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Item 2. Management’s Discussion and Analysis

2024-08-06 compared with 2024-05-08 · 269 added, 170 removed, 537 unchanged (45% 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, 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:

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;

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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 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.

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of June 30, 2024, and our consolidated results of operations for the six months ended June 30, 2024, compared to the same period in the prior fiscal year for the six months ended June 30, 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.

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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.

The following is a summary of some of the significant factors that affected our operating results for the three and six months ended June 30, 2024, and June 30, 2023.

Compared to second quarter 2023, second quarter 2024 net interest income decreased $0.1 million.

The decrease was 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 which increased fifty eight-basis points partially offset by higher yields on assets, a decrease in lower yielding on-balance sheet assets included in liquidity to more normal levels, and $0.2 million recognized in curing technical defaults on performing loans.

The total benefit, i.e., negative provision, for credit losses for the second quarter ended June 30, 2024,was $1.525 million compared to a provision for credit losses of $0.45 million for the quarter ended June 30, 2023.

The second quarter of 2024 negative provision was due to decreases in ACL related to:

(1) $0.6 million due to the impact of loan portfolio decreases and credit quality improvements;

(2) $0.6 million due to improvements in the Moody’s economic scenario per our third-party provider;

and (3) reductions in off-balance sheet reserves to fund commitments of $0.3 million.

The second quarter and six months ended of 2023 provision for credit losses was largely due to loan growth.

Non-interest income decreased $1.0 million in the second quarter of 2024 compared to the second quarter of 2023 due to $0.7 million lower gain on sale of loans and $0.7 million higher loss on sale of securities, partially due to $0.4 million loss recognized as result of an exchange of senior debt for preferred equity.

These decreases were partially offset by $0.2 million higher loan fees due to customer activity and BOLI death benefit income realized of $0.2 million.

Non-interest expenses increased $0.5 million in the second quarter of 2024 from $9.8 million in the second quarter of 2023.

The increase was primarily related to $0.3 million of higher compensation expense due to both the impact of 2024 merit raises and higher incentive compensation, along with inflationary increases in and data processing costs.

Provision for income taxes decreased to $1.0 million in the second quarter of 2024, from $1.1 million in the second quarter of 2023, despite pre-tax income growth of $0.4 million due to a 3.4% decrease in the effective tax rate.

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 began to be recognized in the third quarter of 2023.

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.

We reported net income of $3.7 million and $7.8 million, or $0.35 and $0.75 per diluted share for the three and six months ended June 30, 2024, compared to net income of $3.2 million and $6.9 million or $0.31 and $0.66 per diluted share for the three and six months ended June 30, 2023.

The following is a summary of some of the significant factors that affected our operating results for the six months ended June 30, 2024, and June 30, 2023.

Compared to 2023, for the six-month period ending June 30, 2024, net interest income decreased $1 million, 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

The Company’s cost of interest-bearing liabilities increased from 2.31% for the six months ended June 30, 2023, to 3.14% for the same period in 2024.

This decrease was partially offset by higher interest income on interest earning assets of $4.7 million primarily due to the impact of higher interest rates and 0.4 million of loss recognized as a result of an exchange of senior debt to preferred equity.

The total benefit, i.e., negative provision, for credit losses was $2.325 million for the six months ended June 30, 2024, compared to a provision for credit losses of $0.5 million for the six months ended June 30, 2023.

For the six months ended June 30, 2024, the negative provision was due to decreases in ACL related to:

(1) the $0.9 million impact of loan portfolio decreases and credit quality improvements;

(2) $0.6 million due to improvements in the Moody’s economic scenario per our third-party provider;

(3) reductions in off-balance sheet reserves to fund commitments of $0.6 million;

(4) 1st quarter 2024 a decrease in the allowance for credit losses on individually evaluated loans of $0.5 million;

and (5) net loan recoveries.

CRITICAL ACCOUNTING ESTIMATES

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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.

Allowance for Credit Losses - Loans.

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.

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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 - 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.

value of any underlying collateral, prevailing economic conditions, and other relevant factors determined by management.

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

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

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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.

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 has one reporting unit as of June 30, 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.

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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-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.

The narrative below discusses net interest income, and net interest margin for the three-month and six-month periods ended June 30, 2024, and June 30, 2023, respectively.

Net interest income was $11.6 million for the three months ended June 30, 2024, compared to $11.7 million for the three months ended June 30, 2023.

Interest income for the three months ended June 30, 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

(2) increases in loan and investment yields due to (a) contractual repricing and higher coupons on new loans;

(b) investments in excess of portfolio yield;

and (c) one-time income of $0.2 million recognized from curing technical defaults on performing loans

The net interest margin for the three-month period ended June 30, 2024, was flat at 2.72%, compared to 2.72% for the three-month period ended June 30, 2023.

The net interest margin 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 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 five-basis point increase in yield due to income recognized on curing technical defaults on performing loans.

Net interest income was $23.5 million for the six months ended June 30, 2024, compared to $24.5 million for the six months ended June 30, 2023.

Interest income for the six months ended June 30, decreased from the same period one year ago due to higher net interest-bearing balances and costs, which increased 83 basis points.

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:

(a) contractual repricing and higher coupons on new loans;

(b) investments in excess of portfolio yield;

and (c) one-time income of $0.4 million recognized on nonaccrual payoffs and $0.4 million recognized from curing technical defaults on performing loans.

The net interest margin for the six-month period ended June 30, 2024, was 2.75%, compared to 2.88%, the six-month period ended June 30, 2023.

The decreased net interest margin was due to:

(1) higher liability costs of 83 basis points, due to higher market interest rates;

(2) customers moving balances from lower cost savings and money market accounts to higher yielding certificate accounts, increasing deposit costs;

and (3) the impact of higher short-term interest rates which increased FHLB advance and other borrowing costs.

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(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.

and (3) a nine-basis point increase in yield due to income recognized on nonaccrual loan payoffs and curing technical defaults on performing 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.

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(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

Three months ended June 30, 2024, compared to the three months ended June 30, 2023:

Three months ended June 30, 2024

Three months ended June 30, 2023

Balance Interest

Expense Average

Rate (1) Average

Balance Interest

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Average interest earning assets to average interest-bearing liabilities 1.24 1.22

NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS

(Dollar amounts in thousands)

Six months ended June 30, 2024, compared to the six months ended June 30, 2023:

Six months ended June 30, 2024 Six months ended June 30, 2023

Balance Interest

Expense Average

Balance Interest

Expense Average

Average interest earning assets:

Cash and cash equivalents $ 15,982 $ 463 5.83 % $ 17,931 $ 467 5.25 %

Loans receivable 1,448,061 40,089 5.57 % 1,412,870 35,086 5.01 %

Interest bearing deposits — — — % 126 1 1.60 %

Investment securities (1) 241,069 4,072 3.4 % 266,224 4,385 3.32 %

Other investments 13,200 518 7.89 % 16,923 511 6.09 %

Total interest earning assets (1) $ 1,718,312 $ 45,142 5.28 % $ 1,714,074 $ 40,450 4.76 %

Average interest bearing liabilities:

Savings accounts $ 175,548 $ 850 0.97 % $ 213,106 $ 776 0.73 %

Demand deposits 354,423 4,040 2.29 % 378,450 3,183 1.70 %

Money market accounts 377,410 5,878 3.13 % 299,393 2,870 1.93 %

CD’s 356,250 7,779 4.39 % 270,819 3,681 2.74 %

IRA’s — — — % — — — %

Total deposits $ 1,263,631 $ 18,547 2.95 % $ 1,161,768 $ 10,510 1.82 %

FHLB advances and other borrowings 123,334 3,114 5.08 % 229,825 5,459 4.79 %

Total interest bearing liabilities $ 1,386,965 $ 21,661 3.14 % $ 1,391,593 $ 15,969 2.31 %

Net interest income $ 23,481 $ 24,481

Interest rate spread 2.14 % 2.45 %

Net interest margin (1) 2.75 % 2.88 %

Average interest earning assets to average interest bearing liabilities 1.24 1.23

Rate/Volume Analysis.

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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).

(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.

For the three and six-month periods ended June 30, 2024, compared to the same periods in 2023, the loan volume increased due to organic growth.

The increase in deposit volume is due to:

(1) increased certificate volumes due to CD growth, some as a result of movement from non-maturity deposits and, to a lesser extent, brokered CD growth;

and (2) growth in money market accounts due to organic growth.

Investment securities volume decreases for the three months ended June 30, 2024, compared to the three months ended June 30, 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.

Three months ended June 30, 2024, compared to the three months ended June 30, 2023.

Increase (decrease) due to

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Loans 316 1,645 1,961

Investment securities (223) 25 (198)

Other investments (81) 59 (22)

Total interest earning assets (71) 1,757 1,686

Interest expense:

Savings accounts (74) 110 36

Demand deposits (55) 326 271

Money market accounts 521 663 1,184

CD’s 506 1,179 1,685

Total deposits 898 2,278 3,176

FHLB Advances and other borrowings (1,481) 101 (1,380)

Total interest bearing liabilities (583) 2,379 1,796

Net interest income $ 512 $ (622) $ (110)

RATE / VOLUME ANALYSIS

(Dollar amounts in thousands)

Six months ended June 30, 2024, compared to the six months ended June 30, 2023.

Increase (decrease) due to

Volume Rate Net

Interest income:

Cash and cash equivalents $ (54) $ 50 $ (4)

Loans receivable 894 4,109 5,003

Interest bearing deposits (1) — (1)

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Net interest income $ 1,105 $ (2,105) $ (1,000)

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 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;

Total benefit, i.e., negative provision, for credit losses for the second quarter ended June 30, 2024,was $1.525 million compared to a provision for credit losses of $0.45 million for the quarter ended June 30, 2023.

The second quarter of 2024 negative provision was due to decreases in ACL related to:

(1) $0.6 million due to the impact of loan portfolio decreases and credit quality improvements;

(2) $0.6 million due to improvements in the economic scenario per our third-party provider;

and (3) reductions in off-balance sheet reserves to fund commitments of $0.3 million.

The second quarter and six months ended June 30, 2023, provision for credit losses was largely due to loan growth.

For the six months ended June 30, 2024, the total benefit, i.e., negative provision, for credit losses for the was $2.325 million compared to a provision for credit losses of $0.5 million for the six months ended June 30, 2023.

For the six months ended June 30, 2024, the negative provision was due to decreases in ACL related to:

(1) $0.9 million due to the impact of loan portfolio decreases and credit quality improvements;

(2) $0.6 million due to improvements in the Moody’s economic scenario per our third-party provider;

(3) reductions in off-balance sheet reserves to fund commitments of $0.6 million;

(4) 1st quarter 2024 a decrease in the allowance for credit losses on individually evaluated loans of $0.5 million;

and (5) net loan recoveries.

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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.

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

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-month periods ended March 31, 2024 and 2023, respectively.

Three months ended March 31,

2024 2023 % Change

The following table reflects the various components of non-interest income for the three and six-month periods ended June 30, 2024 and 2023, respectively.

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

2024 2023 % Change 2024 2023 % Change

Non-interest Income:

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Loan fees and service charges 309 88 251.14 % 539 168 220.83 %

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

Net realized gains on debt securities — 12 N/M — 12 N/M

Net losses (gains) on equity securities (658) (2) N/M (491) 54 N/M

Bank Owned Life Insurance (BOLI) death benefit 184 — N/M 184 — N/M

Other 257 333 (22.82) % 510 586 (12.97) %

Total non-interest income $ 1,913 $ 2,913 (34.33) % $ 5,177 $ 5,205 (0.54) %

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.

Gain on sale of loans decreased in the three-month period ended June 30, 2024, compared to the three-month period ended June 30, 2023, primarily due to lower gains on SBA loan sales.

For the six-month periods ending June 30, 2024, and 2023, loan sale gains increased due to higher first quarter 2024 SBA gain on sale.

Loan fees and services charges are higher for the three-month and six-month periods ended June 30, 2024, compared to the same periods in 2023 due to forbearance fees and higher late charges.

The change in net (losses) gains on investment securities between the three-month period ended June 30, 2024, and the three-month period ended June 30, 2023, is primarily the result of the $0.4 million loss recognized as a result of an exchange of senior debt for preferred equity of a community development financial institution.

See Investment Securities for more detail.

In addition, there were other equity mark-to-market losses in the second quarter of 2024.

For the six-month period ended June 30, 2024, from the same period in 2023, the change is due to the second quarter 2024 losses, partially offset by gains recognized in the first quarter of 2024 due to increased valuations of equity securities.

In the second quarter, the Company recognized $0.18 million of life insurance proceeds above the carrying value of the underlying insurance policy on an employee who passed.

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

The following table reflects the various components of non-interest expense for the three and six-month periods ended June 30, 2024 and 2023, respectively.

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

2024 2023 % Change 2024 2023 % Change

Non-interest Expense:

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Non-interest expense (annualized) / Average assets 2.28 % 2.14 % 6.54 % 2.32 % 2.20 % 5.45 %

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.

Compensation expense for the three and six-month periods ended June 30, 2024, increased from the same period in 2023, largely due to annual employee pay raises effective late first quarter of 2024, along with higher incentive compensation in the second quarter of 2024 than in the second quarter of 2023.

Data processing for the three and six months ended June 30, 2024, increased from the same 2023 periods, 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 and six months ended June 30, 2024, decreased from the comparable prior year periods, as intangible assets related to certain acquisitions have been fully amortized.

Mortgage servicing rights expenses, net, decreased in the three and six-month periods ended June 30, 2024, compared to the comparable 2023 periods, due to the impact of slowing prepayments, and to a lesser extent, a smaller servicing portfolio.

The increase in other non-interest expense during the three and six months ended June 30, 2024, from the comparable prior year period is largely due to:

1) the establishment of an SBA valuation reserve of $0.4 million in the first quarter of 2024, and 2) the second quarter 2024 write down of the remaining lease asset of a closed branch of $0.2 million, partially offset by selected one-time expense recoveries of $0.1 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.

Provision for income taxes decreased to $1.0 million in the second quarter of 2024 from $1.1 million in the second quarter of 2023, despite a corresponding increase in pre-tax income of $0.4 million due to a lower effective tax rate.

Provision for income taxes for the six-month period ending June 30, 2024, decreased $0.21 million, to $2.1 million, compared to $2.4 million for the six-month period ended June 30, 2023, as pre-tax income increased $0.688 million.

The decrease in the effective tax rate in 2024 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 began to be 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.

Cash and cash equivalents remained nearly flat at $36.9 million at June 30, 2024, compared to $37.1 million at December 31, 2024.

Investment Securities.

We manage our securities portfolio to provide liquidity and enhance income.

We manage our securities portfolio to provide liquidity, modify interest rate risk 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.

Securities available for sale decreased $9.3 million during the six months ended June 30, 2024, to $146.4 million from $155.7 million at December 31, 2023.

Along with principal repayments and changes in fair value, there was an exchange of a community development financial institution’s senior debt for a preferred equity security in the company’s operating subsidiary of $2.25

million, resulting in a decrease in AFS securities and an increase in equity securities.

The senior debt to preferred equity exchange resulted in recognition of a $0.4 million loss, reflected in net losses on investment securities on the consolidated statement of operations, and a $0.168 million reduction of unrealized losses in accumulated other comprehensive loss on the consolidated balance sheet at June 30, 2024.

Securities held to maturity decreased $2.6 million to $88.6 million during the six-month period ended June 30, 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

March 31, 2024

June 30, 2024

government agency obligations $ 15,180 $ 15,098

11 unchanged sentences

Held to maturity securities Amortized

March 31, 2024

June 30, 2024

Obligations of states and political subdivisions $ 500 $ 469

6 unchanged sentences

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

June 30, 2024 December 31, 2023

Available for sale securities Amortized

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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

June 30, 2024 December 31, 2023

Held to maturity securities Amortized

3 unchanged sentences

Total $ 88,605 $ 69,027 $ 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.

At June 30, 2024, the Bank has pledged certain of its mortgage-backed securities with a carrying value of $28.5 million as collateral to secure a line of credit with the Federal Reserve Bank.

As of June 30, 2024, there were no borrowings outstanding on this Federal Reserve Bank line of credit.

As of June 30, 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 $1.8 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.

As of June 30, 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.

5 unchanged sentences

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

Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, decreased by $32.2 million, to $1.43 billion as of June 30, 2024, from $1.46 billion at December 31, 2023.

The following table reflects the composition, of our loan portfolio at June 30, 2024, and December 31, 2023:

June 30, 2024 December 31, 2023

Amount Percent Amount Percent

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(in thousands, except ratios)

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

June 30, 2024 and Three Months Ended March 31, 2024 and Three Months Ended December 31, 2023 and Three Months Ended

Allowance for Credit Losses (“ACL”)

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

Three months ended March 31, 2024

Three months ended June 30, 2024

Allowance for Credit Losses - Loans:

4 unchanged sentences

ACL - Loans, at end of period $ 17,033 $ 1,117 $ 2,784 $ 244 $ 21,178

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

Six months ended June 30, 2024

Allowance for Credit Losses - Loans:

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

Cumulative effect of ASU 2016-13 adoption — — — — —

Charge-offs — — — (17) (17)

Recoveries 41 25 3 5 74

Additions/(reversals) to ACL - Loans via provision for credit losses charged to operations (1,792) (13) 37 (19) (1,787)

ACL - Loans, at end of period $ 17,033 $ 1,117 $ 2,784 $ 244 $ 21,178

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:

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ACL - Loans to loans, end of period 1.48 % 1.57 %

In addition to the ACL - Loans, the Company has established an ACL - Unfunded Commitments of $0.712 million at June 30, 2024, and $1.25 million at December 31, 2023, classified in other liabilities on the consolidated balance sheets.

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

June 30, 2024 and Three Months Ended June 30, 2024 and Six Months Ended

ACL - Unfunded Commitments - beginning of period $ 975 $ 1,250

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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)

June 30, 2024 and Six Months Then Ended (1) December 31, 2023 and Twelve Months Then Ended (1)

Nonperforming assets:

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ACL - Loans, at end of period $ 21,178 $ 22,908

ACL-Loans to NCOs (annualized) 10,525.19 % 5,079.38 %

ACL-Loans to NCOs (annualized) N/M N/M

NCOs (annualized) to average loans (0.01) % (0.03) %

7 unchanged sentences

Quarter Ended

2024 March 31,

2024 December 31,

1 unchanged sentence

2023 June 30,

2023 March 31, 2023

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

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Balance, end of period $ 8,352 $ 8,413 $ 13,184 $ 13,456 $ 15,663

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.

Nonperforming assets were $10.3 million at June 30, 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 first quarter of 2024.

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 %

Below is a summary of loan modifications made to borrowers experiencing financial difficulty during the three months ended June 30, 2024.

Other-Than-Insignificant Payment Delay

Loan Class Amortized Cost Basis at

March 31, 2024 % of Total Class of Financing Receivables

June 30, 2024 % of Total Class of Financing Receivables

Commercial and industrial $ 920 0.72 %

Residential mortgage $ 163 0.12 %

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.

Since June 30, 2023, special mention credit loan decreased in each quarter.

In the first and second quarters of 2024, this was due to loan payoffs.

Substandard loans have decreased significantly since June 30, 2023, largely due to first quarter 2024 payoffs of nonaccrual loans, which were also categorized as substandard, and the $3 million decrease in 3Q 2023, partially offset by a new loan relationship, adding $3.7 million to substandard loans in the fourth quarter of 2023.

(in thousands)

(Loan balance at unpaid principal balance) March 31,

(Loan balance at unpaid principal balance) June 30,

2024 March 31,

2024 December 31,

1 unchanged sentence

2023 June 30,

2023 March 31,

Special mention loan balances $ 8,848 $ 13,737 $ 18,392 $ 20,043 $ 20,507

1 unchanged sentence

Criticized loans, end of period $ 23,268 $ 28,470 $ 37,988 $ 36,214 $ 39,710

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

As of June 30, 2024, hotel loans totaled $92 million with a weighted average LTV of 51% and average balance of $4.6 million.

$4.5 million of these loans are nonaccrual and classified as substandard.

Restaurant loans totaled $58 million, at June 30, 2024.

The weighted average LTV percentage on these restaurant loans was 46% and the average loan balance was $816 thousand.

There was one restaurant loan in criticized loans totaling $0.05 million.

Approximately 67% or $38 million of restaurant loans are to franchise quick-service restaurants.

At June 30, 2024, we have $29 million of office loans with a weighted average LTV of 59% and average loan balance of $421 thousand.

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

Mortgage Servicing Rights.

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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 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.

The fair market value of the Company’s MSR asset was $5.4 million at June 30, 2024, compared to $5.6 million at December 31, 2023.

At June 30, 2024 and 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 June 30, 2024, and December 31, 2023, were $483.3 million and $495.5 million, respectively.

The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at June 30, 2024, and December 31, 2023, was 1.12% and 1.13%, respectively.

Total deposits decreased $7.9 million during the quarter ended June 30, 2024, to $1.52 billion.

Seasonal public deposits decreased $19.5 million with modest decreases in consumer and commercial deposits.

Partially offsetting these decreases were increases in brokered deposits of $12.8 million largely due to new brokered CDs of $40 million replacing $30 million of brokered CD maturities.

Brokered MMDA’s also increased during the second quarter, returning to near December 31, 2023 levels.

Deposits by type for five quarters are detailed below:

2024 March 31,

2024 December 31,

1 unchanged sentence

2023 June 30,

2023 March 31,

Consumer deposits $ 822,665 $ 827,290 $ 814,899 $ 794,970 $ 790,404

3 unchanged sentences

Total deposits $ 1,519,544 $ 1,527,489 $ 1,519,092 $ 1,473,235 $ 1,464,682

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.

At June 30, 2024, the deposit portfolio composition was 54% consumer, 27% commercial, 12% public and 7% brokered deposits compared to 54% consumer, 28% commercial, 12% public and 6% brokered deposits at December 31, 2023.

2024 March 31,

2024 December 31, 2023 September 30,

2023 June 30,

2023 March 31,

Non-interest bearing demand deposits $ 255,703 $ 248,537 $ 265,704 $ 275,790 $ 261,876

4 unchanged sentences

Total deposits $ 1,519,544 $ 1,527,489 $ 1,519,092 $ 1,473,235 $ 1,464,682

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.

Uninsured and uncollateralized deposits were $246.7 million, or 16% of total deposits, at June 30, 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 June 30, 2024, were $401.6 million, or 26% 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 was $714.1 million, or 289% of uninsured and uncollateralized deposits at June 30, 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 March 31, 2024, and December 31, 2023, is as follows:

March 31, 2024 December 31, 2023

A summary of Federal Home Loan Bank (FHLB) advances and other borrowings at June 30, 2024, and December 31, 2023, is as follows:

June 30, 2024 December 31, 2023

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

10 unchanged sentences

Totals $ 92,998 $ 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.

(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 $1,100.0 million and $1,106.3 million at June 30, 2024 and December 31, 2023, respectively.

At June 30, 2024, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $416.1 million compared to $370.6 million as of December 31, 2023.

(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $81.0 million and $217.5 million, during the six months ended June 30, 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 June 30, 2024 and December 31, 2023 were 3.54% and 4.16%, respectively.

(4) In June 2024, the FHLB called the $10.0 million, 3.82% advance maturing in 2028.

(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.

(a) A term note, which was subsequently refinanced in March 2022, modified in February of 2023, and refinanced in May 2024, requiring quarterly interest-only payments through January 2029, 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%.

7 unchanged sentences

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.

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.

FHLB advances decreased $48.0 million to $31.5 million as of June 30, 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 the FHLB’s call of a $10 million advance, with an interest rate of 3.82% in June of 2024.

The Company does not have any callable advances at June 30, 2024.

At June 30, 2024, short-term FHLB advances consisted of $16.5 million maturing in July 2024 and other 2024 maturities of $10 million.

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.

The Bank’s current unused borrowing capacity, supported by loan collateral as of June 30 , 2024, is approximately $416.1 million.

At June 30 , 2024, and December 31, 2023, the Bank had the ability to borrow $21.4 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 $28.5 million and $29.2 million as of June 30, 2024 and December 31, 2023, respectively.

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

1 unchanged sentence

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.

There were no borrowings outstanding on these lines of credit as of June 30, 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.

1 unchanged sentence

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.

Stockholders’ equity was $176.0 million at June 30, 2024, compared to $173.3 million at December 31, 2023.

The increase in stockholder’s equity was attributable to net income of $7.8 million for the six-month period ended June 30, 2024, partially offset by the annual cash dividend paid in February to common stockholders of $0.32 per share, or $3.3 million.

Unrealized losses on AFS securities, are securities are reflected in accumulated other comprehensive income and this loss increased less than $0.1 million from December 31, 2023.

The Company repurchased 109 thousand shares of the Company’s common stock in the second quarter of 2024 at $11.28 per share.

The Company repurchased 159 thousand shares of the Company’s common stock in the six-month period ended June 30, 2024, at $11.48 per share.

As of June 30, 2024, approximately 43 thousand shares remain available for repurchase under the July 2021 share repurchase authorization and an additional 512 thousand shares are available to repurchase under the new July 2024 share authorization.

Liquidity and Asset / Liability Management.

2 unchanged sentences

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

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

At June 30, 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.

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.

Uninsured and uncollateralized deposits were $246.7 million, or 16% of total deposits, at June 30, 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 unnsured 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.

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.

8 unchanged sentences

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

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

Currently, we have approximately $416.1 million available to borrow under this arrangement, supported by loan collateral as of June 30, 2024.

We also had borrowing capacity of $21.4 million at the Federal Reserve Bank.

1 unchanged sentence

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

While the Bank does not have formal brokered certificate lines of credit with counter parties at 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.

While the Bank does not have formal brokered certificate lines of credit with counter parties at June 30, 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.

5 unchanged sentences

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

As of 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.

As of June 30, the Company had approximately $182.9 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 June 30, 2024.

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

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.

As of June 30, 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:

4 unchanged sentences

Amount Ratio Amount Ratio Amount Ratio

As of March 31, 2024 (Unaudited)

As of June 30, 2024 (Unaudited)

Total capital (to risk weighted assets) $ 227,253 15.0 % $ 121,375 > = 8.0 % $ 151,719 > = 10.0 %

7 unchanged sentences

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.

At June 30, 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:

1 unchanged sentence

Amount Ratio Amount Ratio

As of March 31, 2024 (Unaudited)

As of June 30, 2024 (Unaudited)

Total capital (to risk weighted assets) $ 231,523 15.2 % $ 121,522 > = 8.0 %

8 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis