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 interest earning assets:
Interest bearing deposits — — — % 63 1 1.59 %
Average interest bearing liabilities:
Interest rate spread 2.09 % 2.31 %
Net interest margin 2.73 % 2.81 %
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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) TotalIncrease /(Decrease)
Interest income:
Cash and cash equivalents $ 132 $ 8 $ 140
Interest bearing deposits (1) — (1)
Interest expense:
(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
Non-interest Income:
Service charges on deposit accounts $ 1,924 $ 1,949 (1.28)%
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
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
Non-interest Expense:
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%
(Losses) gains on repossessed assets, net 294 62 374.19%
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 AmortizedCost FairValue
U.S. government agency obligations $ 13,853 $ 13,753
U.S. government agency obligations $ 16,655 $ 16,576
Held to maturity securities AmortizedCost FairValue
Obligations of states and political subdivisions $ 500 $ 478
Total held-to-maturity securities $ 85,504 $ 65,622
Obligations of states and political subdivisions $ 600 $ 565
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 AmortizedCost EstimatedFair Value
Due after one year through five years 8,652 8,715
Due after five years through ten years 41,380 38,033
Total securities with contractual maturities 77,842 74,465
Held to maturity securities AmortizedCost EstimatedFair 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
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 AmortizedCost EstimatedFair 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
Total securities with contractual maturities 88,653 82,263
Held to maturity securities AmortizedCost EstimatedFair 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
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
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,
Available-for-sale securities AmortizedCost FairValue AmortizedCost FairValue
Non-rated — — — —
December 31, December 31,
Held to maturity securities AmortizedCost FairValue AmortizedCost FairValue
AAA — — — —
AA — — — —
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:
Amount Percent Amount Percent
Real Estate Loans:
Commercial/Agricultural real estate:
Residential mortgage:
C&I/Agricultural operating and Consumer installment loans:
C&I/Agricultural operating:
Consumer installment:
Unamortized discount on acquired loans (850) (0.1) % (1,205) (0.1) %
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:
Amount Percent Amount Percent
Fixed rate loans:
Real estate loans:
Non-real estate loans:
Adjustable-rate loans:
Real estate loans:
Non-real estate loans:
Consumer installment — — % 1 — %
Unamortized discount on acquired loans (850) (0.1) % (1,205) (0.1) %
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:
Loan Balance Outstanding in Millions $ 471 $ 238 $ 221 $ 78
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
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:
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
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
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
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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
(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
(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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Allowance for Credit Losses - Loans Roll Forward
(in thousands, except ratios)
Twelve Months Ended
Allowance for Credit Losses (“ACL”)
ACL - Loans, at beginning of period $ 22,908 $ 17,939
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
Ratios:
NCOs (annualized) to average loans 0.01 % (0.03) %
Allowance for Credit Losses - Loans Activity by Segment
(in thousands, except ratios)
Twelve months ended December 31, 2024
Allowance for Credit Losses - Loans:
Allowance for Credit Losses - Loans to Percentage
(in thousands, except ratios)
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.
ACL - Unfunded Commitments - beginning of period $ 1,250 $ —
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:
Nonperforming assets:
Nonaccrual loans
Construction and land development 103 54
Commercial and industrial (“C&I”) 597 —
Consumer installment 1 33
Accruing loans past due 90 days or more 186 389
Other collateral owned 24 —
Total nonperforming assets (“NPAs”) $ 14,269 $ 15,368
ACL - Loans, at beginning of period $ 22,908 $ 17,939
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
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
Charge offs (138) — — — —
Return to accrual status — — — — —
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
Commercial real estate $ 225 0.03 %
Commercial and industrial $ 741 0.64 %
Residential mortgage $ 20 0.02 %
Other-Than-Insignificant Payment Delay
Commercial real estate $ 1,182 0.17 %
Commercial and industrial $ 822 0.71 %
Residential mortgage $ 236 0.18 %
Term Extension and Principal Forgiveness
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)
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)
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)
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:
Federal Home Loan Bank advances $ 5,000 $ 79,530
Other borrowings:
Unamortized debt issuance costs (394) (618)
(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.
Amount Ratio Amount Ratio Amount Ratio
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 AdequacyPurposes
Amount Ratio Amount Ratio
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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:
Cash dividends paid $ 0.32 $ — $ — $ —
Year ended December 31, 2023:
Cash dividends paid $ 0.29 $ — $ — $ —
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually, with various repricing indices. Market interest rates change over time and are not predictable or controllable. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. Like other financial institutions, our interest income and interest expense are affected by general economic conditions and policies of regulatory authorities, including the monetary policies of the Federal Reserve. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.
How We Measure Our Risk of Interest Rate Changes. As part of our attempt to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor our interest rate risk through several means including through the use of third-party reporting software. In monitoring interest rate risk, we continually analyze and manage assets and liabilities based on their payment streams and interest rates, the timing of their maturities, and their sensitivity to actual or potential changes in market interest rates.
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In order to manage the potential for adverse effects of material and prolonged increases in interest rates on our results of operations, we adopted asset and liability management policies to better align the maturities and re-pricing terms of our interest earning assets and interest-bearing liabilities. These policies are implemented by our Asset and Liability Management Committee (ALCO). The ALCO is comprised of members of the Bank’s senior management and a member of the Board of Directors. The ALCO establishes guidelines for and monitors the volume and mix of our assets and funding sources, taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The Committee’s objectives are to manage assets and funding sources to produce results that are consistent with liquidity, cash flow, capital adequacy, growth, risk, and profitability goals for the Bank. The ALCO meets on a regularly scheduled basis to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate risk exposure limits versus current projections pursuant to net present value of portfolio equity analysis. At each meeting, the Committee recommends strategy changes, as appropriate, based on this review. The Committee is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the Bank’s Board of Directors on a regularly scheduled basis.
In managing our assets and liabilities to achieve desired levels of interest rate risk, we have focused our strategies on:
•originating shorter-term secured commercial, agricultural and consumer loan maturities;
•originating variable rate commercial and agricultural loans;
•the sale of a vast majority of longer-term fixed-rate residential loans in the secondary market with servicing retained;
•managing our funding needs by growing core deposits;
•utilize brokered certificate of deposits and borrowings as appropriate, which may have fixed rates with varying maturities;
•purchasing investment securities to modify our interest rate risk profile.
At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the ALCO may determine to increase the Bank’s interest rate risk position somewhat in order to maintain or improve its net interest margin.
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The following table sets forth, at December 31, 2024 and December 31, 2023 an analysis of our interest rate risk as measured by the estimated changes in Economic Value of Equity (“EVE”) resulting from an immediate and permanent shift in the yield curve (up 300 basis points and down 200 basis points).
Percent Change in Economic Value of Equity (EVE)
(1)Assumes an immediate and parallel shift in the yield curve at all maturities.
Our overall interest rate sensitivity is demonstrated by net interest income shock analysis, which measures the change in net interest income in the event of hypothetical changes in interest rates. This analysis assesses the risk of change in our net interest income over the next 12 months in the event of an immediate and parallel shift in the yield curve (up 300 basis points and down 200 basis points). The table below presents our projected change in net interest income for the various rate shock levels at December 31, 2024, and December 31, 2023.
Percent Change in Net Interest Income Over One Year Horizon
-
(1)Assumes an immediate and parallel shift in the yield curve at all maturities.
Note: The table above may not be indicative of future results.
The percent change in net interest income over one year horizon at December 31, 2024 compared to December 31, 2023 is largely due to the impact of a 100 basis point reduction in short-term interest rates in the third and fourth quarter with an increase of approximately 70 basis points in the ten year Treasury rate at December 31, 2024 compared to December 31, 2023, which results in a shifting in results in the +300bp (similar to +2 and 200bp (similar to +300bp) and -200bp scenarios (similar to -200bp)). The assumptions used to measure and assess interest rate risk include interest rates, loan prepayment rates, deposit decay (runoff) rates, and the market values of certain assets under differing interest rate scenarios. Actual values may differ from those projections set forth above should market conditions vary from the assumptions used in preparing the analysis. Further, the computations do not contemplate any actions we may undertake in response to changes in interest rates.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm ( Crowe LLP; Oak Brook Terrace, Illinois; PCAOB ID 173)
Report of Independent Registered Public Accounting Firm (Eide Bailly LLP; Phoenix, Arizona; PCAOB ID 286)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors
of Citizens Community Bancorp, Inc.
Eau Claire, Wisconsin
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Citizens Community Bancorp, Inc. (the “Company”) as of December 31, 2024, the related consolidated statement of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the year ended December 31, 2024, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024, and the results of its operations and its cash flows for the year ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses on Collectively Evaluated Loans – Quantitative Calculation
As discussed in Notes 1 and 3 to the consolidated financial statements, the Company’s allowance for credit losses (ACL) totaled $20.5 million as of December 31, 2024. The ACL is based on expected credit losses over the contractual life of loans, incorporating relevant information including historical loss experience, current economic conditions, and reasonable and supportable forecasts.
Management utilizes a loss rate model for estimating credit losses, applying risk drivers based on loan pool characteristics. Credit loss estimates are based on projected cash flows, adjusted for expected prepayments, economic conditions as forecasted by a third-party source.
We identified auditing the quantitative calculation of the ACL on collectively evaluated loans as a critical audit matter due to the complexity of the models used, the subjective assumptions and judgments involved, and the high degree of estimation
55
uncertainty required by management. This required significant auditor judgment and effort to evaluate the appropriateness of the methodology, the accuracy of the data used and the reasonableness of assumptions utilized.
The primary procedures we performed to address this critical audit matter included:
Testing the design and operating effectiveness of controls over the quantitative portion of the ACL on collectively evaluated loans, including controls addressing:
•Relevance and reliability of data used in the in the quantitative allowance for credit losses calculation.
•Reasonableness of significant assumptions and judgments applied within the quantitative allowance for credit losses calculation including the appropriateness of peer group and selection of the forecast utilized.
•The results of the third-party ACL validation for the loss rate model.
Substantively testing management’s process, including evaluating their judgments and assumptions, for developing the ACL on loans collectively evaluated, which included:
•Testing completeness and accuracy of loan data used in the quantitative allowance for credit loss model including the use of internal specialists to assist in testing the accuracy and completeness of the statistical models and peer data used.
•Evaluating management’s assumptions and judgments in the selection and application of economic forecasts.
•Using the work of specialists to assist in evaluating the relevance and reliability of data used by the Company’s third-party vendor to develop forecast scenarios.
•Testing the mathematical accuracy of the calculation and the appropriate application of the methodology as designed.
/s/ Crowe LLP
We have served as the Company’s auditor since 2024.
Oakbrook Terrace, Illinois
March 13, 2025
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
Citizens Community Bancorp, Inc. and Subsidiary
Eau Claire, Wisconsin
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Citizens Community Bancorp, Inc. and Subsidiary (the Company) as of December 31, 2023, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risk of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.We believe that our audit provides a reasonable basis for our opinion.
Change in Accounting Principle
As discussed in Note 3 to the financial statements, the Company adopted the provisions of FASB Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as of January 1, 2023, using the modified retrospective approach with an adjustment at the beginning of the adoption period. Our opinion is not modified with respect to this matter.
/s/ Eide Bailly, LLP
We served as the Company’s auditor from 2020 to 2023.
Phoenix, Arizona
March 5, 2024
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CITIZENS COMMUNITY BANCORP, INC.
Consolidated Balance Sheets
(in thousands, except share data)
Assets
Mortgage servicing rights, net 3,663 3,865
Foreclosed and repossessed assets, net 915 1,795
Liabilities and Stockholders’ Equity
Liabilities:
Federal Home Loan Bank ("FHLB") advances 5,000 79,530
Commitments and contingent liabilities
Stockholders’ Equity:
Accumulated other comprehensive loss (16,420) (17,328)
See accompanying notes to audited consolidated financial statements.
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CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Operations
(in thousands, except per share data)
For the year ended December 31, 2024 For the year ended December 31, 2023
Interest and dividend income:
Interest expense:
Interest on FHLB borrowed funds 1,281 5,966
Interest on other borrowed funds 3,875 4,184
Net interest income before provision for credit losses 46,474 48,349
(Negative) provision for credit losses (3,175) (475)
Net interest income after provision for credit losses 49,649 48,824
Non-interest income:
Service charges on deposit accounts 1,924 1,949
Loan fees and service charges 996 432
Net realized gains on debt securities — 12
Net (losses) gains on equity securities (856) 447
Bank Owned Life Insurance (BOLI) death benefit 184 —
Non-interest expense:
Amortization of intangible assets 715 755
Mortgage servicing rights expense, net 534 615
Advertising, marketing and public relations 793 734
FDIC premium assessment 798 812
Losses on repossessed assets, net 294 62
Income before provision for income taxes 17,450 18,932
Net income attributable to common stockholders $ 13,751 $ 13,059
Per share information:
Cash dividends paid $ 0.32 $ 0.29
See accompanying notes to audited consolidated financial statements.
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CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Comprehensive Income
(in thousands)
For the year ended December 31, 2024 For the year ended December 31, 2023
Net income attributable to common stockholders $ 13,751 $ 13,059
Other comprehensive income, net of tax:
Securities available-for-sale
Net unrealized gains arising during period, net of tax 778 337
Other comprehensive income, net of tax 908 328
See accompanying notes to audited consolidated financial statements.
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CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except Shares)
Shares Amount
Other comprehensive income, net of tax — — — — 328 328
Forfeiture of unvested shares (4,752) — — — — —
Surrender of restricted shares of common stock (10,287) — (129) — — (129)
Restricted common stock awarded under the equity incentive plan 50,606 1 — — — 1
Common stock options exercised 3,000 — 28 — — 28
Amortization of restricted stock — — 722 — — 722
Cash dividends ($0.29 per share) — — — (3,040) — (3,040)
Other comprehensive income, net of tax — — — — 908 908
Forfeiture of unvested shares (246) — — — — —
Surrender of restricted shares of common stock (10,010) — (119) — — (119)
Restricted common stock awarded under the equity incentive plan 16,955 — — — — —
Common stock options exercised 2,000 — 22 — — 22
Amortization of restricted stock — — 631 — — 631
Cash dividends ($0.32 per share) — — — (3,346) — (3,346)
See accompanying notes to audited consolidated financial statements.
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CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Cash Flows
(in thousands)
For the year ended December 31, 2024 For the year ended December 31, 2023
Cash flows from operating activities:
Net income attributable to common stockholders $ 13,751 $ 13,059
Net accretion on debt securities (78) (64)
Negative provision for credit losses (3,175) (475)
Net loss (gain) on equity securities 856 (447)
Net realized gain on sale of debt securities — (12)
Deferred tax asset valuation allowance — 1,792
Mortgage servicing rights amortization and impairment, net 534 615
Amortization of intangible assets 715 755
Amortization of restricted stock 631 722
Loss on closure of branch facilities — 380
Decrease in deferred income taxes 380 202
Increase in cash surrender value of life insurance (954) (693)
Net (gain) loss from disposals of foreclosed and repossessed assets (19) 62
Provision for valuation allowance on foreclosed properties 313 —
Gain on sale of loans held for sale, net (2,216) (1,692)
Proceeds from sale of loans held for sale 60,347 46,907
Originations of loans held for sale (53,687) (50,988)
Net change in:
Accrued interest receivable and other assets (1,775) 54
Cash flows from investing activities:
Proceeds from Bank Owned Life Insurance (“BOLI”) death benefit 499 —
Net decrease in other interest bearing deposits — 249
Purchase of available-for-sale securities — (11,007)
Proceeds from principal payments of available-for-sale securities 14,842 16,594
Proceeds from sales of available-for-sale securities — 5,105
Equity investment capital distribution 276 132
Purchase of equity investments (450) (1,350)
Net sales of other investments 520 284
Proceeds from sales of foreclosed and repossessed assets 877 307
Proceeds from insurance claim on foreclosed and repossessed assets 27 —
Net capital expenditures (889) (1,367)
Proceeds from disposal of office properties and equipment 13 12
Cash flows from financing activities:
Change in short term in Federal Home Loan Bank advances, net (44,000) (68,000)
Federal Home Loan Bank advance call payments (10,000) (15,000)
Federal Home Loan Bank advances — 25,000
Federal Home Loan Bank maturities (20,530) (5,000)
Amortization of debt issuance costs 224 223
Other borrowings principal reductions (6,083) (5,167)
Net (decrease) increase in deposits (30,952) 94,361
Restricted common stock awarded under the equity incentive plan — 1
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Repurchase shares of common stock (6,097) (421)
Surrender of restricted shares of common stock (119) (129)
Common stock options exercised 22 28
Net increase in cash and cash equivalents 13,034 1,775
Cash and cash equivalents at beginning of period 37,138 35,363
Cash and cash equivalents at end of period $ 50,172 $ 37,138
Supplemental cash flow information:
Cash paid during the period for:
Supplemental noncash disclosure:
Transfers from loans receivable to foreclosed and repossessed assets $ 274 $ 158
See accompanying notes to audited consolidated financial statements.
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CITIZENS COMMUNITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of Citizens Community Federal N.A. (the “Bank”) included herein have been included by its parent company, Citizens Community Bancorp, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). As used in this annual report, the terms “we”, “us”, “our”, and “Citizens Community Bancorp, Inc.” mean the Company and its wholly owned subsidiary, the Bank, unless the context indicates other meaning.
The Bank is a national banking association (a “National Bank”) and operates under the title of Citizens Community Federal National Association (“Citizens Community Federal N.A.” or “Bank”). The Company is a bank holding company, supervised by the Federal Reserve Bank of Minneapolis (the “FRB”), and operates under the title of Citizens Community Bancorp, Inc. The Office of the Comptroller of the Currency (the “OCC”), is the primary federal regulator for the Bank.
The consolidated income of the Company is principally derived from the income of the Bank, the Company’s wholly owned subsidiary, serving customers primarily in Wisconsin and Minnesota through 22 branch locations. Its primary markets include the Chippewa Valley Region in Wisconsin, Mankato and Twin Cities markets in Minnesota, and various rural communities around these areas. The Bank offers traditional community banking services to businesses, agricultural operators and consumers, including one-to-four family residential mortgages.
The Bank is subject to competition from other financial institutions and non-financial institutions providing financial products. Additionally, the Bank is subject to the regulations of certain regulatory agencies and undergoes periodic examination by those regulatory agencies.
In preparing these consolidated financial statements, we evaluated the events and transactions occurring subsequent to the balance sheet date of December 31, 2024, through the date on which the consolidated financial statements were available to be issued on March 13, 2025, for items that should potentially be recognized or disclosed in these consolidated financial statements.
Unless otherwise stated herein, and except for share and per share amounts, all amounts are in thousands.
Principles of Consolidation – The accompanying consolidated financial statements include the accounts of the Company and the Bank. All significant inter-company accounts and transactions have been eliminated.
Use of Estimates—Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, fair value of financial instruments, the allowance for credit losses, mortgage servicing rights, foreclosed and repossessed assets, valuation of intangible assets arising from acquisitions, useful lives for depreciation and amortization, valuation of goodwill and long-lived assets, stock based compensation, deferred tax assets, uncertain income tax positions and contingencies. Management does not anticipate any material changes to estimates made herein in the near term. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: those items described under the caption “Risk Factors” in Item 1A of the accompanying annual report on Form 10-K for the year ended December 31, 2024, and external market factors such as market interest rates and unemployment rates, changes to operating policies and procedures, and changes in applicable banking regulations. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period.
Cash and Cash Equivalents—For purposes of reporting cash flows in the consolidated financial statements, cash and cash equivalents include cash, due from banks, and interest bearing deposits with original maturities of three months or less.
Investment Securities; Available-for-sale and Held-to-Maturity – Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of the date of each balance sheet.Securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity.Held-to-maturity securities are stated at amortized cost.Investment securities not classified as held-to-maturity are classified as available-for-sale.Available-for-sale securities are stated at fair value, with unrealized holding gains and losses
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being reported in other comprehensive income (loss), net of tax. Realized gains or losses on sales of available-for-sale securities are calculated with the specific identification method and are included in the consolidated statements of operations under net realized gains on debt securities. Interest income includes amortization of purchase premium or accretion of purchase discount. Amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the estimated lives of the securities.
Allowance for Credit Losses - Available-for-sale Securities - The Company measures the allowance for credit losses on available-for-sale debt securities by evaluating securities in an unrealized loss position using a two-step process. First, the Company assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost. If it is determined that the Company intends or will be required to sell the security, it is written down to its fair value as net gains or losses on investment securities in our consolidated statement of operations. For agency mortgage-backed and asset-backed securities that do not meet the criteria in step one, there are no expected credit losses as they are guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. For other debt securities that do not meet the criteria in step one, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and the allowance for credit losses on available-for-sale investments is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Allowance for Credit Losses - Held-to-Maturity Securities - The Company measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. For agency mortgage-backed securities there are no expected credit losses as they are guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. For other securities, the estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.
The Company has elected to not measure an ACL on accrued interest on available-for-sale and held-to-maturity securities, as it would write off accrued interest in a timely manner if the related security was determined to have a credit loss. Accrued interest receivable on available-for-sale and held-to-maturity securities was $920 at December 31, 2024. The Company has no available-for-sale securities or held-to-maturity securities which it deems to have a credit loss at December 31, 2024.
Equity investments - The Company is required to maintain an investment in Federal Agricultural Mortgage Corporation (“Farmer Mac”) equity securities. Farmer Mac equity securities are carried at their fair market value, which is readily determinable. Changes in fair value are recognized as net (losses) gains on equity securities in the consolidated statements of operations.
Included in equity investments are preferred shares of a community development financial institution, which are carried at their fair market value. As no ready market exists for this investment, the Company utilizes significant unobservable inputs (Level 3 inputs) to determine fair value. We record the unrealized gains and losses resulting from changes in the fair value of this investment as net gains or losses on investment securities in our consolidated statements of operations.
Also included in equity investments are the Company’s investments in a Volcker Rule-compliant Small Business Investment Company (SBIC) and an investment fund. The SBIC and investment fund meet the definition of investment companies, as defined in ASC 946, Financial Services - Investment Companies. These investments seek returns by investing in various small businesses and do not have redemption rights. Distributions from the investments will be received as the underlying investments, which generally have a life of 10 years, are liquidated or earlier distributions are made. We elected the practical expedient available in Topic 820, Fair Value Measurements, which permits the use of net asset value ("NAV") per share or equivalent to value investments in entities that are or are similar to investment companies. SBICs and investment funds report their investments at estimated fair value. We record the unrealized gains and losses resulting from changes in the fair value of these investments as gains or losses on equity securities in our consolidated statements of operations. The carrying value of these investments is equal to the capital account balance as provided by the investee and adjusted as necessary.
Other investments - As a member of the Federal Reserve Bank (“FRB”) System and the Federal Home Loan Bank (“FHLB”) System, the Bank is required to maintain an investment in the capital stock of these entities. These securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other exchange traded equity securities. As no ready market exists for these stocks, and they have no quoted
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market value, these investments are carried at cost and periodically evaluated for impairment based on the ultimate recovery of par value. Cash dividends are reported as interest on investments in the consolidated statement of operations.
Also included in other investments is stock of our correspondent bank, Bankers’ Bank, without readily determinable fair value. This stock is carried at cost plus or minus changes resulting from observable price changes in orderly transactions for this stock, less impairment charges, if any.
Management’s evaluation for impairment of these other investments includes consideration of the financial condition and other available relevant information of the issuer. Based on management’s quarterly evaluation, no impairment has been recorded on these securities. Other investments totaling $12,500 at December 31, 2024, consisted of $3,865 of FHLB stock, $5,717 of Federal Reserve Bank stock and $2,918 of Bankers’ Bank stock. Other investments totaling $15,725 at December 31, 2023, consisted of $7,302 of FHLB stock, $5,699 of Federal Reserve Bank stock and $2,724 of Bankers’ Bank stock.
Loans receivable – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs. Interest income is accrued on the unpaid principal balance of these loans and is presented as a separate line item on the consolidated balance sheets. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the interest method over the contractual life of the loan with no prepayments assumed. If the loan is prepaid, any unamortized net fee is recognized at that time. Late charge fees are recognized into income when collected.
Interest income on commercial, mortgage and consumer loans 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 end 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.
Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for a loan placed on nonaccrual status is reversed against interest income. Interest received on such loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual status. Loans are returned to accrual status when the collectability of principal and interest is probable including when payments are made that bring the loan account current with the contractual term of the loan and a six month payment history has been established.
Residential mortgage loans and open ended consumer installment loans are charged off to estimated net realizable value less estimated selling costs at the earlier of when (a) the loan is deemed by management to be uncollectible or a specific reserve is established, or (b) the loan becomes past due 180 days or more. Closed ended consumer installment loans are charged off to net realizable value at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 120 days or more. Commercial/agricultural real estate, commercial and industrial and agricultural operating loans are charged off to net realizable value at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 90 days or more.
Allowance for Credit Losses - Loans – The allowance for credit losses (“ACL”) on loans is a valuation allowance for current expected credit losses in the Company’s loan portfolio. Prior to January 1, 2023, the valuation allowance was established for probable and inherent credit losses. Loan losses are charged against the ACL when management believes that the collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the ACL. 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 relevant available 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 on loans 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
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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. For commercial/agricultural real estate loans, the loss rate is then combined with the loans balance and contractual maturity, adjusted for expected prepayments, to determine expected future losses. Future and supportable economic forecasts are based on national economic conditions and their reversion to the mean is implicit in the model and generally occurs over a period of two years. For commercial and industrial/agricultural operating, residential, and consumer loans, the loss rate is then combined with the loans balance and contractual maturity, to determine expected future losses.
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.