Citizens Community Bancorp Inc

Previous wording

Factors that could affect actual results or outcomes include the matters described under the caption “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 5, 2024 (“2023 10-K”), the matters described in “Risk Factors” in Item 1A of the quarterly reports on Form 10-Q for the quarter ended March 31, 2024, filed with the SEC on May 8, 2024; the matters described in “Risk Factors” in Item 1A of this Form 10-Q, and the following:

Current wording

Factors that could affect actual results or outcomes include the matters described under the caption “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 5, 2024 (“2023 10-K”), the matters described in “Risk Factors” in Item 1A of the quarterly reports on Form 10-Q for the quarter ended March 31, 2024, filed with the SEC on May 8, 2024; the matters described in “Risk Factors” in Item 1A of the quarterly reports on Form 10-Q for the quarter ended June 30, 2024, filed with the SEC on August 6, 2024; the matters described in “Risk Factors” in Item 1A of this Form 10-Q, and the following:

Previous wording

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of June 30, 2024, and our consolidated results of operations for the six months ended June 30, 2024, compared to the same period in the prior fiscal year for the six months ended June 30, 2023. This discussion should be read in conjunction with the interim consolidated financial statements and the condensed notes thereto included with this report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes related thereto included in our 2023 10-K. Unless otherwise stated, all monetary amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than share, per share and capital ratio amounts, are stated in thousands.

Current wording

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of September 30, 2024, and our consolidated results of operations for the three and nine months ended September 30, 2024, compared to the same periods in the prior fiscal year ended September 30, 2023. This discussion should be read in conjunction with the interim consolidated financial statements and the condensed notes thereto included with this report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes related thereto included in our 2023 10-K. Unless otherwise stated, all monetary amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than share, per share and capital ratio amounts, are stated in thousands.

Previous wording

The following is a summary of some of the significant factors that affected our operating results for the three and six months ended June 30, 2024, and June 30, 2023. Compared to second quarter 2023, second quarter 2024 net interest income decreased $0.1 million. The decrease was primarily due to the impact of higher short-term interest rates on the Bank’s liability-sensitive balance sheet, i.e., higher deposit costs, and customer account shifts to higher-cost certificates, along with increased borrowing costs which increased fifty eight-basis points partially offset by higher yields on assets, a decrease in lower yielding on-balance sheet assets included in liquidity to more normal levels, and $0.2 million recognized in curing technical defaults on performing loans.

Current wording

The following is a summary of some of the significant factors that affected our operating results for the three and nine months ended September 30, 2024, and September 30, 2023. Compared to third quarter 2023, third quarter 2024 net interest income decreased $0.8 million. The decrease was primarily due to the impact of higher short-term interest rates on the Bank’s liability-sensitive balance sheet, i.e., higher deposit costs, and customer account shifts to higher-cost certificates, partially offset by higher yields on assets, and a decrease in lower yielding on-balance sheet assets included in liquidity to more normal levels.

Previous wording

The total benefit, i.e., negative provision, for credit losses for the second quarter ended June 30, 2024,was $1.525 million compared to a provision for credit losses of $0.45 million for the quarter ended June 30, 2023. The second quarter of 2024 negative provision was due to decreases in ACL related to: (1) $0.6 million due to the impact of loan portfolio decreases and credit quality improvements; (2) $0.6 million due to improvements in the Moody’s economic scenario per our third-party provider; and (3) reductions in off-balance sheet reserves to fund commitments of $0.3 million. The second quarter and six months ended of 2023 provision for credit losses was largely due to loan growth.

Current wording

The total benefit, i.e., negative provision, for credit losses for the third quarter ended September 30, 2024,was $0.4 million compared to a negative provision for credit losses of $0.3 million for the quarter ended September 30, 2023. The third quarter of 2024 negative provision was due to decreases in ACL related to: (1) on-balance sheet ACL of $0.1 million; and (2) reductions in off-balance sheet reserves to fund commitments of $0.3 million. The third quarter ended September 30, 2023, negative provision for credit losses was primarily due to net recoveries on an agricultural credit and the impact of the payoff of two large loans.

Previous wording

Non-interest expenses increased $0.5 million in the second quarter of 2024 from $9.8 million in the second quarter of 2023. The increase was primarily related to $0.3 million of higher compensation expense due to both the impact of 2024 merit raises and higher incentive compensation, along with inflationary increases in and data processing costs.

Current wording

Non-interest expense increased $0.4 million in the third quarter of 2024 from $10.0 million in the third quarter of 2023. The increase was primarily related to higher compensation expense due to both the impact of 2024 merit increases and higher incentive compensation.

Previous wording

. Provision for income taxes decreased to $1.0 million in the second quarter of 2024, from $1.1 million in the second quarter of 2023, despite pre-tax income growth of $0.4 million due to a 3.4% decrease in the effective tax rate. The decrease in the effective tax rate is primarily due to the Wisconsin state budget, signed by Governor Evers on July 5, 2023, which provides financial institutions a tax exemption on income earned on Wisconsin commercial and agricultural loans up to $5 million retroactive to January 1, 2023, the impact of which began to be recognized in the third quarter of 2023.

Current wording

Provision for income taxes decreased to $0.9 million in the third quarter of 2024, from $2.5 million in the third quarter of 2023, primarily due to a decrease in the effective tax rate. The decrease in the effective tax rate is primarily due to the Wisconsin state budget, signed by Governor Evers on July 5, 2023, which provides financial institutions a tax exemption on income earned on Wisconsin commercial and agricultural loans up to $5 million retroactive to January 1, 2023, the impact of which began to be recognized in the third quarter of 2023. This change reduces the Company’s 2023 Wisconsin state income tax rate and thus, its overall effective tax rate. The third quarter ended September 30, 2023, reflects three quarters of the related 2023 tax benefit, retroactive to January 1, 2023, as a reduction of income tax expense. This positive impact was more than offset by a one-time tax expense of $1.8 million reflecting the impact of the lower 2023 Wisconsin state tax rate on the future realization of existing net deferred tax assets.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

Compared to 2023, for the six-month period ending June 30, 2024, net interest income decreased $1 million, primarily due to the impact of higher short-term interest rates on the Bank’s liability-sensitive balance sheet, i.e., higher deposit costs, and customer account shifts to higher-cost certificates, along with increased borrowing costs, partially offset by higher yields on assets. The Company’s cost of interest-bearing liabilities increased from 2.31% for the six months ended June 30, 2023, to 3.14% for the same period in 2024. This decrease was partially offset by higher interest income on interest earning assets of $4.7 million primarily due to the impact of higher interest rates and 0.4 million of loss recognized as a result of an exchange of senior debt to preferred equity.

Current wording

Compared to 2023, for the nine-month period ended September 30, 2024, net interest income decreased $1.8 million, primarily due to the impact of higher short-term interest rates on the Bank’s liability-sensitive balance sheet, i.e., higher deposit costs, and customer account shifts to higher-cost certificates, partially offset by higher yields on assets. The Company’s interest-bearing liabilities increased from 2.46% for the nine months ended September 30, 2023, to 3.18% for the same period in 2024. This increase in interest-bearing liabilities cost was partially offset by higher interest income on interest earning assets of $5.4 million primarily due to the impact of higher interest rates.

Previous wording

For the six months ended June 30, 2024, the total benefit, i.e., negative provision, for credit losses for the was $2.325 million compared to a provision for credit losses of $0.5 million for the six months ended June 30, 2023. For the six months ended June 30, 2024, the negative provision was due to decreases in ACL related to: (1) $0.9 million due to the impact of loan portfolio decreases and credit quality improvements; (2) $0.6 million due to improvements in the Moody’s economic scenario per our third-party provider; (3) reductions in off-balance sheet reserves to fund commitments of $0.6 million; (4) 1st quarter 2024 a decrease in the allowance for credit losses on individually evaluated loans of $0.5 million; and (5) net loan recoveries.

Current wording

The total benefit, i.e., negative provision, for credit losses was $2.725 million for the nine months ended September 30, 2024, compared to a provision for credit losses of $0.175 million for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, the negative provision was due to decreases in ACL related to: (1) the $0.9 million impact of loan portfolio decreases and credit quality improvements; (2) $0.6 million due to improvements in the Moody’s economic scenario per our third-party provider; (3) reductions in off-balance sheet reserves to fund commitments of $0.9 million; (4) a decrease in the allowance for credit losses on individually evaluated loans of $0.5 million largely in the first quarter; and (5) net loan recoveries. The provision for credit losses for the nine months ended September 30, 2023, was $0.175 million, primarily due to growth in the loan portfolio, partially offset by the impact of net recoveries of $0.187 million, reductions in reserves on individually evaluated loans, and third quarter loan payoffs.

Previous wording

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.

Current wording

Our determination of the allowance for credit losses - loans is based on: (1) an individual allowance for specifically identified and evaluated loans that management has determined have unique risk characteristics. For these loans, the estimated loss is based on likelihood of default, payment history, and net realizable value of underlying collateral. Allowance for credit losses for collateral dependent loans are based on the fair value of the underlying collateral relative to the amortized cost of the loans. For loans that are not collateral dependent, the allowance for credit losses is based on the present value of expected future cash flows discounted at the loan’s original effective interest rate through the repayment period; and (2) a collective allowance for loans not specifically identified in (1) above. The allowance for these loans is estimated by pooling loans with a similar risk profile and calculating a collective loss rate using the pool’s risk drivers, historical loss experience, and reasonable and supportable future economic forecasts to project lifetime losses. This collectively estimated loss is adjusted for qualitative factors.

Previous wording

Interest rate spread and net interest margin are used to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest earning assets and the rate paid for interest-bearing liabilities that fund those assets. Net interest margin is expressed as the percentage of net interest income to average interest earning assets. Net interest margin currently exceeds interest rate spread because non-interest-bearing sources of funds (“net free funds”), principally demand deposits and stockholders’ equity, also support interest earning assets. The narrative below discusses net interest income, and net interest margin for the three-month and six-month periods ended June 30, 2024, and June 30, 2023, respectively.

Current wording

Interest rate spread and net interest margin are used to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest earning assets and the rate paid for interest-bearing liabilities that fund those assets. Net interest margin is expressed as the percentage of net interest income to average interest earning assets. Net interest margin currently exceeds interest rate spread because non-interest-bearing sources of funds (“net free funds”), principally demand deposits and stockholders’ equity, also support interest earning assets. The narrative below discusses net interest income, and net interest margin for the three-month and nine-month periods ended September 30, 2024, and September 30, 2023, respectively.

Previous wording

The net interest margin for the three-month period ended June 30, 2024, was flat at 2.72%, compared to 2.72% for the three-month period ended June 30, 2023. The net interest margin was due to higher deposit costs due to higher market interest rates and customers moving from lower cost savings and money market accounts to higher yielding certificate accounts and the impact of higher short-term interest rates which increased FHLB advance and other borrowing costs. This was offset by: (1) increases in loan and investment yields due to contractual repricing; (2) rates on new loans and investments exceeding the portfolio as a whole; and (3) a five-basis point increase in yield due to income recognized on curing technical defaults on performing loans.

Current wording

Net interest income was $11.3 million for the three months ended September 30, 2024, compared to $12.1 million for the three months ended September 30, 2023. Interest income for the three months ended September 30, 2024, decreased from the same period one year ago due to higher net interest-bearing deposit balances and costs. This was partially offset by increases in asset yields due to (1) contractual repricing and higher coupons on new loans; and (2) principal reductions in low-yielding investments. The net interest margin for the three-month period ended September 30, 2024, decreased to 2.63%, compared to 2.79%, for the three-month period ended September 30, 2023. The lower net interest margin was due to higher deposit costs attributable to higher market interest rates and customers moving from lower cost savings and money market accounts to higher yielding certificate accounts; and the impact of higher short-term interest rates which increased FHLB advance and other borrowing costs. This was partially offset by increases in loan yields due to contractual repricing and rates on new loans exceeding the portfolio as a whole.

Previous wording

Net interest income was $23.5 million for the six months ended June 30, 2024, compared to $24.5 million for the six months ended June 30, 2023. Interest income for the six months ended June 30, decreased from the same period one year ago due to higher net interest-bearing balances and costs, which increased 83 basis points. This was partially offset by: (1) positive loan volume variance due to growth in loans outstanding; (2) increases in loan and investment yields due to: (a) contractual repricing and higher coupons on new loans; (b) investments in excess of portfolio yield; and (c) one-time income of $0.4 million recognized on nonaccrual payoffs and $0.4 million recognized from curing technical defaults on performing loans.

Current wording

Net interest income was $34.8 million for the nine months ended September 30, 2024, compared to $36.6 million for the nine months ended September 30, 2023. Net interest income for the nine months ended September 30, 2024, decreased from the same period one year ago, due to higher interest-bearing balances and costs, which increased 72 basis points. This was partially offset by: (1) positive loan volume variance due to growth in loans outstanding; (2) increases in loan and investment yields due to: (a) contractual repricing and higher coupons on new loans; (b) principal reductions in low-yielding investments; and (c) one-time income in the first and second quarters of $0.4 million recognized on nonaccrual payoffs and $0.4 million recognized from curing technical defaults on performing loans.

Previous wording

The net interest margin for the six-month period ended June 30, 2024, was 2.75%, compared to 2.88%, the six-month period ended June 30, 2023. The decreased net interest margin was due to: (1) higher liability costs of 83 basis points, due to higher market interest rates; (2) customers moving balances from lower cost savings and money market accounts to higher yielding certificate accounts, increasing deposit costs; and (3) the impact of higher short-term interest rates which increased FHLB advance and other borrowing costs. This was partially offset by: (1) increases in loan and investment yields due to contractual repricing; (2) rates on new loans and investments exceeding the portfolio as a whole; and (3) a nine-basis point increase in yield due to income recognized on nonaccrual loan payoffs and curing technical defaults on performing loans.

Current wording

The net interest margin for the nine-month period ended September 30, 2024, was 2.71%, compared to 2.85%, for the nine-month period ended September 30, 2023. The decreased net interest margin was due to: (1) higher liability costs due to higher market interest rates; (2) customers moving balances from lower cost savings and money market accounts to higher yielding certificate accounts, increasing deposit costs; and (3) the impact of higher short-term interest rates which increased FHLB advance and other borrowing costs. This was partially offset by: (1) increases in loan yields due to contractual repricing; (2) rates on new loans exceeding the portfolio as a whole; and (3) a six-basis point increase in yield due to income recognized on nonaccrual loan payoffs and curing technical defaults on performing loans in the first and second quarter; and 4) principal reductions in low-yielding investments

Previous wording

Rate/Volume Analysis. The following tables present the dollar amount of changes in interest income and interest expense for the components of interest earning assets and interest-bearing liabilities that are presented in the preceding table. For each category of interest earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in volume, which are changes in the average outstanding balances multiplied by the prior period rate (i.e., holding the initial rate constant); and (2) changes in rate, which are changes in average interest rates multiplied by the prior period volume (i.e., holding the initial balance constant). Rate changes have been discussed previously in the net interest income section above. For the three and six-month periods ended June 30, 2024, compared to the same periods in 2023, the loan volume increased due to organic growth. The increase in deposit volume is due to: (1) increased certificate volumes due to CD growth, some as a result of movement from non-maturity deposits and, to a lesser extent, brokered CD growth; and (2) growth in money market accounts due to organic growth. Investment securities volume decreases for the three months ended June 30, 2024, compared to the three months ended June 30, 2023 are primarily due to: (1) principal repayments; and (2) unrealized losses in the available-for-sale securities portfolio.

Current wording

Rate/Volume Analysis. The following tables present the dollar amount of changes in interest income and interest expense for the components of interest earning assets and interest-bearing liabilities that are presented in the preceding table. For each category of interest earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in volume, which are changes in the average outstanding balances multiplied by the prior period rate (i.e., holding the initial rate constant); and (2) changes in rate, which are changes in average interest rates multiplied by the prior period volume (i.e., holding the initial balance constant). Rate changes have been discussed previously in the net interest income section above. For the three month period ended September 30, 2024, compared to the same period in 2023, average earning assets decreased modestly due to net principal repayments on available for sale (“AFS”) and held-to-maturity (“HTM”) security portfolios and a less than 1% decline in loan balances. Average interest-bearing liabilities saw customer preferences leading to growth in money market and certificate accounts, with the growth in deposits funding a decrease in FHLB advances. For the nine-month period ended September 30, 2024, compared to the same period in 2023, loan volume increases due to organic growth, primarily in late 2023 and early 2024, more than offset a reduction in low-yielding AFS and HTM securities. For the nine-month period ended September 30, 2024, the volume change in interest-bearing liabilities are similar to the three months ended September 30, 2024, explanation.

Previous wording

Total benefit, i.e., negative provision, for credit losses for the second quarter ended June 30, 2024,was $1.525 million compared to a provision for credit losses of $0.45 million for the quarter ended June 30, 2023. The second quarter of 2024 negative provision was due to decreases in ACL related to: (1) $0.6 million due to the impact of loan portfolio decreases and credit quality improvements; (2) $0.6 million due to improvements in the economic scenario per our third-party provider; and (3) reductions in off-balance sheet reserves to fund commitments of $0.3 million. The second quarter and six months ended June 30, 2023, provision for credit losses was largely due to loan growth.

Current wording

The total benefit, i.e., negative provision, for credit losses for the third quarter ended September 30, 2024,was $0.4 million compared to a negative provision for credit losses of $0.3 million for the quarter ended September 30, 2023. The third quarter of 2024 negative provision was due to decreases in ACL related to: (1) on-balance sheet ACL of $0.1 million; and (2) reductions in off-balance sheet reserves to fund commitments of $0.3 million. The third quarter ended September 30, 2023, negative provision for credit losses was primarily due to net recoveries on an agricultural credit and the impact of the payoff of two large loans.

Previous wording

The total benefit, i.e., negative provision, for credit losses was $2.325 million for the six months ended June 30, 2024, compared to a provision for credit losses of $0.5 million for the six months ended June 30, 2023. For the six months ended June 30, 2024, the negative provision was due to decreases in ACL related to: (1) the $0.9 million impact of loan portfolio decreases and credit quality improvements; (2) $0.6 million due to improvements in the Moody’s economic scenario per our third-party provider; (3) reductions in off-balance sheet reserves to fund commitments of $0.6 million; (4) 1st quarter 2024 a decrease in the allowance for credit losses on individually evaluated loans of $0.5 million; and (5) net loan recoveries.

Current wording

The total benefit, i.e., negative provision, for credit losses was $2.725 million for the nine months ended September 30, 2024, compared to a provision for credit losses of $0.175 million for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, the negative provision was due to decreases in ACL related to: (1) the $0.9 million impact of loan portfolio decreases and credit quality improvements; (2) $0.6 million due to improvements in the Moody’s economic scenario per our third-party provider; (3) reductions in off-balance sheet reserves to fund commitments of $0.9 million; (4) a decrease in the allowance for credit losses on individually evaluated loans of $0.5 million largely in the first quarter; and (5) net loan recoveries. The provision for credit losses for the nine months ended September 30, 2023, was $0.175 million, primarily the result of growth in the loan portfolio, partially offset by the impact of net recoveries of $0.187 million, reductions in reserves on individually evaluated loans and third quarter 2023 loan payoffs.

Previous wording

Continued strong economic conditions in our markets, as evidenced by unemployment rates below the national average in our two largest population centers, have resulted in positive overall economic trends for businesses. The impact of higher interest rates and the impact of an inverted yield forecast are factors that the third-party model of economic conditions used computing the ACL level.

Current wording

Continued strong economic conditions in our markets, as evidenced by unemployment rates below the national average in our two largest population centers, have resulted in positive overall economic trends for businesses. The impact of higher interest rates and the impact of an inverted yield forecast are factors that the third-party model used for economic conditions in computing the ACL level.

Previous wording

Management believes that the provision recorded for the current year’s three and six-month periods is adequate in view of the present condition of our loan portfolio and the sufficiency of collateral supporting our non-performing loans. We continually monitor non-performing loan relationships and will adjust our provision, as necessary, if changing facts and circumstances require a change in the ACL. 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.

Current wording

Management believes that the provision recorded for the current year’s three- and nine-month periods is adequate in view of the present condition of our loan portfolio and the sufficiency of collateral supporting our non-performing loans. We continually monitor non-performing loan relationships and will adjust our provision, as necessary, if changing facts and circumstances require a change in the ACL. In addition, a decline in the quality of our loan portfolio as a result of general economic conditions, factors affecting particular borrowers or our market areas, or otherwise, could all affect the adequacy of our ACL. If there are significant charge-offs against the ACL, or we otherwise determine that the ACL is inadequate, we will need to record an additional provision in the future.

Previous wording

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

Current wording

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

Previous wording

Gain on sale of loans decreased in the three-month period ended June 30, 2024, compared to the three-month period ended June 30, 2023, primarily due to lower gains on SBA loan sales. For the six-month periods ending June 30, 2024, and 2023, loan sale gains increased due to higher first quarter 2024 SBA gain on sale.

Current wording

Gain on sale of loans increased in the three-month period ended September 30, 2024, compared to the three-month period ended September 30, 2023, with the increase approximately 80% attributable to higher gains on SBA loan sales and the remainder due to residential gains on sale of loans. For the nine-month periods ending September 30, 2024, and 2023, gain on sale of loans increased approximately 60% due to higher SBA gains on sale of loans and approximately 40% due to higher residential gains on sale of loans.

Previous wording

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

Current wording

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

Previous wording

The change in net (losses) gains on investment securities between the three-month period ended June 30, 2024, and the three-month period ended June 30, 2023, is primarily the result of the $0.4 million loss recognized as a result of an exchange of senior debt for preferred equity of a community development financial institution. See Investment Securities for more detail. In addition, there were other equity mark-to-market losses in the second quarter of 2024. For the six-month period ended June 30, 2024, from the same period in 2023, the change is due to the second quarter 2024 losses, partially offset by gains recognized in the first quarter of 2024 due to increased valuations of equity securities.

Current wording

The decrease in net (losses) gains on equity securities between the three-month period ended September 30, 2024, and the three-month period ended September 30, 2023, is primarily the result of equity mark-to-market losses in the third quarter of 2024, and mark-to-market gains in the third quarter of 2023. The decrease in net (losses) gains on equity securities between the nine-month period ended September 30, 2024, and the nine-month period ended September 30, 2023, is primarily the result of the $0.4 million loss recognized as a result of an exchange of senior debt for preferred equity of a community development financial institution in the second quarter of 2024. See Investment Securities for more details. In addition, there were other equity mark-to-market losses in the second and third quarters of 2024.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

Data processing for the three and six months ended June 30, 2024, increased from the same 2023 periods, largely due to inflationary pressures and the impact of new software implementation costs to aid in future efficiency efforts.

Current wording

Data processing for the three and nine months ended September 30, 2024, increased from the same 2023 periods, largely due to inflationary pressures and the impact of new software implementation costs to aid in future efficiency efforts.

Previous wording

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

Current wording

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

Previous wording

The increase in other non-interest expense during the three and six months ended June 30, 2024, from the comparable prior year period is largely due to: 1) the establishment of an SBA valuation reserve of $0.4 million in the first quarter of 2024, and 2) the second quarter 2024 write down of the remaining lease asset of a closed branch of $0.2 million, partially offset by selected one-time expense recoveries of $0.1 million.

Current wording

The increase in other non-interest expense for the nine months ended September 30, 2024, from the comparable prior year period is largely due to: 1) the establishment of an SBA valuation reserve of $0.4 million in the first quarter of 2024, and 2) the second quarter 2024 write down of the remaining lease asset of a closed branch of $0.2 million, partially offset by selected one-time expense recoveries of $0.1 million.

Previous wording

Income Taxes. Provision for income taxes decreased to $1.0 million in the second quarter of 2024 from $1.1 million in the second quarter of 2023, despite a corresponding increase in pre-tax income of $0.4 million due to a lower effective tax rate. Provision for income taxes for the six-month period ending June 30, 2024, decreased $0.21 million, to $2.1 million, compared to $2.4 million for the six-month period ended June 30, 2023, as pre-tax income increased $0.688 million. The decrease in the effective tax rate in 2024 is primarily due to the Wisconsin state budget, signed by Governor Evers on July 5, 2023, which provides financial institutions a tax exemption on income earned on Wisconsin commercial and agricultural loans up to $5 million retroactive to January 1, 2023, the impact of which began to be recognized in the third quarter of 2023.

Current wording

Income Taxes. Provision for income taxes decreased to $0.9 million in the third quarter of 2024 from $2.5 million in the third quarter of 2023. Provision for income taxes for the nine-month period ending September 30, 2024, decreased $1.9 million, to $3.0 million, compared to $4.9 million for the nine-month period ended September 30, 2023, as pre-tax income decreased $0.169 million. The decrease in the effective tax rate in 2024 is primarily due to the Wisconsin state budget, signed by Governor Evers on July 5, 2023, which provides financial institutions a tax exemption on income earned on Wisconsin commercial and agricultural loans up to $5 million retroactive to January 1, 2023. This change reduces the Company’s 2023 Wisconsin state income tax rate and thus, its overall effective tax rate. The third quarter ended September 30, 2023, reflects three quarters of the related 2023 tax benefit, retroactive to January 1, 2023, as a reduction of income tax expense. This positive impact was more than offset by a one-time tax expense of $1.8 million reflecting the impact of the lower 2023 Wisconsin state tax rate on the future realization of existing net deferred tax assets.

Previous wording

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

Current wording

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

Previous wording

Investment Securities. We manage our securities portfolio to provide liquidity, modify interest rate risk and enhance income. Our investment portfolio is comprised of securities available for sale and securities held to maturity. Securities available for sale decreased $9.3 million during the six months ended June 30, 2024, to $146.4 million from $155.7 million at December 31, 2023. Along with principal repayments and changes in fair value, there was an exchange of a community development financial institution’s senior debt for a preferred equity security in the company’s operating subsidiary of $2.25 million, resulting in a decrease in AFS securities and an increase in equity securities. The senior debt to preferred equity exchange resulted in recognition of a $0.4 million loss, reflected in net losses on investment securities on the consolidated statement of operations, and a $0.168 million reduction of unrealized losses in accumulated other comprehensive loss on the consolidated balance sheet at June 30, 2024.

Current wording

Investment Securities. We manage our securities portfolio to provide liquidity, modify interest rate risk and enhance income. Our investment portfolio is comprised of securities available for sale and securities held to maturity. Securities available for sale decreased $6.3 million during the nine months ended September 30, 2024, to $149.4 million from $155.7 million at December 31, 2023. Along with principal repayments and changes in fair value, there was an exchange of a community development financial institution’s senior debt for a preferred equity security in the company’s operating subsidiary of $2.25 million, resulting in a decrease in AFS securities and an increase in equity securities during the second quarter of 2024. The exchange resulted in the recognition of $0.168 million of unrealized losses on available-for-sale securities, previously included in other comprehensive income, as well as an additional $0.270 million loss, for a total loss of $0.438 million. This total loss of $0.438 million was recognized on the June 30, 2024, consolidated statement of operations as net losses on equity securities.

Previous wording

Securities held to maturity decreased $2.6 million to $88.6 million during the six-month period ended June 30, 2024, from $91.2 million at December 31, 2023, due to principal repayments.

Current wording

Securities held to maturity decreased $4.2 million to $87.0 million during the nine-month period ended September 30, 2024, from $91.2 million at December 31, 2023, due to principal repayments.

Previous wording

At June 30, 2024, the Bank has pledged certain of its mortgage-backed securities with a carrying value of $28.5 million as collateral to secure a line of credit with the Federal Reserve Bank. As of June 30, 2024, there were no borrowings outstanding on this Federal Reserve Bank line of credit. As of June 30, 2024, the Bank has pledged certain of its U.S. Government Agency securities with a carrying value of $0.4 million and mortgage-backed securities with a carrying value of $1.8 million as collateral against specific municipal deposits. As of June 30, 2024, the Bank also has mortgage-back securities with a carrying value of $0.1 million and U.S. Government Agencies with a carrying value of $0.4 million pledged as collateral to the Federal Home Loan Bank of Des Moines.

Current wording

At September 30, 2024, the Bank has pledged certain of its mortgage-backed securities with a carrying value of $34.7 million as collateral to secure a line of credit with the Federal Reserve Bank. As of September 30, 2024, there were no borrowings outstanding on this Federal Reserve Bank line of credit. As of September 30, 2024, the Bank has pledged certain of its U.S. Government Agency securities with a carrying value of $0.4 million and mortgage-backed securities with a carrying value of $1.8 million as collateral against specific municipal deposits. As of September 30, 2024, the Bank also has mortgage-backed securities with a carrying value of $0.1 million pledged as collateral to the Federal Home Loan Bank of Des Moines.

Previous wording

Loans. Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, decreased by $32.2 million, to $1.43 billion as of June 30, 2024, from $1.46 billion at December 31, 2023. The following table reflects the composition, of our loan portfolio at June 30, 2024, and December 31, 2023:

Current wording

Loans. Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, decreased by $36.0 million, to $1.42 billion as of September 30, 2024, from $1.46 billion at December 31, 2023. The following table reflects the composition, of our loan portfolio at September 30, 2024, and December 31, 2023:

Previous wording

The determination of the ACL requires significant judgement to estimate credit losses. The ACL is measured collectively on a pooled basis when similar risk characteristics exist, and on an individual basis when management determines that the loan does not share similar risk characteristics with other loans. The ACL on loans collectively evaluated is measured using the loss rate model. The Company categorizes its loan portfolio into four segments based on similar risk characteristics. Loans within each segment are pooled based on individual loan characteristics. Aggregated risk drivers are then calculated at a pool level. Risk drivers are identified attributes that have proven to be predictive of loan loss rates and vary based on loan segment and type. A loss rate is calculated and applied to the pool utilizing a model that combines the pool’s risk drivers, historical loss experience, and reasonable and supportable future economic forecasts to project lifetime losses. The loss rate is then combined with the loan’s balance and contractual maturity, adjusted for expected prepayments, to determine expected future losses. 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.

Current wording

The determination of the ACL requires significant judgement to estimate credit losses. The ACL is measured collectively on a pooled basis when similar risk characteristics exist, and on an individual basis when management determines that the loan does not share similar risk characteristics with other loans. The ACL on loans collectively evaluated is measured using the loss rate model. The Company categorizes its loan portfolio into four segments based on similar risk characteristics. Loans within each segment are pooled based on individual loan characteristics. Aggregated risk drivers are then calculated at a pool level. Risk drivers are identified attributes that have proven to be predictive of loan loss rates and vary based on loan segment and type. A loss rate is calculated and applied to the pool utilizing a model that combines the pool’s risk drivers, historical loss experience, and reasonable and supportable future economic forecasts to project lifetime losses. The loss rate is then combined with the loan’s balance and contractual maturity, adjusted for expected prepayments, to determine expected future losses.

Previous wording

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

Current wording

In addition to the ACL - Loans, the Company has established an ACL - Unfunded Commitments of $0.46 million at September 30, 2024, and $1.25 million at December 31, 2023, classified in other liabilities on the consolidated balance sheets.

Previous wording

Nonperforming assets were $10.3 million at June 30, 2024, compared to $15.4 million at December 31, 2023. Nonperforming assets decreased primarily due to nonperforming loan payoffs of $5.4 million during the first quarter of 2024.

Current wording

Nonperforming assets were $17.1 million at September 30, 2024, compared to $15.4 million at December 31, 2023. Nonperforming assets increased largely due to one agricultural real estate loan relationship in forestry services that moved from special mention to substandard and was placed on nonaccrual in the third quarter. This increase was offset by nonperforming loan payoffs of $5.4 million during the first quarter of 2024.

Previous wording

The table below shows a summary of criticized loans, split by special mention and substandard for the past five quarters. Since June 30, 2023, special mention credit loan decreased in each quarter. In the first and second quarters of 2024, this was due to loan payoffs. Substandard loans have decreased significantly since June 30, 2023, largely due to first quarter 2024 payoffs of nonaccrual loans, which were also categorized as substandard, and the $3 million decrease in 3Q 2023, partially offset by a new loan relationship, adding $3.7 million to substandard loans in the fourth quarter of 2023.

Current wording

The table below shows a summary of criticized loans, split by special mention and substandard for the past five quarters. From September 30, 2023 through June 30, 2024, special mention credit loans decreased in each quarter. In the first and second quarters of 2024, this was due to loan payoffs. Special mention loans increased by $2.2 million to $11.0 million at September 30, 2024, compared to $8.8 million at June 30, 2024. The increase was largely due to one loan of $8.7 million, which is secured by a multi-family unit. The addition of the multi-family unit to special mention was partially offset by the movement of a $7.7 million agricultural real estate loan relationship in forestry services that moved to substandard and was placed on nonaccrual.