Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and the Company intends that these forward-looking statements be covered by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as “anticipate,” “believe,” “could,” “expect,” “estimates,” “intend,” “may,” “preliminary,” “planned,” “potential,” “should,” “will,” “would,” or the negative of those terms or other words of similar meaning. Similarly, statements that describe the Company’s future plans, objectives or goals are also forward-looking statements. 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, 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;
• 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;
• 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;
• disintermediation risk;
• our ability to maintain our reputation;
• our ability to maintain or increase our market share;
• our ability to realize the benefits of net deferred tax assets;
• our inability to obtain needed liquidity;
• our ability to raise capital needed to fund growth or meet regulatory requirements;
• our ability to attract and retain key personnel;
• our ability to keep pace with technological change;
• prevalence of fraud and other financial crimes;
• the possibility that our internal controls and procedures could fail or be circumvented;
• our ability to successfully execute our acquisition growth strategy;
• risks posed by acquisitions and other expansion opportunities, including difficulties and delays in integrating the acquired business operations or fully realizing the cost savings and other benefits;
• restrictions on our ability to pay dividends;
• the potential volatility of our stock price;
• accounting standards for credit losses;
• legislative or regulatory changes or actions, or significant litigation, adversely affecting the Company or Bank;
• public company reporting obligations;
• changes in federal or state tax laws; and
• changes in accounting principles, policies or guidelines and their impact on financial performance.
Stockholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. 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.
GENERAL
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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 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. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors that our management believes to be relevant at the time our consolidated financial statements are prepared. Some of these estimates are more critical than others. In addition to the policies included in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included as an exhibit in our annual report on our 2023 10-K, our critical accounting estimates are as follows:
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 unaudited consolidated financial statements for further discussion of our adoption of ASU 2016-13.
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
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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 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 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.
Goodwill.
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 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 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.
STATEMENT OF OPERATIONS ANALYSIS
Net Interest Income. Net interest income represents the difference between the dollar amount of interest earned on interest-bearing assets and the dollar amount of interest paid on interest-bearing liabilities. The interest income and expense of financial institutions (including those of the Bank) are significantly affected by general economic conditions, competition, policies of regulatory authorities and other factors.
Interest rate spread and net interest margin are used to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest earning assets and the rate paid for interest-bearing liabilities that fund those assets. Net interest margin is expressed as the percentage of net interest income to average interest earning assets. 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-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) 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
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and the impact of higher short-term interest rates which increased FHLB advance and other borrowing 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 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 periods ended March 31, 2024, and March 31, 2023. Non-accruing loans have been included in the table as loans carrying a zero yield.
NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS
(Dollar amounts in thousands)
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
Average
Balance Interest
Income/
Expense Average
Yield/
Rate (1) Average
Balance Interest
Income/
Expense Average
Yield/
Rate (1)
Average interest earning assets:
Cash and cash equivalents $ 13,071 $ 191 5.88 % $ 18,270 $ 140 3.11 %
Loans 1,456,586 20,168 5.57 % 1,412,409 17,126 4.92 %
Interest-bearing deposits — — — % 249 1 1.63 %
Investment securities 243,991 2,060 3.40 % 270,174 2,175 3.22 %
Other investments 13,350 260 7.83 % 16,663 231 5.62 %
Total interest earning assets $ 1,726,998 $ 22,679 5.28 % $ 1,717,765 $ 19,673 4.64 %
Average interest-bearing liabilities:
Savings accounts $ 176,838 $ 421 0.96 % $ 216,169 $ 382 0.72 %
Demand deposits 353,995 2,017 2.29 % 391,635 1,432 1.48 %
Money market 377,475 2,920 3.11 % 301,710 1,096 1.47 %
CD’s 360,177 3,851 4.30 % 255,567 1,438 2.28 %
Total deposits $ 1,268,485 $ 9,209 2.92 % $ 1,165,081 $ 4,348 1.51 %
FHLB Advances and other borrowings 124,701 1,565 5.05 % 232,166 2,530 4.42 %
Total interest-bearing liabilities $ 1,393,186 $ 10,774 3.11 % $ 1,397,247 $ 6,878 2.00 %
Net interest income $ 11,905 $ 12,795
Interest rate spread 2.17 % 2.64 %
Net interest margin 2.77 % 3.02 %
Average interest earning assets to average interest-bearing liabilities 1.24 1.23
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Rate/Volume Analysis. The following tables present the dollar amount of changes in interest income and interest expense for the components of interest earning assets and interest-bearing liabilities that are presented in the preceding table. For each category of interest earning assets and interest-bearing liabilities, information is provided on changes attributable to: 1) changes in volume, which are changes in the average outstanding balances multiplied by the prior period rate (i.e., holding the initial rate constant) and 2) changes in rate, which are changes in average interest rates multiplied by the prior period volume (i.e., holding the initial balance constant). Rate changes have been discussed previously in the net interest income section above. 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 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 March 31, 2024, compared to the three months ended March 31, 2023.
Increase (decrease) due to
Volume Rate Net
Interest income:
Cash and cash equivalents $ (51) $ 102 $ 51
Loans 553 2,489 3,042
Interest-bearing deposits (1) — (1)
Investment securities (217) 102 (115)
Other investments (53) 82 29
Total interest earning assets 231 2,775 3,006
Interest expense:
Savings accounts (79) 118 39
Demand deposits (151) 736 585
Money market accounts 325 1,499 1,824
CD’s 723 1,690 2,413
Total deposits 818 4,043 4,861
FHLB Advances and other borrowings (1,325) 360 (965)
Total interest bearing liabilities (507) 4,403 3,896
Net interest income $ 738 $ (1,628) $ (890)
Nine months ended compared to the nine months ended .
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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 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-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 . 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:
Service charges on deposit accounts $ 471 $ 485 (2.89) %
Interchange income 541 551 (1.81) %
Loan servicing income 582 569 2.28 %
Gain on sale of loans 1,020 298 242.28 %
Loan fees and service charges 230 80 187.50 %
Net gains (losses) on investment securities 167 56 198.21 %
Other 253 253 — %
Total non-interest income $ 3,264 $ 2,292 42.41 %
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.
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Non-interest Expense. 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:
Compensation and related benefits $ 5,483 $ 5,338 2.72 %
Occupancy 1,367 1,423 (3.94) %
Data processing 1,597 1,460 9.38 %
Amortization of intangible assets 179 204 (12.25) %
Mortgage servicing rights expense, net 148 158 (6.33) %
Advertising, marketing and public relations 164 136 20.59 %
FDIC premium assessment 205 201 1.99 %
Professional services 566 505 12.08 %
Gains on repossessed assets, net — (29) 100.00 %
Other 1,068 725 47.31 %
Total non-interest expense $ 10,777 $ 10,121 6.48 %
Non-interest expense (annualized) / Average assets 2.36 % 2.25 % 4.89 %
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. 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. 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. We manage our securities portfolio to provide liquidity and enhance income. Our investment portfolio is comprised of securities available for sale and securities held to maturity. 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.
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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
Cost Fair
Value
March 31, 2024
U.S. government agency obligations $ 15,835 $ 15,728
Mortgage-backed securities 89,933 70,679
Corporate debt securities 47,164 41,778
Asset-backed securities 23,632 23,487
Totals $ 176,564 $ 151,672
December 31, 2023
U.S. government agency obligations $ 16,655 $ 16,576
Mortgage-backed securities 91,091 73,480
Corporate debt securities 47,158 41,174
Asset-backed securities 24,840 24,513
Totals $ 179,744 $ 155,743
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The amortized cost and fair value of our held to maturity securities by asset categories as of the dates noted below were as follows:
Held to maturity securities Amortized
Cost Fair
Value
March 31, 2024
Obligations of states and political subdivisions $ 500 $ 466
Mortgage-backed securities 89,442 69,804
Totals $ 89,942 $ 70,270
December 31, 2023
Obligations of states and political subdivisions $ 600 $ 565
Mortgage-backed securities 90,629 72,697
Totals $ 91,229 $ 73,262
The composition of our available for sale portfolios by credit rating as of the dates indicated below was as follows:
March 31, 2024 December 31, 2023
Available for sale securities Amortized
Cost Fair
Value Amortized
Cost Fair
Value
U.S. government agency $ 97,305 $ 78,026 $ 98,977 $ 81,351
AAA 12,386 12,256 9,695 9,508
AA 19,709 19,613 23,913 23,709
A 8,200 7,465 8,200 7,292
BBB 38,964 34,312 38,959 33,883
Non-rated — — — —
Total available for sale securities $ 176,564 $ 151,672 $ 179,744 $ 155,743
The composition of our held to maturity portfolio by credit rating as of the dates indicated was as follows:
March 31, 2024 December 31, 2023
Held to maturity securities Amortized
Cost Fair
Value Amortized
Cost Fair
Value
U.S. government agency $ 89,442 $ 69,804 $ 90,629 $ 72,697
AAA — — — —
AA — — — —
A 500 466 600 565
Total $ 89,942 $ 70,270 $ 91,229 $ 73,262
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 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, 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.
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Loans. 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
Real estate loans:
Commercial/Agricultural real estate
Commercial real estate $ 745,720 51.4 % $ 750,531 51.4 %
Agricultural real estate 80,451 5.5 % 83,350 5.7 %
Multi-family real estate 235,450 16.2 % 228,095 15.6 %
Construction and land development 93,560 6.5 % 110,941 7.6 %
Residential mortgage
Residential mortgage 129,665 8.9 % 129,021 8.8 %
Purchased HELOC loans 2,895 0.2 % 2,880 0.2 %
Total real estate loans 1,287,741 88.8 % 1,304,818 89.3 %
C&I/Agricultural operating and Consumer Installment Loans:
C&I/Agricultural operating
Commercial and industrial (“C&I”) 128,434 8.9 % 121,666 8.3 %
Agricultural operating 26,237 1.8 % 25,691 1.8 %
Consumer installment
Originated indirect paper 5,851 0.4 % 6,535 0.5 %
Other consumer 5,750 0.4 % 6,187 0.4 %
Total C&I/Agricultural operating and Consumer installment Loans 166,272 11.5 % 160,079 11.0 %
Gross loans $ 1,454,013 100.3 % $ 1,464,897 100.3 %
Unearned net deferred fees and costs and loans in process (2,757) (0.2) % (2,900) (0.2) %
Unamortized discount on acquired loans (1,097) (0.1) % (1,205) (0.1) %
Total loans (net of unearned income and deferred expense) 1,450,159 100.0 % 1,460,792 100.0 %
Allowance for credit losses (22,436) (22,908)
Total loans receivable, net $ 1,427,723 $ 1,437,884
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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 project 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 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; 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 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.
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Allowance for Credit Losses - Loans Roll Forward
(in thousands, except ratios)
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
Loans charged off:
Commercial/Agricultural real estate — —
C&I/Agricultural operating — —
Residential mortgage — —
Consumer installment (5) (6)
Total loans charged off (5) (6)
Recoveries of loans previously charged off:
Commercial/Agricultural real estate 39 253
C&I/Agricultural operating 15 6
Residential mortgage 1 2
Consumer installment 3 9
Total recoveries of loans previously charged off: 58 270
Net loan recoveries/(charge-offs) (“NCOs”) 53 264
(Reversals)/additions to ACL - Loans via provision for credit losses charged to operations (525) (329)
ACL - Loans, at end of period $ 22,436 $ 22,908
Average outstanding loan balance $ 1,456,586 $ 1,458,558
Ratios:
NCOs (annualized) to average loans (0.01) % (0.07) %
Allowance for Credit Losses - Loans Activity by Segment
(in thousands, except ratios)
Commercial/Agricultural Real Estate C&I/Agricultural operating Residential Mortgage Consumer Installment Total
Three months ended March 31, 2024
Allowance for Credit Losses - Loans:
ACL - Loans, at beginning of period $ 18,784 $ 1,105 $ 2,744 $ 275 $ 22,908
Charge-offs — — — (5) (5)
Recoveries 39 15 1 3 58
(Reversals)/additions to ACL - Loans via provision for credit losses charged to operations (568) 46 20 (23) (525)
ACL - Loans, at end of period $ 18,255 $ 1,166 $ 2,765 $ 250 $ 22,436
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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
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
(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)
March 31,
2024 December 31,
2023
Loans, end of period $ 1,450,159 $ 1,460,792
ACL - Loans $ 22,436 $ 22,908
ACL - Loans to loans, end of period 1.55 % 1.57 %
Allowance for Credit Losses - Unfunded Commitments:
(in thousands)
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 $ —
Cumulative effect of ASU 2016-13 adoption — 1,537
Increases to ACL - Unfunded Commitments via provision for credit losses charged to operations (275) (287)
ACL - Unfunded Commitments - end of period $ 975 $ 1,250
Nonperforming Loans, Potential Problem Loans and Foreclosed Properties. We practice early identification of nonaccrual and problem loans in order to minimize the Bank’s risk of loss. Nonperforming loans are defined as nonaccrual loans and restructured loans that were 90 days or more past due at the time of their restructure, or when management determines that such classification is warranted. The accrual of interest income is discontinued on our loans according to the following schedule:
• Commercial/agricultural real estate loans, past due 90 days or more;
• C&I/Agricultural operating loans, past due 90 days or more;
• Closed ended consumer installment loans, past due 120 days or more; and
• Residential mortgage loans and open-ended consumer installment loans, past due 180 days or more.
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 being recorded as interest income.
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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:
March 31, 2024 and Three Months Then Ended (1) December 31, 2023 and Twelve Months Then Ended (1)
Nonperforming assets:
Nonaccrual loans
Commercial real estate $ 5,340 $ 10,359
Agricultural real estate 382 391
Construction and land development — 54
Commercial and industrial 440 —
Agricultural operating 1,106 1,180
Residential mortgage 1,127 1,167
Consumer installment 18 33
Total nonaccrual loans $ 8,413 $ 13,184
Accruing loans past due 90 days or more 326 389
Total nonperforming loans (“NPLs”) 8,739 13,573
Other real estate owned 1,845 1,795
Other collateral owned — —
Total nonperforming assets (“NPAs”) $ 10,584 $ 15,368
Average outstanding loan balance $ 1,456,586 $ 1,430,035
Loans, end of period $ 1,450,159 $ 1,460,792
Total assets, end of period $ 1,819,315 $ 1,851,391
ACL - Loans, at beginning of period $ 22,908 $ 17,939
Cumulative effect of ASU 2016-13 adoption — 4,706
Loans charged off:
Commercial/Agricultural real estate — (46)
C&I/Agricultural operating — —
Residential mortgage — (78)
Consumer installment (5) (36)
Total loans charged off (5) (160)
Recoveries of loans previously charged off:
Commercial/Agricultural real estate 39 489
C&I/Agricultural operating 15 47
Residential mortgage 1 42
Consumer installment 3 33
Total recoveries of loans previously charged off: 58 611
Net loan recoveries/(charge-offs) (“NCOs”) 53 451
(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
Ratios:
ACL-Loans to NCOs (annualized) 10,525.19 % 5,079.38 %
NCOs (annualized) to average loans (0.01) % (0.03) %
ACL-Loans to total loans 1.55 % 1.57 %
ACL-Loans to nonaccrual loans 266.68 % 173.76 %
Nonaccrual loans to total loans 0.58 % 0.90 %
NPLs to total loans 0.60 % 0.93 %
NPAs to total assets 0.58 % 0.83 %
(1) Loan balances are stated at amortized cost.
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Nonaccrual Loans Roll Forward:
Quarter Ended
March 31,
2024 December 31,
2023 September 30,
2023 June 30,
2023 March 31, 2023
Balance, beginning of period $ 13,184 $ 13,456 $ 15,663 $ 10,410 $ 11,204
Additions 961 538 33 7,826 154
Charge offs — — (53) (23) (49)
Transfers to OREO — (23) — (110) (25)
Return to accrual status — — (190) — (252)
Payments received (5,767) (781) (1,994) (2,429) (527)
Other, net 35 (6) (3) (11) (95)
Balance, end of period $ 8,413 $ 13,184 $ 13,456 $ 15,663 $ 10,410
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 three months ended March 31, 2024.
Term Extension
Loan Class Amortized Cost Basis at
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
March 31, 2024 % of Total Class of Financing Receivables
Residential mortgage $ 82 0.06 %
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The table below shows a summary of criticized loans, split by special mention and substandard for the past five quarters. 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 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. 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) March 31,
2024 December 31,
2023 September 30,
2023 June 30,
2023 March 31,
2023
Special mention loan balances $ 13,737 $ 18,392 $ 20,043 $ 20,507 $ 6,636
Substandard loan balances 14,733 19,596 16,171 19,203 15,439
Criticized loans, end of period $ 28,470 $ 37,988 $ 36,214 $ 39,710 $ 22,075
Mortgage Servicing Rights. Mortgage servicing rights (“MSR”) assets are initially measured at fair value; assessed at least quarterly for impairment; carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value. MSR assets are amortized in proportion to and over the period of estimated net servicing income, with the amortization recorded in non-interest expense in the consolidated statement of operations. The valuation of MSRs and related amortization thereon are based on numerous factors, assumptions, and judgments, such as those for: changes in the mix of loans, interest rates, prepayment speeds, and default rates. Changes in these factors, assumptions and judgments may have a material effect on the valuation and amortization of MSRs. 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 $5.4 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. 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) 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.
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March 31,
2024 December 31,
2023 September 30,
2023 June 30,
2023 March 31,
2023
Consumer deposits $ 827,290 $ 814,899 $ 794,970 $ 790,404 $ 786,614
Commercial deposits 414,088 423,762 429,358 401,079 391,534
Public deposits 202,175 182,172 163,734 175,869 194,683
Brokered deposits 83,936 98,259 85,173 97,330 63,962
Total deposits $ 1,527,489 $ 1,519,092 $ 1,473,235 $ 1,464,682 $ 1,436,793
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.
March 31,
2024 December 31, 2023 September 30,
2023 June 30,
2023 March 31,
2023
Non-interest bearing demand deposits $ 248,537 $ 265,704 $ 275,790 $ 261,876 $ 247,735
Interest bearing demand deposits 361,278 343,276 336,962 358,226 390,730
Savings accounts 177,595 176,548 183,702 206,380 214,537
Money market accounts 387,879 374,055 312,689 288,934 309,005
Certificate accounts 352,200 359,509 364,092 349,266 274,786
Total deposits $ 1,527,489 $ 1,519,092 $ 1,473,235 $ 1,464,682 $ 1,436,793
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.
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Federal Home Loan Bank (FHLB) advances and Other Borrowings. 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
Federal Home Loan Bank advances (1), (2), (3) (4) 2024 $ 24,500 1.44 % 5.45 % 2024 $ 64,530 0.00 % 5.45 %
2025 5,000 1.45 % 1.45 % 2025 5,000 1.45 % 1.45 %
2028 10,000 3.82 % 3.82 % 2028 10,000 3.82 % 3.82 %
Federal Home Loan Bank advances $ 39,500 $ 79,530
Senior Notes (5) 2034 $ 18,083 6.75 % 7.50 % 2034 $ 18,083 6.75 % 7.75 %
Subordinated Notes (6) 2030 $ 15,000 6.00 % 6.00 % 2030 $ 15,000 6.00 % 6.00 %
2032 35,000 4.75 % 4.75 % 2032 35,000 4.75 % 4.75 %
$ 50,000 $ 50,000
Unamortized debt issuance costs (560) (618)
Total other borrowings $ 67,523 $ 67,465
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 $1,115.2 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:
(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%.
(b) A $5.0 million line of credit, maturing August 1, 2024, that remains undrawn upon.
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(6) Subordinated notes resulted from the following:
(a) 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. In September 2025, the fixed interest rate will be reset quarterly to equal the three-month term Secured Overnight Financing Rate plus 591 basis points. The note is callable by the Bank when, and anytime after, the floating rate is initially set. Interest-only payments are due semi-annually each year during the fixed interest period and quarterly during the floating interest period.
(b) The Company’s Subordinated Note Purchase Agreement entered into with certain purchasers in March 2022, which bears a fixed interest rate of 4.75% for five years. In April 2027, the fixed interest rate will be reset quarterly to equal the three-month term Secured Overnight Financing Rate plus 329 basis points. The note is callable by the Bank when, and anytime after, the floating rate is initially set. Interest-only payments are due semi-annually each year during the fixed interest period and quarterly during the floating interest period.
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 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 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.
Stockholders’ Equity. 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 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.
On July 23, 2021, the Board of Directors adopted a share repurchase program. 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 . . 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 unpledged securities portfolio divided by total assets. 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 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.
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 .
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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.
Our primary sources of funds are deposits, amortization, prepayments and maturities on the investment and loan portfolios and funds provided from operations. We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, and to fund loan commitments. While scheduled payments from the amortization of loans and maturing short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. Although $311.9 million of our $352.2 million (89%) 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 2021 and early 2022. Since June of 2022, we strategically increased deposit pricing, which resulted in modest growth in certificates. Retail non-maturity interest-bearing accounts have increased 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. 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. We utilize FHLB borrowings to leverage our capital base, to provide funds for our lending and investment activities, and to manage our interest rate risk. 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 $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 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.
In reviewing the adequacy of our liquidity, we review and evaluate historical financial information, including information regarding general economic conditions, current ratios, management goals and the resources available to meet our anticipated liquidity needs. Management believes that our liquidity is adequate, and to management’s knowledge, there are no known events or uncertainties that will result or are likely to reasonably result in a material increase or decrease in our liquidity.
Off-Balance Sheet Liabilities . In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments, issued to meet customer financial needs. Such financial instruments are recorded in the financial statements when they become payable. 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 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.
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Capital Resources. 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:
Actual For Capital Adequacy
Purposes To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of March 31, 2024 (Unaudited)
Total capital (to risk weighted assets) $ 229,819 14.9 % $ 123,277 > = 8.0 % $ 154,097 > = 10.0 %
Tier 1 capital (to risk weighted assets) 210,507 13.7 % 92,458 > = 6.0 % 123,277 > = 8.0 %
Common equity tier 1 capital (to risk weighted assets) 210,507 13.7 % 69,344 > = 4.5 % 100,163 > = 6.5 %
Tier 1 leverage ratio (to adjusted total assets) 210,507 11.7 % 72,000 > = 4.0 % 90,000 > = 5.0 %
As of December 31, 2023 (Audited)
Total capital (to risk weighted assets) $ 228,092 14.6 % $ 124,883 > = 8.0 % $ 156,104 > = 10.0 %
Tier 1 capital (to risk weighted assets) 208,726 13.4 % 93,662 > = 6.0 % 124,883 > = 8.0 %
Common equity tier 1 capital (to risk weighted assets) 208,726 13.4 % 70,247 > = 4.5 % 101,468 > = 6.5 %
Tier 1 leverage ratio (to adjusted total assets) 208,726 11.5 % 72,479 > = 4.0 % 90,599 > = 5.0 %
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:
Actual For Capital Adequacy
Purposes
Amount Ratio Amount Ratio
As of March 31, 2024 (Unaudited)
Total capital (to risk weighted assets) $ 229,366 14.9 % $ 123,277 > = 8.0 %
Tier 1 capital (to risk weighted assets) 160,054 10.4 % 92,458 > = 6.0 %
Common equity tier 1 capital (to risk weighted assets) 160,054 10.4 % 69,344 > = 4.5 %
Tier 1 leverage ratio (to adjusted total assets) 160,054 8.9 % 72,000 > = 4.0 %
As of December 31, 2023 (Audited)
Total capital (to risk weighted assets) $ 230,160 14.7 % $ 124,883 > = 8.0 %
Tier 1 capital (to risk weighted assets) 160,794 10.3 % 93,662 > = 6.0 %
Common equity tier 1 capital (to risk weighted assets) 160,794 10.3 % 70,247 > = 4.5 %
Tier 1 leverage ratio (to adjusted total assets) 160,794 8.9 % 72,479 > = 4.0 %
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