allowance for Credit Losses Policy conforms to all applicable regulatory requirements.

However, based on periodic examinations by regulators, the amount of the allowance for credit losses recorded during a particular period may be adjusted.

Our determination of the allowance for credit losses - loans is based on (1) an individual allowance for specifically identified and evaluated loans that management has determined have unique risk characteristics.

For these loans, the estimated loss is based on likelihood of default, payment history, and net realizable value of underlying collateral.

Specific allocations for collateral dependent loans are based on the fair value of the underlying collateral relative to the amortized cost of the loans.

For loans that are not collateral dependent, the specific allocation is based on the present value of expected future cash flows discounted at the loan’s original effective interest rate through the repayment period;

and (2) a general allowance on loans not specifically identified in (1) above, based on historical loss ratios, which are adjusted for qualitative and general economic factors.

We continue to refine our allowance for loan losses methodology, with an increased emphasis on historical performance adjusted for applicable economic and qualitative factors.

Assessing the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans, any of which estimates may be susceptible to significant change.

and (2) a collective allowance for loans not specifically identified in (1) above.

The allowance for these loans is estimated by pooling loans with a similar risk profile and calculating a collective loss rate using the pool’s risk drivers, historical loss experience, and reasonable and supportable future economic forecasts to project lifetime losses.

This collectively estimated loss is adjusted for qualitative factors.

Assessing the allowance for credit losses - loans is inherently subjective as it requires making material estimates, including the amount, and timing of future cash flows expected to be received on impaired loans, any of which estimates may be susceptible to significant change.

In our opinion, the allowance, when taken as a whole, reflects estimated probable loan losses in our loan portfolio.

Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value with no carryover of related allowance for loan losses.

Any allowance for loan loss on these pools reflects only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be collected).

Allowance for Credit Losses – Unfunded Commitments.

The Company estimates expected credit losses over the contractual period for which the Company is exposed to credit risk, via a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Company.

The allowance for credit losses - unfunded commitments on off-balance sheet exposures is included in other liabilities on the consolidated balance sheet.

Goodwill and Other Intangible Assets.

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The Company does not amortize goodwill, but reviews goodwill for impairment at a reporting unit level on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired.

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.

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 December 31, 2023, which is related to its banking activities.

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When the qualitative evaluation indicates that impairment is more likely than not, quantitative testing is required whereby the fair value of the Company’s reporting unit is calculated and compared to the recorded book value, “step one.” If the calculated fair value of the Company’s reporting unit exceeds its carrying value, goodwill is not considered impaired, and “step two” is not considered necessary.

If the carrying value of the company’s reporting unit exceeds its calculated fair value, the impairment test continues

(“step two”) by comparing the carrying value of the Company’s reporting unit’s goodwill to the implied fair value of goodwill.

If the carrying value of the company’s reporting unit exceeds its calculated fair value, the impairment test continues (“step two”) by comparing the carrying value of the Company’s reporting unit’s goodwill to the implied fair value of goodwill.

An impairment charge is recognized if the carrying value of goodwill exceeds the implied fair value of goodwill.

In 2022, the Company performed quarterly reviews to determine if a triggering event had occurred that would require impairment testing.

These quarterly reviews determined that no triggering event occurred during 2022.

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

The Company has monitored events and conditions quarterly since December 31, 2022, and has determined that no triggering event has occurred that would require goodwill to be tested for impairment at an interim date.

The Company also performed its required annual goodwill impairment testing and determined that goodwill was not impaired as of December 31, 2023.

Fair Value Measurements and Valuation Methodologies.

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

As of December 31, 2022, management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary.

As of December 31, 2023, a valuation allowance related to the realizability of its deferred tax assets was necessary due to the 2023 Wisconsin budget change, which resulted in the company not realizing a future deduction on its deferred assets.

In the third quarter of 2023, a valuation allowance of $1.8 million was established.

STATEMENT OF OPERATIONS ANALYSIS

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Net interest income was $48.3 million for 2023 compared to $56.4 million for 2022.

The increase is largely due to the positive loan volume variance due to growth in loans outstanding.

Negative loan rate variances are due to a decrease in SBA PPP accretion of $5.9 million, which was partially offset by the impact of higher interest rates on newly originated, renewed and repricing loans.

The positive rate variance on investment securities was largely due to the repricing of variable rate securities and the impact of new purchases above the portfolio rate.

This positive rate variance was partially offset by higher interest expense on subordinated debt of $35 million issued in March 2022, with a coupon rate of 4.75%.

In August 2022, interest expense was partially reduced by the call and redemption of $15 million of 6.75% subordinated debt issued in 2017.

In addition, the impact of higher interest rates on liability costs reduced net interest income.

The decrease, overall, is largely due to the impact of higher short-term interest rates, which with the Company’s liability sensitive balance sheet (See Market Risk Section of the MDA) resulted in (1) higher deposit costs due to customer retention strategies;

(2) a deposit mix change, increasing deposit costs as customers moved from lower cost savings and money market products to higher cost certificates;

(3) increased borrowing costs on FHLB advances;

and (4) lower merger discount accretion of $1.2 million and lower SBA accretion of $0.3 million.

These decreases to net interest income were partially offset by (1) a positive loan volume variance due to loan growth;

and (2) increases in loan and investment yields due to contractual repricing;

and (3) higher coupons on new loans.

The net interest margin for 2023 was 2.81% compared to 3.39% for 2022.

The increase in the net interest margin was due to the following factors:

(1) the impact of higher interest rates on new, maturing, and repricing loans;

(2) the impact of higher interest rates on the variable rate investment portfolio;

and (3) a reduction in the balance of low yielding cash as a percentage of total assets.

These positive impacts were partially offset by:

(1) a decrease in SBA PPP loan accretion income of $5.9 million;

(2) higher interest expense on subordinated debt, due to the issuance of $35 million with a coupon rate of 4.75%, partially offset by the call and redemption of $15 million of 6.75% subordinated debt issued in 2017;

and (3) the impact of higher interest rates on liability costs.

The decrease in the net interest margin was due to the following factors:

(1) higher deposit and borrowing costs, including the impact of a full year of interest expense on the subordinated debt issued in March 2022;

and (2) eight basis points of lower accretion on merger discount and SBA PPP accretion.

These decreases were partially offset by increases in loan and investment yields.

Average Balances, Net Interest Income, Yields Earned and Rates Paid.

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Cash and cash equivalents $ 18,469 $ 1,010 5.47 % $ 19,796 $ 203 1.03 %

Loans 1,351,052 61,639 4.56 % 1,216,244 58,172 4.78 %

Loans receivable 1,430,035 73,577 5.15 % 1,351,052 61,639 4.56 %

Interest bearing deposits 63 1 1.59 % 1,106 24 2.17 %

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Demand deposits 359,866 6,727 1.87 % 403,289 1,881 0.47 %

Money market 317,879 1,721 0.54 % 269,620 783 0.29 %

Money market accounts 306,020 6,976 2.28 % 317,879 1,721 0.54 %

CD’s 317,376 10,619 3.35 % 178,726 2,074 1.16 %

IRA’s 35,192 244 0.69 % 39,699 451 1.14 %

Total deposits $ 1,183,349 $ 25,749 2.18 % $ 1,134,649 $ 6,429 0.57 %

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Cash and cash equivalents $ (15) $ 822 $ 807

Loans 6,244 (2,777) 3,467

Loans receivable 3,742 8,196 11,938

Interest bearing deposits (17) (6) (23)

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CD’s 2,179 6,366 8,545

IRA’s (46) (161) (207)

Total deposits 1,758 17,562 19,320

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(1) the change in interest due to both rate and volume has been allocated in proportion to the relationship to the dollar amounts of the change in each.

Provision for Loan Losses.

We determine our provision for loan losses (“provision,” or “PLL”) to provide an adequate allowance for loan losses (“ALL”) to reflect probable and inherent credit losses in our loan portfolio.

The provision for loan losses recorded in 2022 was $1.5 million compared to no provision for 2021.

In 2022, the provision allocated for originated loan growth was approximately $1.3 million for 2022 and the provision related to charge-offs, reduced by decreases in changes in specific reserves, was approximately $0.2 million.

The remaining provision in 2022 was related to qualitative factor increases to reflect uncertainty in current general economic conditions and a modest increase in unallocated ALL.

In 2021, the impact of growth in the originated loan portfolio and modest charge-offs were offset by a reduction in Q-Factors related to economic qualitative factor decreases to reflect reduced uncertainty in current general economic conditions and a modest reduction in the unallocated reserve.

Management believes that the provisions for the years ended December 31, 2022, and 2021, are both adequate in view of the condition of the Bank’s loan portfolio and the sufficiency of collateral supporting non-performing loans as of the respective year-end dates.

We are continually monitoring non-performing loan relationships and will make provisions, as necessary, if the facts and circumstances change.

In addition, a decline in the quality of our loan portfolio as a result of general economic conditions, factors affecting particular borrowers or our market areas, or other factors could all affect the adequacy of our ALL.

If there are significant charge-offs against the ALL, or we otherwise determine that the ALL is inadequate, we will need to record an additional PLL in the future.

See Note 1, “Nature of Business and Summary of Significant Accounting Policies - Allowance for Loan Losses ” of “Notes to Consolidated Financial Statements and Supplementary Data” to this Form 10-K, for further analysis of the provision for loan losses.

Provision for Credit Losses.

We determine our provision for credit losses (“provision”) based on our desire to provide an adequate Allowance for Credit Losses (“ACL”) - Loans to reflect estimated lifetime losses in our loan portfolio and ACL - Unfunded Commitments to reflect estimated losses on our unfunded commitments to lend.

We use a third-party model to collectively evaluate and estimate the ACL on loans and unfunded commitments on a pooled basis.

The model pools loans and commitments with similar characteristics and calculates an estimated loss rate for the pool based on identified risk drivers.

These risk drivers vary with loan type.

Projections about future economic conditions and the effect they could have on future losses are inherent in the model.

Loans with uniquely identified circumstances and risks are individually evaluated.

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

Total benefit, i.e., negative provision, for credit losses for the twelve months ended December 31, 2023, was $0.475 million, compared to provision of $1.475 million for the twelve months ended December 31, 2022.

The current year’s negative provision is primarily the result of net recoveries of $0.425 million in the last six months of 2023 and improving forecasted future economic conditions.

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 good overall economic trends for businesses.

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 twelve-month period 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.

In addition, a decline in the quality of our loan portfolio as a result of general economic conditions, factors affecting particular borrowers or our market areas, or otherwise, could all affect the adequacy of our ACL.

If there are significant charge-offs against the ACL, or we otherwise determine that the ACL is inadequate, we will need to record an additional provision in the future.

Non-Interest Income .

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N/M means not meaningful

Service charges on deposit accounts increased $292 thousand due to an increase in customer spending activity.

Loan servicing income decreased largely due to decreased capitalized mortgage servicing rights as a result of lower mortgage loan origination sold volumes.

The decrease in gain on sale of loans in 2022 is due to fewer mortgage loan originations and lower related sale volumes and a decrease in SBA loans sold.

Net gains on investment securities decreased in 2022 due to no realized gains on sale of AFS securities in 2022, compared to a $573 thousand net gain on sale in 2021.

The sales in 2021 consisted of senior debt of large bank holding companies and lower yielding trust preferred securities.

Both helped fund loan growth and decrease 100% risk weighted AFS securities.

The net gains on investment securities were also impacted by smaller increases in the market value of our investment in Farmer Mac and Bankers’ Bank stock and the recognition of $367 thousand of net unrealized gain on investments recorded at Net Asset Value (“NAV”).

Other income decreased largely due to the cash receipt of $131 thousand in 2021 related to a private mortgage-backed security claim.

This cash receipt represents a supplement to the proceeds received in fiscal 2015 from the private mortgage-backed security previously owned by the Bank and sold in 2011.

Loan servicing income decreased for the twelve-month period ended December 31, 2023, compared to the same prior year period, due to lower origination volume of loans sold resulting in lower capitalization of mortgage service rights, along with lower mortgage servicing income due to servicing a smaller portfolio.

The increase in gain on sale of loans in 2023 is due to an increase in SBA loans sold, more than offsetting lower mortgage gains.

Loan fees and services charges are lower for the twelve-month period ended December 31, 2023, compared to the same period in 2022 due to lower customer transaction activity.

The change in net gains on investment securities between the twelve months ended December 31, 2023, and the twelve months ended December 31, 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.

Other non-interest income increased for the twelve months ended December 31, 2023, compared to the same period in 2022 due in part to higher BOLI income and certain positive one-time events.

Non-Interest Expense.

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Professional services 1,524 1,707 (10.72)%

Gains on repossessed assets, net (395) (199) 98.49%

(Losses) gains on repossessed assets, net 62 (395) (115.70)%

New market tax credit depletion — 650 N/M

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Non-interest expense (annualized) / Average assets 2.19 % 2.32 %

Compensation expense decreased in 2022 primarily due to lower salaries due to lower headcount and a decrease in incentives based on performance.

Professional fees increased slightly in 2022 largely due to a modest increase in utilization of third parties in completing one-time and ongoing projects.

Gains on repossessed assets increased largely due to the sale of a former branch sold in 2022, partially offset by limited gains on sales of repossessed assets due to foreclosure compared to 2021.

In the first quarter of 2022, the Bank invested $4.1 million in a New Markets Tax Credit (“NMTC”).

Based on current accounting guidance, the related non-tax-deductible asset depletion will occur over a 5-year period in lockstep with the recognition of the tax credit.

The Emerging Issues Task Force of the Financial Accounting Standards Board has issued guidance that, if implemented in its current proposal, would change the depletion expense from equal to the tax credit until the asset is depleted, to being proportional with the NMTC recognized, which is seven years.

Other non-interest expense increased in 2022 primarily due to branch closure costs in 2022 of $1.0 million and $0.3 million of increased origination costs and deposit product costs.

Compensation expense decreased in 2023 largely due to lower incentive compensation due to lower production volumes and lower net income.

Amortization of intangible assets decreased for the twelve months ended December 31,2023, from the same prior year period, as intangible assets related to certain acquisitions have been fully amortized .

Mortgage servicing rights expense, net increased for the twelve months ended December 31, 2023, compared to the comparable prior year period 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 twelve months ended December 31, 2023, compared to the prior year period, due to management’s intentional decision to limit expenditures.

The FDIC insurance premium increased for the twelve-month period ended December 31, 2023, from the comparable prior year period 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 .

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

Based on the applicable accounting guidance at the time of investment, the related non-tax-deductible asset depletion would have occurred over a 5-year period in lockstep with the recognition of the tax credit.

In March of 2023, FASB issued ASU 2023-02, which allows for proportional amortization of tax credit investments that meet certain criteria.

We determined that our New Market Tax Credit investment met the criteria of ASU 2023-02 and chose to early adopt, using the modified retrospective approach as of January 1, 2023.

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

The decrease in other expenses during the twelve months ended December 31, 2023, from the comparable prior year period, is largely related to branch closure costs incurred in 2022 of $1.0 million compared to $0.4 million in 2023.

Income Taxes.

Income tax provision was $5.8 million in 2022 compared to $7.7 million for 2021 primarily due to the impact of lower pre-tax income and the impact of the new market tax credit purchased in 2022 discussed above.

Income tax provision was $5.9 million in 2023 compared to $5.8 million for 2022.

The 2023 effective tax rate was 31.0% compared to 24.7% in 2022.

This difference is primarily due to the impact of the NMTC.

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

However, this benefit was 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, with the charge creating a Wisconsin state tax valuation allowance.

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.

Income tax expense recorded in the accompanying Consolidated Statements of Operations involves interpretation and application of certain accounting pronouncements and federal and state tax codes and is, therefore, considered a critical accounting policy.

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Such taxing authorities may require that changes in the amount of tax expense or the amount of the valuation allowance be recognized when their interpretations differ from those of management, based on their judgments about information available to them at the time of their examinations.

As noted above, a Wisconsin income tax valuation allowance was created due to the Wisconsin budget law change, resulting in reduction of the realization of Wisconsin deferred tax assets.

BALANCE SHEET ANALYSIS

Total assets increased $76.8 million to $1.82 billion at December 31, 2022, from $1.74 billion at December 31, 2021.

Strong originated loan growth was funded by the utilization of excess asset liquidity, resulting in a decrease in cash and cash equivalents, net deposit growth, and the utilization of FHLB advances.

Total assets increased by $35.0 million to $1.85 billion at December 31, 2023, from $1.82 billion at December 31, 2022.

Cash and Cash Equivalents.

Cash and cash equivalents decreased from $47.7 million at December 31, 2021, to $35.4 million at December 31, 2022.

As noted above, this decrease, along with deposit growth and FHLB advances, funded loan portfolio growth.

Cash and cash equivalents increased from $35.4 million at December 31, 2022, to $37.1 million at December 31, 2023, largely due to an increase in interest-bearing balances.

Investment Securities.

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Securities AFS (recorded at fair value), which represent the majority of our investment portfolio, decreased to $155.7 million at December 31, 2023, compared with $166.0 million at December 31, 2022.

This decrease is due to the change in unrealized losses of $24.6 million in 2022, along with principal repayments and maturities.

These reductions were partially offset primarily by purchases of bank holding company issued capital instruments, which are classified as corporate debt securities.

In 2021, the sale of trust preferred securities issued by bank holding companies with an amortized cost of $17.4 million and $10.6 million of non-CDFI bank holding company senior debt, reduced the portfolio of these securities to zero.

The weighted average coupon of these sales was 2.2%.

The sale of these 100% risk-weighted assets partially offset the impact of loan growth on risk-weighted assets and increased the overall yield of interest-earning assets.

In addition, the bank sold $9.7 million of other AFS securities, largely U.S.

agency mortgage-backed securities.

These 2021 sales resulted in net realized gains of $573 thousand, which is included in net gains on investment securities in the Consolidated Statements of Operations

Securities held to maturity increased to $96.4 million at December 31, 2022, compared to $71.1 million at December 31, 2021.

The increase was largely due to the purchase of agency mortgage-backed securities, net of principal repayments.

The unrealized loss on the held to maturity portfolio increased by $17.6 million during the year to $19.6 million at December 31, 2022.

This decrease is due to principal repayments, maturities and $5 million of SBA floating-rate securities sales.

These reductions were partially offset by purchases of $8 million of SBA floating-rate securities.

Securities held to maturity decreased to $91.2 million at December 31, 2023, compared to $96.4 million at December 31, 2022.

The decrease was largely due to principal repayments.

The unrealized loss on the held to maturity portfolio decreased by $1.6 million during the year to $18.0 million at December 31, 2023.

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

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government agency obligations $ 16,655 $ 16,576

Obligations of states and political subdivisions — —

Mortgage-backed securities 91,091 73,480

Corporate debt securities 47,158 41,174

Corporate asset-backed securities 29,877 28,817

Asset-backed securities 24,840 24,513

Total available for sale securities $ 179,744 $ 155,743

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government agency obligations $ 18,373 $ 18,313

Obligations of states and political subdivisions 140 140

Mortgage-backed securities 97,458 78,610

Corporate debt securities 44,636 40,251

Corporate asset-backed securities 33,902 33,908

Asset-backed securities 29,877 28,817

Total available for sale securities $ 190,344 $ 165,991

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Cost Estimated

Due in one year or less $ 100 $ 100

Due after one year through five years 500 465

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Corporate debt securities 3,350 76 35,916 5,914 39,266 5,990

Corporate asset-backed securities 7,955 221 20,862 839 28,817 1,060

Asset-backed securities 3,348 22 20,008 317 23,356 339

Total available for sale securities $ 10,474 $ 103 $ 133,027 $ 23,993 $ 143,501 $ 24,096

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Corporate debt securities 21,547 1,688 18,704 2,697 40,251 4,385

Corporate asset-backed securities 19,296 127 — — 19,296 127

Asset-backed securities 7,955 221 20,862 839 28,817 1,060

Total available for sale securities $ 42,325 $ 2,943 $ 109,611 $ 21,583 $ 151,936 $ 24,526

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BBB 38,959 33,883 38,936 35,118

Below investment grade — — — —

Non-rated — — — —

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government agency $ 90,629 $ 72,697 $ 95,779 $ 76,233

AA — — 4,000 4,000

A 600 565 600 546

Below investment grade — — — —

Non-rated — — — —

Total $ 91,229 $ 73,262 $ 96,379 $ 76,779

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

At December 31, 2021, the Bank has pledged certain of its mortgage-backed securities with a carrying value of $0.9 million as collateral to secure a line of credit with the Federal Reserve Bank.

As of December 31, 2023, the Bank also has mortgage-backed securities with a carrying value of $0.2 million and U.S.

Government Agencies with a carrying value of $0.4 million pledged as collateral to the Federal Home Loan Bank of Des Moines.

At December 31, 2022, the Bank 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.

As of December 31, 2022, there were no borrowings outstanding on this Federal Reserve Bank line of credit.

3 unchanged sentences

Total loans outstanding, net of deferred loan fees and costs, increased to $1.46 billion at December 31, 2023, from $1.42 billion at December 31, 2022.

Gross loan growth consisted largely of $27.5 million in commercial real estate loans, $30.6 million of multi-family real estate loans, $23.0 of construction and land development loans, and $13.8 million of commercial and industrial loan growth.

In addition, the growth in residential mortgage and agricultural real estate portfolios of $23.8 million exceeded the reduction in the remaining loan portfolios of $19.6 million.

Included in the shrink numbers above is 100% of the of SBA PPP loans of $8.8 million at December 31, 2021.

Gross loan growth consisted largely of $24.6 million in commercial real estate loans, $19.2 million of multi-family real estate loans, $8.4 million in construction and land development loans and residential mortgage loan growth of $23.6 million.

The growth in these portfolios exceeded the reduction in the remaining loan portfolios of $27.1 million.

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

19 unchanged sentences

Total C&I/Agricultural operating and Consumer installment loans 160,079 11.0 % 182,205 12.8 %

Gross loans before SBA PPP loans 1,416,135 100.3 % 1,308,290 99.8 %

SBA PPP Loans — — % 8,755 0.7 %

Gross loans 1,464,897 100.3 % 1,416,135 100.3 %

2 unchanged sentences

Total loans (net of unearned income and deferred expense) 1,460,792 100.0 % 1,411,784 100.0 %

Allowance for Loan losses (17,939) (16,913)

Allowance for credit losses (22,908) (17,939)

Total loans receivable, net $ 1,437,884 $ 1,393,845

30 unchanged sentences

Total loans (net of unearned income) 1,460,792 100.0 % 1,411,784 100.0 %

Allowance for loan losses (17,939) (16,913)

Allowance for credit losses (22,908) (17,939)

Total loans receivable, net $ 1,437,884 $ 1,393,845

13 unchanged sentences

Loan amounts, their contractual maturities and weighted average interest rates at December 31, 2022 are shown below.

SBA PPP loans at an interest rate of 1% are included in the C&I/agricultural operating segment amounts as follows:

(1) $2.1 million is included in the one year or less amounts and (2) $6.7 million is included in the one year to five-year amounts.

Real estate Non-real estate

11 unchanged sentences

We believe that the critical factors in the overall management of credit or loan quality are sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, recording an adequate allowance to provide for incurred loan losses, and reasonable non-accrual and charge-off policies.

The following table summarizes SBA PPP loans by origination year as of December 31, 2022 and December 31, 2021, respectively.

2020 Originations 2021 Originations Total

Balance Net Deferred Fee Income Balance Net Deferred Fee Income Balance Net Deferred Fee Income

SBA PPP loans, December 31, 2020 $ 123,702 $ 2,991 $ — $ — $ 123,702 $ 2,991

2021 SBA PPP loan originations — — 55,854 3,494 55,854 3,494

2021 SBA PPP loan forgiveness and fee accretion (121,574) (2,987) (49,227) (3,201) (170,801) (6,188)

SBA PPP loans, December 31, 2021 2,128 4 6,627 293 8,755 297

2022 SBA PPP loan forgiveness and fee accretion (2,128) (4) (6,627) (293) (8,755) (297)

SBA PPP loans, December 31, 2022 $ — $ — $ — $ — $ — $ —

Risk Management and the Allowance for Loan Losses.

The loan portfolio is our primary asset subject to credit risk.

To address this credit risk, we maintain an ALL for probable and inherent credit losses through periodic charges to our earnings.

These charges are shown in our accompanying Consolidated Statements of Operations as Provision for Loan Losses.

See “Statement of Operations Analysis - Provision for Loan Losses ” above.

We attempt to control, monitor, and minimize credit risk through the use of prudent lending standards, a thorough review of potential borrowers prior to lending and ongoing and timely review of payment performance.

Asset quality administration, including early identification of loans performing in a substandard manner, as well as timely and active resolution of problems, further enhances management of credit risk and minimization of loan losses.

Any losses that occur and that are charged off against the ALL are periodically reviewed with specific efforts focused on achieving maximum recovery of both principal and interest on the affected loan.

At least quarterly, we review the adequacy of the ALL.

Based on an estimate computed pursuant to the requirements of ASC 450-10, “ Accounting for Contingencies” and ASC 310-10, “ Accounting by Creditors for Impairment of a Loan” , the analysis of the ALL consists of three components:

(i) specific credit allocation established for expected losses relating to specific impaired loans for which the recorded investment in the loan exceeds its fair value;

(ii) general portfolio allocation based on historical loan loss experience for significant loan categories;

and (iii) general portfolio allocation based on qualitative factors such as economic conditions and other relevant factors specific to the markets in which we operate.

We currently segregate loans into pools based on common risk characteristics for purposes of determining the ALL.

The additional segmentation of the portfolio is intended to provide a more effective basis for the determination of qualitative factors affecting our ALL.

In addition, management continually evaluates our ALL methodology to assess whether modifications in our methodology are appropriate in light of underwriting practices, market conditions, identifiable trends, regulatory pronouncements or other factors.

Changes in the ALL by loan portfolio segment for the periods presented were as follows:

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

Year ended December 31, 2022:

Allowance for Loan Losses:

Beginning balance, January 1, 2022 $ 12,354 $ 1,959 $ 518 $ 225 $ 774 $ 15,830

Charge-offs (157) (310) (35) (45) — (547)

Recoveries 74 35 2 50 — 161

Provision 1,280 571 89 (109) 34 1,865

Total Allowance on originated loans 13,551 2,255 574 121 808 17,309

Other acquired loans:

Beginning balance, January 1, 2022 856 69 130 28 — 1,083

Charge-offs (48) (36) (33) (3) — (120)

Recoveries 28 1 27 1 — 57

Provision (302) 29 (99) (18) — (390)

Total allowance on other acquired loans 534 63 25 8 — 630

Total allowance on acquired loans 534 63 25 8 — 630

Ending balance, December 31, 2022 $ 14,085 $ 2,318 $ 599 $ 129 $ 808 $ 17,939

Risk Management and the Allowance for Credit Losses - Loans.

The Allowance for Credit Losses - Loans (“ACL”) is a valuation allowance for expected future credit losses in the Company’s loan portfolio as of the balance sheet date.

In determining the allowance, the Company estimates credit losses over the loan’s entire contractual term, adjusted for expected prepayments when appropriate.

The allowance estimate considers qualitative and quantitative relevant information from internal and external sources relating to historical loss experience;

known and inherent risks in our portfolio;

information about specific borrowers’ ability to repay;

estimated collateral values;

current economic conditions;

reasonable and supportable forecasts for future conditions;

and other relevant factors determined by management.

To ensure that the ACL is maintained at an adequate level, a detailed analysis is performed on a quarterly basis and an appropriate provision is made to adjust the allowance.

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

The determination of the ACL requires significant judgement to estimate credit losses.

The ACL is measured collectively on a pooled basis when similar risk characteristics exist, and on an individual basis when management determines that the loan does not share similar risk characteristics with other loans.

The ACL on loans collectively evaluated is measured using the loss rate model.

The Company categorizes its loan portfolio into four segments based on similar risk characteristics.

Loans within each segment are pooled based on individual loan characteristics.

Aggregated risk drivers are then calculated at a pool level.

Risk drivers are identified attributes that have proven to be predictive of loan loss rates and vary based on loan segment and type.

A loss rate is calculated and applied to the pool utilizing a model that combines the pool’s risk drivers, historical loss experience, and reasonable and supportable future economic forecasts to projected lifetime losses.

The loss rate is then combined with the loan’s balance and contractual maturity, adjusted for expected prepayments, to determine expected future losses.

Future and supportable economic forecasts are based on national economic conditions and their reversion to the mean is implicit in the model and generally occurs over a period of two years.

Qualitative adjustments are made to the allowance calculated on collectively evaluated loans to incorporate factors not included in the model.

Qualitative factors include but are not limited to:

lending policies and procedures, the experience and ability of lending and other staff, the volume and severity of problem credits, quality of the loan review system, and other external factors.

Loans that exhibit different risk characteristics from the pool are individually evaluated for impairment.

Loans can be identified for individual evaluation for a variety of reasons including delinquency, nonaccrual status, risk rating and loan modification.

Accruing loans that exhibit different risk characteristics from their pool may also be within scope.

On these loans, an allowance may be established so that the loan is reported, net, at the lower of (a) its amortized cost;

(b) the present value of the loan’s estimated future cash flows using the loan’s existing rate;

or (c) at the fair value of any loan collateral, less estimated disposal costs, if the loan is collateral dependent.

Collateral dependency is determined using the practical expedient when:

(1) the borrower is experiencing financial difficulty;

and (2) repayment is expected to be provided substantially through the sale or operation of the collateral.

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’ 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.

The Allowance for Credit Losses - Unfunded Commitments on off-balance sheet exposures is included in other liabilities on the consolidated balance sheet.

On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments using the modified retrospective method.

This adoption resulted in a $4.7 million increase in the ACL on loans (“ACL - Loans”) and established a $1.5 million ACL on unfunded commitments (“ACL - Unfunded Commitments”).

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 $0.3 million to $23.0 million at December 31, 2023, representing 1.57% 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 from ACL adoption in 2023, was primarily due to net loan recoveries.

The ACL - Unfunded Commitments, established under ASU 2016-13, was $1.3 million at December 31, 2023.

Allowance for Credit Losses - Loans Roll Forward

(in thousands, except ratios)

Twelve Months Ended

2023 December 31,

Allowance for Credit Losses (“ACL”)

ACL - Loans, at beginning of period $ 17,939 $ 16,913

Cumulative effect of ASU 2016-13 adoption 4,706 —

Loans charged off:

Commercial/Agricultural real estate (46) (205)

C&I/Agricultural operating — (346)

Residential mortgage (78) (68)

Consumer installment (36) (48)

Total loans charged off (160) (667)

Recoveries of loans previously charged off:

Commercial/Agricultural real estate 489 102

C&I/Agricultural operating 47 36

Residential mortgage 42 29

Consumer installment 33 51

Total recoveries of loans previously charged off:

Net loan recoveries/(charge-offs) (“NCOs”) 451 (449)

(Reversals)/additions to ACL - Loans via provision for credit losses charged to operations (188) 1,475

ACL - Loans, at end of period $ 22,908 $ 17,939

Average outstanding loan balance $ 1,430,035 $ 1,351,052

NCOs (annualized) to average loans (0.03) % 0.03 %

Allowance for Credit Losses - Loans Activity by Segment

(in thousands, except ratios)

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

Year ended December 31, 2021:

Allowance for Loan Losses:

Beginning balance, January 1, 2021 $ 10,271 $ 2,112 $ 1,041 $ 489 $ 906 $ 14,819

Charge-offs (51) — — (54) — (105)

Recoveries 14 110 9 41 — 174

Provision 2,120 (263) (532) (251) (132) 942

Total Allowance on originated loans 12,354 1,959 518 225 774 15,830

Other acquired loans:

Beginning balance, January 1, 2021 $ 1,684 $ 141 $ 335 $ 64 $ — $ 2,224

Twelve months ended December 31, 2023

Allowance for Credit Losses - Loans:

ACL - Loans, at beginning of period $ 14,085 $ 2,318 $ 599 $ 129 $ 808 $ 17,939

Cumulative effect of ASU 2016-13 adoption 4,510 (331) 1,119 216 (808) 4,706

Charge-offs (46) — (78) (36) — (160)

Recoveries 489 47 42 33 — 611

Provision (642) (78) (209) (13) — (942)

Total Allowance on other acquired loans 856 69 130 28 — 1,083

Total Allowance on acquired loans 856 69 130 28 — 1,083

Ending balance, December 31, 2021 $ 13,210 $ 2,028 $ 648 $ 253 $ 774 $ 16,913

The specific credit allocation for the ALL is based on a regular analysis of all originated loans that are considered impaired.

In compliance with ASC 310-10, the fair value of the loan is determined based on either the present value of expected cash flows discounted at the loan’s effective interest rate, the market price of the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral less the expected cost of sale for such collateral.

At December 31, 2022, the Company had evaluated loans for impairment with a recorded investment of $26.8 million, consisting of $7.0 million PCI loans, with a carrying amount of $6.9 million, $7.0 million of TDR loans, net of TDR PCI loans and $12.9 million of substandard non-TDR non-PCI loans.

The $26.8 million total of loans individually evaluated for impairment includes $5.2 million of performing TDR loans.

At December 31, 2021, the Company had evaluated loans for impairment with a recorded investment of $31.7 million, consisting of $11.2 million PCI loans, with a carrying amount of $10.6 million, $9.9 million of TDR loans, net of TDR PCI loans and $11.3 million of substandard non-TDR non-PCI loans.

The $31.7 million total of loans individually evaluated for impairment includes $8.0 million of performing TDR loans.

At December 31, 2022, the allowance for loan losses was $17.9 million or 1.27% of total loans compared to $16.9 million or 1.29% of our total loan portfolio at December 31, 2021.

This level was based on our analysis of the loan portfolio risk at each of December 31, 2022, and December 31, 2021, as discussed above.

Allowance for Loan Losses to Loans, net of SBA PPP Loans

(Reversals)/additions to ACL - Loans via provision for credit losses charged to operations (254) (929) 1,062 (67) — (188)

ACL - Loans, at end of period $ 18,784 $ 1,105 $ 2,744 $ 275 $ — $ 22,908

Allowance for Credit Losses - Loans to Percentage

(in thousands, except ratios)

2023 December 31,

Loans, end of period $ 1,460,792 $ 1,411,784

SBA PPP loans, net of deferred fees — (8,457)

Loans, net of SBA PPP loans and deferred fees $ 1,411,784 $ 1,302,506

Allowance for loan losses $ 17,939 $ 16,913

ALL to loans, end of period 1.27 % 1.29 %

All of the nine factors identified in the FFIEC’s Interagency Policy Statement on the Allowance for Loan and Lease Losses are taken into account in determining the ALL.

The impact of the factors in general categories are subject to change;

thus, the allocations are management’s estimate of the loan loss categories in which the probable and inherent loss has occurred as of the date of our assessment.

Of the nine factors, we believe the following have the greatest impact on our customers’ ability to repay loans and our ability to recover potential losses through collateral sales:

(1) lending policies and procedures;

(2) economic and business conditions;

and (3) the value of the underlying collateral.

As loan balances and estimated losses in a particular loan type decrease or increase and as the factors and resulting allocations are monitored by management, changes in the risk profile of the various parts of the loan portfolio may be reflected in the allocated allowance.

The general component of our ALL-covers non-impaired loans and is based on historical loss experience adjusted for these and other qualitative factors.

In addition, management continues to refine the ALL estimation process as new information becomes available.

These refinements could also cause increases or decreases in the ALL.

The unallocated portion of the ALL is intended to account for imprecision in the estimation process or relevant current information that may not have been considered in the process.

Accruing loans 30-89 days or more past due increased $7.5 million at December 31, 2022, compared to December 31, 2021, largely related to increases in agricultural real estate and construction and land development loans 30-59 days delinquent.

Nonaccrual loans decreased modestly to $11.2 million at December 31, 2022, from $11.7 million at December 31, 2021.

We believe our credit and underwriting policies continue to support more effective lending decisions by the Bank, which increases the likelihood of maintaining loan quality going forward.

Refer to the “Risk Management and the Allowance for Loan Losses” section below for more information related to non-performing loans.

For the year ended December 31, 2022, net loan charge-offs were $0.449 million compared to $0.130 million for the year ended December 31, 2021.

Certain external factors may result in higher future losses but are not readily determinable at this time, including, but not limited to:

unemployment rates, increased taxes and continuing increased regulatory expectations with respect to ALL levels.

As a result, our analysis may show a need to increase our ALL as a percentage of total loans and nonperforming loans for the near future.

Loans charged-off are subject to periodic review and specific efforts are taken to achieve maximum recovery of principal, accrued interest and related expenses on the loans charged-off.

COVID-19 Loan Modifications.

In response to COVID-19, our banking regulator issued an Interagency Statement encouraging financial institutions to work prudently with borrowers who are or may be unable to meet their contractual obligations due to COVID-19.

Additionally, Section 4013 of the CARES Act provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020, until the earlier of December 31, 2020, or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act is terminated.

Section 541 of the Consolidated Appropriations Act, 2021 extends this relief to the earlier of January 1, 2022, or 60 days after the national emergency termination date.

The President of the United States has announced that the national emergency declaration will end on May 11, 2023.

The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act.

In accordance with this guidance, the Bank instituted a plan to offer modifications to impacted borrowers.

The Bank continues to work with borrowers as the pandemic persists and is requiring additional support in exchange for additional modifications beyond the original term.

As of December 31, 2022, the Bank has $0.1 million of remaining residential mortgage COVID-19 related modifications under Section 4013 of the CARES Act.

previously deferred commercial loans have exited deferral status.

At December 31, 2021, COVID-19 related modifications under Section 4013 of the CARES Act totaled $6.6 million, or 0.5% of gross loans.

ACL - Loans $ 22,908 $ 17,939

ACL - Loans to loans, end of period 1.57 % 1.27 %

Allowance for Credit Losses - Unfunded Commitments:

(in thousands)

In addition to the ACL - Loans, the Company has established an ACL - Unfunded Commitments of $1.250 million at December 31, 2023 and $0 at December 31, 2022, classified in other liabilities on the consolidated balance sheets.

December 31, 2023 and Twelve Months Ended December 31, 2022 and Twelve Months Ended

ACL - Unfunded Commitments - beginning of period $ — $ —

Cumulative effect of ASU 2016-13 adoption 1,537 —

Reversals to ACL - Unfunded Commitments via provision for credit losses charged to operations (287) —

ACL - Unfunded Commitments - end of period $ 1,250 $ —

Nonperforming Loans, Potential Problem Loans and Foreclosed Properties.

7 unchanged sentences

When interest accruals are discontinued, interest credited to income is reversed.

If collection is in doubt, cash receipts on non-accrual loans are used to reduce principal rather than recorded as interest income.

Restructuring a loan typically involves the granting of some concession to the borrower involving a loan modification, such as modifying the payment schedule or making interest rate changes.

Restructured loans may involve loans that have 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.

Restructured loans that comply with the restructured terms are considered performing loans.

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

If collection is in doubt, cash receipts on non-accrual loans are used to reduce principal rather than being recorded as interest income.

The Company adopted ASU 2022-02 on January 1, 2023, which eliminated special accounting rules for TDRs.

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

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 non-performing assets and other balance sheet information as of the dates indicated below and changes in the ACL for the periods then ended:

December 31, 2023 and twelve months ended December 31, 2022 and twelve months ended

3 unchanged sentences

Agricultural real estate 391 2,742

Construction and land development 54 —

Commercial and industrial (“C&I”) — 552

8 unchanged sentences

Total nonperforming assets (“NPAs”) $ 15,368 $ 12,721

Troubled Debt Restructurings (“TDRs”) $ 7,788 $ 12,523

Nonaccrual TDRs $ 2,617 $ 4,539

Average outstanding loan balance $ 1,430,035 $ 1,351,052

1 unchanged sentence

Total assets, end of period $ 1,851,391 $ 1,816,386

ALL, at beginning of period $ 16,913 $ 17,043

ACL - Loans, at beginning of period $ 17,939 $ 16,913

Cumulative effect of ASU 2016-13 adoption 4,706 —

Loans charged off:

10 unchanged sentences

Total recoveries of loans previously charged off:

Net loans charged off (“NCOs”) (449) (130)

Additions to ALL via provision for loan losses charged to operations 1,475 —

ALL, at end of period $ 17,939 $ 16,913

ALL to NCOs (annualized) 3,995.32 % 13,010.00 %

Net loan recoveries/(charge-offs) (“NCOs”) 451 (449)

(Reversals)/additions to ACL - Loans via provision for credit losses charged to operations (188) 1,475

ACL - Loans, at end of period $ 22,908 $ 17,939

ACL to NCOs (annualized) (5,079.38) % 3,995.32 %

NCOs (annualized) to average loans 0.03 % (0.03) %

ALL to total loans 1.27 % 1.29 %

ACL to total loans 1.57 % 1.27 %

NPLs to total loans 0.93 % 0.81 %

NPAs to total assets 0.83 % 0.70 %

The following table shows the detail of non-performing assets by originated and acquired portfolios.

Nonperforming Originated and Acquired Assets

December 31, 2022 December 31, 2021

Nonperforming assets:

Originated nonperforming assets:

Nonaccrual loans $ 8,947 $ 6,448

Accruing loans past due 90 days or more 213 63

Total originated nonperforming loans (“NPL”) 9,160 6,511

Other real estate owned (“OREO”) 1,041 —

Other collateral owned 6 2

Total originated nonperforming assets (“NPAs”) $ 10,207 $ 6,513

Acquired nonperforming assets:

Nonaccrual loans $ 2,257 $ 5,217

Accruing loans past due 90 days or more 33 97

Total acquired nonperforming loans (“NPL”) 2,290 5,314

Other real estate owned (“OREO”) 224 1,406

Other collateral owned — —

Total acquired nonperforming assets (“NPAs”) $ 2,514 $ 6,720

Total nonperforming assets (“NPAs”) $ 12,721 $ 13,233

Loans, end of period $ 1,411,784 $ 1,310,963

Total assets, end of period $ 1,816,386 $ 1,739,628

Originated NPLs to total loans 0.65 % 0.50 %

Acquired NPLs to total loans 0.16 % 0.41 %

Originated NPAs to total assets 0.56 % 0.37 %

Acquired NPAs to total assets 0.14 % 0.39 %

Non-performing assets include non-performing loans, other real estate owned, and other collateral owned.

Our non-performing assets were $12.7 million, or 0.70% of total assets, at December 31, 2022, compared to $13.2 million, or 0.76% of total assets, at December 31, 2021.

The decrease was largely due to a decrease in acquired nonaccrual loans and sale of a former branch asset transferred to OREO in 2021, partially offset by an increase in acquired nonaccrual loans and the transfer to OREO of two former branch assets in 2022.

Nonaccrual Loans Roll Forward

December 31, 2022 December 31, 2021

Quarter Ended

2023 September 30,

2023 June 30,

2023 March 31, 2023 December 31, 2022

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

3 unchanged sentences

Return to accrual status — (190) — (252) —

Repurchase of government guaranteed loans 517

Payments received (781) (1,994) (2,429) (527) (561)

1 unchanged sentence

Balance, end of period $ 13,184 $ 13,456 $ 15,663 $ 10,410 $ 11,204

The table below shows the totals of accruing troubled debt restructurings as of December 31, 2022, and December 31, 2021.

The decrease in troubled debt restructurings from 2021 to 2022 in dollars was largely due to one commercial real estate loan of $3.5 million that paid in full in 2022.

Troubled Debt Restructurings in Accrual Status

December 31, 2022 December 31, 2021

Modifications Recorded

Investment Number of

Nonaccrual loans increased by $2.0 million at December 31, 2023, from $11.2 million at December 31, 2022, largely due to adding a $5.4 million hotel loan from special mention to substandard and nonaccrual in the second quarter of 2023, partially offset by payments received, which include loan payoffs.

Nonperforming assets increased to $15.4 million or 0.83% of total assets at December 31, 2023, compared to $12.7 million, or 0.70% of total assets at December 31, 2022.

During 2023, the transfer of a closed branch to REO was offset by the reduction in 90+ delinquent and accruing residential 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 twelve months ended December 31, 2023.

Term Extension

Loan Class Amortized Cost Basis at

December 31, 2023 % of Total Class of Financing Receivables

Commercial real estate $ 4,694 0.63 %

Commercial and industrial $ 2,200 1.82 %

Residential mortgage $ 35 0.03 %

Other consumer $ 1 0.02 %

Other-Than-Insignificant Payment Delay

Loan Class Amortized Cost Basis at

December 31, 2023 % of Total Class of Financing Receivables

Residential mortgage $ 69 0.05 %

Other consumer $ 19 0.31 %

Included in the nonaccrual loans roll forward table above, for periods prior to the January 1, 2023 adoption of ASU 2022-02 are nonaccrual TDR loans.

Nonaccrual TDR loans were $2.6 million at December 31, 2022.

December 31, 2022

Modifications Recorded

6 unchanged sentences

Total loans 51 $ 5,171

The table below shows the totals of special mention, substandard and the total of these, known as criticized loans as of December 31, 2022, and 2021.

The increase in criticized loans in 2022 was largely due to the addition of two loans in the second quarter of 2022.

One was a commercial real estate loan secured by a hotel, and the other was a fully secured C&I working capital loan.

This increase was partially offset by a reduction in originated accruing TDR loans, nonperforming and other substandard loans.

December 31, 2022 December 31, 2021

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

Criticized loans increased by $8.5 million in the twelve months ended December 31, 2023.

Two new relationships, each $9 million, moved to special mention in the second quarter and a $5 million relationship moved from special mention to substandard in the second quarter.

Special mention loans decreased $1.7 million in the fourth quarter, largely due to loans being upgraded and principal reductions of $2.2 million.

Substandard changes from December 31, 2022, are impacted by the addition of a $5 million loan relationship in the second quarter moving from special mention and a $3.7 million loan relationship secured by single family rental homes in the Twin Cities added in the fourth quarter, partially offset by loan repayments.

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 December 31, 2023, hotel loans totaled $97 million with a weighted average LTV of 55% and average balance of $3.9 million.

Restaurant loans totaled $52 million, at December 31, 2023.

The weighted-average LTV percentage on these restaurant loans was 48% and the average loan balance was $709 thousand.

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

At December 31, 2023, we have $40 million of office loans with a weighted average LTV of 64% and average loan balance of $574 thousand.

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

(in thousands)

(Loan balance at unpaid principal balance) December 31,

2023 September 30,

2023 June 30,

2023 March 31,

2023 December 31,

Special mention loan balances $ 18,392 $ 20,043 $ 20,507 $ 6,636 $ 12,170

1 unchanged sentence

Criticized loans, end of period $ 37,988 $ 36,214 $ 39,710 $ 22,075 $ 29,489

Accretable difference:

The table below shows scheduled accretion by year for the accretable difference recognized due to fair value purchase accounting on recent whole bank acquisitions.

In addition, the table below shows $1.16 million of accretable discount from purchased impaired loans with the original non-accretable discount transferred to accretable discount.

The accretion on this balance is scheduled to be approximately $80 in 2023;

however, large balance payoffs, as seen in 2022, 2021 and 2020, would accelerate this accretion.

Fiscal years ending December 31, Purchase Accounting Accretable Discount

Thereafter 751

Total $ 1,670

Mortgage Servicing Rights .

The Company continues to sell loans to investors in the secondary market and generally retains the rights to service mortgage loans sold to others.

MSR assets are initially measured at fair value by a third party;

Mortgage servicing rights (“MSR”) assets are initially measured at fair value;

assessed at least quarterly for impairment;

5 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 increased to $5.7 million at December 31, 2022, compared to $4.3 million at December 31, 2021.

Impairment reversals of $0.6 million were recorded in 2022 on the MSR impairment which reduced the impairment to zero at December 31, 2022.

This was partially offset by a reduction in the gross MSR balance of $0.5 million, which was due to amortization of $0.8 million and additions from originations of $0.3 million.

In 2021, amortization was $1.6 million and additions from originations were $1.1 million for a reduction in the gross asset of $0.5 million The unpaid balances of one- to four-family residential real estate loans serviced for others as of December 31, 2022, and December 31, 2021, were $523.7 million and $556.1 million, respectively.

The amortized cost of MSR assets decreased as amortization exceeded additions due to loan sales, resulting in the unpaid balances of one-to-four family residential real estate loans serviced for others to decrease as of December 31, 2023, to $495.5 million from $523.7 million at December 31, 2022.

The fair market value of the Company’s MSR asset was $5.6 million at December 31, 2023, and $5.7 million at December 31, 2022.

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

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

1 unchanged sentence

We have intangible assets of $1.7 million at December 31, 2023, compared to $2.4 million at December 31, 2022.

The intangible assets are comprised of core deposit intangible assets arising from various acquisitions from 2016 through 2019.

The intangible assets were comprised of core deposit intangible assets arising from various acquisitions

from 2016 through 2019.

In the fourth quarter of 2022, one of the acquisition core deposits became fully amortized, leading to a reduction in amortization in 2023.

Amortization of these intangibles was $0.8 million in 2023.

1 unchanged sentence

Included in foreclosed and repossessed assets, net are two closed branch locations that are being held for sale.

These properties are being held at $1,041 and $130, respectively, which represent their estimated fair market values less the cost to sell.

In 2022, a loss of $666 was recognized on the reclassification of these properties from fixed assets to foreclosed assets.

The bank closed on the sale of the property valued at $130 in January 2023 to a non-financial institution at the carrying value.

Deposits are our largest source of funds.

Total deposits increased to $1.42 billion at December 31, 2022, from $1.39 billion at December 31, 2021.

The increase in deposits was largely due to the addition of $39.8 million of broker certificates in the third and fourth quarter.

Based on current market conditions, the brokered CD markets are available to the Bank for supplemental additions.

Growth in non-interest bearing demand deposits and money market accounts was partially offset by a $25.0 million reduction in interest bearing demand deposits as customers sought higher yields and a reduction in CD’s of $17.5 million before the impact of brokered CD additions.

The following is a summary of deposits by type at December 31, 2022 and December 31, 2021, respectively:

December 31, 2022 December 31, 2021

These properties are being held at $0.9 million and $0.7 million, respectively, which represent their estimated fair market values less the anticipated costs to sell.

In 2023, a loss of $0.4 million was recognized on the reclassification of the $0.7 million from property and equipment to foreclosed assets, which was recorded in other expense.

Deposits have grown each quarter since December 31, 2022, with growth in brokered deposits accounting for the growth in the first and second quarters of 2023.

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

Total deposits increased $94.4 million during the twelve months ended December 31, 2023, to $1.52 billion.

Deposit Composition

(in thousands)

2023 September 30,

2023 June 30,

2023 March 31,

2023 December 31,

Non-interest bearing demand deposits $ 265,704 $ 275,790 $ 261,876 $ 247,735 $ 284,722

4 unchanged sentences

Total deposits $ 1,519,092 $ 1,473,235 $ 1,464,682 $ 1,436,793 $ 1,424,720

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

There are no material customer or industry deposit concentrations.

Deposits decreased during January 2023 as commercial customers decreased their cash balances to support the needs of their businesses with the commercial customers balances increasing from March 31, 2023.

Deposit Portfolio Composition

(in thousands)

2023 September 30,

2023 June 30,

2023 March 31,

2023 December 31,

Consumer deposits $ 814,899 $ 794,970 $ 790,404 $ 786,614 $ 805,598

Commercial deposits 423,762 429,358 401,079 391,534 405,733

Public deposits 182,172 163,734 175,869 194,683 173,548

Brokered deposits 98,259 85,173 97,330 63,962 39,841

Total deposits $ 1,519,092 $ 1,473,235 $ 1,464,682 $ 1,436,793 $ 1,424,720

At December 31, 2023, our deposit portfolio composition was 54% consumer, 28% commercial, 12% 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 $275.8 million, or 18% of total deposits at December 31, 2023, and $298.8 million, or 21% of total deposits at December 31, 2022.

Uninsured deposits alone at December 31, 2023, were $427.5 million, or 28% of total deposits, and $441.2 million, or 31% of total deposits at December 31, 2022, with the difference being an increase in fully secured government deposits.

Federal Home Loan Bank (FHLB) advances and other borrowings.

6 unchanged sentences

2028 10,000 3.82 % 3.82 % 2028 — — % — %

2029 — — % — % 2029 42,500 1.00 % 1.13 %

2030 — — % — % 2030 12,500 0.52 % 0.86 %

Subtotal 142,530 111,530

Unamortized discount on acquired notes — (3)

Federal Home Loan Bank advances, net $ 142,530 $ 111,527

Federal Home Loan Bank advances $ 79,530 $ 142,530

Other borrowings:

3 unchanged sentences

$ 50,000 $ 50,000

$ 50,000 $ 30,000

Unamortized debt issuance costs (618) (841)

5 unchanged sentences

(3) The weighted-average interest rates on FHLB borrowings, with maturities less than twelve months, outstanding as of December 31, 2023 and December 31, 2022 were 4.16% and 4.09%, respectively.

(4) At December 31, 2022, no FHLB term notes can be called by the FHLB.

At December 31, 2021, FHLB term notes totaling $55,000 could be called by the FHLB on a quarterly basis, and if not called, would mature at various dates in 2029 and 2030.

These notes were called by the FHLB in 2022.

(4) At December 31, 2023, one FHLB term note totaling $10,000 could be called once by the FHLB on June 15, 2024, and if not called, would mature in 2028.

At December 31, 2022, no FHLB term notes could be called by the FHLB.

(5) Senior notes, entered into by the Company in June 2019 consist of the following:

(a) A term note, which was subsequently refinanced in March 2022, requiring quarterly interest-only payments through March 2025, and quarterly principal and interest payments thereafter.

(a) A term note, which was subsequently refinanced in March 2022 and modified in February of 2023, requiring quarterly interest-only payments through March 2027, and quarterly principal and interest payments thereafter.

Interest is variable, based on US Prime rate minus 75 basis points with a floor rate of 3.00%.

2 unchanged sentences

(a) The Company’s private sale in August 2017, which bore a fixed interest rate of 6.75% for five years.

In August 2022, they converted to a three-month LIBOR plus 4.90% rate, and the interest rate will reset quarterly thereafter.

callable by the Bank when, and anytime after, the floating rate is initially set.

Interest-only payments were due quarterly.

In August 2022, they would have converted to a three-month LIBOR plus 4.90% rate, and the interest rate would have reset quarterly thereafter if not called.

The Company sent the required redemption notice to the note holders in June 2022, and this subordinated note was called and repaid in full on August 10, 2022.

The note was callable by the Bank when, and anytime after, the floating rate was initially set.

Interest-only payments were due quarterly.

(b) The Company’s Subordinated Note Purchase Agreement entered into with certain purchasers in August 2020, which bears a fixed interest rate of 6.00% for five years.

8 unchanged sentences

We utilize advances and other borrowings, as necessary, to supplement core deposits to meet our funding and liquidity needs and we evaluate all options for funding securities.

FHLB advances increased $31.0 million to $142.5 million as of December 31, 2022, compared to $111.5 million as of December 31, 2021.

The Bank terminated $15.0 million of advances in the quarter ended March 31, 2022, incurring a $0.002 million prepayment penalty, as we modestly reduced excess liquidity.

FHLB advances decreased $63.0 million to $79.5 million as of December 31, 2023, compared to $142.5 million as of December 31, 2022.

The Bank had January 2024 advance maturities of $44 million and an additional $5 million of advances maturing in the first quarter of 2024.

The bank entered into $15 million of five-year advances, callable once after six months, in the second quarter of 2023, which were called in the fourth quarter 2023.

The Bank entered into a $10 million five-year maturity advance callable one time in June 2024.

The Bank terminated $15.0 million of advances in the quarter ended March 31, 2022, incurring a $2 thousand prepayment penalty, as we reduced excess liquidity.

$27.5 million of FHLB advances were called by the FHLB in each of the quarters ended June 30, 2022, and September 30, 2022.

The Bank added a $5 million advance maturing in the second quarter of 2023.

The Bank had $12 million of FHLB advances maturing overnight as of December 31, 2022, and an additional $95.0 million maturing in January of 2023.

The Bank had $107 million of FHLB advances maturing in January 2023.

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

1 unchanged sentence

The Bank’s current unused borrowing capacity, supported by loan collateral as of December 31, 2023, is approximately $370.6 million.

The Bank maintains three unsecured federal funds purchased lines of credit with its banking partners which total $75.0 million.

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

The Bank maintains two unsecured federal funds purchased lines of credit with its banking partners which total $70.0 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 December 31, 2023, or December 31, 2022.

At December 31, 2022 and 2021, the Bank had the ability to borrow $4.1 million and $0.8 from the Federal Reserve Bank of Minneapolis.

At December 31, 2023, and 2022, the Bank had the ability to borrow $22.4 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 $29.2 million and $5.4 million as of December 31, 2023, and 2022, respectively.

2 unchanged sentences

Total stockholders’ equity was $173.3 million at December 31, 2023, compared to $167.1 million at December 31, 2022.

The increases in stockholders’ equity included the Company’s net income of $17.8 million and restricted stock amortization of $0.9 million.

These increases were more than offset by:

(1) the repurchase of approximately 129 thousand shares of its common stock, which reduced equity by $1.8 million;

(2) the payment of the annual cash dividend, paid in February 2022, to common stockholders at $0.26 per share or $2.7 million;

and (3) an increase in the unrealized loss on available for sale securities of $17.8 million.

In November 2020, the Board of Directors authorized a 5% or 557 thousand share repurchase program.

The Company repurchased all remaining authorized shares of the Company’s stock under the November 2020 share repurchase program not previously repurchased in 2020 during the year ended December 31, 2021.

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

Under this new share repurchase program, approximately 129 thousand shares were repurchased during the year ended December 31, 2022.

The Company is authorized to repurchase an additional 243 thousand shares under this July 2021 share repurchase program.

On August 16, 2022, the Inflation Reduction Act was signed into law, which includes a 1% excise tax on stock repurchases.

We do not expect the 1% excise tax on stock repurchases under the Inflation Reduction Act will have a material impact to our financial statements for the fiscal years after December 31, 2022.

The increase in stockholders’ equity included the Company’s net income of $13.0 million, restricted stock amortization of $0.7 million and a decrease in the unrealized loss on available for sale securities of $0.3 million, net of tax, due to lower interest rates.

These increases were offset by:

(1) the $4.4 million cumulative effect adjustment from the adoption of ASU 2016-13;

(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) the repurchase of approximately 42 thousand shares of its common stock, which reduced equity by $0.4 million.

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

There were 14 thousand shares repurchased in the second quarter of 2023, no shares repurchased during the first and third quarters of 2023, and 27 thousand

shares repurchased during the fourth quarter.

As of December 31, 2023, an additional 202 thousand shares remain available for repurchase.

Liquidity and Asset / Liability Management.

Liquidity management refers to our ability to ensure cash is available in a timely manner to meet loan demand, depositors’ needs, and meet other financial obligations as they become due without undue

cost, risk, or disruption to normal operating activities.

We manage and monitor our short-term and long-term liquidity positions and needs through a regular review of maturity profiles, funding sources, and loan and deposit forecasts to minimize funding risk.

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

At December 31, 2022, our liquidity ratio decreased to 13.0% percent from 17.0% at December 31, 2021.

This was largely due to a reduction in interest-bearing cash.

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

At December 31, 2023, our on-balance sheet liquidity ratio decreased to 11.4% percent from 13.0% at December 31, 2022, remaining above our internal requirement of 10%.

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

There are no material customers or industry deposit concentrations.

At December 31, 2023, our deposit portfolio composition was 54% consumer, 28% commercial, 12% 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 $275.8 million, or 18% of total deposits, at December 31, 2023, and $298.8 million, or 21% of total deposits, at December 31, 2022.

On-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability was $673.6 million, or 244% of uninsured and uncollateralized deposits at December 31, 2023.

At December 31, 2022, on-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability was $614.9 million, or 221% of uninsured and uncollateralized deposits.

Our primary sources of funds are deposits, amortization, prepayments and maturities on the investment and loan portfolios and funds provided from operations.

2 unchanged sentences

Although $329.9 million of our $359.5 million (92%) CD portfolio will mature within the next 12 months, we have historically retained a majority of our maturing CD’s.

However, due to strategic pricing decisions regarding rate matching and branch closures, our retention rate decreased in 2022 and may remain at lower than historical levels in 2023 based on management’s current pricing strategy, which reflects the Bank’s current strong on-balance sheet liquidity ratio.

However, due to strategic pricing decisions regarding rate matching and branch closures, our retention rate decreased in 2021 and early 2022.

Since June of 2022, we strategically increased CD pricing, which resulted in growth in certificates, as customers looked to increase duration.

Retail non-maturity interest-bearing accounts have decreased at approximately the same rate as the certificate accounts, as our customers have moved to higher-yielding certificates and spent money.

Through new deposit product offerings to our branch and commercial customers, we are currently attempting to strengthen customer relationships to attract additional non-rate sensitive deposits.

Based on interest rates on scheduled maturities and lower current market interest rates, this should also improve our cost of funds.

However, this is challenging in the current competitive environment.

We maintain access to additional sources of funds including FHLB borrowings and lines of credit with the Federal Reserve Bank, and our correspondent banks.

2 unchanged sentences

Currently, we have approximately $370.6 million available to borrow under this arrangement, supported by loan collateral as of December 31, 2023.

At December 31, 2021, the Bank had no borrowing capacity under the Federal Reserve SBA PPP Liquidity Facility, as the program expired on July 30, 2021.

We also had borrowing capacity of $4.1 million at the Federal Reserve Bank and $75 million of uncommitted federal funds purchased lines with correspondent banks as part of our contingency funding plan.

In addition, the Company maintains 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 December 31, 2022, we believe that the Bank could access this market, which provides an additional potential source of liquidity as evidenced by third and fourth quarter 2022 new brokered deposits.

We also had borrowing capacity of $22.4 million at the Federal Reserve Bank and have been approved to access the Bank Term Funding Program (“BTFP”) if the need should arise.

The Bank maintains $70 million of uncommitted federal funds purchased lines with correspondent banks as part of our contingency funding plan.

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 December 31, 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 9, “Federal Home Loan Bank and Other Borrowings” of “Notes to Consolidated Financial Statements” which are included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K, for further detail.

46 unchanged sentences

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

Interest income $ 15,376 $ 16,703 $ 17,959 $ 19,359

Interest dividend income $ 19,673 $ 20,777 $ 21,772 $ 22,026

Interest expense 6,878 9,091 9,651 10,279

Net interest income 13,167 14,267 14,457 14,478

Provision for loan losses — 400 375 700

Net interest income after provision for loan losses 13,167 13,867 14,082 13,778

Net interest income before provision for credit losses 12,795 11,686 12,121 11,747

Provision for credit losses 50 450 (325) (650)

Net interest income after provision for credit losses 12,745 11,236 12,446 12,397

Non-interest income 2,292 2,913 2,565 2,480

Non-interest expense 10,121 9,846 9,969 10,206

Income before income tax expense 6,212 5,777 5,277 6,315

Provision for income tax 1,506 1,411 1,284 1,619

Net income $ 4,706 $ 4,366 $ 3,993 $ 4,696

Income before provision for income taxes 4,916 4,303 5,042 4,671

Provision for income taxes 1,254 1,097 2,544 978

Net income attributable to common stockholders $ 3,662 $ 3,206 $ 2,498 $ 3,693

Basic earnings per share $ 0.35 $ 0.31 $ 0.24 $ 0.35

Diluted earnings per share $ 0.35 $ 0.31 $ 0.24 $ 0.35

Dividends paid $ 0.26 $ — $ — $ —

Cash dividends paid $ 0.29 $ — $ — $ —

Year ended December 31, 2022:

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

Interest income $ 15,620 $ 15,478 $ 16,175 $ 16,762

Interest dividend income $ 15,376 $ 16,703 $ 17,959 $ 19,359

Interest expense 2,209 2,436 3,502 4,881

Net interest income 12,764 12,831 13,688 14,384

Net interest income before provision for loan losses 13,167 14,267 14,457 14,478

Provision for loan losses — 400 375 700

2 unchanged sentences

Non-interest expense 9,668 10,462 11,277 10,336

Income before income tax expense 7,451 6,426 6,816 8,266

Provision for income tax 1,945 1,720 1,819 2,209

Income before provision for income taxes 6,212 5,777 5,277 6,315

Provision for income taxes 1,506 1,411 1,284 1,619

Net income $ 4,706 $ 4,366 $ 3,993 $ 4,696

1 unchanged sentence

Diluted earnings per share $ 0.45 $ 0.41 $ 0.38 $ 0.45

Dividends paid $ 0.23 $ — $ — $ —

Cash dividends paid $ 0.26 $ — $ — $ —

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

What changed 10-K

Item 7. Management’s Discussion and Analysis