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Item 2. Management’s Discussion and Analysis

2024-05-08 compared with 2023-11-03 · 194 added, 318 removed, 513 unchanged (50% of the section changed)

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

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

Factors that could affect actual results or outcomes include the matters described under the caption “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 5, 2024 (“2023 10-K”), the matters described in “Risk Factors” in Item 1A of this Form 10-Q, and the following:

• conditions in the financial markets and economic conditions generally;

• reputational risk, new legislation, regulations, or policy changes as a result of recent volatility in the banking sector;

• adverse impacts to the Company or Bank arising from the COVID-19 pandemic;

• acts of terrorism and political or military actions by the United States or other governments;

• the possibility of a deterioration in the residential real estate markets;

• the impact of inflation on our business and our customers;

• geopolitical tensions, including current or anticipated impact of military conflicts;

• higher lending risks associated with our commercial and agricultural banking activities;

• future pandemics (including new variants of COVID-19);

• cybersecurity risks;

• adverse impacts on the regional banking industry and the business environment in which it operates;

• interest rate risk;

• lending risk;

• higher lending risks associated with our commercial and agricultural banking activities;

• the sufficiency of the allowance for credit losses;

• changes in the fair value or ratings downgrades of our securities;

• the sufficiency of allowance for credit losses;

• competitive pressures among depository and other financial institutions;

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• prevalence of fraud and other financial crimes;

• cybersecurity risks;

• the possibility that our internal controls and procedures could fail or be circumvented;

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

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

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of March 31, 2024, and our consolidated results of operations for the three months ended March 31, 2024, compared to the same period in the prior fiscal year for the three months ended March 31, 2023.

This discussion should be read in conjunction with the interim consolidated financial statements and the condensed notes thereto included with this report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes related thereto included in our 2023 10-K.

Unless otherwise stated, all monetary amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than share, per share and capital ratio amounts, are stated in thousands.

PERFORMANCE SUMMARY

The following is a summary of some of the significant factors that affected our operating results for the three months ended March 31, 2024, and March 31, 2023.

Compared to first quarter 2023, first quarter 2024 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’s cost of interest-bearing liabilities increased from 2.00% in the first quarter 0f 2023 to 3.11% for the first quarter of 2024.

This resulted in an increase in interest expense of $3.9 million.

The reduction in net interest income, due to higher interest expense, was partially offset by higher interest income on interest earning assets of $3 million primarily due to the impact of higher interest rates and $0.6 million of interest income recorded primarily due to nonaccrual loan payoffs.

As a result, net interest income fell $0.9 million.

The provision for credit losses decreased from a provision of $0.05 million in the first quarter of 2023 to a negative provision of $0.8 million in the first quarter of 2024.

The negative provision in the first quarter of 2024 was primarily due to:

1) a decrease in allowance for credit losses (“ACL”) reserves on individually evaluated loans of $0.5 million;

2) the reduction in commitments to fund construction loans;

and 3) net loan recoveries.

Non-interest income increased $1.0 million in the first quarter of 2024 compared to the first quarter of 2023 due to higher gain on sale of loans and higher loan fees due to customer activity.

Non-interest expenses increased $0.7 million in the first quarter of 2024 from $10.1 million in the first quarter of 2023.

The increase was primarily related to a $0.4 million establishment of a SBA recourse reserve recorded in other expense, along with inflationary increases in compensation and data processing costs.

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.

We reported net income of $4.1 million, or $0.39 per diluted share for the quarter ended March 31, 2024, compared to net income of $3.7 million or $0.35 per diluted share for the quarter ended March 31, 2023.

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements are prepared in accordance with GAAP.

Our consolidated financial statements have been prepared in conformity with U.S.

Generally Accepted Accounting Principles (“GAAP”).

In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amount of assets, liabilities, revenue, expenses, and their related disclosures.

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See also Notes 1 and 3 to the unaudited 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.

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.

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.

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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.

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.

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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.

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 collateral dependent 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.

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.

We account for goodwill and other intangible assets in accordance with ASC Topic 350, “Intangibles - Goodwill and Other.” The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, as goodwill.

The Company amortizes acquired intangible assets with definite useful economic lives over their useful economic lives utilizing the straight-line method.

On a periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amounts of the intangible assets may be impaired.

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.

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

The Company has one reporting unit as of March 31, 2024, which is related to its banking activities.

The Company performed the required goodwill impairment test and determined that goodwill was not impaired as of December 31, 2023.

The Company has monitored events and conditions since December 31, 2023, and has determined that no triggering event has occurred that would require goodwill to be tested for impairment.

Fair Value Measurements and Valuation Methodologies.

We apply various valuation methodologies to assets and liabilities which often involve a significant degree of judgment, particularly when liquid markets do not exist for the particular items being valued.

Quoted market prices are referred to when estimating fair values for certain assets, such as most investment securities.

However, for those items for which an observable liquid market does not exist, management utilizes significant estimates and assumptions to value such items.

Examples of these items include loans, deposits, borrowings, goodwill, core deposit intangible assets, other assets and liabilities obtained or assumed in business combinations, and certain other financial instruments.

These valuations require the use of various assumptions, including, among others, discount rates, rates of return on assets, repayment rates, cash flows, default rates, and liquidation values.

The use of different assumptions could produce significantly different results, which could have material positive or negative effects on the Company’s results of operations, financial condition, or disclosures of fair value information.

In addition to valuation, the Company must assess whether there are any declines in value below the carrying value of assets that should be considered other than temporary or otherwise require an adjustment in carrying value and recognition of a loss in the consolidated statement of operations.

Examples include but are not limited to:

loans, investment securities, goodwill, core deposit intangible assets and deferred tax assets, among others.

Specific assumptions, estimates and judgments utilized by management are discussed in detail herein in management’s discussion and analysis of the Company’s balance sheet and statement of operations and in notes 1, 2, 3, 4 and 10 of Condensed Notes to Consolidated Financial Statements.

Income Taxes.

Amounts provided for income tax expenses are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws.

The amounts provided for income taxes are also impacted by the Company’s investment in a New Markets Tax Credit.

With the adoption of ASU 2023-02 on January 1, 2023, amortization of the investment will now be recognized in the period of and proportional to recognition of the related tax credit and included in provision for income taxes.

Deferred income tax assets and liabilities, which arise principally from temporary differences between the amounts reported in the financial statements and the tax basis of certain assets and liabilities, are included in the amounts provided for income taxes.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and tax planning strategies which will create taxable income during the periods in which those temporary differences become deductible.

Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and if necessary, tax planning strategies in making this assessment.

The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and application of specific provisions of federal and state tax codes.

There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be material to our consolidated results of operations and reported earnings.

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

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

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

unrealized losses on AFS securities.

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

STATEMENT OF OPERATIONS ANALYSIS

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

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

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

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

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

This was partially offset by:

1) positive loan volume variance due to growth in loans outstanding and 2) increases in loan and investment yields due to both contractual repricing and higher coupons on new loans and investments in excess of portfolio yield and 3) the realization of $0.4 million of interest income due to a nonaccrual loan payoff.

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

The net interest margin decrease was due to:

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

The narrative below discusses net interest income, interest rate spread, and net interest margin for the three-month periods ended March 31, 2024, and March 31, 2023, respectively.

Net interest income was $11.9 million for the three months ended March 31, 2024, compared to $12.8 million for the three months ended March 31, 2023.

Interest income for the three months ended March 31, 2024, decreased from the same period one year ago due to higher net interest-bearing balances and costs.

This was partially offset by:

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

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

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

1) positive loan volume variance due to growth in loans outstanding;

2) increases in loan and investment yields due to both contractual repricing and higher coupons on new loans and investments in excess of portfolio yield;

and 3) the realization of $0.6 million of interest income principally due to nonaccrual loans payoff.

The net interest margin for the three-month period ended March 31, 2024, was 2.77%, compared to 3.02% for the three-month period ended March 31, 2023.

The net interest margin decrease was due to higher deposit costs due to higher market interest rates and customers moving from lower cost savings and money market accounts to higher yielding certificate accounts

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

This was partially offset by:

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

The net interest margin decrease was due to:

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

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

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

2) rates on new loans and investments exceeding the portfolio as a whole;

and 3) a thirteen-basis point increase in yield due to income realized principally on the payoff of a nonaccrual loans.

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

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

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

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

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(Dollar amounts in thousands)

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

Three months ended September 30, 2023

Three months ended September 30, 2022

Balance Interest

Expense Average

Rate (1) Average

Balance Interest

Expense Average

Average interest earning assets:

Cash and cash equivalents $ 21,298 $ 302 5.63 % $ 11,043 $ 60 2.16 %

Loans 1,435,284 19,083 5.27 % 1,370,897 15,937 4.61 %

Interest-bearing deposits — — — % 1,079 7 2.57 %

Investment securities (1) 252,226 2,119 3.33 % 274,868 1,768 2.57 %

Other investments 15,511 268 6.85 % 14,910 187 4.98 %

Total interest earning assets (1) $ 1,724,319 $ 21,772 5.01 % $ 1,672,797 $ 17,959 4.26 %

Average interest-bearing liabilities:

Savings accounts $ 199,279 $ 328 0.65 % $ 238,095 $ 211 0.35 %

Demand deposits 354,073 1,863 2.09 % 413,033 575 0.55 %

Money market 298,098 1,889 2.51 % 331,469 519 0.62 %

CD’s 358,238 3,308 3.66 % 160,960 376 0.93 %

Total deposits $ 1,209,688 $ 7,388 2.42 % $ 1,143,557 $ 1,681 0.58 %

FHLB Advances and other borrowings 182,967 2,263 4.91 % 192,338 1,821 3.76 %

Total interest-bearing liabilities $ 1,392,655 $ 9,651 2.75 % $ 1,335,895 $ 3,502 1.04 %

Net interest income $ 12,121 $ 14,457

Interest rate spread 2.26 % 3.22 %

Net interest margin (1) 2.79 % 3.43 %

Average interest earning assets to average interest-bearing liabilities 1.24 1.25

(1) Fully taxable equivalent (FTE).

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

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

NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS

(Dollar amounts in thousands)

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

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

Three months ended March 31, 2024, compared to the three months ended March 31, 2023:

Three months ended March 31, 2024

Three months ended March 31, 2023

Balance Interest

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Average interest earning assets to average interest-bearing liabilities 1.24 1.23

(1) Fully taxable equivalent (FTE).

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

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

Rate/Volume Analysis.

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

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

For the three months ended March 31, 2024, compared to the same period in 2023, the loan volume increased due to organic growth.

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

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

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

Investment securities volume decreases for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, are primarily due to:

1) principal repayments and 2) unrealized losses in the available for sale securities portfolio.

RATE / VOLUME ANALYSIS

(Dollar amounts in thousands)

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

Increase (decrease) due to

Volume Rate Net

Interest income:

Cash and cash equivalents $ 76 $ 166 $ 242

Loans 774 2,372 3,146

Interest-bearing deposits (7) — (7)

Investment securities (157) 508 351

Other investments 8 73 81

Total interest earning assets 694 3,119 3,813

Interest expense:

Savings accounts (40) 157 117

Demand deposits (95) 1,383 1,288

Money market accounts (58) 1,428 1,370

CD’s 675 2,257 2,932

Total deposits 482 5,225 5,707

FHLB Advances and other borrowings (93) 535 442

Total interest bearing liabilities 389 5,760 6,149

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

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

Three months ended March 31, 2024, compared to the three months ended March 31, 2023.

Increase (decrease) due to

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Net interest income $ 738 $ (1,628) $ (890)

Nine months ended compared to the nine months ended .

Provision for Credit Losses.

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

Total benefit, i.e.

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

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

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

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

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

Total benefit, i.e., negative provision, for credit losses for the three months ended March 31, 2024, was $0.8 million.

The provision for credit losses was $0.05 million in the first quarter of 2023.

The negative provision in the first quarter of 2024 was primarily due to:

1) a decrease in reserves on individually evaluated loans of $0.5 million;

2) the reduction in commitments to fund construction loans;

and 3) net loan recoveries.

Continued strong economic conditions in our markets, as evidenced by unemployment rates below the national average in our two largest population centers, have resulted in positive overall economic trends for businesses.

The impact of higher interest rates and the impact of an inverted yield forecast are factors that the third-party model of economic conditions used computing the ACL level.

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

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

Management believes that the provision recorded for the current year’s three-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.

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Non-interest Income .

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

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

2023 2022 % Change 2023 2022 % Change

The following table reflects the various components of non-interest income for the three-month periods ended March 31, 2024 and 2023, respectively.

Three months ended March 31,

2024 2023 % Change

Non-interest Income:

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Loan fees and service charges 230 80 187.50 %

Net gains (losses) on investment securities 116 (55) N/M 182 (167) N/M

Net gains (losses) on investment securities 167 56 198.21 %

Other 253 253 — %

Total non-interest income $ 3,264 $ 2,292 42.41 %

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

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

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

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

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

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

Gain on sale of loans increased in the current three-month period ended March 31, 2024, compared to the three-month period ended March 31, 2023, primarily due to higher SBA gains.

Loan fees and services charges are higher for the three-month period ended March 31, 2024, compared to the same period in 2023 due to higher late charges and forbearance fees.

The change in net gains (losses) on investment securities between the three-month period ended March 31, 2024, and the three-month period ended March 31, 2023, is primarily a result of gains recognized in the first quarter of 2024 due to increased valuations of equity securities.

Non-interest Expense.

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

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

2023 2022 % Change 2023 2022 % Change

The following table reflects the various components of non-interest expense for the three-month periods ended March 31, 2024 and 2023, respectively.

Three months ended March 31,

2024 2023 % Change

Non-interest Expense:

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Gains on repossessed assets, net — (29) 100.00 %

New market tax credit depletion — 163 N/M — 488 N/M

Other 1,068 725 47.31 %

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Non-interest expense (annualized) / Average assets 2.36 % 2.25 % 4.89 %

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

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

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

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

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

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

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

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

Compensation expense for the three months ended March 31, 2024, increased from the same period in 2023, largely due to 2023 annual employee pay raises effective late first quarter of 2023.

Data processing for the three months ended March 31, 2024, increased from the same period in 2023 largely due to inflationary pressures and the impact of new software implementation costs to aid in future efficiency efforts.

Amortization of intangible assets for the three months ended March 31, 2024, compared to March 31, 2023, decreased from the same prior year period, as intangible assets related to certain acquisitions have been fully amortized.

The increase in other expenses during the three months ended March 31, 2024, from the comparable prior year period is largely due to the establishment of a SBA valuation reserve of $0.4 million.

Income Taxes.

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

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

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

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

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

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

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

Provision for income taxes decreased to $1.1 million in the first quarter of 2024 from $1.3 million in the first quarter of 2023.

The effective tax rate was 21.3% for the quarter ended March 31, 2024, and 25.5% for the quarter ended March 31, 2023.

The decrease in the effective tax rate is primarily due to the Wisconsin state budget, signed by Governor Evers on July 5, 2023, which provides financial institutions a tax exemption on income earned on Wisconsin commercial and agricultural loans up to $5 million retroactive to January 1, 2023, the impact of which was recognized in the third quarter of 2023.

BALANCE SHEET ANALYSIS

Cash and Cash Equivalents.

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

Cash and cash equivalents decreased $8.5 million during the quarter to $28.6 million at March 31, 2024, largely due to a decrease in clearing balances of $10.9 million partially offset by an increase in interest-bearing deposits at the Federal Reserve Bank of $5.5 million.

Investment Securities.

1 unchanged sentence

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

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

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

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

This decrease was due to principal repayments.

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

Securities available for sale decreased $4.0 million during the quarter ended March 31, 2024, to $151.7 million from $155.7 million at December 31, 2023.

The decrease was due to principal repayments of $3.1 million and a decrease in the market value of the AFS portfolio of $0.9 million.

Securities held to maturity decreased $1.3 million to $89.9 million during the quarter ended March 31, 2024, from $91.2 million at December 31, 2023, due to principal repayments.

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

Available for sale securities Amortized

September 30, 2023

March 31, 2024

government agency obligations $ 15,835 $ 15,728

1 unchanged sentence

Corporate debt securities 47,164 41,778

Corporate asset-backed securities 25,825 25,476

Asset-backed securities 23,632 23,487

Totals $ 176,564 $ 151,672

3 unchanged sentences

Corporate debt securities 47,158 41,174

Corporate asset-backed securities 29,877 28,817

Asset-backed securities 24,840 24,513

Totals $ 179,744 $ 155,743

1 unchanged sentence

Held to maturity securities Amortized

September 30, 2023

March 31, 2024

Obligations of states and political subdivisions $ 500 $ 466

6 unchanged sentences

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Available for sale securities Amortized

8 unchanged sentences

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Held to maturity securities Amortized

3 unchanged sentences

Total $ 89,942 $ 70,270 $ 91,229 $ 73,262

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

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

At March 31, 2024, the Bank has pledged certain of its mortgage-backed securities with a carrying value of $28.9 million as collateral to secure a line of credit with the Federal Reserve Bank.

As of March 31, 2024, there were no borrowings outstanding on this Federal Reserve Bank line of credit.

As of March 31, 2024, the Bank has pledged certain of its U.S.

Government Agency securities with a carrying value of $0.4 million and mortgage-backed securities with a carrying value of $1.9 million as collateral against specific municipal deposits.

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

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

As of December 31, 2022, the Bank had pledged certain of its U.S.

As of March 31, 2024, the Bank also has mortgage-back securities with a carrying value of $0.1 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, 2023, the Bank has pledged certain of its mortgage-backed securities with a carrying value of $29.2 million as collateral to secure a line of credit with the Federal Reserve Bank.

As of December 31, 2023, there were no borrowings outstanding on this Federal Reserve Bank line of credit.

As of December 31, 2023, the Bank has pledged certain of its U.S.

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

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

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

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

September 30, 2023 December 31, 2022

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.

Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, decreased by $10.6 million, to $1.45 billion as of March 31, 2024, from $1.46 billion at December 31, 2023.

The following table reflects the composition, of our loan portfolio at March 31, 2024, and December 31, 2023:

March 31, 2024 December 31, 2023

Amount Percent Amount Percent

48 unchanged sentences

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 that exhibit different risk characteristics from the pool are individually evaluated for credit losses.

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;

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;

8 unchanged sentences

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 September 30, 2023, representing 1.59% of loans receivable.

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

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

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

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

Allowance for Credit Losses - Loans Roll Forward

(in thousands, except ratios)

Three Months Ended Nine Months Ended

September 30,

2023 September 30,

2022 September 30,

2023 September 30,

March 31, 2024 and Three Months Ended December 31, 2023 and Three Months Ended

Allowance for Credit Losses (“ACL”)

ACL - Loans, at beginning of period $ 22,908 $ 22,973

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

Loans charged off:

10 unchanged sentences

Total recoveries of loans previously charged off:

218 74 341 146

Net loan recoveries/(charge-offs) (“NCOs”) 53 264

5 unchanged sentences

(in thousands, except ratios)

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

Three months ended Septemeber 30, 2023

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

Three months ended March 31, 2024

Allowance for Credit Losses - Loans:

4 unchanged sentences

ACL - Loans, at end of period $ 18,255 $ 1,166 $ 2,765 $ 250 $ 22,436

The following table present the balance and activity in the allowance for credit losses (“ACL”) - loans by portfolio segment for the twelve months ended December 31, 2023:

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

Nine months ended September 30, 2023

Twelve months ended December 31, 2023

Allowance for Credit Losses - Loans:

3 unchanged sentences

Recoveries 489 47 42 33 — 611

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

(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

1 unchanged sentence

(in thousands, except ratios)

September 30,

2024 December 31,

4 unchanged sentences

(in thousands)

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

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

In addition to the ACL - Loans, the Company has established an ACL - Unfunded Commitments of $0.975 million at March 31, 2024, and $1.25 million at December 31, 2023, classified in other liabilities on the consolidated balance sheets.

March 31, 2024 and Three Months Ended December 31, 2023 and Twelve Months Ended

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

12 unchanged sentences

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

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

March 31, 2024 and Three Months Then Ended (1) December 31, 2023 and Twelve Months Then Ended (1)

Nonperforming assets:

31 unchanged sentences

Net loan recoveries/(charge-offs) (“NCOs”) 53 451

Additions to ACL - loans via provision for credit losses charged to operations 141 1,475

(Reductions) additions to ACL - loans via provision for credit losses charged to operations (525) (188)

ACL - Loans, at end of period $ 22,436 $ 22,908

7 unchanged sentences

(1) Loan balances are stated at amortized cost.

(2) Loan balances are stated at the unpaid principal balance of the loan.

Nonaccrual Loans Roll Forward:

Quarter Ended

2024 December 31,

2023 September 30,

2023 June 30,

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

2023 March 31, 2023

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

3 unchanged sentences

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

Repurchases of government guaranteed loans — — — — 517

Payments received (5,767) (781) (1,994) (2,429) (527)

1 unchanged sentence

Balance, end of period $ 8,413 $ 13,184 $ 13,456 $ 15,663 $ 10,410

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

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

Nonperforming assets were $10.6 million at March 31, 2024, compared to $15.4 million at December 31, 2023.

Nonperforming assets decreased primarily due to nonperforming loan payoffs of $5.4 million during the current quarter.

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 nine months ended September 30, 2023.

Below is a summary of loan modifications made to borrowers experiencing financial difficulty during the three months ended March 31, 2024.

Term Extension

Loan Class Amortized Cost Basis at

September 30, 2023 % of Total Class of Financing Receivables

Commercial real estate $ 4,826 0.65 %

Residential mortgage $ 36 0.03 %

March 31, 2024 % of Total Class of Financing Receivables

Commercial and industrial $ 2,300 1.80 %

Other-Than-Insignificant Payment Delay

Loan Class Amortized Cost Basis at

September 30, 2023 % of Total Class of Financing Receivables

Residential mortgage $ 69 0.06 %

Other consumer $ 20 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

Troubled debt restructurings:

Accrual Status

Commercial/Agricultural real estate 10 $ 1,336

C&I/Agricultural operating 5 960

March 31, 2024 % of Total Class of Financing Receivables

Residential mortgage $ 82 0.06 %

Consumer installment — —

Total loans 51 $ 5,171

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

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

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

Since March 31, 2023, special mention credit additions were two loan relationships, each totaling $9 million added in the second quarter of 2023, with a $5 million relationship in the second quarter of 2023 moving to substandard and a payoff in the first quarter of 2023.

Substandard loans increased largely due to the movement of a $5 million loan from special mention in the second quarter of 2023 and a new loan relationship addition of $3.7 million in the fourth quarter of 2023.

These increases were more than offset by the first quarter 2024 payoffs of nonaccrual loans, which were also categorized as substandard and the $3 million decrease in 3Q 2023.

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

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

As of March 31, 2024, hotel loans totaled $95 million with a weighted average LTV of 54% and average balance of $4.5 million.

$4.6 million of these loans are nonaccrual and classified as substandard.

Restaurant loans totaled $57 million, at March 31, 2024.

The weighted average LTV percentage on these restaurant loans was 44% and the average loan balance was $801 thousand.

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

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

There were no restaurant loans in special mention or substandard loans.

Approximately 66% or $38 million of restaurant loans are to franchise quick-service restaurants.

At March 31, 2024, we have $40 million of office loans with a weighted average LTV of 64% and average loan balance of $581 thousand.

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

(in thousands)

(Loan balance at unpaid principal balance) September 30,

2023 June 30,

2023 March 31,

(Loan balance at unpaid principal balance) March 31,

2024 December 31,

2023 September 30,

2023 June 30,

2023 March 31,

Special mention loan balances $ 13,737 $ 18,392 $ 20,043 $ 20,507 $ 6,636

10 unchanged sentences

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

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

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

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

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

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

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

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

The fair market value of the Company’s MSR asset was $5.4 million at March 31, 2024, compared to $5.6 million at December 31, 2023.

At March 31, 2024, the Company identified MSR impairment, and recorded a related valuation allowance of $5 thousand.

At December 31, 2023, there was no MSR impairment or related valuation allowance.

The unpaid balances of one-to-four family residential real estate loans serviced for others as of March 31, 2024, and December 31, 2023, were $489.7 million and $495.5 million, respectively.

The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at March 31, 2024, and December 31, 2023, was 1.11% and 1.13%, respectively.

Deposits have grown each quarter since March 31, 2023.

Total deposits increased $8.4 million during the quarter ended March 31, 2024, to $1.53 billion.

During the current quarter:

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

2) retail deposits grew $4.6 million;

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

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

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

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

There are no material customer or industry deposit concentrations.

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

1) consumer deposits grew $12.4 million, primarily in CD’s:

2) public deposits grew $20 million, largely due to seasonally growth and are expected to decrease modestly the next quarters due to seasonal shrinkage;

3) commercial deposits shrank $9.7 million, largely due to seasonal decrease growth in non-interest-bearing deposits, although the growth was less than what was experienced in the first quarter of 2023;

and 4) brokered deposits decreased $14.3 million, primarily due to CD maturities not replaced due to organic deposit growth.

Deposit composition changed during the first quarter of 2024, as both business and retail depositors sought higher yields on deposit accounts.

2024 December 31,

2023 September 30,

1 unchanged sentence

2023 March 31,

2023 December 31,

Consumer deposits $ 827,290 $ 814,899 $ 794,970 $ 790,404 $ 786,614

3 unchanged sentences

Total deposits $ 1,527,489 $ 1,519,092 $ 1,473,235 $ 1,464,682 $ 1,436,793

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

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

September 30,

At March 31, 2024, the deposit portfolio composition was 54% consumer, 27% commercial, 13% public and 6% brokered deposits compared to 54% consumer, 28% commercial, 12% public and 6% brokered deposits at December 31, 2023.

2024 December 31, 2023 September 30,

2023 June 30,

2023 March 31,

2023 December 31, 2022

Non-interest bearing demand deposits $ 248,537 $ 265,704 $ 275,790 $ 261,876 $ 247,735

4 unchanged sentences

Total deposits $ 1,527,489 $ 1,519,092 $ 1,473,235 $ 1,464,682 $ 1,436,793

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

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

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

Uninsured and uncollateralized deposits were $265.1 million, or 17% of total deposits, at March 31, 2024, and $275.8 million, or 18% of total deposits, at December 31, 2023.

Uninsured deposits alone, i.e., excluding fully secured government deposits, at March 31, 2024, were $429.1 million, or 28% of total deposits, and $427.5 million, or 28% of total deposits at December 31, 2023 .

On-balance sheet liquidity collateralized new borrowing capacity and uncommitted federal funds borrowing availability totaled $696.8 million, or 263% of uninsured and uncollateralized deposits at March 31, 2024.

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

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

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

September 30, 2023 December 31, 2022

A summary of Federal Home Loan Bank (FHLB) advances and other borrowings at March 31, 2024, and December 31, 2023, is as follows:

March 31, 2024 December 31, 2023

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

2 unchanged sentences

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

2028 15,000 3.57 % 3.59 %

Federal Home Loan Bank advances $ 39,500 $ 79,530

6 unchanged sentences

Totals $ 107,023 $ 146,995

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

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

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

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

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

(1) The FHLB advances bear fixed rates, require interest-only monthly payments, and are collateralized by a blanket lien on pre-qualifying first mortgages, home equity lines, multi-family loans and certain other loans which had a pledged balance of $1,115.2 million and $1,106.3 million at March 31, 2024 and December 31, 2023, respectively.

At March 31, 2024, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $397.2 million compared to $370.6 million as of December 31, 2023.

(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $64.0 million and $217.5 million, during the three months ended March 31, 2024 and the twelve months ended December 31, 2023, respectively.

(3) The weighted-average interest rate on FHLB borrowings maturing within twelve months as of March 31, 2024 and December 31, 2023 were 2.73% and 4.16%, respectively.

(4) FHLB term notes totaling $10.0 million, with 2028 maturity dates, are callable once by the FHLB in June of 2024.

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

2 unchanged sentences

(b) A $5.0 million line of credit, maturing August 1, 2024, that remains undrawn upon.

This line was renewed effective August 1, 2023 and will mature August 1, 2024.

(6) Subordinated notes resulted from the following:

7 unchanged sentences

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

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

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

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

FHLB advances decreased $40.0 million to $39.5 million as of March 31, 2024, compared to $79.5 million as of December 31, 2023.

The decrease is a result of decreased funding needs due to increases in deposits, loan shrinkage and a decrease in non-interest-bearing cash.

At March 31, 2024, short-term FHLB advances consisted of $9.5 million maturing in April 2024.

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

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

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

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

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

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

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

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

The Bank’s current unused borrowing capacity, supported by loan collateral as of March 31, 2024, is approximately $397.2 million.

At March 31, 2024, and December 31, 2023, the Bank had the ability to borrow $21.6 million and $22.4 million from the Federal Reserve Bank of Minneapolis.

The ability to borrow is based on mortgage-backed securities pledged with a carrying value of $28.9 million and $29.2 million as of March 31, 2024, and December 31, 2023, respectively.

There were no related Federal Reserve borrowings outstanding as of March 31, 2024, or December 31, 2023.

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

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

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

There were no borrowings outstanding on these lines of credit as of March 31, 2024, or December 31, 2023.

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

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

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

Stockholders’ Equity.

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

Total stockholders’ equity was $172.8 at March 31, 2024, compared to $173.3 million at December 31, 2023.

The decrease in stockholder’s equity was attributable to:

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

1) the annual cash dividend paid in February to common stockholders of $0.32 per share, or $3.3 million;

and 2) the ten-year US Treasury rate of 4.20% at March 31, 2024, compared to 3.88% at December 31, 2023.

Unrealized losses on AFS securities are reflected in accumulated other comprehensive income.

These reductions to equity were partially offset by net income of $4.1 million.

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

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

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

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

There were 50 thousand shares repurchased in the first quarter of 2024 at a price of $11.95 per share.

As of March 31, 2024, an additional 152 thousand shares remain available for repurchase.

Liquidity and Asset / Liability Management .

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

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

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

At March 31, 2024, our on-balance sheet liquidity ratio of 11.4% was flat with the December 31, 2023, level.

There are no material customers or industry deposit concentrations.

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

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

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

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

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

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

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

Uninsured and uncollateralized deposits were $265.1 million, or 17% of total deposits, at March 31, 2024, and $275.8 million, or 18% of total deposits, at December 31, 2023.

At December 31, 2023, on-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability totaled $673.6 million, or 244% 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.

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

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

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

Currently, we have approximately $397.2 million available to borrow under this arrangement, supported by loan collateral as of March 31, 2024.

We also had borrowing capacity of $21.6 million at the Federal Reserve Bank.

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 September 30, 2023, we believe that the Bank could access this market, which provides an additional potential source of liquidity, as evidenced by access to this market during the past four quarters.

While the Bank does not have formal brokered certificate lines of credit with counter parties at March 31, 2024, we believe that the Bank could access this market, which provides an additional potential source of liquidity, as evidenced by access to this market during the past four quarters.

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

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

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

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

As of March 31, 2024, the Company had approximately $182.6 million in unused loan commitments, compared to approximately $210.4 million in unused commitments as of December 31, 2023.

In addition, there are $3.4 million of commitments for contributions of capital to an SBIC and an investment company at March 31, 2024.

These commitments totaled $3.4 million at December 31, 2023.

Capital Resources.

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

As of March 31, 2024, and December 31, 2023, as shown in the table below, the Bank’s Tier 1 and Risk-based capital levels exceeded levels necessary to be considered “Well Capitalized” under Prompt Corrective Action provisions.

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

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Amount Ratio Amount Ratio Amount Ratio

As of September 30, 2023 (Unaudited)

As of March 31, 2024 (Unaudited)

Total capital (to risk weighted assets) $ 229,819 14.9 % $ 123,277 > = 8.0 % $ 154,097 > = 10.0 %

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Tier 1 leverage ratio (to adjusted total assets) 208,726 11.5 % 72,479 > = 4.0 % 90,599 > = 5.0 %

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

At March 31, 2024, and December 31, 2023, the Bank was categorized as “Well Capitalized” under Prompt Corrective Action Provisions, as determined by the OCC, our primary regulator.

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

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Amount Ratio Amount Ratio

As of September 30, 2023 (Unaudited)

As of March 31, 2024 (Unaudited)

Total capital (to risk weighted assets) $ 229,366 14.9 % $ 123,277 > = 8.0 %

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis