Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion sets forth management’s discussion and analysis of our results of operations for the year ended December 31, 2024 and December 31, 2023, and our financial position as of December 31, 2024 and December 31, 2023, respectively. The MD&A should be read in conjunction with our consolidated financial statements, related notes, the selected financial data and the statistical information presented elsewhere in this Annual Report on Form 10-K for a more complete understanding of the following discussion and analysis. Unless otherwise noted, years refer to the Company’s fiscal years ended December 31, 2024 and December 31, 2023.
PERFORMANCE SUMMARY
The following is a summary of some of the significant factors that affected our operating results for the twelve months ended December 31, 2024, compared to the same 2023 period. In 2024, net interest income decreased $1.9 million, primarily due to the ongoing impact of higher short-term interest rates on the Bank’s liability-sensitive balance sheet, i.e., higher deposit costs, with growth in higher-cost money market accounts and certificates, along with increased borrowing costs, partially offset by higher asset yields. The Company recorded a $3.175 million negative provision for credit losses largely due to the impact of improving forecasted future economic conditions, as forecasted by Moody’s, who the Company utilizes for economic forecasts and the impact of balance sheet optimization, which resulted in loan portfolio shrinkage. The $0.475 million of negative provision for credit losses in 2023 was largely due to net recoveries of $0.451 million. Non-interest income for the twelve months ended December 31, 2024, compared to the same period in 2023 decreased approximately $150 thousand. This decrease was largely due to losses on equity securities, largely offset by higher gain on sale of loans, due to an approximate equal increase in SBA gains and mortgage gains and an increase in loan fees and service charges primarily due to higher fees collected on loan payoffs. Non-interest expense increased approximately 5% or $2.2 million primarily due to a $1.6 million increase in compensation due to higher incentive compensation and merit increases.
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. Unless otherwise stated, all monetary amounts in the tables set forth 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.
We reported net income of $13.75 million for the twelve months ended December 31, 2024, compared to net income of $13.06 million for the twelve months ended December 31, 2023. Diluted earnings per share were $1.34 for the twelve months ended December 31, 2024, compared to $1.25 for the twelve months ended December 31, 2023. Return on average assets for the twelve months ended December 31, 2024, was 0.76%, compared to 0.71% for the twelve months ended December 31, 2023. The return on average equity was 7.84% for the twelve months ended December 31, 2024, and 7.87% for the comparable period in 2023.
The Company utilized a balance sheet optimization strategy in 2024, which resulted in the runoff of non-strategic loan relationship with the proceeds used to reduced more expensive borrowings and wholesale deposits.
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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 the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. Some of these estimates are more critical than others. Below is a discussion of our critical accounting estimates.
Allowance for Credit Losses
We adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), “Measurement of Credit Losses on Financial Instruments” through a cumulative-effect adjustment on January 1, 2023. We have selected a loss estimation methodology, utilizing a third-party model. See also Notes 1 and 3 to the audited consolidated financial statements for further discussion of our adoption of ASU 2016-13.
Allowance for Credit Losses - Loans. We maintain an allowance for credit losses to absorb probable and inherent losses in our loan portfolio. The allowance is based on ongoing, quarterly assessments of the estimated lifetime losses in our loan portfolio. In evaluating the level of the allowance for credit losses, we consider the types of loans and the amount of loans in our loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, the estimated 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, Board of Governors of the Federal Reserve, Federal Deposit Insurance Corporation, and National Credit Union Administration. We believe that the Bank’s Allowance for Credit Losses Policy conforms to all applicable regulatory requirements. However, based on periodic examinations by regulators, the amount of the allowance for credit losses recorded during a particular period may be adjusted.
Our determination of the allowance for credit losses - loans is based on (1) an individual allowance for specifically identified and evaluated loans that management has determined have unique risk characteristics. For these loans, the estimated loss is based on likelihood of default, payment history, and net realizable value of underlying collateral. Specific allocations for collateral dependent loans are based on the fair value of the underlying collateral relative to the amortized cost of the loans. For loans that are not collateral dependent, the specific allocation is based on the present value of expected future cash flows discounted at the loan’s original effective interest rate through the repayment period; and (2) a collective allowance for loans not specifically identified in (1) above. The allowance for these loans is estimated by pooling loans with a similar risk profile and calculating a collective loss rate using the pool’s risk drivers, historical loss experience, and reasonable and supportable future economic forecasts to project lifetime losses. This collectively estimated loss is adjusted for qualitative factors.
Assessing the allowance for credit losses - loans is inherently subjective as it requires making material estimates, including the amount, and timing of future cash flows expected to be received on impaired 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.
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STATEMENT OF OPERATIONS ANALYSIS
Twelve months ended December 31, 2024 vs. Twelve months ended December 31, 2023
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 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 exceeds interest rate spread because non-interest-bearing sources of funds (“net free funds”), principally demand deposits and stockholders’ equity, also support interest earning assets. The narrative below discusses net interest income, interest rate spread, and net interest margin.
Net interest income was $46.5 million for 2024 compared to $48.3 million for 2023. The decrease, overall, is largely due to the impact of higher short-term interest rates which, with the Company’s liability sensitive balance sheet (See Market Risk Section of the MD&A), resulted in higher deposit costs due to customer retention strategies and increased borrowing costs on FHLB advances These decreases to net interest income were partially offset by increases in loan yields due to contractual repricing and coupons on new loans.
The net interest margin for 2024 was 2.73% compared to 2.81% for 2023. The decrease in the net interest margin was due to higher deposit and borrowing costs. The decrease was partially offset by increases in loan yields.
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Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following table shows 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. Also presented is the weighted average yield on interest earning assets on a tax-equivalent basis, rates paid on interest bearing liabilities and the resultant spread at December 31, 2024 and December 31, 2023. Non-accruing loans average balances are included in the table with the loans carrying a zero yield.
Twelve months ended December 31, 2024 Twelve months ended December 31, 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 $ 20,864 $ 1,150 5.51 % $ 18,469 $ 1,010 5.47 %
Loans receivable 1,430,631 79,738 5.57 % 1,430,035 73,577 5.15 %
Interest bearing deposits — — — % 63 1 1.59 %
Investment securities 238,851 7,977 3.34 % 257,020 8,606 3.35 %
Other investments 12,816 750 5.85 % 16,274 1,054 6.48 %
Total interest earning assets $ 1,703,162 $ 89,615 5.26 % $ 1,721,861 $ 84,248 4.89 %
Average interest bearing liabilities:
Savings accounts $ 171,069 $ 1,684 0.98 % $ 200,087 $ 1,427 0.71 %
Demand deposits 353,107 8,083 2.29 % 359,866 6,727 1.87 %
Money market accounts 371,909 11,725 3.15 % 306,020 6,976 2.28 %
CD’s 366,634 16,493 4.50 % 317,376 10,619 3.35 %
Total deposits $ 1,262,719 $ 37,985 3.01 % $ 1,183,349 $ 25,749 2.18 %
FHLB advances and other borrowings 99,731 5,156 5.17 % 208,373 10,150 4.87 %
Total interest bearing liabilities $ 1,362,450 $ 43,141 3.17 % $ 1,391,722 $ 35,899 2.58 %
Net interest income $ 46,474 $ 48,349
Interest rate spread 2.09 % 2.31 %
Net interest margin 2.73 % 2.81 %
Average interest earning assets to average interest bearing liabilities 1.25 1.24
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Rate/Volume Analysis. The following table presents 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 variances were discussed previously above. Volume variances for the twelve months ended December 31, 2024 compared to the same period in 2023 are: ( 1) lower investment securities average balances in 2024, as principal repayments on the lower yielding investment security portfolio were not being reinvested, (2) higher average balances in money market and CD’s in 2024 compared to 2023, which resulted in being able to reduce higher cost FHLB advances and borrowing in 2024 compared to 2023.
Twelve months ended December 31, 2024 v. 2023 increase (decrease) due to
Volume (1) Rate (1) Total
Increase /
(Decrease)
Interest income:
Cash and cash equivalents $ 132 $ 8 $ 140
Loans receivable 31 6,130 6,161
Interest bearing deposits (1) — (1)
Investment securities (607) (22) (629)
Other investments (208) (96) (304)
Total interest earning assets $ (653) $ 6,020 $ 5,367
Interest expense:
Savings accounts $ (231) $ 488 $ 257
Demand deposits (129) 1,485 1,356
Money market accounts 1,684 3,065 4,749
CD’s 1,807 4,067 5,874
Total deposits 3,131 9,105 12,236
FHLB advances and other borrowings (5,599) 605 (4,994)
Total interest bearing liabilities (2,468) 9,710 7,242
Net interest income $ 1,815 $ (3,690) $ (1,875)
(1) The change in interest due to both rate and volume has been allocated in proportion to the relationship to the dollar amounts of the change in each.
Provision for Credit Losses. We determine our provision for credit losses (“provision”) based on our desire to provide an adequate Allowance for Credit Losses (“ACL”) - Loans to reflect estimated lifetime losses in our loan portfolio and ACL - Unfunded Commitments to reflect estimated losses on our unfunded commitments to lend. We use a third-party model to collectively evaluate and estimate the ACL on loans and unfunded commitments on a pooled basis. The model pools loans and commitments with similar characteristics and calculates an estimated loss rate for the pool based on identified risk drivers. These risk drivers vary with loan type. Projections about future economic conditions and the effect they could have on future losses are inherent in the model. Loans with uniquely identified circumstances and risks are individually evaluated. Lifetime losses on these loans are estimated based on the loans’ individual characteristics.
Total benefit, i.e., negative provision, for credit losses for the twelve months ended December 31, 2024, was $3.175 million, compared to negative provision of $0.475 million for the twelve months ended December 31, 2023. The Company’s $3.175 million negative provision for credit losses in 2024 was largely due to the impact of improving forecasted future economic conditions by Moody’s, who the Company utilizes for economic forecasts and the impact of balance sheet optimization, which resulted in loan portfolio shrinkage. The $0.475 million of negative provision for credit losses in 2023 was largely due to net recoveries of $0.451 million
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Continued improving economic conditions in our markets, as evidenced by unemployment rates below the national average in our two largest population centers, have resulted in good overall economic trends for businesses.
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 twelve-month period is adequate in view of the present condition of our loan portfolio and the sufficiency of collateral supporting our non-performing loans. We continually monitor non-performing loan relationships and will adjust our provision, as necessary, if changing facts and circumstances require a change in the ACL. In addition, a decline in the quality of our loan portfolio as a result of general economic conditions, factors affecting particular borrowers or our market areas, or otherwise, could all affect the adequacy of our ACL. If there are significant charge-offs against the ACL, or we otherwise determine that the ACL is inadequate, we will need to record an additional provision in the future.
Non-Interest Income . The following table reflects the various components of non-interest income for 2024 and 2023, respectively.
Twelve months ended December 31, Change from prior year
2024 2023 2024 over 2023
Non-interest Income:
Service charges on deposit accounts $ 1,924 $ 1,949 (1.28)%
Interchange income 2,247 2,324 (3.31)%
Loan servicing income 2,271 2,218 2.39%
Gain on sale of loans 2,216 1,692 30.97%
Loan fees and service charges 996 432 130.56%
Net realized gains on debt securities — 12 (100.00)%
Net (losses) gains on equity securities (856) 447 (291.50)%
Bank Owned Life Insurance (BOLI) death benefit 184 — N/M
Other 1,125 1,176 (4.34)%
Total non-interest income $ 10,107 $ 10,250 (1.40)%
N/M means not meaningful
The increase in gain on sale of loans for the twelve months ended December 31, 2024, compared to the same period in 2023 is due to an approximately equal increase in SBA loans sold and higher mortgage gains.
The increase in loan fees and services charges for the twelve months ended December 31, 2024, compared to the same period in 2023 is primarily due to higher fees collected due to loan payoffs.
The decrease in net gains on equity securities for the twelve months ended December 31, 2024, compared to the same period in 2023 is primarily due to the change in valuations of equity securities.
The increase in Bank Owned Life Insurance death benefit or the twelve months ended December 31, 2024, compared to the same period in 2023 BOLI is due to the passing of an employee in 2024.
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Non-Interest Expense. The following table reflects the various components of non-interest expense for 2024 and 2023.
Twelve months ended December 31, % Change From prior year
2024 2023 2024 over 2023
Non-interest Expense:
Compensation and related benefits $ 22,741 $ 21,106 7.75%
Occupancy 5,159 5,431 (5.01)%
Data processing 6,530 5,951 9.73%
Amortization of intangible assets 715 755 (5.30)%
Mortgage servicing rights expense, net 534 615 (13.17)%
Advertising, marketing and public relations 793 734 8.04%
FDIC premium assessment 798 812 (1.72)%
Professional services 1,763 1,524 15.68%
(Losses) gains on repossessed assets, net 294 62 374.19%
Other 2,979 3,152 (5.49)%
Total non-interest expense $ 42,306 $ 40,142 5.39%
Non-interest expense (annualized) / Average assets 2.34 % 2.19 %
Compensation expense increased for the twelve months ended December 31, 2024, compared to the same period in 2023 largely due to higher incentive compensation and merit increases.
Data processing expense increased for the twelve months ended December 31, 2024, compared to the same period in 2023 largely due to several 2024 projects which will increase efficiencies of operations in future years.
Mortgage servicing rights expense, net decreased for the twelve months ended December 31, 2024, compared to the same period in 2023 due to lower amortization resulting from lower forecasted prepayments and the impact of a lower balance of loans serviced for others.
Professional fees increased for the twelve months ended December 31, 2024, compared to the same period in 2023 largely due to higher audit and consulting fees.
The decrease in other expenses for the twelve months ended December 31, 2024, compared to the same period in 2023 is primarily due to lower loan origination costs due to lower loan volumes in 2024.
Income Taxes. Income tax provision was $3.7 million in 2024 compared to $5.9 million for 2023. The 2024 effective tax rate was 21.2% compared to 31.0% 2023. The Wisconsin state budget, signed by Governor Evers on July 5, 2023, provides financial institutions with a tax exemption on income earned on Wisconsin commercial and agricultural loans up to $5 million retroactive to January 1, 2023. This change reduced the Company’s 2023 Wisconsin state income tax rate and thus, its overall effective tax rate. However, this benefit was 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, with the charge creating a Wisconsin state tax valuation allowance. In addition, the impact of the New Market Tax Credit investment depletion, now being included in income tax expense, increased the income tax rate, while lower pre-tax income reduced current period income tax expense. In addition, lower pre-tax income reduced tax expense by approximately $0.4 million.
Income tax expense recorded in the accompanying Consolidated Statements of Operations involves interpretation and application of certain accounting pronouncements and federal and state tax codes and is, therefore, considered a critical accounting policy. We undergo examinations by various taxing authorities. Such taxing authorities may require that changes in the amount of tax expense or the amount of the valuation allowance be recognized when their interpretations differ from those of management, based on their judgments about information available to them at the time of their examinations. As noted above, a Wisconsin income tax valuation allowance was created due to the Wisconsin budget law change, resulting in reduction of the realization of Wisconsin deferred tax assets.
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BALANCE SHEET ANALYSIS
Total assets decreased by $102.9 million to $1.75 billion at December 31, 2024, from $1.85 billion at December 31, 2023.
Cash and Cash Equivalents. Cash and cash equivalents increased from $37.1 million at December 31, 2023, to $50.2 million at December 31, 2024, largely due to an increase in interest-bearing balances.
Investment Securities. We manage our securities portfolio to provide liquidity, manage interest rate risk, and enhance income. Our investment portfolio is comprised of securities available-for-sale (“AFS”) and securities held to maturity (“HTM”).
Securities AFS (recorded at fair value), which represent the majority of our investment portfolio, decreased to $142.9 million at December 31, 2024, compared with $155.7 million at December 31, 2023. This decrease is due to principal repayments and maturities, partially offset by the increase in CRA mortgage-backed securities of $2.8 million and lower unrealized losses of $1.1 million.
Securities held to maturity decreased to $85.5 million at December 31, 2024, compared to $91.2 million at December 31, 2023. The decrease was largely due to principal repayments. The unrealized loss on the held to maturity portfolio increased by $1.9 million during the year to $19.8 million at December 31, 2024.
The amortized cost and market values of our investment securities by asset categories as of the dates indicated below were as follows:
Available-for-sale securities Amortized
Cost Fair
Value
December 31, 2024
U.S. government agency obligations $ 13,853 $ 13,753
Mortgage-backed securities 87,762 68,386
Corporate debt securities 44,931 41,716
Asset-backed securities 19,058 18,996
Total available-for-sale securities $ 165,604 $ 142,851
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
Total available-for-sale securities $ 179,744 $ 155,743
Held to maturity securities Amortized
Cost Fair
Value
December 31, 2024
Obligations of states and political subdivisions $ 500 $ 478
Mortgage-backed securities 85,004 65,144
Total held-to-maturity securities $ 85,504 $ 65,622
December 31, 2023
Obligations of states and political subdivisions $ 600 $ 565
Mortgage-backed securities 90,629 72,697
Total held to maturity securities $ 91,229 $ 73,262
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The amortized cost and fair values of our investment securities by maturity, as of December 31, 2024 were as follows:
Available-for-sale securities Amortized
Cost Estimated
Fair Value
Due in one year or less $ 4,526 $ 4,487
Due after one year through five years 8,652 8,715
Due after five years through ten years 41,380 38,033
Due after ten years 23,284 23,230
Total securities with contractual maturities 77,842 74,465
Mortgage-backed securities 87,762 68,386
Total available-for-sale securities $ 165,604 $ 142,851
Held to maturity securities Amortized
Cost Estimated
Fair Value
Due in one year or less $ 100 $ 100
Due after one year through five years 400 378
Due after five years through ten years — —
Total securities with contractual maturities 500 478
Mortgage-backed securities 85,004 65,144
Total held-to-maturity securities $ 85,504 $ 65,622
The amortized cost and fair values of our investment securities by maturity, as of December 31, 2023 were as follows:
Available-for-sale securities Amortized
Cost Estimated
Fair Value
Due in one year or less $ — $ —
Due after one year through five years 13,986 13,703
Due after five years through ten years 45,549 39,701
Due after ten years 29,118 28,859
Total securities with contractual maturities 88,653 82,263
Mortgage-backed securities 91,091 73,480
Total available-for-sale securities $ 179,744 $ 155,743
Held to maturity securities Amortized
Cost Estimated
Fair Value
Due in one year or less $ 100 $ 100
Due after one year through five years 500 465
Due after five years through ten years — —
Total securities with contractual maturities 600 565
Mortgage-backed securities 90,629 72,697
Total held-to-maturity securities $ 91,229 $ 73,262
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The following tables show the fair value and gross unrealized losses of securities with unrealized losses, as of the dates indicated below, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position:
Less than 12 Months 12 Months or More Total
Available-for-sale securities Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses
December 31, 2024
U.S. government agency obligations $ 5,472 $ 25 $ 3,334 $ 103 $ 8,806 $ 128
Mortgage-backed securities 2,732 112 65,654 19,264 68,386 19,376
Corporate debt securities — — 36,806 3,326 36,806 3,326
Asset-backed securities 939 1 12,210 104 13,149 105
Total available-for-sale securities $ 9,143 $ 138 $ 118,004 $ 22,797 $ 127,147 $ 22,935
December 31, 2023
U.S. government agency obligations $ 3,776 $ 5 $ 3,627 $ 151 $ 7,403 $ 156
Mortgage-backed securities — — 73,476 17,611 73,476 17,611
Corporate debt securities 3,350 76 35,916 5,914 39,266 5,990
Asset-backed securities 3,348 22 20,008 317 23,356 339
Total available-for-sale securities $ 10,474 $ 103 $ 133,027 $ 23,993 $ 143,501 $ 24,096
Unrealized losses reflected in the preceding tables have not been included in results of operations because the unrealized loss was not due to credit impairment. Management has determined that the Company neither intends to sell, nor will it be required to sell each debt security before its anticipated recovery, and therefore recovery of cost will occur.
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The composition of our investment securities portfolio by credit rating as of the periods indicated below was as follows:
December 31, December 31,
2024 2023
Available-for-sale securities Amortized
Cost Fair
Value Amortized
Cost Fair
Value
U.S. government agency $ 94,327 $ 74,910 $ 98,977 $ 81,351
AAA 7,210 7,148 9,695 9,508
AA 19,136 19,077 23,913 23,709
A 5,950 5,620 8,200 7,292
BBB 38,981 36,096 38,959 33,883
Non-rated — — — —
Total available for sale securities $ 165,604 $ 142,851 $ 179,744 $ 155,743
December 31, December 31,
2024 2023
Held to maturity securities Amortized
Cost Fair
Value Amortized
Cost Fair
Value
U.S. government agency $ 85,004 $ 65,144 $ 90,629 $ 72,697
AAA — — — —
AA — — — —
A 500 478 600 565
Total $ 85,504 $ 65,622 $ 91,229 $ 73,262
At December 31, 2024, the Bank pledged certain of its mortgage-backed securities with a carrying value of $34.0 million as collateral to secure a line of credit with the Federal Reserve Bank. As of December 31, 2024, there were no borrowings outstanding on this Federal Reserve Bank line of credit. As of December 31, 2024, the Bank has pledged certain of its U.S. Government Agency securities with a carrying value of $0.3 million and mortgage-backed securities with a carrying value of $1.8 million as collateral against specific municipal deposits. As of December 31, 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 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, decreased to $1.37 billion at December 31, 2024, from $1.46 billion at December 31, 2023.
The Company’s planned balance sheet optimization resulted in the runoff of largely non-strategic loans.
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The following table reflects the composition, or mix, of our loan portfolio at December 31, 2024 and December 31, 2023:
December 31, 2024 December 31, 2023
Amount Percent Amount Percent
Real Estate Loans:
Commercial/Agricultural real estate:
Commercial real estate $ 709,018 51.8 % $ 750,531 51.4 %
Agricultural real estate 73,130 5.3 % 83,350 5.7 %
Multi-family real estate 220,805 16.1 % 228,095 15.6 %
Construction and land development 78,489 5.7 % 110,941 7.6 %
Residential mortgage:
Residential mortgage 132,341 9.7 % 129,021 8.8 %
Purchased HELOC loans 2,956 0.2 % 2,880 0.2 %
Total real estate loans 1,216,739 88.8 % 1,304,818 89.3 %
C&I/Agricultural operating and Consumer installment loans:
C&I/Agricultural operating:
Commercial and industrial ("C&I") 115,657 8.4 % 121,666 8.3 %
Agricultural operating 31,000 2.3 % 25,691 1.8 %
Consumer installment:
Originated indirect paper 3,970 0.4 % 6,535 0.5 %
Other consumer 5,012 0.4 % 6,187 0.4 %
Total C&I/Agricultural operating and Consumer installment loans 155,639 11.5 % 160,079 11.0 %
Gross loans 1,372,378 100.3 % 1,464,897 100.3 %
Unearned net deferred fees and costs and loans in process (2,547) (0.2) % (2,900) (0.2) %
Unamortized discount on acquired loans (850) (0.1) % (1,205) (0.1) %
Total loans (net of unearned income and deferred expense) 1,368,981 100.0 % 1,460,792 100.0 %
Allowance for credit losses (20,549) (22,908)
Total loans receivable, net $ 1,348,432 $ 1,437,884
Our loan portfolio is diversified by types of borrowers and industry groups within the market areas that we serve. Significant loan concentrations are considered to exist for a financial entity when the amounts of loans to multiple borrowers engaged in similar activities cause them to be similarly impacted by economic or other conditions. As illustrated above, at December 31, 2024, the largest loan concentration we identified was commercial real estate loans which comprised 52% of our total loan portfolio. Approximately 89% of our total gross loans are secured by real estate.
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The following table sets forth, as of December 31, 2024 and December 31, 2023 respectively the fixed and adjustable-rate loans in our loan portfolio:
December 31, 2024 December 31, 2023
Amount Percent Amount Percent
Fixed rate loans:
Real estate loans:
Commercial/Agricultural real estate $ 426,840 31.2 % $ 457,931 31.3 %
Residential mortgage 37,691 2.8 % 44,740 3.1 %
Total fixed rate real estate loans 464,531 34.0 % 502,671 34.4 %
Non-real estate loans:
C&I/Agricultural Operating 107,899 7.9 % 116,193 7.9 %
Consumer installment 8,982 0.7 % 12,722 0.9 %
Total fixed rate non-real estate loans 116,881 8.6 % 128,915 8.8 %
Total fixed rate loans 581,412 42.6 % 631,586 43.2 %
Adjustable-rate loans:
Real estate loans:
Commercial/Agricultural real estate 654,602 47.8 % 714,986 49.0 %
Residential mortgage 97,606 7.1 % 87,160 6.0 %
Total adjustable-rate real estate loans 752,208 54.9 % 802,146 55.0 %
Non-real estate loans:
C&I/Agricultural operating 38,758 2.8 % 31,164 2.1 %
Consumer installment — — % 1 — %
Total adjustable-rate non-real estate loans 38,758 2.8 % 31,165 2.1 %
Total adjustable-rate loans 790,966 57.7 % 833,311 57.1 %
Gross loans 1,372,378 1,464,897
Unearned net deferred fees and costs and loans in process (2,547) (0.2) % (2,900) (0.2) %
Unamortized discount on acquired loans (850) (0.1) % (1,205) (0.1) %
Total loans (net of unearned income) 1,368,981 100.0 % 1,460,792 100.0 %
Allowance for credit losses (20,549) (22,908)
Total loans receivable, net $ 1,348,432 $ 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 December 31, 2024:
Non-Owner Occupied CRE Owner- Occupied CRE Multi-family CRE Construction and Development CRE
Loan Balance Outstanding in Millions $ 471 $ 238 $ 221 $ 78
Number of Loans 746 385 129 91
Average Loan Size in Millions $ 0.6 $ 0.6 $ 1.7 $ 0.9
Approximate Weighted Average LTV 52 % 51 % 62 % 74 %
Weighted Average Seasoning in Months 44 41 41 NA
Trailing 12 Month Net Charge-Offs 0.00 % 0.00 % 0.00 % 0.00 %
Criticized Loans in Millions $ 7.6 $ 4.2 $ 0.0 $ 0.1
Criticized Loans as a Percent of Total 1.6 % 1.7 % 0.0 % 0.1 %
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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 % 79 % 63 % 55 %
Minnesota 20 % 17 % 33 % 7 %
Other 28 % 4 % 4 % 38 %
The following table further disaggregates the composition of our commercial real estate loan portfolio by selected industry components at December 31, 2024:
Campground Hotel Restaurant Office
Loan Balance Outstanding in Millions $ 139 $ 88 $ 59 $ 28
Number of Loans 68 20 78 71
Average Loan Size in Millions $ 2.0 $ 4.4 $ 0.8 $ 0.4
Approximate Weighted Average LTV 49 % 51 % 48 % 58 %
Weighted Average Seasoning in Months 38 48 38 44
Trailing 12 Month Net Charge-Offs 0.00 % (0.04) % 0.00 % 0.00 %
Criticized Loans in Millions $ 0.0 $ 4.0 $ 0.0 $ 0.5
Criticized Loans as a Percent of Total 0.0 % 4.6 % 0.1 % 1.8 %
The table below lists our CRE portfolio selected industry components by geographical location:
Campground Hotel Restaurant Office
Wisconsin 21 % 38 % 57 % 83 %
Minnesota 0 % 41 % 27 % 8 %
Other 79 % 21 % 16 % 9 %
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Loan amounts, their contractual maturities and weighted average interest rates at December 31, 2024 are shown below.
Real estate Non-real estate
Commercial/Agricultural real estate Residential mortgage C&I/Agricultural operating Consumer installment Total
Amount Weighted
Average
Rate Amount Weighted
Average
Rate Amount Weighted
Average
Rate Amount Weighted
Average
Rate Amount Weighted
Average
Rate
Due in one year or less (1) $ 91,179 6.42 % $ 850 5.65 % $ 53,024 7.41 % $ 678 7.69 % $ 145,731 6.78 %
Due after one year through five years 329,022 5.02 % 5,319 5.43 % 50,714 5.47 % 6,954 6.64 % 392,009 5.11 %
Due after five years 661,240 5.11 % 129,129 5.98 % 42,919 6.93 % 1,350 7.33 % 834,638 5.34 %
$ 1,081,441 5.19 % $ 135,298 5.96 % $ 146,657 6.60 % $ 8,982 6.82 % $ 1,372,378 5.43 %
(1) Includes loans having no stated maturity and overdraft loans.
Loan amounts, their contractual maturities and weighted average interest rates at December 31, 2023 are shown below.
Real estate Non-real estate
Commercial/Agricultural real estate Residential mortgage C&I/Agricultural operating Consumer installment Total
Amount Weighted
Average
Rate Amount Weighted
Average
Rate Amount Weighted
Average
Rate Amount Weighted
Average
Rate Amount Weighted
Average
Rate
Due in one year or less (1) $ 80,068 5.61 % $ 1,107 5.43 % $ 41,603 8.29 % $ 784 7.86 % $ 123,562 5.72 %
Due after one year through five years 310,377 4.87 % 7,587 5.33 % 50,929 5.16 % 7,817 6.21 % 376,710 4.94 %
Due after five years 782,472 5.01 % 123,207 5.68 % 54,825 6.73 % 4,121 5.95 % 964,625 4.90 %
$ 1,172,917 5.01 % $ 131,901 5.66 % $ 147,357 6.63 % $ 12,722 6.23 % $ 1,464,897 4.98 %
(1) Includes loans having no stated maturity and overdraft loans.
We believe that the critical factors in the overall management of credit or loan quality are sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, recording an adequate allowance to provide for incurred loan losses, and reasonable non-accrual and charge-off policies.
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Risk Management and the 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 projected 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. As the Company’s commercial lending function started after the Great Recession, the Company’s historical credit experience is insufficient to estimate expected credit loss. The Company utilized peer information to supplement expected loss experience. Peer selection was a review of institutions with comparable asset size, geography, and portfolio concentrations. Management judgement is required at each point in the measurement process. 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 impairment. 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. However, if it is probable that the Company will foreclose on the collateral, the use of the fair value of the collateral to calculate the allowance for credit loss is required.
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.
On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments using the modified retrospective method. This adoption resulted in a $4.7 million increase in the ACL on loans (“ACL - Loans”) and established a $1.5 million ACL on unfunded commitments (“ACL - Unfunded Commitments”). The increase in transition ACL is primarily due to the interaction of change from an incurred loss model to a lifetime loss model and the duration of our portfolio. Since transition, the ACL- Loans modestly increased $0.3 million to $23.0 million at December 31, 2023, representing 1.57% of loans receivable. The allowance for loan losses, prior to the ASU 2016-13 transition, was $17.9 million at December 31, 2022, representing 1.27% of loans receivable.
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40
Allowance for Credit Losses - Loans Roll Forward
(in thousands, except ratios)
Twelve Months Ended
December 31,
2024 December 31,
2023
Allowance for Credit Losses (“ACL”)
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 (143) —
Residential mortgage (4) (78)
Consumer installment (35) (36)
Total loans charged off (221) (160)
Recoveries of loans previously charged off:
Commercial/Agricultural real estate 56 489
C&I/Agricultural operating 36 47
Residential mortgage 7 42
Consumer installment 22 33
Total recoveries of loans previously charged off: 121 611
Net loan recoveries/(charge-offs) (“NCOs”) (100) 451
(Reversals)/additions to ACL - Loans via provision for credit losses charged to operations (2,259) (188)
ACL - Loans, at end of period $ 20,549 $ 22,908
Average outstanding loan balance $ 1,430,631 $ 1,430,035
Ratios:
NCOs (annualized) to average loans 0.01 % (0.03) %
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
Twelve months ended December 31, 2024
Allowance for Credit Losses - Loans:
ACL - Loans, at beginning of period $ 18,784 $ 1,105 $ 2,744 $ 275 $ 22,908
Charge-offs (39) (143) (4) (35) (221)
Recoveries 56 36 7 22 121
(Reversals)/additions to ACL - Loans via provision for credit losses charged to operations (2,285) 332 (258) (48) (2,259)
ACL - Loans, at end of period $ 16,516 $ 1,330 $ 2,489 $ 214 $ 20,549
Allowance for Credit Losses - Loans to Percentage
(in thousands, except ratios)
December 31,
2024 December 31,
2023
Loans, end of period $ 1,368,981 $ 1,460,792
ACL - Loans $ 20,549 $ 22,908
ACL - Loans to loans, end of period 1.50 % 1.57 %
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Allowance for Credit Losses - Unfunded Commitments:
(in thousands)
In addition to the ACL - Loans, the Company has established an ACL - Unfunded Commitments of $0.334 million at December 31, 2024 and $1.250 million at December 31, 2023, classified in other liabilities on the consolidated balance sheets.
December 31, 2024 and Twelve Months Ended December 31, 2023 and Twelve Months Ended
ACL - Unfunded Commitments - beginning of period $ 1,250 $ —
Cumulative effect of ASU 2016-13 adoption — 1,537
Reversals to ACL - Unfunded Commitments via provision for credit losses charged to operations (916) (287)
ACL - Unfunded Commitments - end of period $ 334 $ 1,250
Nonperforming Loans, Potential Problem Loans and Foreclosed Properties. We employ early identification of non-accrual and problem loans in order to minimize the risk of loss. Non-performing loans are defined as either 90 days or more past due or non-accrual. The accrual of interest income is discontinued according to the following schedules:
• Commercial/agricultural real estate loans, past due 90 days or more;
• Commercial and industrial/agricultural operating loans past due 90 days or more;
• Closed ended consumer installment loans past due 120 days or more; and
• Residential mortgage and open ended consumer installment loans past due 180 days or more.
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The following table identifies the various components of non-performing assets and other balance sheet information as of the dates indicated below and changes in the ACL for the periods then ended:
December 31, 2024 and twelve months ended December 31, 2023 and twelve months ended
Nonperforming assets:
Nonaccrual loans
Commercial real estate $ 4,594 $ 10,359
Agricultural real estate 6,222 391
Construction and land development 103 54
Commercial and industrial (“C&I”) 597 —
Agricultural operating 793 1,180
Residential mortgage 858 1,167
Consumer installment 1 33
Total nonaccrual loans 13,168 13,184
Accruing loans past due 90 days or more 186 389
Total nonperforming loans (“NPLs”) 13,354 13,573
Other real estate owned 891 1,795
Other collateral owned 24 —
Total nonperforming assets (“NPAs”) $ 14,269 $ 15,368
Average outstanding loan balance $ 1,430,631 $ 1,430,035
Loans, end of period $ 1,368,981 $ 1,460,792
Total assets, end of period $ 1,748,519 $ 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 (143) —
Residential mortgage (4) (78)
Consumer installment (35) (36)
Total loans charged off (221) (160)
Recoveries of loans previously charged off:
Commercial/Agricultural real estate 56 489
C&I/Agricultural operating 36 47
Residential mortgage 7 42
Consumer installment 22 33
Total recoveries of loans previously charged off: 121 611
Net loan recoveries/(charge-offs) (“NCOs”) (100) 451
(Reversals)/additions to ACL - Loans via provision for credit losses charged to operations (2,259) (188)
ACL - Loans, at end of period $ 20,549 $ 22,908
Ratios:
ACL to NCOs (annualized) N/M N/M
NCOs (annualized) to average loans (0.01) % 0.03 %
ACL to total loans 1.50 % 1.57 %
NPLs to total loans 0.98 % 0.93 %
NPAs to total assets 0.82 % 0.83 %
N/M means not meaningful
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Nonaccrual Loans Roll Forward
Quarter Ended
December 31,
2024 September 30,
2024 June 30,
2024 March 31, 2024 December 31,
2023
Balance, beginning of period $ 15,042 $ 8,352 $ 8,413 $ 13,184 $ 13,456
Additions 1,054 7,486 352 961 538
Charge offs (138) — — — —
Transfers to OREO (201) (124) — — (23)
Return to accrual status — — — — —
Payments received (2,515) (641) (411) (5,767) (781)
Other, net (74) (31) (2) 35 (6)
Balance, end of period $ 13,168 $ 15,042 $ 8,352 $ 8,413 $ 13,184
Nonaccrual loans remained flat at approximately $13.2 million at both December 31, 2024, and December 31, 2023, with one large loan payoff in the second quarter and other payments received offsetting the addition of a $7.3 million relationship secured by collateral in the forestry services industry. Approximately $1.4 million of the payments received in the fourth quarter are related to this relationship.
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 twelve months ended December 31, 2024.
Term Extension
Loan Class Amortized Cost Basis at
December 31, 2024 % of Total Class of Financing Receivables
Commercial real estate $ 225 0.03 %
Commercial and industrial $ 741 0.64 %
Residential mortgage $ 20 0.02 %
Other-Than-Insignificant Payment Delay
Loan Class Amortized Cost Basis at
December 31, 2024 % of Total Class of Financing Receivables
Commercial real estate $ 1,182 0.17 %
Commercial and industrial $ 822 0.71 %
Residential mortgage $ 236 0.18 %
Term Extension and Principal Forgiveness
Loan Class Amortized Cost Basis at
December 31, 2024 % of Total Class of Financing Receivables
Other consumer $ 2 0.04 %
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The table below shows a summary of criticized loans, split by special mention and substandard balances, as of the past five quarter-ends. Criticized loans decreased by $10.6 million in the twelve months ended December 31, 2024. Special mention loans decreased $9.9 million during 2024, primarily due to the $8.6 million reduction in a forestry services loan which paid down in the first two quarters and then movement of the remaining $7.4 million loan to substandard in the third quarter 2024. Substandard loans decreased $0.7 million from December 31, 2023, primarily due to the payoff of a $4.4 million nonaccrual loan in the fist quarter and other reductions, partially offset by the addition of the $5.8 million forestry services loan in 2024, which is also a nonaccrual loan. This forestry services loan was special mention at December 31, 2023, and moved to substandard in the quarter-end September 30, 2024.
(in thousands)
(Loan balance at unpaid principal balance) December 31,
2024 September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023
Special mention loan balances $ 8,480 $ 11,047 $ 8,848 $ 13,737 $ 18,392
Substandard loan balances 18,891 21,202 14,420 14,733 19,596
Criticized loans, end of period $ 27,371 $ 32,249 $ 23,268 $ 28,470 $ 37,988
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 amortized cost of MSR assets decreased as amortization exceeded additions due to loan sales, resulting in the unpaid balances of one-to-four family residential real estate loans serviced for others to decrease as of December 31, 2024, to $479.6 million from $495.5 million at December 31, 2023.
The fair market value of the Company’s MSR asset was $5.2 million at December 31, 2024, and $5.6 million at December 31, 2023. At December 31, 2024, and December 31, 2023, the Company did not have an MSR impairment, or related valuation allowance. The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at December 31, 2024, and December 31, 2023, were 1.09% and 1.13%, respectively.
Intangible Assets. We have intangible assets of $1.0 million at December 31, 2024, compared to $1.7 million at December 31, 2023. The intangible assets at December 31, 2024, were comprised of core deposit intangible assets arising from 2017 and 2019 acquisitions. Amortization of these intangibles was $0.7 million in 2024. Amortization expense is scheduled to be $0.6 million in 2025 and $0.4 million in 2026.
Foreclosed and repossessed assets. Included in foreclosed and repossessed assets at December 31, 2024, is a branch location that is being held for sale. This property is being held for $0.7 million at December 31, 2024, which represents the estimated fair market value less the anticipated costs to sell. In 2024, a loss of $0.3 million was recognized and a former branch location was sold. In 2023, a loss of $0.4 million was recognized on the reclassification of the $0.7 million from property and equipment to foreclosed assets, which was recorded in other expense.
Deposits. At December 31, 2024, deposits decreased modestly by $30.9 million compared to December 31, 2023, balances. Some of the loan shrinkage proceeds were utilized to decrease wholesale deposits by $73.1 million in 2024. Some of this shrinkage was funded by the net growth in retail, commercial and public deposits, totaling $42 million during 2024.
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Deposit Composition
(in thousands)
December 31,
2024 September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023
Non-interest-bearing demand deposits $ 252,656 $ 256,840 $ 255,703 $ 248,537 $ 265,704
Interest-bearing demand deposits 355,750 346,971 353,477 361,278 343,276
Savings accounts 159,821 169,096 170,946 177,595 176,548
Money market accounts 369,534 366,067 370,164 387,879 374,055
Certificate accounts 350,387 381,693 369,254 352,200 359,509
Total deposits $ 1,488,148 $ 1,520,667 $ 1,519,544 $ 1,527,489 $ 1,519,092
Consumer, commercial and government deposits have been stable since January 31, 2023, and following the two large coastal bank failures in early March 2023. There are no material customer or industry deposit concentrations.
Deposit Portfolio Composition
(in thousands)
December 31,
2024 September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023
Consumer deposits $ 852,083 $ 844,808 $ 822,665 $ 827,290 $ 814,899
Commercial deposits 412,355 406,095 395,148 400,910 415,715
Public deposits 190,460 176,844 187,698 202,175 182,172
Wholesale deposits 33,250 92,920 114,033 97,114 106,306
Total deposits $ 1,488,148 $ 1,520,667 $ 1,519,544 $ 1,527,489 $ 1,519,092
At December 31, 2024, the deposit portfolio composition was 57% consumer, 28% commercial, 13% public, and 2% wholesale deposits. At December 31, 2023, our deposit portfolio composition was 54% consumer, 28% commercial, 12% public and 6% wholesale deposits.
Uninsured and uncollateralized deposits were $265.4 million, or 18% of total deposits, at December 31, 2024, and $275.8 million, or 18% of total deposits at December 31, 2023. Uninsured deposits at December 31, 2024, were $428.0 million, or 29% of total deposits, and $427.5 million, or 28% of total deposits at December 31, 2023, with the difference being an increase in fully secured government deposits.
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Federal Home Loan Bank (FHLB) advances and other borrowings. A summary of Federal Home Loan Bank (FHLB) advances and other borrowings at December 31, 2024 and December 31, 2023 is as follows:
December 31, 2024 December 31, 2023
Stated Maturity Amount Range of Stated Rates Stated Maturity Amount Range of Stated Rates
Federal Home Loan Bank advances (1), (2), (3), (4) 2024 $ — — % — % 2024 $ 64,530 — % 5.45 %
2025 5,000 1.45 % 1.45 % 2025 5,000 1.45 % 1.45 %
2028 10,000 3.82 % 3.82 %
Federal Home Loan Bank advances $ 5,000 $ 79,530
Other borrowings:
Senior notes (5) 2039 $ 12,000 6.75 % 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 (394) (618)
Total other borrowings $ 61,606 $ 67,465
Totals $ 66,606 $ 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 pledged balances of $1,075,001 and $1,106,267 at December 31, 2024 and 2023, respectively. At December 31, 2024, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $424,658 compared to $370,569 as of December 31, 2023.
(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $81,000 and $217,530, during the twelve months ended December 31, 2024 and December 31, 2023, respectively.
(3) The weighted-average interest rates on FHLB borrowings, with maturities less than twelve months, outstanding as of December 31, 2024 and December 31, 2023 were 1.45% and 4.16%, respectively.
(4) In June 2024, the FHLB called the $10,000, 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 $5,000 line of credit, maturing August 1, 2025, that remains undrawn upon.
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(6) Subordinated notes resulted from the following:
(a) The Company’s Subordinated Note Purchase Agreement entered into with certain purchasers in August 2020, which bears a fixed interest rate of 6.00% for five years. In September 2025, the fixed interest rate will be reset quarterly to equal the three-month term Secured Overnight Financing Rate plus 591 basis points. The note is callable by the Bank when, and anytime after, the floating rate is initially set. Interest-only payments are due semi-annually each year during the fixed interest period and quarterly during the floating interest period.
(b) The Company’s Subordinated Note Purchase Agreement entered into with certain purchasers in March 2022, which bears a fixed interest rate of 4.75% for five years. In April 2027, the fixed interest rate will be reset quarterly to equal the three-month term Secured Overnight Financing Rate plus 329 basis points. The note is callable by the Bank when, and anytime after, the floating rate is initially set. Interest-only payments are due semi-annually each year during the fixed interest period and quarterly during the floating interest period.
Federal Home Loan Bank (FHLB) advances and other borrowings
We utilize advances and other borrowings, as necessary, to supplement core deposits to meet our funding and liquidity needs, and we evaluate all options for funding securities.
FHLB advances decreased $74.5 million to $5.0 million as of December 31, 2024, compared to $79.5 million as of December 31, 2023, as proceeds from the investment security and loan portfolio shrinkage were used to reduce borrowings. In January 2024, $44.0 million of FHLB advances matured and an additional $20.5 million of FHLB advances matured in 2024, after January. A $10 million FHLB advance, which the FHLB could call one-time, was called in June 2024. The Bank has an irrevocable Standby Letter of Credit Master Reimbursement Agreement with the Federal Home Loan Bank. This irrevocable standby letter of credit (“LOC”) is supported by loan collateral as an alternative to directly pledging investment securities on behalf of a municipal customer as collateral for their interest-bearing deposit balances. The Bank’s current unused borrowing capacity, supported by loan collateral, was approximately $424.7 million at December 31, 2024. The Company refinanced its senior debt in May 2024 and reduced the balances by $6.1 million.
The Bank maintains two unsecured federal funds purchased lines of credit with its banking partners which total $70.0 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 December 31, 2023, or December 31, 2022.
At December 31, 2024, and 2023, the Bank had the ability to borrow $24.9 million and $22.4 million, respectively from the Federal Reserve Bank of Minneapolis. The ability to borrow is based on mortgage-backed securities pledged with a carrying value of $33.9 million and $29.2 million as of December 31, 2024, and 2023, respectively. There were no Federal Reserve borrowings outstanding as of December 31, 2024, and 2023.
Stockholders’ Equity. Total stockholders’ equity was $179.1 million at December 31, 2024, compared to $173.3 million at December 31, 2023. The increase in stockholders’ equity included the Company’s net income of $13.8 million, a decrease in the unrealized loss on available-for-sale securities of $0.9 million, net of tax, due to lower interest rates and restricted stock amortization of $0.6 million. These increases were partially offset by: 1) the repurchase of approximately 476 thousand shares of its common stock, which reduced equity by $6.1 million and 2) the payment of the annual cash dividend, paid in February to common stockholders of $0.32 per share which was a 10% increase from the prior year dividend amount of $0.29 per share, or $3.3 million.
In July 2024, the Board of Directors adopted a 5% share repurchase program. As of December 31, 2024, an additional 238 thousand shares remain available for repurchase under this program. 2024 share repurchases included all remaining shares under a 2021 approved share repurchase program. The remaining, roughly 50% of 2024 share repurchases, were under the repurchase program that was approved in 2024.
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 December 31, 2024, our on-balance sheet liquidity ratio increased to 11.75% percent from 11.4% at December 31, 2023,
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remaining above our internal requirement of 10%. This was largely due to reductions in the AFS and HTM investment portfolios.
There are no material customers or industry deposit concentrations. At December 31, 2024, the deposit portfolio composition was 57% consumer, 28% commercial, 13% public, and 2% wholesale deposits. At December 31, 2023, our deposit portfolio composition was 54% consumer, 28% commercial, 12% public and 6% wholesale deposits.
Uninsured and uncollateralized deposits were $265.4 million, or 18% of total deposits, at December 31, 2024, and $275.8 million, or 18% of total deposits at December 31, 2023. Uninsured deposits at December 31, 2024, were $428.0 million, or 29% of total deposits, and $427.5 million, or 28% of total deposits at December 31, 2023, with the difference being an increase in fully secured government deposits.
On-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability was $724.8 million, or 273% of uninsured and uncollateralized deposits at December 31, 2024. At December 31, 2023, on-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability was $673.6 million, or 244% of uninsured and uncollateralized deposits.
Our primary sources of funds are deposits, amortization, prepayments and maturities on the investment and loan portfolios and funds provided from operations. We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, and to fund loan commitments. While scheduled payments from the amortization of loans and maturing short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Although $329.6 million of our $350.4 million (94%) CD portfolio will mature within the next 12 months, we have historically retained a majority of our maturing CD’s. In 2024, retail non-maturity interest-bearing accounts were approximately flat with a growth in certificate accounts. Through new deposit product offerings to our branch and commercial customers, we are currently attempting to strengthen customer relationships to attract additional non-rate sensitive deposits. However, this is challenging in the current competitive environment.
We maintain access to additional sources of funds including FHLB borrowings and lines of credit with the Federal Reserve Bank, and our correspondent banks. We utilize FHLB borrowings to leverage our capital base, to provide funds for our lending and investment activities, and to manage our interest rate risk. Our borrowing arrangement with the FHLB calls for pledging certain qualified real estate, commercial and industrial loans, and borrowing up to 75% of the value of those loans, not to exceed 35% of the Bank’s total assets. Currently, we have approximately $424.7 million available to borrow under this arrangement, supported by loan collateral as of December 31, 2024. We also had borrowing capacity of $24.9 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 approved brokered certificate lines of credit with counter parties at December 31, 2024, we believe that the Bank could access this market, which provides an additional potential source of liquidity. See Note 9, “Federal Home Loan Bank and Other Borrowings” of “Notes to Consolidated Financial Statements” which are included in Item 8, “Financial Statements and Supplementary Data” of this Form 10-K, 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 Arrangements . 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 December 31, 2024, the Company has approximately $137.0 in unused loan commitments, compared to approximately $210.4 million in unused loan commitments as of December 31, 2023. In addition, there are $2.9 million of commitments for contributions of capital to an SBIC and an investment company at December 31, 2024. These commitments totaled $3.4 million of commitments at December 31, 2023. See Note 11, “Commitments and Contingencies”; “Financial Instruments with Off-Balance Sheet Risk” of “Notes to Consolidated Financial Statements” which are included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K, for further detail.
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Capital Resources. As of the dates indicated below, our Tier 1 and Risk-based capital levels exceeded levels necessary to be considered “Well Capitalized” under Prompt Corrective Action provisions for the Bank.
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 December 31, 2024
Total capital (to risk weighted assets) $ 225,432 15.6 % $ 115,755 > = 8.0 % $ 144,693 > = 10.0 %
Tier 1 capital (to risk weighted assets) 207,749 14.4 % 86,816 > = 6.0 % 115,755 > = 8.0 %
Common equity tier 1 capital (to risk weighted assets) 207,749 14.4 % 65,112 > = 4.5 % 94,051 > = 6.5 %
Tier 1 leverage ratio (to adjusted total assets) 207,749 11.9 % 69,787 > = 4.0 % 87,234 > = 5.0 %
As of December 31, 2023
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 December 31, 2024, 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 December 31, 2024
Total capital (to risk weighted assets) $ 232,926 16.1 % $ 115,914 > = 8.0 %
Tier 1 capital (to risk weighted assets) 165,243 11.4 % 86,936 > = 6.0 %
Common equity tier 1 capital (to risk weighted assets) 165,243 11.4 % 65,202 > = 4.5 %
Tier 1 leverage ratio (to adjusted total assets) 165,243 9.5 % 69,867 > = 4.0 %
As of December 31, 2023
Total capital (to risk weighted assets) $ 230,160 14.7 % $ 124,883 > = 8.0 %
Tier 1 capital (to risk weighted assets) 160,794 10.3 % 93,662 > = 6.0 %
Common equity tier 1 capital (to risk weighted assets) 160,794 10.3 % 70,247 > = 4.5 %
Tier 1 leverage ratio (to adjusted total assets) 160,794 8.9 % 72,479 > = 4.0 %
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Selected Quarterly Financial Data
The following is selected financial data summarizing the results of operations for each quarter as of the periods indicated below:
Year ended December 31, 2024:
March 31, 2024 June 30, 2024 September 30, 2024 December 31, 2024
Interest dividend income $ 22,679 $ 22,463 $ 22,512 $ 21,961
Interest expense 10,774 10,887 11,227 10,253
Net interest income before provision for credit losses 11,905 11,576 11,285 11,708
Provision for credit losses (800) (1,525) (400) (450)
Net interest income after provision for credit losses 12,705 13,101 11,685 12,158
Non-interest income 3,264 1,913 2,921 2,009
Non-interest expense 10,777 10,299 10,421 10,809
Income before provision for income taxes 5,192 4,715 4,185 3,358
Provision for income taxes 1,104 1,040 899 656
Net income attributable to common stockholders $ 4,088 $ 3,675 $ 3,286 $ 2,702
Basic earnings per share $ 0.39 $ 0.35 $ 0.32 $ 0.27
Diluted earnings per share $ 0.39 $ 0.35 $ 0.32 $ 0.27
Cash dividends paid $ 0.32 $ — $ — $ —
Year ended December 31, 2023:
March 31, 2023 June 30, 2023 September 30, 2023 December 31, 2023
Interest dividend income $ 19,673 $ 20,777 $ 21,772 $ 22,026
Interest expense 6,878 9,091 9,651 10,279
Net interest income before provision for loan losses 12,795 11,686 12,121 11,747
Provision for loan losses 50 450 (325) (650)
Net interest income after provision for loan losses 12,745 11,236 12,446 12,397
Non-interest income 2,292 2,913 2,565 2,480
Non-interest expense 10,121 9,846 9,969 10,206
Income before provision for income taxes 4,916 4,303 5,042 4,671
Provision for income taxes 1,254 1,097 2,544 978
Net income $ 3,662 $ 3,206 $ 2,498 $ 3,693
Basic earnings per share $ 0.35 $ 0.31 $ 0.24 $ 0.35
Diluted earnings per share $ 0.35 $ 0.31 $ 0.24 $ 0.35
Cash dividends paid $ 0.29 $ — $ — $ —