Citizens Community Bancorp Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Certain matters discussed in this report contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and the Company intends that these forward-looking statements be covered by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as “anticipate,” “believe,” “could,” “expect,” “estimates,” “intend,” “may,” “preliminary,” “planned,” “potential,” “should,” “will,” “would,” or the negative of those terms or other words of similar meaning. Similarly, statements that describe the Company’s future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are inherently subject to many uncertainties in the Company’s operations and business environment. Factors that could affect actual results or outcomes include the matters described under the caption “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 5, 2024 (“2023 10-K”), the matters described in “Risk Factors” in Item 1A of 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: • conditions in the financial markets and economic conditions generally; • the impact of inflation on our business and our customers; • geopolitical tensions, including current or anticipated impact of military conflicts; • higher lending risks associated with our commercial and agricultural banking activities; • future pandemics (including new variants of COVID-19); • cybersecurity risks; • adverse impacts on the regional banking industry and the business environment in which it operates; • interest rate risk; • lending risk; • changes in the fair value or ratings downgrades of our securities; • the sufficiency of allowance for credit losses; • competitive pressures among depository and other financial institutions; • disintermediation risk; • our ability to maintain our reputation; • our ability to maintain or increase our market share; • our ability to realize the benefits of net deferred tax assets; • our inability to obtain needed liquidity; • our ability to raise capital needed to fund growth or meet regulatory requirements; • our ability to attract and retain key personnel; • our ability to keep pace with technological change; • prevalence of fraud and other financial crimes; • the possibility that our internal controls and procedures could fail or be circumvented; • our ability to successfully execute our acquisition growth strategy; • risks posed by acquisitions and other expansion opportunities, including difficulties and delays in integrating the acquired business operations or fully realizing the cost savings and other benefits; • restrictions on our ability to pay dividends; • the potential volatility of our stock price; • accounting standards for credit losses; • legislative or regulatory changes or actions, or significant litigation, adversely affecting the Company or Bank; • public company reporting obligations; • changes in federal or state tax laws; and • changes in accounting principles, policies or guidelines and their impact on financial performance. 60 Stockholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this filing and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances occurring after the date of this report. GENERAL 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. Unless otherwise stated, all monetary amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than share, per share and capital ratio amounts, are stated in thousands. PERFORMANCE SUMMARY The following is a summary of some of the significant factors that affected our operating results for the three 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 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 $3.3 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 61 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; (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) 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. 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. CRITICAL ACCOUNTING ESTIMATES Our consolidated financial statements have been prepared in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amount of assets, liabilities, revenue, expenses, and their related disclosures. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors that our management believes to be relevant at the time our consolidated financial statements are prepared. Some of these estimates are more critical than others. In addition to the policies included in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included as an exhibit in our annual report on our 2023 10-K, our critical accounting estimates are as follows: Allowance for Credit Losses - 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. We have selected a loss estimation methodology, utilizing a third-party model. See also Notes 1 and 3 to the unaudited consolidated financial statements for further discussion of our adoption of ASU 2016-13. We maintain an allowance for credit losses to absorb probable and inherent losses in our loan portfolio. The allowance is based on ongoing quarterly assessments of the estimated lifetime losses in our loan portfolio. In evaluating the level of the allowance for credit losses, we consider the types of loans and the amount of loans in our loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, prevailing economic conditions, and other relevant factors determined by management. We follow all applicable regulatory guidance, including the “Interagency Policy Statement on Allowances for Credit losses,” issued by the Office of the Comptroller of the Currency, Department of the Treasury, Federal Deposit Insurance Corporation, and National Credit Union Administration. We believe that the Bank’s Allowance for Credit Losses Policy conforms to all applicable regulatory 62 requirements. However, based on periodic examinations by regulators, the amount of the allowance for credit losses recorded during a particular period may be adjusted. Our determination of the allowance for credit losses - loans is based on: (1) an individual allowance for specifically identified and evaluated loans that management has determined have unique risk characteristics. For these loans, the estimated loss is based on likelihood of default, payment history, and net realizable value of underlying collateral. 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. The allowance for these loans is estimated by pooling loans with a similar risk profile and calculating a collective loss rate using the pool’s risk drivers, historical loss experience, and reasonable and supportable future economic forecasts to project lifetime losses. This collectively estimated loss is adjusted for qualitative factors. Assessing the allowance for credit losses - loans is inherently subjective as it requires making material estimates, including the amount, and timing of future cash flows expected to be received on collateral dependent loans, any of which estimates may be susceptible to significant change. In our opinion, the allowance, when taken as a whole, reflects estimated probable loan losses in our loan portfolio. Goodwill. We account for goodwill and other intangible assets in accordance with ASC Topic 350, “Intangibles - Goodwill and Other.” The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, as goodwill. The Company does not amortize goodwill, but reviews goodwill for impairment at a reporting unit level on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired. A reporting unit is defined as any distinct, separately identifiable component of the Company’s one operating segment for which complete, discrete financial information is available and reviewed regularly by the segment’s management. The Company has one reporting unit as of 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. The Company has monitored events and conditions since December 31, 2023, and has determined that no triggering event has occurred that would require goodwill to be tested for impairment. STATEMENT OF OPERATIONS ANALYSIS Net Interest Income. Net interest income represents the difference between the dollar amount of interest earned on interest-bearing assets and the dollar amount of interest paid on interest-bearing liabilities. The interest income and expense of financial institutions (including those of the Bank) are significantly affected by general economic conditions, competition, policies of regulatory authorities and other factors. Interest rate spread and net interest margin are used to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest earning assets and the rate paid for interest-bearing liabilities that fund those assets. Net interest margin is expressed as the percentage of net interest income to average interest earning assets. Net interest margin currently exceeds interest rate spread because non-interest-bearing sources of funds (“net free funds”), principally demand deposits and stockholders’ equity, also support interest earning assets. The narrative below discusses net interest income, 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 63 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) 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 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. This was partially offset by: (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 September 30, 2024, and September 30, 2023. Non-accruing loans have been included in the table as loans carrying a zero yield. NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS (Dollar amounts in thousands) Three months ended September 30, 2024, compared to the three months ended September 30, 2023: Three months ended September 30, 2024 Three months ended September 30, 2023 Average Balance Interest Income/ Expense Average Yield/ Rate Average Balance Interest Income/ Expense Average Yield/ Rate Average interest earning assets: Cash and cash equivalents $ 25,187 $ 360 5.69 % $ 21,298 $ 302 5.63 % Loans 1,429,928 20,115 5.60 % 1,435,284 19,083 5.27 % Investment securities 236,960 1,966 3.30 % 252,226 2,119 3.33 % Other investments 12,553 71 2.25 % 15,511 268 6.85 % Total interest earning assets $ 1,704,628 $ 22,512 5.25 % $ 1,724,319 $ 21,772 5.01 % Average interest-bearing liabilities: Savings accounts $ 170,777 $ 450 1.05 % $ 199,279 $ 328 0.65 % Demand deposits 357,201 2,152 2.40 % 354,073 1,863 2.09 % Money market 381,369 3,126 3.26 % 298,098 1,889 2.51 % CD’s 379,722 4,437 4.65 % 358,238 3,308 3.66 % Total deposits $ 1,289,069 $ 10,165 3.14 % $ 1,209,688 $ 7,388 2.42 % FHLB Advances and other borrowings 80,338 1,062 5.26 % 182,967 2,263 4.91 % Total interest-bearing liabilities $ 1,369,407 $ 11,227 3.26 % $ 1,392,655 $ 9,651 2.75 % Net interest income $ 11,285 $ 12,121 Interest rate spread 1.99 % 2.26 % Net interest margin 2.63 % 2.79 % Average interest earning assets to average interest-bearing liabilities 1.24 1.24 64 NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS (Dollar amounts in thousands) 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 Average Balance Interest Income/ Expense Average Yield/ Rate Average Balance Interest Income/ Expense Average Yield/ Rate Average interest earning assets: Cash and cash equivalents $ 19,073 $ 823 5.76 % $ 19,066 $ 768 5.39 % Loans receivable 1,441,972 60,204 5.58 % 1,420,423 54,169 5.10 % Interest bearing deposits — — — % 84 1 1.59 % Investment securities 240,054 6,038 3.36 % 261,507 6,505 3.33 % Other investments 12,983 589 6.06 % 16,447 779 6.33 % Total interest earning assets $ 1,714,082 $ 67,654 5.27 % $ 1,717,527 $ 62,222 4.84 % Average interest bearing liabilities: Savings accounts $ 173,946 $ 1,300 1.00 % $ 208,446 $ 1103 0.71 % Demand deposits 355,356 6,192 2.33 % 370,235 5,047 1.82 % Money market accounts 378,740 9,005 3.18 % 298,957 4,759 2.13 % CD’s 364,131 12,215 4.48 % 300,279 6,989 3.11 % Total deposits $ 1,272,173 $ 28,712 3.01 % $ 1,177,917 $ 17,898 2.03 % FHLB advances and other borrowings 108,897 4,176 5.12 % 214,034 7,722 4.82 % Total interest bearing liabilities $ 1,381,070 $ 32,888 3.18 % $ 1,391,951 $ 25,620 2.46 % Net interest income $ 34,766 $ 36,602 Interest rate spread 2.09 % 2.38 % Net interest margin 2.71 % 2.85 % Average interest earning assets to average interest bearing liabilities 1.24 1.23 65 Rate/Volume Analysis. The following tables present the dollar amount of changes in interest income and interest expense for the components of interest earning assets and interest-bearing liabilities that are presented in the preceding table. For each category of interest earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in volume, which are changes in the average outstanding balances multiplied by the prior period rate (i.e., holding the initial rate constant); and (2) changes in rate, which are changes in average interest rates multiplied by the prior period volume (i.e., holding the initial balance constant). Rate changes have been discussed previously in the net interest income section above. For the three 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 September 30, 2024, compared to the three months ended September 30, 2023. Increase (decrease) due to Volume Rate Net Interest income: Cash and cash equivalents $ 56 $ 2 $ 58 Loans (71) 1,103 1,032 Investment securities (127) (26) (153) Other investments (42) (155) (197) Total interest earning assets (184) 924 740 Interest expense: Savings accounts (53) 175 122 Demand deposits 17 272 289 Money market accounts 592 645 1,237 CD’s 207 922 1,129 Total deposits 763 2,014 2,777 FHLB Advances and other borrowings (1,352) 151 (1,201) Total interest bearing liabilities (589) 2,165 1,576 Net interest income $ 405 $ (1,241) $ (836) 66 RATE / VOLUME ANALYSIS (Dollar amounts in thousands) Nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. Increase (decrease) due to Volume Rate Net Interest income: Cash and cash equivalents $ — $ 55 $ 55 Loans receivable 833 5,202 6,035 Interest bearing deposits (1) — (1) Investment securities (539) 72 (467) Other investments (158) (32) (190) Total interest earning assets 135 5,297 5,432 Interest expense: Savings accounts (207) 404 197 Demand deposits (210) 1,355 1,145 Money market accounts 1,459 2,787 4,246 CD’s 1,674 3,552 5,226 Total deposits 2,716 8,098 10,814 FHLB advances and other borrowings (4,018) 472 (3,546) Total interest bearing liabilities (1,302) 8,570 7,268 Net interest income $ 1,437 $ (3,273) $ (1,836) Provision for Credit Losses. We determine our provision for credit losses (“provision”) based on our desire to provide an adequate Allowance for Credit Losses (“ACL”) - Loans to reflect estimated lifetime losses in our loan portfolio and ACL - Unfunded Commitments to reflect estimated losses on our unfunded commitments to lend. We use a third-party model to collectively evaluate and estimate the ACL on loans and unfunded commitments on a pooled basis. The model pools loans and commitments with similar characteristics and calculates an estimated loss rate for the pool based on identified risk drivers. These risk drivers vary with loan type. Projections about future economic conditions and the effect they could have on future losses are inherent in the model. Loans with uniquely identified circumstances and risks are individually evaluated. Lifetime losses on these loans are estimated based on the loans’ individual characteristics. 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 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. 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; (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) 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 67 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 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. In addition, a decline in the quality of our loan portfolio as a result of general economic conditions, factors affecting particular borrowers or our market areas, or otherwise, could all affect the adequacy of our ACL. If there are significant charge-offs against the ACL, or we otherwise determine that the ACL is inadequate, we will need to record an additional provision in the future. Non-interest Income . The following table reflects the various components of non-interest income for the three 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 Non-interest Income: Service charges on deposit accounts $ 513 $ 491 4.48 % $ 1,474 $ 1,464 0.68 % Interchange income 577 601 (3.99) % 1,697 1,743 (2.64) % Loan servicing income 643 611 5.24 % 1,751 1,679 4.29 % Gain on sale of loans 752 299 151.51 % 1,998 1,501 33.11 % Loan fees and service charges 165 140 17.86 % 704 308 128.57 % Net realized gains on debt securities — — N/M — 12 N/M Net (losses) gains on equity securities (78) 116 N/M (569) 170 N/M Bank Owned Life Insurance (BOLI) death benefit — — N/M 184 — N/M Other 349 307 13.68 % 859 893 (3.81) % Total non-interest income $ 2,921 $ 2,565 13.88 % $ 8,098 $ 7,770 4.22 % 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. 68 Non-interest Expense. 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 Non-interest Expense: Compensation and related benefits $ 5,743 $ 5,293 8.50 % $ 16,901 $ 15,967 5.85 % Occupancy 1,242 1,335 (6.97) % 3,942 4,117 (4.25) % Data processing 1,665 1,536 8.40 % 4,787 4,440 7.82 % Amortization of intangible assets 178 179 (0.56) % 536 576 (6.94) % Mortgage servicing rights expense, net 163 150 8.67 % 427 456 (6.36) % Advertising, marketing and public relations 225 185 21.62 % 575 472 21.82 % FDIC premium assessment 201 204 (1.47) % 606 608 (0.33) % Professional services 336 342 (1.75) % 1,249 1,153 8.33 % Gains on repossessed assets, net 65 100 (35.00) % 47 62 (24.19) % Other 603 645 (6.51) % 2,427 2,085 16.40 % Total non-interest expense $ 10,421 $ 9,969 4.53 % $ 31,497 $ 29,936 5.21 % Non-interest expense (annualized) / Average assets 2.29 % 2.15 % 6.51 % 2.31 % 2.18 % 5.96 % 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 $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. 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. 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. 69 BALANCE SHEET ANALYSIS Cash and Cash Equivalents. 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. 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 $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 Cost Fair Value September 30, 2024 U.S. government agency obligations $ 14,497 $ 14,457 Mortgage-backed securities 89,439 74,020 Corporate debt securities 44,925 41,051 Asset-backed securities 20,021 19,904 Totals $ 168,882 $ 149,432 December 31, 2023 U.S. government agency obligations $ 16,655 $ 16,576 Mortgage-backed securities 91,091 73,480 Corporate debt securities 47,158 41,174 Asset-backed securities 24,840 24,513 Totals $ 179,744 $ 155,743 The amortized cost and fair value of our held to maturity securities by asset categories as of the dates noted below were as follows: Held to maturity securities Amortized Cost Fair Value September 30, 2024 Obligations of states and political subdivisions $ 500 $ 481 Mortgage-backed securities 86,533 70,565 Totals $ 87,033 $ 71,046 December 31, 2023 Obligations of states and political subdivisions $ 600 $ 565 Mortgage-backed securities 90,629 72,697 Totals $ 91,229 $ 73,262 70 The composition of our available for sale portfolios by credit rating as of the dates indicated below was as follows: September 30, 2024 December 31, 2023 Available for sale securities Amortized Cost Fair Value Amortized Cost Fair Value U.S. government agency $ 96,246 $ 80,821 $ 98,977 $ 81,351 AAA 10,366 10,322 9,695 9,508 AA 17,345 17,239 23,913 23,709 A 5,950 5,571 8,200 7,292 BBB 38,975 35,479 38,959 33,883 Non-rated — — — — Total available for sale securities $ 168,882 $ 149,432 $ 179,744 $ 155,743 The composition of our held to maturity portfolio by credit rating as of the dates indicated was as follows: September 30, 2024 December 31, 2023 Held to maturity securities Amortized Cost Fair Value Amortized Cost Fair Value U.S. government agency $ 86,533 $ 70,565 $ 90,629 $ 72,697 AAA — — — — AA — — — — A 500 481 600 565 Total $ 87,033 $ 71,046 $ 91,229 $ 73,262 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 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. As of December 31, 2023, there were no borrowings outstanding on this Federal Reserve Bank line of credit. As of December 31, 2023, the Bank has pledged certain of its U.S. Government Agency securities with a carrying value of $0.5 million and mortgage-backed securities with a carrying value of $1.9 million as collateral against specific municipal deposits. As of December 31, 2023, the Bank also has mortgage-backed securities with a carrying value of $0.2 million and U.S. Government Agencies with a carrying value of $0.4 million pledged as collateral to the Federal Home Loan Bank of Des Moines. Loans. 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: 71 September 30, 2024 December 31, 2023 Amount Percent Amount Percent Real estate loans: Commercial/Agricultural real estate Commercial real estate $ 730,459 51.3 % $ 750,531 51.4 % Agricultural real estate 76,043 5.3 % 83,350 5.7 % Multi-family real estate 239,191 16.8 % 228,095 15.6 % Construction and land development 87,875 6.2 % 110,941 7.6 % Residential mortgage Residential mortgage 134,944 9.5 % 129,021 8.8 % Purchased HELOC loans 2,932 0.2 % 2,880 0.2 % Total real estate loans 1,271,444 89.3 % 1,304,818 89.3 % C&I/Agricultural operating and Consumer Installment Loans: C&I/Agricultural operating Commercial and industrial (“C&I”) 119,619 8.4 % 121,666 8.3 % Agricultural operating 27,550 1.9 % 25,691 1.8 % Consumer installment Originated indirect paper 4,405 0.3 % 6,535 0.5 % Other consumer 5,438 0.4 % 6,187 0.4 % Total C&I/Agricultural operating and Consumer installment Loans 157,012 11.0 % 160,079 11.0 % Gross loans $ 1,428,456 100.3 % $ 1,464,897 100.3 % Unearned net deferred fees and costs and loans in process (2,703) (0.2) % (2,900) (0.2) % Unamortized discount on acquired loans (925) (0.1) % (1,205) (0.1) % Total loans (net of unearned income and deferred expense) 1,424,828 100.0 % 1,460,792 100.0 % Allowance for credit losses (21,000) (22,908) 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 % 72 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. The Allowance for Credit Losses - Loans (“ACL”) is a valuation allowance for expected future credit losses in the Company’s loan portfolio as of the balance sheet date. In determining the allowance, the Company estimates credit losses over the loan’s entire contractual term, adjusted for expected prepayments when appropriate. The allowance estimate considers qualitative and quantitative relevant information from internal and external sources relating to historical loss experience; known and inherent risks in our portfolio; information about specific borrowers’ ability to repay; estimated collateral values; current economic conditions; reasonable and supportable forecasts for future conditions; and other relevant factors determined by management. To ensure that the ACL is maintained at an adequate level, a detailed analysis is performed on a quarterly basis and an appropriate provision is made to adjust the allowance. The entire ACL balance is available for any loan that, in management’s judgment, should be charged off. The determination of the ACL requires significant judgement to estimate credit losses. The ACL is measured collectively on a pooled basis when similar risk characteristics exist, and on an individual basis when management determines that the loan does not share similar risk characteristics with other loans. The ACL on loans collectively evaluated is measured using the loss rate model. The Company categorizes its loan portfolio into four segments based on similar risk characteristics. Loans within each segment are pooled based on individual loan characteristics. Aggregated risk drivers are then calculated at a pool level. Risk drivers are identified attributes that have proven to be predictive of loan loss rates and vary based on loan segment and type. A loss rate is calculated and applied to the pool utilizing a model that combines the pool’s risk drivers, historical loss experience, and reasonable and supportable future economic forecasts to project lifetime losses. The loss rate is then combined with the loan’s balance and contractual maturity, adjusted for expected prepayments, to determine expected future losses. 73 Future and supportable economic forecasts are based on national economic conditions and their reversion to the mean is implicit in the model and generally occurs over a period of two years. Qualitative adjustments are made to the allowance calculated on collectively evaluated loans to incorporate factors not included in the model. Qualitative factors include but are not limited to: lending policies and procedures, the experience and ability of lending and other staff, the volume and severity of problem credits, quality of the loan review system, and other external factors. Loans that exhibit different risk characteristics from the pool are individually evaluated for credit losses. Loans can be identified for individual evaluation for a variety of reasons including delinquency, nonaccrual status, risk rating and loan modification. Accruing loans that exhibit different risk characteristics from their pool may also be within scope. On these loans, an allowance may be established so that the loan is reported, net, at the lower of: (a) its amortized cost; (b) the present value of the loan’s estimated future cash flows using the loan’s existing rate; or (c) at the fair value of any loan collateral, less estimated disposal costs, if the loan is collateral dependent. Collateral dependency is determined using the practical expedient when: (1) the borrower is experiencing financial difficulty; and (2) repayment is expected to be provided substantially through the sale or operation of the collateral. In addition, various regulatory agencies periodically review the ACL. These agencies may require the Company to make additions to the ACL or may require that certain loan balances be charged off or downgraded into classified loan categories when the agencies’ evaluation differs from management’s evaluation based on their judgments of collectability from the information available to them at the time of examination. The Allowance for Credit Losses - Unfunded Commitments is a liability for expected future credit losses on the Company’s commitments to lend. The Company estimates expected credit losses over the contractual period for which the Company is exposed to credit risk, via a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Company. The Allowance for Credit Losses - Unfunded Commitments on off-balance sheet exposures is included in other liabilities on the consolidated balance sheet. 74 Allowance for Credit Losses - Loans Roll Forward (in thousands, except ratios) 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”) ACL - Loans, at beginning of period $ 21,178 $ 22,436 $ 22,973 Loans charged off: Commercial/Agricultural real estate (39) — — C&I/Agricultural operating — — — Residential mortgage (4) — — Consumer installment (11) (12) (6) Total loans charged off (54) (12) (6) Recoveries of loans previously charged off: Commercial/Agricultural real estate 5 2 253 C&I/Agricultural operating 10 10 6 Residential mortgage 4 2 2 Consumer installment 5 2 9 Total recoveries of loans previously charged off: 24 16 270 Net loan recoveries/(charge-offs) (“NCOs”) (30) 4 264 (Reversals)/additions to ACL - Loans via provision for credit losses charged to operations (148) (1,262) (329) ACL - Loans, at end of period $ 21,000 $ 21,178 $ 22,908 Average outstanding loan balance $ 1,429,928 $ 1,439,535 $ 1,458,558 Ratios: NCOs (annualized) to average loans 0.01 % — % (0.07) % Allowance for Credit Losses - Loans Activity by Segment (in thousands, except ratios) Commercial/Agricultural Real Estate C&I/Agricultural operating Residential Mortgage Consumer Installment Total Three months ended September 30, 2024 Allowance for Credit Losses - Loans: ACL - Loans, at beginning of period $ 17,033 $ 1,117 $ 2,784 $ 244 $ 21,178 Charge-offs (39) — (4) (11) (54) Recoveries 5 10 4 5 24 (Reversals)/additions to ACL - Loans via provision for credit losses charged to operations (76) 224 (290) (6) (148) ACL - Loans, at end of period $ 16,923 $ 1,351 $ 2,494 $ 232 $ 21,000 Commercial/Agricultural Real Estate C&I/Agricultural operating Residential Mortgage Consumer Installment Total 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 Charge-offs (39) — (4) (28) (71) Recoveries 46 35 7 10 98 Additions/(reversals) to ACL - Loans via provision for credit losses charged to operations (1,868) 211 (253) (25) (1,935) ACL - Loans, at end of period $ 16,923 $ 1,351 $ 2,494 $ 232 $ 21,000 75 The following table present the balance and activity in the allowance for credit losses (“ACL”) - loans by portfolio segment for the twelve months ended December 31, 2023: Commercial/Agricultural Real Estate C&I/Agricultural operating Residential Mortgage Consumer Installment Unallocated Total Twelve months ended December 31, 2023 Allowance for Credit Losses - Loans: ACL - Loans, at beginning of period $ 14,085 $ 2,318 $ 599 $ 129 $ 808 $ 17,939 Cumulative effect of ASU 2016-13 adoption 4,510 (331) 1,119 216 (808) 4,706 Charge-offs (46) — (78) (36) — (160) Recoveries 489 47 42 33 — 611 (Reversals)/additions to ACL - Loans via provision for credit losses charged to operations (254) (929) 1,062 (67) — (188) ACL - Loans, at end of period $ 18,784 $ 1,105 $ 2,744 $ 275 $ — $ 22,908 Allowance for Credit Losses - Loans to Percentage (in thousands, except ratios) September 30, 2024 December 31, 2023 Loans, end of period $ 1,424,828 $ 1,460,792 ACL - Loans $ 21,000 $ 22,908 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 $0.46 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) September 30, 2024 and Three Months Ended September 30, 2024 and Nine Months Ended ACL - Unfunded Commitments - beginning of period $ 712 $ 1,250 Cumulative effect of ASU 2016-13 adoption — — Increases to ACL - Unfunded Commitments via provision for credit losses charged to operations (252) (790) ACL - Unfunded Commitments - end of period $ 460 $ 460 Nonperforming Loans, Potential Problem Loans and Foreclosed Properties. We practice early identification of nonaccrual and problem loans in order to minimize the Bank’s risk of loss. Nonperforming loans are defined as nonaccrual loans and restructured loans that were 90 days or more past due at the time of their restructure, or when management determines that such classification is warranted. The accrual of interest income is discontinued on our loans according to the following schedule: • Commercial/agricultural real estate loans, past due 90 days or more; • C&I/Agricultural operating loans, past due 90 days or more; • Closed ended consumer installment loans, past due 120 days or more; and • Residential mortgage loans and open-ended consumer installment loans, past due 180 days or more. When interest accruals are discontinued, interest credited to income is reversed. If collection is in doubt, cash receipts on non-accrual loans are used to reduce principal rather than being recorded as interest income. 76 The following table identifies the various components of nonperforming assets and other balance sheet information as of the dates indicated below and changes in the ACL for the periods then ended: September 30, 2024 and Nine Months Then Ended (1) December 31, 2023 and Twelve Months Then Ended (1) Nonperforming assets: Nonaccrual loans Commercial real estate $ 4,778 $ 10,359 Agricultural real estate 6,193 391 Construction and land development 106 54 Commercial and industrial 1,956 — Agricultural operating 901 1,180 Residential mortgage 1,088 1,167 Consumer installment 20 33 Total nonaccrual loans $ 15,042 $ 13,184 Accruing loans past due 90 days or more 530 389 Total nonperforming loans (“NPLs”) 15,572 13,573 Other real estate owned 1,567 1,795 Other collateral owned 5 — Total nonperforming assets (“NPAs”) $ 17,144 $ 15,368 Average outstanding loan balance $ 1,441,972 $ 1,430,035 Loans, end of period $ 1,424,828 $ 1,460,792 Total assets, end of period $ 1,799,137 $ 1,851,391 ACL - Loans, at beginning of period $ 22,908 $ 17,939 Cumulative effect of ASU 2016-13 adoption — 4,706 Loans charged off: Commercial/Agricultural real estate (39) (46) C&I/Agricultural operating — — Residential mortgage (4) (78) Consumer installment (28) (36) Total loans charged off (71) (160) Recoveries of loans previously charged off: Commercial/Agricultural real estate 46 489 C&I/Agricultural operating 35 47 Residential mortgage 7 42 Consumer installment 10 33 Total recoveries of loans previously charged off: 98 611 Net loan recoveries/(charge-offs) (“NCOs”) 27 451 (Reductions) additions to ACL - loans via provision for credit losses charged to operations (1,935) (188) ACL - Loans, at end of period $ 21,000 $ 22,908 Ratios: ACL-Loans to NCOs (annualized) N/M N/M NCOs (annualized) to average loans — % (0.03) % ACL-Loans to total loans 1.47 % 1.57 % ACL-Loans to nonaccrual loans 139.61 % 173.76 % Nonaccrual loans to total loans 1.06 % 0.90 % NPLs to total loans 1.09 % 0.93 % NPAs to total assets 0.95 % 0.83 % (1) Loan balances are stated at amortized cost. 77 Nonaccrual Loans Roll Forward: Quarter Ended September 30, 2024 June 30, 2024 March 31, 2024 December 31, 2023 September 30, 2023 Balance, beginning of period $ 8,352 $ 8,413 $ 13,184 $ 13,456 $ 15,663 Additions 7,486 352 961 538 33 Charge offs — — — — (53) Transfers to OREO (124) — — (23) — Return to accrual status — — — — (190) Payments received (641) (411) (5,767) (781) (1,994) Other, net (31) (2) 35 (6) (3) Balance, end of period $ 15,042 $ 8,352 $ 8,413 $ 13,184 $ 13,456 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 September 30, 2024. Term Extension Loan Class Amortized Cost Basis at 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 % 78 The table below shows a summary of criticized loans, split by special mention and substandard for the past five quarters. 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. 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) September 30, 2024 June 30, 2024 March 31, 2024 December 31, 2023 September 30, 2023 Special mention loan balances $ 11,047 $ 8,848 $ 13,737 $ 18,392 $ 20,043 Substandard loan balances 21,202 14,420 14,733 19,596 16,171 Criticized loans, end of period $ 32,249 $ 23,268 $ 28,470 $ 37,988 $ 36,214 Mortgage Servicing Rights. Mortgage servicing rights (“MSR”) assets are initially measured at fair value; assessed at least quarterly for impairment; carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value. MSR assets are amortized in proportion to and over the period of estimated net servicing income, with the amortization recorded in non-interest expense in the consolidated statement of operations. The valuation of MSRs and related amortization thereon are based on numerous factors, assumptions, and judgments, such as those for: changes in the mix of loans, interest rates, prepayment speeds, and default rates. Changes in these factors, assumptions and judgments may have a material effect on the valuation and amortization of MSRs. Although management believes that the assumptions used to evaluate the MSRs for impairment are reasonable, future adjustment may be necessary if future economic conditions differ substantially from the economic assumptions used to determine the value of MSRs. The fair market value of the Company’s MSR asset was $5.0 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. Deposits. 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, 2024 December 31, 2023 September 30, 2023 Consumer deposits $ 844,808 $ 822,665 $ 827,290 $ 814,899 $ 794,970 Commercial deposits 432,361 412,385 414,088 423,762 429,358 Public deposits 176,844 187,698 202,175 182,172 163,734 Brokered deposits 66,654 96,796 83,936 98,259 85,173 Total deposits $ 1,520,667 $ 1,519,544 $ 1,527,489 $ 1,519,092 $ 1,473,235 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. 79 September 30, 2024 June 30, 2024 March 31, 2024 December 31, 2023 September 30, 2023 Non-interest bearing demand deposits $ 256,840 $ 255,703 $ 248,537 $ 265,704 $ 275,790 Interest bearing demand deposits 346,971 353,477 361,278 343,276 336,962 Savings accounts 169,096 170,946 177,595 176,548 183,702 Money market accounts 366,067 370,164 387,879 374,055 312,689 Certificate accounts 381,693 369,254 352,200 359,509 364,092 Total deposits $ 1,520,667 $ 1,519,544 $ 1,527,489 $ 1,519,092 $ 1,473,235 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 . 80 Federal Home Loan Bank (FHLB) advances and Other Borrowings. 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 Federal Home Loan Bank advances (1), (2), (3), (4) 2024 $ 16,000 1.45 % 4.94 % 2024 $ 64,530 0.00 % 5.45 % 2025 5,000 1.45 % 1.45 % 2025 5,000 1.45 % 1.45 % 2028 0 0.00 % 0.00 % 2028 10,000 3.82 % 3.82 % Federal Home Loan Bank advances $ 21,000 $ 79,530 Senior Notes (5) 2039 $ 12,000 7.25 % 7.75 % 2034 $ 18,083 6.75 % 7.75 % Subordinated Notes (6) 2030 $ 15,000 6.00 % 6.00 % 2030 $ 15,000 6.00 % 6.00 % 2032 35,000 4.75 % 4.75 % 2032 35,000 4.75 % 4.75 % $ 50,000 $ 50,000 Unamortized debt issuance costs (452) (618) Total other borrowings $ 61,548 $ 67,465 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 $1,082.0 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. (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, 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%. (b) A $5.0 million line of credit, maturing August 1, 2025, that remains undrawn upon. (6) Subordinated notes resulted from the following: (a) The Company’s Subordinated Note Purchase Agreement entered into with certain purchasers in August 2020, which bears a fixed interest rate of 6.00% for five years. In September 2025, the fixed interest rate will be reset quarterly to equal the three-month term Secured Overnight Financing Rate plus 591 basis points. The note is callable by the Bank when, and anytime after, the floating rate is initially set. Interest-only payments are due semi-annually each year during the fixed interest period and quarterly during the floating interest period. (b) The Company’s Subordinated Note Purchase Agreement entered into with certain purchasers in March 2022, which bears a fixed interest rate of 4.75% for five years. In April 2027, the fixed interest rate will be reset quarterly to equal the three-month term Secured Overnight Financing Rate plus 329 basis points. The note is callable by the Bank when, and 81 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 $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 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 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 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. See Note 7, “Federal Home Loan Bank Advances and Other Borrowings” for more information. Stockholders’ Equity. 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. Liquidity management refers to our ability to ensure cash is available in a timely manner to meet loan demand, depositors’ needs, and meet other financial obligations as they become due without undue cost, risk, or disruption to normal operating activities. We manage and monitor our short-term and long-term liquidity positions and needs through a regular review of maturity profiles, funding sources, and loan and deposit forecasts to minimize funding risk. A key metric we monitor is our liquidity ratio, calculated as cash and unpledged securities portfolio divided by total assets. At 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. 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. 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 . 82 Our primary sources of funds are deposits, amortization, prepayments and maturities on the investment and loan portfolios and funds provided from operations. We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, and to fund loan commitments. While scheduled payments from the amortization of loans and maturing short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Although $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. We maintain access to additional sources of funds including FHLB borrowings and lines of credit with the Federal Reserve Bank, and our correspondent banks. We utilize FHLB borrowings to leverage our capital base, to provide funds for our lending and investment activities, and to manage our interest rate risk. Our borrowing arrangement with the FHLB calls for pledging certain qualified real estate, commercial and industrial loans, and borrowing up to 75% of the value of those loans, not to exceed 35% of the Bank’s total assets. Currently, we have approximately $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. The bank maintains $70 million of uncommitted federal funds purchased lines with correspondent banks as part of our contingency funding plan. In addition, the Company has a $5.0 million revolving line of credit which is available as needed for general liquidity purposes. While the Bank does not have formal brokered certificate lines of credit with counter parties at September 30, 2024, we believe that the Bank could access this market, which provides an additional potential source of liquidity, as evidenced by access to this market during the past four quarters. See Note 7, “Federal Home Loan Bank and Other Borrowings” of “Notes to Consolidated Financial Statements” which are included in Part I, Item 1, “Financial Statements and Supplementary Data” of this Form 10-Q, for further detail. In reviewing the adequacy of our liquidity, we review and evaluate historical financial information, including information regarding general economic conditions, current ratios, management goals and the resources available to meet our anticipated liquidity needs. Management believes that our liquidity is adequate, and to management’s knowledge, there are no known events or uncertainties that will result or are likely to reasonably result in a material increase or decrease in our liquidity. Off-Balance Sheet Liabilities . In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments, issued to meet customer financial needs. Such financial instruments are recorded in the financial statements when they become payable. These instruments include unused commitments for lines of credit, overdraft protection lines of credit and home equity lines of credit, as well as commitments to extend credit. As of 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. 83 Capital Resources. 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: Actual For Capital Adequacy Purposes To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio As of September 30, 2024 (Unaudited) Total capital (to risk weighted assets) $ 226,597 15.0 % $ 120,814 > = 8.0 % $ 151,018 > = 10.0 % Tier 1 capital (to risk weighted assets) 208,326 13.8 % 90,611 > = 6.0 % 120,814 > = 8.0 % Common equity tier 1 capital (to risk weighted assets) 208,326 13.8 % 67,958 > = 4.5 % 98,162 > = 6.5 % Tier 1 leverage ratio (to adjusted total assets) 208,326 11.7 % 71,173 > = 4.0 % 88,966 > = 5.0 % As of December 31, 2023 (Audited) Total capital (to risk weighted assets) $ 228,092 14.6 % $ 124,883 > = 8.0 % $ 156,104 > = 10.0 % Tier 1 capital (to risk weighted assets) 208,726 13.4 % 93,662 > = 6.0 % 124,883 > = 8.0 % Common equity tier 1 capital (to risk weighted assets) 208,726 13.4 % 70,247 > = 4.5 % 101,468 > = 6.5 % Tier 1 leverage ratio (to adjusted total assets) 208,726 11.5 % 72,479 > = 4.0 % 90,599 > = 5.0 % At 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: Actual For Capital Adequacy Purposes Amount Ratio Amount Ratio As of September 30, 2024 (Unaudited) Total capital (to risk weighted assets) $ 231,825 15.3 % $ 120,972 > = 8.0 % Tier 1 capital (to risk weighted assets) 163,554 10.8 % 90,729 > = 6.0 % Common equity tier 1 capital (to risk weighted assets) 163,554 10.8 % 68,047 > = 4.5 % Tier 1 leverage ratio (to adjusted total assets) 163,554 9.2 % 71,173 > = 4.0 % As of December 31, 2023 (Audited) Total capital (to risk weighted assets) $ 230,160 14.7 % $ 124,883 > = 8.0 % Tier 1 capital (to risk weighted assets) 160,794 10.3 % 93,662 > = 6.0 % Common equity tier 1 capital (to risk weighted assets) 160,794 10.3 % 70,247 > = 4.5 % Tier 1 leverage ratio (to adjusted total assets) 160,794 8.9 % 72,479 > = 4.0 % 84