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Item 2. Management’s Discussion and Analysis

2024-11-05 compared with 2024-08-06 · 237 added, 201 removed, 605 unchanged (42% of the section changed)

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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 the quarterly reports on Form 10-Q for the quarter ended March 31, 2024, filed with the SEC on May 8, 2024;

the matters described in “Risk Factors” in Item 1A of the quarterly reports on Form 10-Q for the quarter ended June 30, 2024, filed with the SEC on August 6, 2024;

the matters described in “Risk Factors” in Item 1A of this Form 10-Q, and the following:

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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 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.

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of September 30, 2024, and our consolidated results of operations for the three and nine months ended September 30, 2024, compared to the same periods in the prior fiscal year ended September 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 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;

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

Compared to third quarter 2023, third quarter 2024 net interest income decreased $0.8 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, partially offset by higher yields on assets, and a decrease in lower yielding on-balance sheet assets included in liquidity to more normal levels.

The total benefit, i.e., negative provision, for credit losses for the third quarter ended September 30, 2024,was $0.4 million compared to a negative provision for credit losses of $0.3 million for the quarter ended September 30, 2023.

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

(1) on-balance sheet ACL of $0.1 million;

and (2) 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 third quarter ended September 30, 2023, negative provision for credit losses was primarily due to net recoveries on an agricultural credit and the impact of the payoff of two large loans.

Non-interest income increased $0.4 million in the third quarter of 2024 compared to the third quarter of 2023, primarily due to $0.5 million higher gain on sale of loans.

Non-interest expense increased $0.4 million in the third quarter of 2024 from $10.0 million in the third quarter of 2023.

The increase was primarily related to higher compensation expense due to both the impact of 2024 merit increases and higher incentive compensation.

Provision for income taxes decreased to $0.9 million in the third quarter of 2024, from $2.5 million in the third quarter of 2023, primarily due to a 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.

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

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

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

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 $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:

We reported net income of $3.3 million and $11.0 million, or $0.32 and $1.07 per diluted share for the three and nine months ended September 30, 2024, compared to net income of $2.5 million and $9.4 million or $0.24 and $0.89 per diluted share for the three and nine months ended September 30, 2023.

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

Compared to 2023, for the nine-month period ended September 30, 2024, net interest income decreased $1.8 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, partially offset by higher yields on assets.

The Company’s interest-bearing liabilities increased from 2.46% for the nine months ended September 30, 2023, to 3.18% for the same period in 2024.

This increase in interest-bearing liabilities cost was partially offset by higher interest income on interest earning assets of $5.4 million primarily due to the impact of higher interest rates.

The total benefit, i.e., negative provision, for credit losses was $2.725 million for the nine months ended September 30, 2024, compared to a provision for credit losses of $0.175 million for the nine months ended September 30, 2023.

For the nine months ended September 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;

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(3) reductions in off-balance sheet reserves to fund commitments of $0.9 million;

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

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

and (5) net loan recoveries.

The provision for credit losses for the nine months ended September 30, 2023, was $0.175 million, primarily due to growth in the loan portfolio, partially offset by the impact of net recoveries of $0.187 million, reductions in reserves on individually evaluated loans, and third quarter loan payoffs.

Non-interest income for the nine months ended September 30, 2024, increased $0.3 million compared to the nine-months ended September 30, 2023.

Higher gains on loan sales, loan fees and service charges and a bank owned life insurance death benefit were partially offset by net losses on equity securities.

Non-interest expense for the nine months ended September 30, 2024, increased $1.6 million largely due to higher compensation expense of $0.9 million, related to higher incentive costs and the impact of annual merit increases, and higher other expenses, primarily due to the establishment of a $0.4 million SBA recourse reserve..

Provision for income taxes decreased to $0.9 million in the third quarter of 2024, from $2.5 million in the third quarter of 2023, primarily due to a decrease in the effective tax rate.

The lower 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.

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

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

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

CRITICAL ACCOUNTING ESTIMATES

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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.

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.

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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;

Allowance for credit losses 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 allowance for credit losses 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.

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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 June 30, 2024, which is related to its banking activities.

The Company has one reporting unit as of September 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, 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 (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:

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

Net interest income was $11.3 million for the three months ended September 30, 2024, compared to $12.1 million for the three months ended September 30, 2023.

Interest income for the three months ended September 30, 2024, decreased from the same period one year ago due to higher net interest-bearing deposit balances and costs.

This was partially offset by increases in asset yields due to (1) contractual repricing and higher coupons on new loans;

and (2) principal reductions in low-yielding investments.

The net interest margin for the three-month period ended September 30, 2024, decreased to 2.63%, compared to 2.79%, for the three-month period ended September 30, 2023.

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

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

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

Net interest income was $34.8 million for the nine months ended September 30, 2024, compared to $36.6 million for the nine months ended September 30, 2023.

Net interest income for the nine months ended September 30, 2024, decreased from the same period one year ago, due to higher interest-bearing balances and costs, which increased 72 basis points.

This was partially

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

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(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.

(b) principal reductions in low-yielding investments;

and (c) one-time income in the first and second quarters 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 nine-month period ended September 30, 2024, was 2.71%, compared to 2.85%, for the nine-month period ended September 30, 2023.

The decreased net interest margin was due to:

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

(1) higher liability costs 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;

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

(1) increases in loan yields due to contractual repricing;

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

and (3) a six-basis point increase in yield due to income recognized on nonaccrual loan payoffs and curing technical defaults on performing loans in the first and second quarter;

and 4) principal reductions in low-yielding investments

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

Three months ended June 30, 2024

Three months ended June 30, 2023

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

Three months ended September 30, 2024

Three months ended September 30, 2023

Balance Interest

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Loans 1,429,928 20,115 5.60 % 1,435,284 19,083 5.27 %

Interest-bearing deposits — — — % 5 — — %

Investment securities 236,960 1,966 3.30 % 252,226 2,119 3.33 %

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(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

Nine months ended September 30, 2024, compared to the nine months ended September 30, 2023:

Nine months ended September 30, 2024 Nine months ended September 30, 2023

Balance Interest

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CD’s 364,131 12,215 4.48 % 300,279 6,989 3.11 %

IRA’s — — — % — — — %

Total deposits $ 1,272,173 $ 28,712 3.01 % $ 1,177,917 $ 17,898 2.03 %

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

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.

For the three month period ended September 30, 2024, compared to the same period in 2023, average earning assets decreased modestly due to net principal repayments on available for sale (“AFS”) and held-to-maturity (“HTM”) security portfolios and a less than 1% decline in loan balances.

Average interest-bearing liabilities saw customer preferences leading to growth in money market and certificate accounts, with the growth in deposits funding a decrease in FHLB advances.

For the nine-month period ended September 30, 2024, compared to the same period in 2023, loan volume increases due to organic growth, primarily in late 2023 and early 2024, more than offset a reduction in low-yielding AFS and HTM securities.

For the nine-month period ended September 30, 2024, the volume change in interest-bearing liabilities are similar to the three months ended September 30, 2024, explanation .

RATE / VOLUME ANALYSIS

(Dollar amounts in thousands)

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

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

Increase (decrease) due to

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(Dollar amounts in thousands)

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

Nine months ended September 30, 2024, compared to the nine months ended September 30, 2023.

Increase (decrease) due to

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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 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;

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

(1) on-balance sheet ACL of $0.1 million;

and (2) 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;

The third quarter ended September 30, 2023, negative provision for credit losses was primarily due to net recoveries on an agricultural credit and the impact of the payoff of two large loans.

For the nine months ended September 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 $0.9 million;

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

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

and (5) net loan recoveries.

The provision for credit losses for the nine months ended September 30, 2023, was $0.175 million, primarily the result of growth in the loan portfolio, partially offset by the impact of net recoveries of $0.187 million, reductions in reserves on individually evaluated loans and third quarter 2023 loan payoffs.

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.

The impact of higher

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

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

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

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

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

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Non-interest Income .

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,

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

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

2024 2023 % Change 2024 2023 % Change

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Total non-interest income $ 2,921 $ 2,565 13.88 % $ 8,098 $ 7,770 4.22 %

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.

Gain on sale of loans increased in the three-month period ended September 30, 2024, compared to the three-month period ended September 30, 2023, with the increase approximately 80% attributable to higher gains on SBA loan sales and the remainder due to residential gains on sale of loans.

For the nine-month periods ending September 30, 2024, and 2023, gain on sale of loans increased approximately 60% due to higher SBA gains on sale of loans and approximately 40% due to higher residential gains on sale of loans.

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

The decrease in net (losses) gains on equity securities between the three-month period ended September 30, 2024, and the three-month period ended September 30, 2023, is primarily the result of equity mark-to-market losses in the third quarter of 2024, and mark-to-market gains in the third quarter of 2023.

The decrease in net (losses) gains on equity securities between the nine-month period ended September 30, 2024, and the nine-month period ended September 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 in the second quarter of 2024.

See Investment Securities for more details.

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

In the second quarter of 2024, the Company recognized $0.18 million of life insurance proceeds above the carrying value of the underlying insurance policy on an employee who passed, which is reflected in Bank Owned Life Insurance (BOLI) death benefit.

Non-interest Expense.

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,

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

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

2024 2023 % Change 2024 2023 % Change

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Non-interest expense (annualized) / Average assets 2.29 % 2.15 % 6.51 % 2.31 % 2.18 % 5.96 %

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:

Compensation expense for the three and nine-month periods ended September 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 both the three and nine months ended September 30, 2024.

Data processing for the three and nine months ended September 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.

Mortgage servicing rights expenses, net, increased in the three months ended September 30, 2024 compared to the same period in 2023, primarily due to an impairment of $0.04 million due to higher forecasted future prepayments in a small tranche of higher coupon recent loan production, partially offset by slowing prepayments on the majority of the servicing portfolio, and to a lesser extent, a smaller servicing portfolio.

Mortgage servicing rights expenses, net, decreased slightly in the nine-month period ended September 30, 2024, compared to the comparable 2023 period, due to the impact of slowing prepayments, and to a lesser extent, a smaller servicing portfolio, partially offset by the third quarter 2024 impairment.

Advertising expense increased for the three and nine months ended September 30, 2024, compared to the same periods in 2023, due to higher marketing spends to support commercial loan and deposit growth and increased market analytics.

The increase in other non-interest expense for the nine months ended September 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 $1.0 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.

Provision for income taxes decreased to $0.9 million in the third quarter of 2024 from $2.5 million in the third quarter of 2023.

Provision for income taxes for the nine-month period ending September 30, 2024, decreased $1.9 million, to $3.0 million, compared to $4.9 million for the nine-month period ended September 30, 2023, as pre-tax income decreased $0.169 million.

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

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

BALANCE SHEET ANALYSIS

Cash and Cash Equivalents.

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

Cash and cash equivalents decreased $0.5 million to $36.6 million at September 30, 2024, compared to $37.1 million at December 31, 2023.

Investment Securities.

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

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.

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.

Securities available for sale decreased $6.3 million during the nine months ended September 30, 2024, to $149.4 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 during the second quarter of 2024.

The exchange resulted in the recognition of $0.168 million of unrealized losses on available-for-sale securities, previously included in other comprehensive income, as well as an additional $0.270 million loss, for a total loss of $0.438 million.

This total loss of $0.438 million was recognized on the June 30, 2024, consolidated statement of operations as net losses on equity securities.

Securities held to maturity decreased $4.2 million to $87.0 million during the nine-month period ended September 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

June 30, 2024

September 30, 2024

government agency obligations $ 14,497 $ 14,457

11 unchanged sentences

Held to maturity securities Amortized

June 30, 2024

September 30, 2024

Obligations of states and political subdivisions $ 500 $ 481

6 unchanged sentences

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

June 30, 2024 December 31, 2023

September 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:

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

Held to maturity securities Amortized

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Total $ 87,033 $ 71,046 $ 91,229 $ 73,262

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.

At September 30, 2024, the Bank has pledged certain of its mortgage-backed securities with a carrying value of $34.7 million as collateral to secure a line of credit with the Federal Reserve Bank.

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

As of September 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 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.

As of September 30, 2024, the Bank also has mortgage-backed securities with a carrying value of $0.1 million pledged as collateral to the Federal Home Loan Bank of Des Moines.

At December 31, 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.

4 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 $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

Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, decreased by $36.0 million, to $1.42 billion as of September 30, 2024, from $1.46 billion at December 31, 2023.

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

September 30, 2024 December 31, 2023

Amount Percent Amount Percent

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Total loans receivable, net $ 1,403,828 $ 1,437,884

Commercial real estate (”CRE”) lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property or the business conducted on the property securing the loan.

Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

The level of owner-occupied property versus non-owner-occupied property are tracked and monitored on a regular basis.

The following table lists the portfolio characteristics of our major commercial real estate loan portfolio at September 30, 2024:

Non-Owner Occupied CRE Owner- Occupied CRE Multi-family CRE Construction and Development CRE

Loan Balance Outstanding in Millions $ 489 $ 241 $ 239 $ 88

Number of Loans 760 394 131 97

Average Loan Size in Millions $ 0.6 $ 0.6 $ 1.8 $ 0.9

Approximate Weighted Average LTV 53 % 52 % 61 % 67 %

Weighted Average Seasoning in Months 42 39 38 NA

Trailing 12 Month Net Charge-Offs 0.00 % (0.01) % 0.00 % 0.00 %

Criticized Loans in Millions $ 8.0 $ 1.8 $ 8.7 $ 0.1

Criticized Loans as a Percent of Total 1.6 % 0.8 % 3.7 % 0.1 %

The table below lists the above CRE portfolio by geographical location:

Non-Owner Occupied CRE Owner- Occupied CRE Multi-family CRE Construction and Development CRE

Wisconsin 52 % 78 % 62 % 50 %

Minnesota 22 % 18 % 33 % 8 %

Other 26 % 4 % 5 % 42 %

The following table further disaggregates the composition of our commercial real estate loan portfolio by selected industry components at September 30, 2024:

Campground Hotel Restaurant Office

Loan Balance Outstanding in Millions $ 151 $ 91 $ 54 $ 31

Number of Loans 71 21 74 71

Average Loan Size in Millions $ 2.1 $ 4.3 $ 0.7 $ 0.4

Approximate Weighted Average LTV 50 % 51 % 49 % 60 %

Weighted Average Seasoning in Months 34 47 39 43

Trailing 12 Month Net Charge-Offs 0.00 % (0.04) % 0.00 % 0.00 %

Criticized Loans in Millions $ 0.0 $ 4.3 $ 0.1 $ 0.2

Criticized Loans as a Percent of Total 0.0 % 4.8 % 0.1 % 0.6 %

The table below lists our CRE portfolio selected industry components by geographical location:

Campground Hotel Restaurant Office

Wisconsin 21 % 39 % 53 % 84 %

Minnesota 0 % 40 % 29 % 8 %

Other 79 % 21 % 18 % 8 %

Allowance for Credit Losses - Loans.

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(in thousands, except ratios)

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

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

Three months ended September 30, 2024

Allowance for Credit Losses - Loans:

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

Six months ended June 30, 2024

Nine months ended September 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 (39) — (4) (28) (71)

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(in thousands, except ratios)

September 30,

2024 December 31,

2 unchanged sentences

ACL - Loans to loans, end of period 1.47 % 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.

In addition to the ACL - Loans, the Company has established an ACL - Unfunded Commitments of $0.46 million at September 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)

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

September 30, 2024 and Three Months Ended September 30, 2024 and Nine Months Ended

ACL - Unfunded Commitments - beginning of period $ 712 $ 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:

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

September 30, 2024 and Nine Months Then Ended (1) December 31, 2023 and Twelve Months Then Ended (1)

Nonperforming assets:

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Quarter Ended

September 30,

2024 June 30,

2024 March 31,

1 unchanged sentence

2023 September 30,

2023 June 30,

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

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Balance, end of period $ 15,042 $ 8,352 $ 8,413 $ 13,184 $ 13,456

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.

Nonperforming assets were $17.1 million at September 30, 2024, compared to $15.4 million at December 31, 2023.

Nonperforming assets increased largely due to one agricultural real estate loan relationship in forestry services that moved from special mention to substandard and was placed on nonaccrual in the third quarter.

This increase was offset by 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 June 30, 2024.

Other-Than-Insignificant Payment Delay

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

Term Extension

Loan Class Amortized Cost Basis at

June 30, 2024 % of Total Class of Financing Receivables

Commercial and industrial $ 920 0.72 %

September 30, 2024 % of Total Class of Financing Receivables

Residential mortgage $ 5 — %

Other Consumer $ 1 0.02 %

Other-Than-Insignificant Payment Delay

Loan Class Amortized Cost Basis at

September 30, 2024 % of Total Class of Financing Receivables

Commercial real estate $ 1,182 0.16 %

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

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

From September 30, 2023 through June 30, 2024, special mention credit loans 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.

Special mention loans increased by $2.2 million to $11.0 million at September 30, 2024, compared to $8.8 million at June 30, 2024.

The increase was largely due to one loan of $8.7 million, which is secured by a multi-family unit.

The addition of the multi-family unit to special mention was partially offset by the movement of a $7.7 million agricultural real estate loan relationship in forestry services that moved to substandard and was placed on nonaccrual.

(in thousands)

(Loan balance at unpaid principal balance) June 30,

(Loan balance at unpaid principal balance) September 30,

2024 June 30,

2024 March 31,

1 unchanged sentence

2023 September 30,

2023 June 30,

Special mention loan balances $ 11,047 $ 8,848 $ 13,737 $ 18,392 $ 20,043

1 unchanged sentence

Criticized loans, end of period $ 32,249 $ 23,268 $ 28,470 $ 37,988 $ 36,214

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 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.

The fair market value of the Company’s MSR asset was $5.0 million at September 30, 2024, compared to $5.6 million at December 31, 2023.

At September 30, 2024, the MSR valuation allowance was $0.36 million due to higher forecasted future prepayments in a small tranche of higher coupon recent loan production.

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 September 30, 2024, and December 31, 2023, were $482.9 million and $495.5 million, respectively.

The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at September 30, 2024, and December 31, 2023, was 1.04% and 1.13%, respectively.

Total deposits increased $1.1 million during the quarter ended September 30, 2024, to $1.52 billion.

Consumer deposits increased $22.1 million, including an increase in CDs of $17.9 million.

Commercial deposits increased by $20.0 million.

Brokered deposits decreased $30.1 million as the company decreased brokered MMDAs by $24.6 million and $5.5 million in brokered CDs matured and were not replaced.

Public deposits decreased $10.9 million, largely due to expected seasonal outflows.

Deposits by type for five quarters are detailed below:

September 30,

2024 June 30,

2024 March 31,

1 unchanged sentence

2023 September 30,

2023 June 30,

Consumer deposits $ 844,808 $ 822,665 $ 827,290 $ 814,899 $ 794,970

3 unchanged sentences

Total deposits $ 1,520,667 $ 1,519,544 $ 1,527,489 $ 1,519,092 $ 1,473,235

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,

At September 30, 2024, the deposit portfolio composition was 56% consumer, 28% commercial, 12% public, and 4% brokered deposits compared to 54% consumer, 28% commercial, 12% public and 6% brokered deposits at December 31, 2023.

September 30,

2024 June 30,

2024 March 31, 2024 December 31, 2023 September 30,

Non-interest bearing demand deposits $ 256,840 $ 255,703 $ 248,537 $ 265,704 $ 275,790

4 unchanged sentences

Total deposits $ 1,520,667 $ 1,519,544 $ 1,527,489 $ 1,519,092 $ 1,473,235

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.

Uninsured and uncollateralized deposits were $267.1 million, or 18% of total deposits, at September 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 September 30, 2024, were $413.6 million, or 27% 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 $718 million, or 269% of uninsured and uncollateralized deposits at September 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 June 30, 2024, and December 31, 2023, is as follows:

June 30, 2024 December 31, 2023

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

September 30, 2024 December 31, 2023

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

10 unchanged sentences

Totals $ 82,548 $ 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 $1,100.0 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.

(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 $1,082.0 million and $1,106.3 million at September 30, 2024 and December 31, 2023, respectively.

At September 30, 2024, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $414.4 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 nine months ended September 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 September 30, 2024 and December 31, 2023 were 3.28% and 4.16%, respectively.

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

13 unchanged sentences

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

FHLB advances decreased $48.0 million to $31.5 million as of June 30, 2024, compared to $79.5 million as of December 31, 2023.

FHLB advances decreased $58.5 million to $21.0 million as of September 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 Company does not have any callable advances at September 30, 2024 .

At September 30, 2024 , short-term FHLB advances consisted of $16.0 million maturing in 2024 and other maturities of $5 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 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.

The Bank’s current unused borrowing capacity, supported by loan collateral as of September 30, 2024 , is approximately $414.4 million.

At September 30, 2024 , and December 31, 2023, the Bank had the ability to borrow $27.1 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 $34.7 million and $29.2 million as of September 30, 2024 and December 31, 2023, respectively.

There were no related Federal Reserve borrowings outstanding as of September 30, 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 June 30, 2024, or December 31, 2023.

There were no borrowings outstanding on these lines of credit as of September 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.

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.

Stockholders’ equity was $180.1 million at September 30, 2024, compared to $173.3 million at December 31, 2023.

The increase in stockholder’s equity was attributable to net income of $11.0 million for the nine-month period ended September 30, 2024, net unrealized gains of $3.5 million from the AFS securities portfolio reflected in accumulated other comprehensive income from December 31, 2023, partially offset by the annual cash dividend paid in February to common stockholders of $0.32 per share, or $3.3 million.

The Company repurchased 223 thousand shares of the Company’s common stock in the third quarter of 2024 at an average price of $12.91 per share.

The Company repurchased 382 thousand shares of the Company’s common stock in the nine-month period ended September 30, 2024, at an average price of $12.32 per share.

As of September 30, 2024, approximately 333 thousand shares remain available for repurchase under the July 2024 share repurchase 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 June 30, 2024, our on-balance sheet liquidity ratio of 11.4% was flat with the December 31, 2023, level.

At September 30, 2024 , our on-balance sheet liquidity ratio increased by 0.1% to 11.5% from 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 $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 .

Uninsured and uncollateralized deposits were $267.1 million, or 18% of total deposits, at September 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 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.

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 $365.4 million of our $381.7 million (96%) 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.

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

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

Currently, we have approximately $414.4 million available to borrow under this arrangement, supported by loan collateral as of September 30, 2024.

We also had borrowing capacity of $27.1 million at the Federal Reserve Bank.

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

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

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

As of 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.

As of September 30, 2024, the Company had approximately $147.9 million in unused loan commitments, compared to approximately $210.4 million in unused commitments as of December 31, 2023.

In addition, there are $3.1 million of commitments for contributions of capital to an SBIC and an investment company at September 30, 2024.

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

Capital Resources.

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.

As of September 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:

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Amount Ratio Amount Ratio Amount Ratio

As of June 30, 2024 (Unaudited)

As of September 30, 2024 (Unaudited)

Total capital (to risk weighted assets) $ 226,597 15.0 % $ 120,814 > = 8.0 % $ 151,018 > = 10.0 %

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

At 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.

At September 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:

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Amount Ratio Amount Ratio

As of June 30, 2024 (Unaudited)

As of September 30, 2024 (Unaudited)

Total capital (to risk weighted assets) $ 231,825 15.3 % $ 120,972 > = 8.0 %

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis