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Item 8. Financial Statements and Supplementary Data

2021-03-08 compared with 2020-03-10 · 785 added, 838 removed, 1044 unchanged (61% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT BY CITIZENS COMMUNITY BANCORP, INC.’S MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining an effective system of internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934.

The Company’s system of internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

There are inherent limitations in the effectiveness of any system of internal controls over financial reporting, including the possibility of human error and circumvention or overriding controls.

Accordingly, even an effective system of internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation.

Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

The Company completed its acquisition of F&M on July 1, 2019.

As permitted by the SEC rules and regulations, management's assessment did not include the internal controls of the acquired operations of F&M, which are reflected in our consolidated financial statements as of December 31, 2019, and for the period from the acquisition date through December 31, 2019.

In accordance with our integration efforts, we plan to incorporate F&M operations into our internal control over financial reporting structure within the time frame provided by applicable SEC rules and regulations.

The assets of F&M, excluding related goodwill, constituted less than 13% of our total consolidated assets, and revenue of F&M constituted less than 12% of consolidated revenues, as of and for the year ended December 31, 2019.

Under the supervision of the Audit Committee and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the criteria in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

Based upon that evaluation, which excluded an assessment of the internal controls of the acquired operations of F&M, management believes that as of December 31, 2019, the Company maintained effective internal control over financial reporting based on those criteria.

Baker Tilly Virchow Krause, LLP, the independent registered public accounting firm who also has audited the Company’s consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting, which is included on pages 59 - 60 of Item 8.

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 sheet of Citizens Community Bancorp, Inc.

and Subsidiary (the Company) as of December 31, 2020, 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 consolidated financial position of the Company as of December 31, 2020, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with auditing standards generally accepted in the United States of America, the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 8, 2021 expressed an unmodified opinion.

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 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 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 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.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments.

The communication of critical audit matters 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 matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses

As discussed in Notes 1 and 4 to the Company’s consolidated financial statements, the Company has a gross loan portfolio of $1.2 billion and related allowance for loan losses of $17.0 million as of December 31, 2020.

The Company’s allowance for loan losses is a material and complex estimate requiring significant management’s judgment in the evaluation of the credit quality and the estimation of inherent losses within the loan portfolio.

The allowance for loan losses includes a general reserve which is determined based on the results of a quantitative and a qualitative analysis of all loans not measured for impairment at the reporting date.

The Company’s general reserves cover non-impaired loans and is based on historical loss rates and qualitative loss factors for each portfolio.

In calculating the allowance for loan losses, the Company considers relevant credit quality indicators for each loan segment, and estimates losses for each loan type based upon their nature and risk profile.

This process requires significant management judgment in the review of the loan portfolio and assignment of risk ratings based upon the characteristics of loans.

In addition, estimation of losses inherent within the portfolio requires significant management judgment, particularly where the Company has not incurred sufficient historical losses and has utilized industry data in forming its estimate.

Auditing these complex judgments and assumptions involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed.

The primary procedures we performed to address this critical audit matter included:

• Testing the effectiveness of controls over the evaluation of the general reserve qualitative adjustments.

Testing the design and operating effectiveness of controls relating to management’s timely identification of problem loans, appropriate application of loan rating policy, consistency of application of accounting policies and appropriateness of assumptions used in the allowance for loan losses calculation.

• Evaluating the reasonableness of assumptions and reasonableness, accuracy, and completeness of data used by management in forming the loss factors by performing retrospective review of historic loan loss experience and analyzing historical data used in developing the assumptions.

• Evaluating the appropriateness of inputs and factors that the Company used in forming the qualitative loss factors and assessing whether such inputs and factors were relevant, reliable, and reasonable for the purpose used.

• Testing the mathematical accuracy and computation of the allowance for loan losses.

• Evaluated the period to period consistency with which qualitative loss factors are determined and applied.

Evaluate the qualitative adjustments year over year for directional consistency and testing the reasonableness, including the qualitative adjustments attributed to the estimated impact of the COVID-19 pandemic on the Company’s loan portfolio.

Goodwill Impairment Evaluation

As described in Notes 1 and 7 to the consolidated financial statements, the Company’s consolidated goodwill balance was $31,498,000 at December 31, 2020, which is allocated to the Company’s single reporting unit.

Goodwill is tested for impairment at the reporting unit level at least annually, or more frequently whenever events or circumstances occur that indicate that it is more-likely-than-not that an impairment loss has occurred.

Management performed a quantitative assessment of goodwill for the Company’s single reporting unit utilizing estimates of selected market information (market approach).

The calculation of the goodwill impairment involves significant estimates and subjective assumptions which require a high degree of management judgment.

This judgment includes the identification of relevant market and transactions with comparable entities.

We identified the goodwill impairment assessment of the Company as a critical audit matter.

The principal considerations for this determination was the degree of auditor judgment in performing procedures to evaluate the appropriateness of the methodology used by management, including consideration of the significant assumptions and inputs, which includes relevant market and transactions with comparable entities.

The primary procedures we performed to address this critical audit matter included:

• Testing the operating effectiveness of controls over management’s goodwill impairment test including controls addressing:

◦ Management’s review of the reasonableness and accuracy of the Company’s market and transactions with comparable entities.

◦ Management’s review of the accuracy of estimates used to determine implied fair value.

• Substantively testing management’s estimate, including evaluating their judgements and assumptions, for estimating fair value of the Company which included:

◦ Evaluation of key financial data for accuracy, including corroborating the reasonableness and accuracy of the market and transactions with comparable entities.

◦ Utilization of firm employed valuation specialist to evaluate appropriateness of valuation methodologies and overall reasonableness of implied fair value.

/s/ Eide Bailly, LLP

We have served as the Company’s auditor since 2020.

Denver, Colorado

March 8, 2021

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and Subsidiary

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Citizens Community Bancorp, Inc.

and Subsidiary (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows for the year ended December 31, 2019, the three months transition period ended December 31, 2018, and the year ended September 30, 2018, and the related notes (collectively referred to as the "consolidated financial statements").

We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework:

(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the year ended December 31, 2019, the three months transition period ended December 31, 2018, and the year ended September 30, 2018, in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework:

(2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment of Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company's consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Citizens Community Bancorp, Inc.

and Subsidiary (the "Company") as of December 31, 2019, the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flow for the year then ended, and the related notes (collectively referred to as the "consolidated financial statements").

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flow for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

The consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company's consolidated 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 audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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 consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audits also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audits provide a reasonable basis for our opinions.

As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment of internal control over financial reporting F.

of Tomah, Inc .

(“F&M”), which was acquired on July 1, 2019, and whose financial statements constitute less than 13% of consolidated assets and less than 12% of consolidated revenues, as of and for the year ended December 31, 2019.

Accordingly, our audit did not include the internal control over financial reporting at F&M.

Emphasis of Matter

As discussed in Note 1 to the consolidated financial statements, the Company changed its fiscal year end from September 30 to December 31 in 2018.

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Baker Tilly Virchow Krause, LLP

We have served as the Company's auditor since 2010.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/s/ Baker Tilly US, LLP

We have served as the Company's auditor from 2010 to 2019.

Baker Tilly US, LLP (formerly known as Baker Tilly Virchow Krause, LLP)

Minneapolis, Minnesota

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(in thousands, except share data)

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Cash and cash equivalents $ 119,440 $ 55,840

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Loans held for sale 3,075 5,893

Mortgage servicing rights

Mortgage servicing rights, net 3,252 4,282

Office properties and equipment, net 21,165 21,106

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Intangible assets 5,494 7,587

Goodwill 31,498 31,498

Foreclosed and repossessed assets, net 197 1,460

Bank owned life insurance ("BOLI") 23,684 23,063

Other assets 8,416 5,757

TOTAL ASSETS $ 1,649,095 $ 1,531,249

Liabilities and Stockholders’ Equity

Federal Home Loan Bank advances

Deposits $ 1,295,256 $ 1,195,702

Federal Home Loan Bank ("FHLB") and Federal Reserve Bank ("FRB") advances 123,498 130,971

Other borrowings 58,328 43,560

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Unearned deferred compensation ( 550 ) ( 462 )

Accumulated other comprehensive loss

Accumulated other comprehensive income (loss) 1,490 ( 471 )

Total stockholders’ equity 160,564 150,553

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(in thousands, except per share data)

For the year ended December 31, 2019

For the transition period ended December 31, 2018

For the year ended September 30, 2018

For the year ended December 31, 2020 For the year ended December 31, 2019

Interest and dividend income:

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Interest on deposits 10,000 12,174

Interest on FHLB borrowed funds

Interest on FHLB and FRB borrowed funds 1,814 2,721

Interest on other borrowed funds 2,458 2,015

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Insurance commission income 475 734

Gains (losses) on available for sale securities

Gain on sale of branch

Net gains on investment securities 110 271

Net gain on sale of branch — 2,295

Net gain on sale of acquired business lines 432 —

Settlement proceeds 131 —

Other 1,205 1,291

Total non-interest income 18,448 14,975

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Compensation and related benefits 22,321 20,325

Occupancy 3,915 3,697

Office 2,152 2,188

Data processing 4,375 3,938

Amortization of intangible assets 1,622 1,496

Amortization of mortgage servicing rights

Mortgage servicing rights expense 3,050 1,108

Advertising, marketing and public relations 967 1,214

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Professional services 1,829 2,457

(Gains) losses on repossessed assets, net

Gain on repossessed assets, net ( 259 ) ( 125 )

Other 3,117 6,130

Total non-interest expense 43,673 42,686

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(in thousands)

For the year ended December 31, 2019

For the transition period ended, December 31, 2018

For the year ended September 30, 2018

For the year ended December 31, 2020 For the year ended December 31, 2019

Net income attributable to common stockholders $ 12,725 $ 9,463

Other comprehensive income (loss), net of tax:

Other comprehensive income, net of tax:

Securities available for sale

Net unrealized gains (losses) arising during period

Reclassification adjustment for net gains (losses) included in net income

Other comprehensive income (loss)

Net unrealized gains arising during period 2,074 1,219

Reclassification adjustment for net gains included in net income, net of tax ( 113 ) 196

Other comprehensive income 1,961 1,415

Comprehensive income $ 14,686 $ 10,878

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(in thousands, except Shares)

Preferred Stock

Additional Paid-In Capital

Retained Earnings

Unearned Deferred Compensation

Accumulated Other Comprehensive Income (Loss)

Total Stockholders’ Equity

Balance, September 30, 2017

Other comprehensive loss, net of tax

Reclassification of certain deferred tax effects (1)

Preferred stock issued (net of $3,735 of issuance costs)

Preferred stock converted to common stock

Common Stock Additional Paid-In Capital Retained Earnings Unearned Deferred Compensation Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity

Shares Amount

Balance, December 31, 2018 10,953,512 $ 109 $ 125,512 $ 15,264 $ ( 857 ) $ ( 1,841 ) $ 138,187

Net income — — — 9,463 — — 9,463

Other comprehensive income, net of tax — — — — — 1,415 1,415

Forfeiture of unvested shares ( 12,167 ) — ( 199 ) — 199 — —

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Restricted common stock awarded under the equity incentive plan 12,847 — 274 — ( 274 ) — —

Common stock repurchased

Common stock issued to F&M shareholders 288,999 3 3,102 — — — 3,105

Common stock options exercised 28,430 1 202 — — — 203

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Amortization of restricted stock — — — — 470 — 470

Adoption of ASU 2016-01;

Equity securities (1) — — — 45 — ( 45 ) —

Adoption of ASU 2016-02;

Leases — — — ( 57 ) — — ( 57 )

Cash dividends ($ 0.20 per share)

Balance, September 30, 2018

Other comprehensive income, net of tax

Surrender of restricted shares of common stock

Restricted Common stock awarded under the equity incentive plan

Common stock options exercised

Stock option expense

Amortization of restricted stock

— — — ( 2,198 ) — — ( 2,198 )

Balance, December 31, 2019 11,266,954 $ 113 $ 128,856 $ 22,517 $ ( 462 ) $ ( 471 ) $ 150,553

Net income — — — 12,725 — — 12,725

Other comprehensive income, net of tax — — — — — 1,961 1,961

Forfeiture of unvested shares

Unrealized performance-based restricted common stock awards — — ( 92 ) — 92 — —

Surrender of restricted shares of common stock ( 2,641 ) — ( 27 ) — — — ( 27 )

Restricted Common stock awarded under the equity incentive plan 45,507 — 710 — ( 710 ) — —

Common stock fractional share adjustment on acquisitions ( 40 ) — — — — — —

Common stock repurchased ( 253,431 ) ( 2 ) ( 2,757 ) ( 61 ) — — ( 2,820 )

Common stock issued to F&M shareholders

Common stock options exercised

Stock option expense — — 14 — — — 14

Amortization of restricted stock — — — — 530 — 530

Adoption of ASU 2016-01;

Equity securities (2)

Adoption of ASU 2016-02;

Cash dividends ($ 0.21 per share)

— — — ( 2,372 ) — — ( 2,372 )

Balance, December 31, 2020 11,056,349 $ 111 $ 126,704 $ 32,809 $ ( 550 ) $ 1,490 $ 160,564

(1) Amounts reclassified to retained earnings due to early adoption of ASU 2018-02.

See Note 15 - “Income Taxes” for additional information.

(1) Amount reclassified to retained earnings due to January 1, 2019 adoption of ASU 2016-02.

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(in thousands)

For the year ended December 31,

For the transition period ended December 31,

For the year ended September 30,

For the year ended December 31, 2020 For the year ended December 31, 2019

Cash flows from operating activities:

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Adjustments to reconcile net income to net cash provided by operating activities:

Net amortization of premium/accretion discount on investment securities

Premium amortization, net of discount accretion on investment securities 142 899

Depreciation expense 1,954 1,564

Provision for loan losses 7,750 3,525

Net realized (gain) loss on sale of securities

Increase in MSR assets resulting from transfers of financial assets

Amortization of MSR assets

Net realized loss (gain) on equity securities 46 —

Net realized gain on debt securities ( 156 ) —

Net realized loss on sale of securities — ( 271 )

Increase in mortgage servicing rights resulting from transfers of financial assets ( 2,020 ) ( 904 )

Mortgage servicing rights expense 3,050 1,108

Amortization of intangible assets 1,622 1,496

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Net stock based compensation expense 14 18

Loss on sale of office properties and equipment

Loss (gain) on sale of office properties and equipment 178 ( 32 )

Deferred income taxes ( 2,237 ) ( 752 )

Increase in cash surrender value of life insurance ( 621 ) ( 552 )

Net (gain) loss from disposals of foreclosed and repossessed assets

Net gain from disposals of foreclosed and repossessed assets ( 259 ) ( 125 )

Gain on sale of loans held for sale, net ( 6,693 ) ( 2,462 )

Net change in loans held for sale 9,511 ( 1,504 )

Decrease (increase) in accrued interest receivable and other assets

(Decrease) increase in other liabilities

(Increase) decrease in accrued interest receivable and other assets ( 2,080 ) 4,497

Increase (decrease) in other liabilities 581 ( 3,602 )

Net gain on sale of insurance agency ( 252 ) —

Total adjustments 11,060 3,373

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Cash flows from investing activities:

Net decrease in interest-bearing deposits

Net decrease in other interest bearing deposits 992 3,708

Purchase of available for sale securities ( 28,218 ) ( 53,915 )

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Net capital expenditures ( 2,573 ) ( 6,771 )

Net cash (disbursed) acquired in business combinations

Net cash disbursed in business combination — ( 8,137 )

Proceeds from disposal of office properties and equipment 382 300

Net proceeds from sale of insurance agency 1,128 —

Net cash used in investing activities ( 61,815 ) ( 63,333 )

Cash flows from financing activities:

Net increase (decrease) in Federal Home Loan Bank advances

Proceeds from other borrowings, net of debt issuance costs

Net (decrease) increase in short-term Federal Home Loan Bank advances ( 40,973 ) 1,036

Long-term Federal Home Loan Bank advances 66,500 —

Long-term Federal Home Loan Bank maturities ( 33,000 ) —

Amortization of debt issuance costs 91 —

Proceeds from other borrowings, net of origination costs 14,677 —

Proceeds from other borrowings to fund business combination, net of debt issuance costs — 29,913

Principal payment reduction to other borrowings — ( 11,000 )

Net increase (decrease) in deposits

Proceeds from private placement stock offering, net of issuance costs

Common stock issued to F&M shareholders less capitalized equity costs

Net increase in deposits 99,554 39,553

Common stock issued in F&M acquisition less capitalized equity costs — 3,105

Repurchase shares of common stock ( 2,820 ) —

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Net cash provided by financing activities 101,630 60,559

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents 63,600 10,062

Cash and cash equivalents at beginning of period 55,840 45,778

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Interest on borrowings $ 3,950 $ 5,128

Income taxes $ 7,870 $ 3,847

Supplemental noncash disclosure:

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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.

Wells Insurance Agency (“WIA”) is a wholly owned subsidiary of the Bank, providing insurance products to the Bank’s customers.

Wells Insurance Agency (“WIA”) was a wholly owned subsidiary of the Bank, providing insurance products to the Bank’s customers and was sold on June 30, 2020.

F&M Investment Corp.

of Tomah is a wholly owned subsidiary of the Bank that was formerly utilized by F&M to manage its municipal bond portfolio, and is currently in process of being dissolved.

of Tomah was a wholly owned subsidiary of the Bank that was formerly utilized by F&M to manage its municipal bond portfolio, and was dissolved in February 2020.

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 28 branch locations, including two branch locations acquired in the F.

of Tomah, Inc.

merger on July 1, 2019.

Its primary markets include the Chippewa Valley Region in Wisconsin, the Twin Cities and Mankato 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, as well as expanded services through Wells Insurance Agency, Inc.

On September 25, 2018, the Board of Directors of the Company adopted a resolution to change the Company’s fiscal year end from September 30 to December 31, commencing December 31, 2018.

In connection with this change, we previously filed a Transition Report on Form 10-K to report the results of the three month transition period from October 1, 2018 to December 31, 2018.

In this Annual Report, the periods presented are the fiscal year ended December 31, 2019 (which we sometimes refer to in this Annual Report as “fiscal 2019”), the three month transition period from October 1, 2018 to December 31, 2018 (which we sometimes refer to in this Annual Report as the “transition period”) and the year ended September 30, 2018 (which we sometimes refer to in this Annual Report as “fiscal 2018”).

On October 19, 2018, the Company completed its previously announced acquisition (the “Acquisition”) of United Bank.

See Note 2, “Acquisition” for additional information.

On December 3, 2018, the Bank entered into a Purchase and Assumption Agreement with Lake Michigan Credit Union providing for the sale of the Bank’s one branch located in Rochester Hills, MI.

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.

On May 17, 2019, the Company completed the sale of the Rochester Hills, MI branch for a deposit premium of 7 percent, or approximately $ 2.3 million gain, net of selling costs.

1 unchanged sentence

The Bank retained all loans associated with the branch.

On January 21, 2019, the Company and F&M Merger Sub, Inc., a newly formed Minnesota corporation and wholly-owned subsidiary of the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with F.

of Tomah, Inc., a Wisconsin corporation (“F&M”).

On July 1, 2019, the Company closed on the acquisition of F&M and completed the related data systems conversion on July 14, 2019.

See Note 2, “Acquisitions” for additional information.

On July 1, 2019 the Company completed its previously announced acquisition of F.

of Tomah, Inc.

(“F&M”) pursuant to the merger agreement.

In connection with the acquisition, the Company merged Farmers & Merchants Bank with and into the Bank, with the Bank surviving the merger See Note 2, “Acquisitions” for additional information.

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, 2019 through the date on which the consolidated financial statements were available to be issued for items that should potentially be recognized or disclosed in these consolidated financial statements.

Unless otherwise stated, all monetary amounts in these Notes to Consolidated Financial Statements, other than share, per share and capital ratio amounts, are stated in thousands.

In preparing these consolidated financial statements, we evaluated the events and transactions occurring subsequent to the balance sheet date of December 31, 2020 through the date on which the consolidated financial statements were available to be issued on March 8, 2021, for items that should potentially be recognized or disclosed in these consolidated financial statements.

Unless otherwise stated, all monetary amounts in these Notes to Consolidated Financial Statements, other than share, per share, capital and capital ratio amounts, are stated in thousands.

Principles of Consolidation – The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Citizens Community Federal N.A.

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those items described under the caption “Risk Factors” in Item 1A of the accompanying transition report on Form 10-K for the year ended December 31, 2020 and external market factors such as market interest rates and employment 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.

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.

Interest Bearing Deposits— Other interest bearing deposits are certificate of deposit investments made by the Bank with other financial institutions that are carried at cost.

The weighted average months to maturity of the interest bearing deposits is 9.67 months.

Balances over $ 250 in those institutions are not insured by the FDIC and therefore pose a potential risk in the event the institution were to fail.

As of December 31, 2020 and December 31, 2019, there were no certificate of deposit accounts with a balance greater than $ 250 .

Investment Securities;

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Farmer Mac equity securities are carried at their fair market value, which is readily determinable.

Changes in fair value are recognized as gains (losses) on investment securities in the consolidated Statement of Operations.

Changes in fair value are recognized as net gains (losses) on investment securities in the consolidated Statement of Operations.

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.

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As no ready market exists for these stocks, and they have no quoted 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 other income in the consolidated statement of operations.

Also included in non-marketable equity securities is stock in a private company without readily determinable fair value.

Cash dividends are reported as other non-interest income in the consolidated statement of operations.

Also included are non-marketable equity securities 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 other-than-temporary impairment charges, if any.

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Other investments totaling $ 14,948 at December 31, 2020 consisted of $ 8,103 of FHLB stock, $ 5,170 of Federal Reserve Bank stock and $ 1,675 of Bankers’ Bank stock.

Other investments totaling $11,261 at December 31, 2018 consisted of $6,893 of FHLB stock and $4,368 of Federal Reserve Bank stock.

Loans – 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 unearned interest, and net of deferred loan fees and costs, and non-accretable discount on purchased of credit impaired loans.

Interest income is accrued on the unpaid principal balance of these loans.

Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the interest method without anticipating prepayments.

Other investments totaling $ 15,005 at December 31, 2019 consisted of $ 8,196 of FHLB stock, $ 5,162 of Federal Reserve Bank stock, and $ 1,647 of Bankers’ Bank stock.

Loans – 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, accretable discounts on loans purchased, and non-accretable differences on purchased credit impaired (PCI) loans.

Interest income is accrued on the unpaid principal balance

of these loans.

Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the interest method with no prepayment assumptions.

Late charge fees are recognized into income when collected.

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• Commercial/agricultural real estate loans past due 90 days or more;

• Commercial/agricultural non-real estate loans past due 90 days or more;

• Closed ended consumer non-real estate loans past due 120 days or more;

• Residential real estate loans and open ended consumer non-real estate loans past due 180 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;

• Residential mortgage loans and open ended installment loans past due 180 days or more.

Past due status is based on the contractual terms of the loan.

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Loans are returned to accrual status 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.

Interest on impaired loans considered troubled debt restructurings (“TDRs”) or substandard, less than 90 days delinquent, is recognized as income as it accrues based on the revised terms of the loan over an established period of continued payment.

Substandard loans, as defined by the OCC, our primary banking regulator, are loans that are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Residential real estate loans and open ended consumer non-real estate 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 (b) the loan becomes past due 180 days or more.

Closed ended consumer non-real estate 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 and non-real estate 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.

Interest on impaired loans considered troubled debt restructurings (“TDRs”), less than 90 days delinquent, is recognized as income as it accrues based on the revised terms of the loan over an established period of continued payment.

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 (b) the loan becomes past due 180 days or more.

Closed end consumer 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 and commercial and industrial/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 Loan Losses – The allowance for loan losses (“ALL”) is a valuation allowance for probable and inherent credit losses in our loan portfolio.

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Impaired loans consist of all TDRs, as well as individual loans not considered a TDR, that are either (1) rated substandard or worse, (2) on nonaccrual status or (3) PCI loans which are impaired at the time of acquisition.

All TDRs are individually evaluated for impairment.

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Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.

Management considers a number of factors in evaluating the acquisition-date fair value including the remaining life of the acquired loans, delinquency status, estimated prepayments, payment options and other loan features, internal risk grade, estimated value of the underlying collateral and interest rate environment.

Management considers a number of factors in evaluating the acquisition-date fair value including:

the remaining life of the acquired loans, delinquency status, estimated prepayments, payment options and other loan features, internal risk grade, estimated value of the underlying collateral and interest rate environment.

Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if we can reasonably estimate the timing and amount of the expected cash flows on such loans and if we expect to fully collect the new carrying value of the loans.

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Gains and losses on sales of loans are recognized at settlement dates, and are determined by the difference between the sales proceeds and the carrying value of the loans after allocating costs to servicing rights retained.

All sales are made without recourse.

Gains and/or losses on sale of loans are recognized as non-interest income on the consolidated statement of operations.

Interest rate lock commitments on mortgage loans to be funded and sold are valued at fair value, and are included in other assets or liabilities, if material.

Transfers of financial assets— Transfers of financial assets are accounted for as sales when control over the assets has been surrendered.

Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the entity, (2) the transferee obtains the right, free of conditions that constrain it from taking advantage of that right, to pledge or exchange the transferred assets, and (3) the entity does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.

Mortgage Servicing Rights— Mortgage servicing rights (“MSR”) assets result as the Company sells loans to investors in the secondary market and retains the rights to service mortgage loans sold to others.

MSR assets are initially measured at fair value;

assessed at least annually for impairment;

assessed 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, included in amortization of mortgage servicing rights in the Consolidated Statements of Operations, thereon are based on numerous factors, assumptions and judgments, such as those for:

The valuation of MSRs and related amortization, included in mortgage servicing rights expense in the consolidated statements of operations, 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.

Foreclosed and Repossessed Assets, net – Assets acquired through foreclosure or repossession are initially recorded at fair value, less estimated costs to sell, which establishes a new cost basis.

If the fair value declines subsequent to foreclosure or repossession, a write-down is recorded through expense.

Costs incurred after acquisition are expensed and are included in non-interest expense, other in the Consolidated Statements of Operations.

Transfers of financial assets— Transfers of financial assets are accounted for as sales when control over the assets has been surrendered.

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.

Servicing fee income, which is reported on the consolidated statements of operations in non-interest income as Loan servicing fee income, is recorded for fees earned for servicing loans.

The fee are based on a contractual percentage of outstanding principal;

or a fixed amount per loan and are recorded as income when earned.

The amortization of mortgage servicing rights is netted against loan servicing fee income.

Office Properties and Equipment— Premises and equipment are stated at cost less accumulated depreciation.

Land is carried at cost.

Maintenance and repair costs are charged to expense as incurred.

Gains or losses on disposition of office properties and equipment are reflected in income.

Buildings and related components are depreciated using the straight-line method with useful lives ranging from 10 to 40 years.

Furniture, fixtures and equipment are depreciated using the straight-line (or accelerated) method with useful lives ranging from 3 to 10 years.

Leasehold improvements are depreciated using the straight-line (or accelerated) method with useful lives based on the lesser of (a) the estimated life of the lease, or (b) the estimated useful life of the leasehold improvement.

Depreciation expense is included in non-interest expense on the consolidated statement of operations.

Goodwill and other intangible assets— The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350, “Intangibles - Goodwill and Other.” The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, as goodwill.

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On a periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amounts of the intangible assets may be impaired.

The Company does not amortize goodwill, but reviews goodwill for impairment at a reporting unit level on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired.

The Company has the option of performing a qualitative assessment to determine whether any further quantitative testing for impairment is necessary.

The option of whether or not to perform a qualitative assessment is made annually.

Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

A reporting unit is defined as any distinct, separately identifiable component of the Company’s one operating segment for which complete, discrete financial information is available and reviewed regularly by the segment’s management.

The Company has one reporting unit as of December 31, 2020 which is related to its banking activities.

The impairment testing process is conducted by assigning net assets and goodwill to the Company’s reporting unit.

An initial qualitative evaluation is made to assess the likelihood of impairment and determine whether further quantitative testing to calculate the fair value is necessary.

When the qualitative evaluation indicates that impairment is more likely than not, quantitative testing is required whereby the fair value of the Company’s reporting unit is calculated and compared to the recorded book value, “step one.” If the calculated fair value of the Company’s reporting unit exceeds its carrying value, goodwill is not considered impaired and “step two” is not considered necessary.

If the carrying value of the company’s reporting unit exceeds its calculated fair value, the impairment test continues (“step two”) by comparing the carrying value of the Company’s reporting unit’s goodwill to the implied fair value of goodwill.

An impairment charge is recognized if the carrying value of goodwill exceeds the implied fair value of goodwill.

The Company has performed the required goodwill impairment test and has determined that goodwill was not impaired as of December 31, 2020.

See Note 7 for additional information on goodwill and other intangible assets.

Foreclosed and Repossessed Assets, net – Assets acquired through foreclosure or repossession are initially recorded at fair value, less estimated costs to sell, which establishes a new cost basis.

If the fair value declines subsequent to foreclosure or repossession, a write-down is recorded through expense.

Costs incurred after acquisition are expensed and are included in non-interest expense, other in the consolidated statements of operations.

Bank Owned Life Insurance (BOLI)— The Bank invests in bank-owned life insurance (BOLI) as a source of funding for employee benefit expenses.

BOLI involves the purchasing of life insurance by the Bank on a select group of employees.

The Bank is the owner and beneficiary of the policies.

Income from the increase in cash surrender value of the policies as well as the receipt of death benefits is included in non-interest income on the consolidated statement of income.

Leases - We determine if an arrangement is a lease at inception.

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Our lease terms may include options to extend or terminate the lease, when it is reasonably certain that we will exercise that option.

Lease expense is recognized based on the total contractually required lease payments, over the term of the lease, on a straight-line basis.

Office Properties and Equipment— Premises and equipment are stated at cost less accumulated depreciation.

Land is carried at cost.

Maintenance and repair costs are charged to expense as incurred.

Gains or losses on disposition of office properties and equipment are reflected in income.

Buildings and related components are depreciated using the straight-line method with useful lives ranging from 10 to 40 years.

Furniture, fixtures and equipment are depreciated using the straight-line (or accelerated) method with useful lives ranging from 3 to 10 years.

Interest Bearing Deposits— Other interest bearing deposits are certificate of deposit investments made by the Bank with other financial institutions that are carried at cost.

The weighted average months to maturity of the interest bearing deposits is 14.37 months .

Balances over $250 in those institutions are not insured by the FDIC and therefore pose a potential risk in the event the institution were to fail.

As of December 31, 2019 and December 31, 2018, there were zero certificate of deposit accounts with a balance greater than $250 .

Debt and equity issuance costs— Debt issuance costs, which consist primarily of fees paid to note lenders, are deferred and included in other borrowings in the consolidated balance sheet.

Debt issuance costs are amortized over the contractual term

of the corresponding debt, as a component of interest expense on other borrowed funds in the consolidated statement of operations.

expense is recognized based on the total contractually required lease payments, over the term of the lease, on a straight-line basis.

Debt and equity issuance costs— Debt issuance costs, which consist primarily of fees paid to note underwriters, are deferred and included in other borrowings in the consolidated balance sheet.

Debt issuance costs are amortized over the contractual term of the corresponding debt, as a component of interest expense on other borrowed funds in the consolidated statement of operations.

Specific costs associated with the issuance of shares of the Company’s common or preferred stock are netted against proceeds and recorded in stockholders’ equity, as additional paid in capital, on the consolidated balance sheet, in the period of the share issuance.

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See Note 15, “Income Taxes” for details on the Company’s income taxes.

The Company regularly reviews the carrying amount of its net deferred tax assets to determine if the establishment of a valuation allowance is necessary.

The Company assess on a quarterly basis the carrying amount of its net deferred tax assets to determine if the establishment of a valuation allowance is necessary.

If based on the available evidence, it is more likely than not that all or a portion of the Company’s net deferred tax assets will not be realized in future periods, a deferred tax valuation allowance would be established.

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Non-interest income is recognized on the accrual basis of accounting as services are provided or as transactions occur.

Non-interest income includes fees from brokerage and advisory service, deposit accounts, merchant services, ATM and debit card fees, mortgage banking activities, and other miscellaneous services and transactions.

Commission revenue is recognized as of the effective date of the insurance policy or the date the customer is billed, whichever is later.

The Company also receives contingent commissions from insurance companies which are based on the overall profitability of their relationship based primarily on the loss experience of the insurance placed by the Company.

Contingent commissions from insurance companies are recognized when determinable.

Commission revenue is included in other non-interest income in the consolidated statement of operations.

Non-interest income includes fees from deposit accounts, ATM and debit card fees, mortgage banking activities, and other miscellaneous services and transactions.

Commission revenue from WIA was recognized as of the effective date of the insurance policy or the date the customer was billed, whichever was later.

The Company also received contingent commissions from insurance companies which were based on the overall profitability of their relationship based primarily on the loss experience of the insurance placed by the Company.

Contingent commissions from insurance companies were recognized when determinable.

Commission revenue is included in other non-interest income in the consolidated statement of operations and has been discontinued due to the sale of WIA on June 30, 2020.

Earnings Per Share – Basic earnings per common share is net income or loss divided by the weighted average number of common shares outstanding during the period.

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Rate-lock commitments on mortgage loans held for sale are derivative instruments.

If material, derivative instruments are carried on the consolidated balance sheets at fair value, and changes in the fair value thereof are recognized in the consolidated statements of income.

If material, derivative instruments are carried on the

consolidated balance sheets at fair value, and changes in the fair value thereof are recognized in the consolidated statements of operations.

The Company originates single-family residential loans for sale, pursuant to programs primarily with the Federal Home Loan Mortgage Corporation (FHLMC) and other similar third parties.

In connection with these programs, at the time the Company initially issues a loan commitment, it does not lock in a specific interest rate.

At the time the interest rate is locked in by the borrower, the Company concurrently enters into a forward loan sale agreement with the prospective loan purchaser, at a

specific price, in order to manage the interest rate risk inherent to the rate-lock commitment.

At the time the interest rate is locked in by the borrower, the Company concurrently enters into a forward loan sale agreement with the prospective loan purchaser, at a specific price, in order to manage the interest rate risk inherent to the rate-lock commitment.

The forward sale agreement also meets the definition of a derivative instrument.

Any change in the fair value of the loan commitment after the borrower locks in the interest rate is substantially offset by the corresponding change in the fair value of the forward loan sale agreement related to such loan.

The period from the time the borrower locks in the interest rate, to the time the Company funds the loan and sells the loan to a third party, is generally, approximately 45 days.

The period from the time the borrower locks in the interest rate, to the time the Company funds the loan and sells the loan to a third party varies, and could be up to 90 days.

The fair value of each instrument will rise and fall in response to changes in market interest rates, subsequent to the dates the interest rate locks and forward sale agreements are entered into.

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Accordingly, all of the Company’s banking operations are considered by management to be aggregated in one reportable operating segment.

Bank Owned Life Insurance (BOLI)— The Bank invests in bank-owned life insurance (BOLI) as a source of funding for employee benefit expenses.

BOLI involves the purchasing of life insurance by the Bank on a select group of employees.

The Bank is the owner and beneficiary of the policies.

Income from the increase in cash surrender value of the policies as well as the receipt of death benefits is included in non-interest income on the consolidated statement of income.

Recognition of a prior period error- In April 2019 the Company determined that certain state franchise returns had not ever been filed.

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For the fiscal year ended September 30, 2018, pre-tax income was overstated by $ 160 , tax expense was understated by $ 44 and net income was overstated by $ 116 or $ 0.02 per share.

Management of the Company evaluated these prior period errors under the accounting guidance FASB ASC 250, Accounting Changes and Error Corrections and concluded that the effect of these prior period errors was not material to the Company's consolidated financial statements for the year ended December 31, 2019 and was also immaterial to the fiscal year ended September 30, 2018 consolidated financial statements.

Reclassifications— Certain items previously reported were reclassified for consistency with the current presentation.

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Recent Accounting Pronouncements—Adopted

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income - ASU 2018-02 permits, but does not require, entities to reclassify tax effects stranded in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 to retained earnings.

Companies that elect to reclassify these amounts must reclassify stranded tax effects for all items accounted for in accumulated other comprehensive income.

the Company adopted this standard update, effective January 1, 2019.

The Company’s stranded tax effects were related to valuation of the net deferred tax asset attributable to accumulated other comprehensive income (loss), which are unrealized gains (losses) on available-for-sale debt securities.

Adoption resulted in a reclassification between two categories of stock holders’ equity at

January 1, 2018, with an increase of $137 in retained earnings and a decrease in accumulated other comprehensive loss for the same amount (no net change in stockholders’ equity).

Revenue from Contracts with Customers (Topic 606)— Under the ASU, as modified by subsequent ASUs, revenue is recognized when a customer obtains control of promised services in an amount that reflects the consideration the entity expects to receive in exchange for those services.

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The Company’s largest sources of non-interest revenue which are subject to the guidance include fees and service charges on loan and deposit accounts and interchange revenue from debit card transactions.

ASU 2014-08, as amended, became effective for the Company’s annual and interim periods beginning in the first quarter 2019.

ASU 2014-09, as amended, became

effective for the Company’s annual and interim periods beginning in the first quarter 2019.

Adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements as the change in the timing and pattern of the Company’s revenue recognition related to scoped-in non-interest income recognized under the newly issued ASU is consistent with the current applicable accounting guidance.

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Topic 842 became effective for the Company for annual and interim periods beginning in the first quarter 2019.

The Company leased (1) 9 branch locations, (2) its corporate offices (3) 1 production office and (4) office equipment under operating leases that resulted in the recognition of right-of-use assets and corresponding lease liabilities of approximately $5,000 , respectively, under Topic 842.

At adoption, the Company leased (1) 9 branch locations, (2) its corporate offices (3) 1 production office and (4) office equipment under operating leases that resulted in the recognition of right-of-use assets and corresponding lease liabilities of approximately $ 5,000 , respectively, applicable under Topic 842.

The right-of-use assets are included in other assets and the corresponding lease liabilities are included in other liabilities on the consolidated balance sheet.

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whether any existing contracts were or contained leases, the classification of existing leases, and the determination of initial direct costs for existing leases.

As of December 31, 2019, the Company leases (1) 6 branch locations, (2) its corporate offices (3) 1 production office and (4) office equipment under operating leases.

As of December 31, 2020, the Company leases (1) 5 branch locations, (2) its corporate offices and (3) 1 production office under operating leases.

See Note 8 for additional detail.

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The Company adopted this Update for the Company’s annual goodwill impairment tests beginning in the year ended December 31, 2019.

Adoption of this ASU to had no material impact on its consolidated financial statements.

Adoption of this ASU had no material impact on its consolidated financial statements.

ASU 2018-13, Fair Value Measurement (Topic 820)— The ASU modifies disclosure requirements on fair value measurements.

This ASU removes requirements to disclose, (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and (2) the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements.

ASU 2018-13 clarifies that, disclosure regarding measurement uncertainty, is intended to communicate information about the uncertainty in measurement, as of the reporting date.

ASU 2018-13 adds certain disclosure requirements, including (1) disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements, and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

The Company adopted this ASU, in the first quarter of 2020.

The amendments on (1) changes in unrealized gains and losses, (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and (3) the narrative description of measurement uncertainty, are being applied prospectively.

All other amendments have been applied retrospectively for all periods presented.

Adoption of this ASU had no material impact on its consolidated financial position or results of operations.

ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)— The ASU was issued to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement), by providing guidance for determining when the arrangement includes a software license.

The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract, with similar costs to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).

The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments.

This guidance became

effective for the Company beginning in the first quarter of 2020.

Adoption of this ASU had no material impact on its consolidated financial statements.

ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting-- The ASU provides optional and temporary relief, in the form of optional expedients and exceptions, for applying GAAP to modifications of contacts, hedging relationships and other transactions affected by reference rate (e.g.

LIBOR) reforms.

ASU 2020-04 is effective for the Company immediately and through December 31, 2022.

The Company utilizes LIBOR, among other indexes, as a reference rate for underwriting variable rate loans.

Reference rate reform has not had, nor does the Company expect it to have, a material effect on the Company’s consolidated balance sheet, operations or cash flows.

Recently Issued, But Not Yet Effective Accounting Pronouncements

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Many of the loss estimation techniques applied today will still be permitted, though the inputs to those techniques will change to reflect the full amount of expected credit losses.

In addition, ASU 2016-13 amends the accounting for

credit losses on debt securities and purchased financial assets with credit deterioration.

In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration.

In November, 2019, the FASB issued ASU-2019-10, which delayed the effective date for ASU 2016-13 for smaller reporting companies, resulting in ASU 2016-13 becoming effective in the first quarter of 2023 for the Company.

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The Company anticipates recording the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which the ASU is effective, which will be January 1, 2023.

ASU 2018-13, Fair Value Measurement (Topic 820)— The ASU modifies disclosure requirements on fair value measurements.

ASU 2018-13 clarifies that, disclosure regarding measurement uncertainty, is intended to communicate information about the uncertainty in measurement, as of the reporting date.

The amendments in this ASU are effective for the Company beginning in the first quarter 2020.

All other amendments should be applied retrospectively for all periods presented.

The Company does not expect adoption of this ASU to have a material impact on its consolidated financial position or results of operations.

The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments.

This guidance will become effective for the Company beginning in the first quarter 2020, with early adoption permitted.

The Company does not expect adoption of this ASU to have a material impact on its consolidated financial statements.

NOTE 2 – ACQUISITION

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The acquisition of the net assets of F&M constitutes a business combination as defined by FASB ASC Topic 805, “ Business Combinations .” Accordingly, the assets acquired and liabilities assumed are presented at their fair values at acquisition date.

Fair values were determined based on the requirements of FASB ASC Topic 820, “ Fair Value Measurements .”

In many cases, the determination of these fair values required management to make estimates regarding discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change for a period up to 12 months after the acquisition date.

Fair values were determined based on the requirements of FASB ASC Topic 820, “ Fair Value Measurements .” In many cases, the determination of these fair values required management to make estimates regarding discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change for a

period up to 12 months after the acquisition date.

Management engaged third-party valuation specialists to assist in determining such values.

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Citizens Community Bancorp, Inc.

Pro Forma Adjustments

Pro Forma Combined

F&M Pro Forma Adjustments Pro Forma Combined

Year ended December 31, 2019

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The revenue and earnings of F&M from the acquisition date of July 1, 2019 to December 31, 2019 were approximately $ 3,100 and $ 850 , respectively.

On October 19, 2018, the Company completed its previously announced acquisition of United Bank pursuant to the stock purchase agreement, dated June 20, 2018, as then amended.

In connection with the acquisition, the Company merged United Bank with and into the Bank, with the Bank surviving the merger.

Under the terms of the stock purchase agreement, the Company acquired 100% of the common stock of United Bank from United Bancorporation for the purchase price of $51.1 million , which includes approximately $400 in closing date purchase price adjustments as provided in the Stock Purchase Agreement, as amended.

Of the cash consideration to be paid to United Bancorporation in the Acquisition, approximately $44.3 million was paid in cash upon the closing of the Acquisition, and approximately $6.8 million was set aside in escrow or held by the Company for the purposes of funding certain post-closing purchase price adjustments and future indemnity claims in accordance with the Stock Purchase Agreement, as amended.

The merger added $315,216 in assets, $199,859 in loans, $272,671 in deposits, $21,030 in goodwill, and $3,020 in core deposit intangible.

Acquired deposits included approximately $51,000 , deposited by United Bank’s former parent company, and withdrawn from the Bank, as anticipated, subsequent to the acquisition.

None of the goodwill is deductible for tax purposes, as the acquisition is accounted for as a tax-free exchange for tax purposes.

In connection with the United Bank acquisition, we incurred expenses related to (1) accounting, legal and other professional services, (2) contract termination costs, and (3) other costs of integrating and conforming acquired operations with and into the Company.

These merger-related expenses, that were expensed as incurred, amounted to $1,057 for the transition period of three months ended December 31, 2018 and $359 for the year ended September 30, 2018, and were included in non-interest expense on the consolidated statement of operations.

The acquisition of the net assets of United constitutes a business combination as defined by FASB ASC Topic 805, “ Business Combinations .” Accordingly, the assets acquired and liabilities assumed are presented at their fair values at acquisition date.

expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change for a period up to 12 months after the acquisition date.

Management engaged third-party valuation specialists to assist in determining such values.

The results of the fair value evaluation generated goodwill and intangible assets as noted above.

The following pro forma financial information for the periods presented reflects our estimated consolidated pro forma results of operations as if the United acquisition occurred on October 1, 2018, not considering potential cost savings and other business synergies we expect to receive as a result of the acquisition:

Citizens Community Bancorp, Inc.

Pro Forma Adjustments

Pro Forma Combined

Three months ended December 31, 2018

Revenue (net interest income and non-interest income)

Net income attributable to common stockholders

Earnings per share--basic

Earnings per share-diluted

Citizens Community Bancorp, Inc.

Pro Forma Adjustments

Pro Forma Combined

Year ended September 30, 2018

Revenue (net interest income and non-interest income)

Net income attributable to common stockholders

Earnings per share--basic

Earnings per share-diluted

The pro forma adjustments reflect (1) additional depreciation and amortization expense related to, and associated tax effects of, the purchase accounting adjustments made to record various items at fair value and (2) elimination of acquisition related costs incurred.

The revenue and earnings of United Bank since the acquisition date of October 19, 2018 are included in the Company’s consolidated statement of operations, and it is not practical to disclose them separately.

The following table summarizes the amounts recorded on the consolidated balance sheet as of the acquisition date in conjunction with the acquisition discussed above:

The following table summarizes the amounts recorded on the consolidated balance sheet as of the acquisition date in conjunction with the F&M acquisition discussed above:

Fair value of consideration paid $ 23,894

11 unchanged sentences

Cash value of life insurance 4,719

Other assets 1,676

Total identifiable assets acquired $ 193,594

Fair value of liabilities assumed:

Deposits $ 148,637

Other borrowings 20,122

3 unchanged sentences

Goodwill recognized $ 24

On October 25, 2019, the Department of the Treasury released revised guidance which clarified that ordinary course of business transactions, including mergers and acquisitions involving entities owning life insurance contracts, were not intended to meet the definition of a “reportable policy sale”.

As such, the bank-owned life insurance (“BOLI”) policies acquired from F&M retained their tax-free status.

The elimination of the deferred tax liability associated with certain acquired BOLI contracts of F&M, due to this regulation change, resulted in a decrease on other assets and a corresponding decrease in goodwill of $343 , from what was previously reported on the Company’s September 30, 2019 Form 10-Q, filed with the SEC on November 7, 2019.

On October 25, 2019, the Department of the Treasury released regulations which clarified the tax status of acquired life insurance policies, resulting in policies acquired from United Bank and F&M retaining their tax-free status.

As a result, the Company reduced its related deferred tax liabilities by $ 342 (F&M), and $ 300 (United Bank) and F&M’s initial goodwill was reduced by $ 342 on the December 31, 2019 consolidated balance sheet.

$ 300 was recorded as a discrete tax credit reduction on the Company’s statement of operations for the twelve-months ended December 31, 2019.

NOTE 3 – INVESTMENT SECURITIES

The amortized cost, estimated fair value and related unrealized gains and losses on securities available for sale and held to maturity as of December 31, 2020 and December 31, 2019, respectively, were as follows:

Available for sale securities

Available for sale securities Amortized

Losses Estimated

December 31, 2020

3 unchanged sentences

Corporate debt securities 17,199 372 109 17,462

Corporate asset based securities

Corporate asset-backed securities 36,039 104 316 35,827

Trust preferred securities 16,297 189 38 16,448

4 unchanged sentences

Mortgage-backed securities 70,806 635 110 71,331

Agency Securities

Corporate debt securities 18,776 66 117 18,725

Corporate asset based securities

Corporate asset-backed securities 27,718 — 864 26,854

Trust preferred securities 11,167 35 79 11,123

Total available for sale securities $ 180,768 $ 868 $ 1,517 $ 180,119

Held to maturity securities

Held to maturity securities Amortized

Losses Estimated

December 31, 2020

6 unchanged sentences

Total held to maturity securities $ 2,851 $ 106 $ — $ 2,957

At December 31, 2019 , the Bank has pledged certain of its U.S.

Government Agency securities with a carrying value of $1,609 as collateral to secure a line of credit with the Federal Reserve Bank.

At December 31, 2020, the Bank has pledged certain of its mortgage-backed securities with a carrying value of $ 1,209 as collateral to secure a line of credit with the Federal Reserve Bank.

As of December 31, 2020, there were no borrowings outstanding on this Federal Reserve Bank line of credit.

2 unchanged sentences

As of December 31, 2020, the Bank also has mortgage-backed securities with a carrying value of $ 468 pledged as collateral to the Federal Home Loan Bank of Des Moines.

For the twelve months ended December 31, 2020, gross sales of available for sale securities were $ 12,091 , gross gains on sale of available for sale securities were $ 157 , and gross losses on sale of available for sale securities were $ 1 .

The estimated fair value of available for sale securities at December 31, 2020, by contractual maturity, is shown below.

1 unchanged sentence

Expected maturities may differ from contractual maturities on certain agency and securities due to the call feature.

Available for sale securities

December 31, 2020 December 31, 2019

Available for sale securities Amortized

Cost Estimated

Fair Value Amortized

Cost Estimated

Due in one year or less $ — $ — $ 141 $ 141

5 unchanged sentences

Total available for sale securities $ 142,177 $ 144,233 $ 180,768 $ 180,119

Held to maturity securities

December 31, 2020 December 31, 2019

Held to maturity securities Amortized

Cost Estimated

Fair Value Amortized

Cost Estimated

Due in one year or less $ — $ — $ 300 $ 302

Due after one year through five years 200 200 — —

Due after five years through ten years 400 402 — —

Total securities with contractual maturities 600 602 300 302

2 unchanged sentences

Securities with unrealized losses at December 31, 2020 and December 31, 2019, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:

Less than 12 Months

12 Months or More

Available for sale securities

Less than 12 Months 12 Months or More Total

Available for sale securities Fair

Value Unrealized

December 31, 2020

government agency obligations $ 7,654 $ 17 $ 6,834 $ 53 $ 14,488 $ 70

Mortgage-backed securities

Corporate debt securities 3,447 27 1,418 82 4,865 109

Corporate asset based securities

Corporate asset-backed securities — — 24,310 316 24,310 316

Trust preferred securities 5,612 38 — — 5,612 38

Total $ 16,713 $ 82 $ 32,562 $ 451 $ 49,275 $ 533

December 31, 2019

government agency obligations $ 14,593 $ 156 $ 10,540 $ 191 $ 25,133 $ 347

Obligations of states and political subdivisions

Mortgage-backed securities 22,537 62 5,883 48 28,420 110

Agency securities

Corporate debt securities 7,001 15 1,398 102 8,399 117

Corporate asset based securities

Less than 12 Months

12 Months or More

Held to maturity securities

Corporate asset-backed securities 8,683 285 18,171 579 26,854 864

Trust preferred securities 7,420 79 — — 7,420 79

Total $ 60,234 $ 597 $ 35,992 $ 920 $ 96,226 $ 1,517

Less than 12 Months 12 Months or More Total

Held to maturity securities Fair

Value Unrealized

December 31, 2020

Obligations of states and political subdivisions

Mortgage-backed securities $ 16,538 $ 34 $ — $ — $ 16,538 $ 34

Total $ 16,538 $ 34 $ — $ — $ 16,538 $ 34

December 31, 2019

Obligations of states and political subdivisions

Mortgage-backed securities $ — $ — $ — $ — $ — $ —

Total $ — $ — $ — $ — $ — $ —

The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

8 unchanged sentences

Management has determined that more likely than not, 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.

NOTE 4 – LOANS, ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS Loans by classes within portfolio segments were as follows:

December 31, 2019

December 31, 2018

NOTE 4 – LOANS, ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS

Portfolio Segments:

Commercial and agricultural real estate loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and prudently expand its business.

Management examines current and projected cash flows to determine the ability of the borrower to repay its obligations as agreed.

These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.

Commercial real estate 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.

Agricultural real estate loans are primarily comprised of loans for the purchase of farmland.

Loan-to-value ratios on loans secured by farmland generally do not exceed 75 %.

Commercial and industrial (“C&I”) loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower.

These cash flows, however, may not be as expected and the value of collateral securing the loans may fluctuate.

Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee.

Agricultural operating loans are generally comprised of term loans to fund the purchase of equipment, livestock and seasonal operating lines.

Operating lines are typically written for one year and secured by the crop and other farm assets or other business assets, as considered necessary.

Agricultural loans carry significant credit risks as they may involve larger balances concentrated with single borrowers or groups of related borrowers.

In addition, repayment of such loans depends on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized.

Farming operations may be affected by adverse weather conditions such as drought, hail or floods that can severely limit crop yields.

SBA PPP loan balances are 100% guaranteed under the Small Business Association’s Paycheck Protection Program and may be forgiven in full, depending on use of funds and eligibility.

These SBA-backed loans helped businesses keep their workforce employed during the COVID-19 crisis.

Eligible borrowers, who qualify for full loan forgiveness during the eight to twenty four week period following loan disbursement, can apply for forgiveness, once all proceeds for which the borrower requested forgiveness has been used.

Borrowers can apply for forgiveness any time up to the maturity date of the loan.

Residential mortgage loans are collateralized by primary and secondary positions on real estate and are underwritten primarily based on borrower’s documented income, credit scores, and collateral values.

Under consumer home equity loan guidelines, the borrower will be approved for a loan based on a percentage of their home’s appraised value less the balance owed on the existing first mortgage.

Credit risk is minimized within the residential mortgage portfolio due to relatively small loan account balances spread across many individual borrowers.

Management evaluates trends in past due loans and current economic factors such as the housing price index on a regular basis.

Consumer installment loans are comprised of originated indirect paper loans secured primarily by boats and recreational vehicles and other consumer loans secured primarily by automobiles and other personal assets.

The Bank ceased new originations of indirect paper loans in early fiscal 2017.

Consumer loan underwriting terms often depend on the collateral type, debt to income ratio and the borrower’s creditworthiness as evidenced by their credit score.

In the event of a consumer installment loan default, collateral value alone may not provide an adequate source of repayment of the outstanding loan balance.

This shortage is a result of the greater likelihood of damage, loss and depreciation for consumer based collateral.

Loans by classes within portfolio segments were as follows:

December 31, 2020 December 31, 2019

Originated Loans:

4 unchanged sentences

Construction and land development 91,241 71,467

Commercial/Agricultural non-real estate:

Commercial non-real estate

Agricultural non-real estate

Residential real estate:

One to four family

C&I/Agricultural operating:

Commercial and industrial 95,290 89,730

Agricultural operating 24,457 20,717

Residential mortgage:

Residential mortgage 86,283 108,619

Purchased HELOC loans 6,260 8,407

Consumer non-real estate:

Consumer installment:

Originated indirect paper 25,851 39,585

Purchased indirect paper

Other Consumer 12,056 15,546

Originated loans before SBA PPP loans $ 837,023 $ 762,520

SBA PPP loans 123,702 —

Total originated loans $ 960,725 $ 762,520

5 unchanged sentences

Construction and land development 7,276 14,943

Commercial/Agricultural non-real estate:

Commercial non-real estate

Agricultural non-real estate

Residential real estate:

One to four family

Consumer non-real estate:

C&I/Agricultural operating:

Commercial and industrial 21,263 44,004

Agricultural operating 8,328 17,063

Residential mortgage:

Residential mortgage 45,103 67,713

Consumer installment:

Other Consumer 1,157 2,640

5 unchanged sentences

Construction and land development 98,517 86,410

Commercial/Agricultural non-real estate:

Commercial non-real estate

Agricultural non-real estate

Residential real estate:

One to four family

C&I/Agricultural operating:

Commercial and industrial 116,553 133,734

Agricultural operating 32,785 37,780

Residential mortgage:

Residential mortgage 131,386 176,332

Purchased HELOC loans 6,260 8,407

Consumer non-real estate:

Consumer installment:

Originated indirect paper 25,851 39,585

Purchased indirect paper

Other Consumer 13,213 18,186

Total loans before SBA PPP loans $ 1,123,187 $ 1,187,264

SBA PPP loans 123,702 —

Gross loans $ 1,246,889 $ 1,187,264

Unearned net deferred fees and costs and loans in process ( 4,245 ) ( 393 )

2 unchanged sentences

Loans receivable, net $ 1,220,538 $ 1,167,060

Portfolio Segments:

Commercial and agricultural real estate loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business.

Management examines current and projected cash flows to determine the ability of the borrower to repay its obligations as agreed.

These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate and may include a personal guarantee.

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.

Commercial non-real estate loans are primarily underwritten based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower.

These cash flows, however, may not be as expected and the value of collateral securing the loans may fluctuate.

Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee.

Agricultural non-real estate loans are generally comprised of term loans to fund the purchase of equipment, livestock and seasonal operating lines.

Operating lines are typically written for one year and are secured by the crop and other farm assets as considered necessary.

Agricultural loans carry significant credit risks as they may involve larger balances concentrated with single borrowers or groups of related borrowers.

In addition, repayment of such loans depends on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized.

Farming operations may be affected by adverse weather conditions such as drought, hail or floods that can severely limit crop yields.

Residential real estate loans are collateralized by primary and secondary positions on real estate and are underwritten primarily based on borrower’s documented income, credit scores, and collateral values.

Under consumer home equity loan guidelines, the borrower will be approved for a loan based on a percentage of their home’s appraised value less the balance owed on the existing first mortgage.

Credit risk is minimized within the residential real estate portfolio as relatively small loan amounts are spread across many individual borrowers.

Management evaluates trends in past due loans and current economic factors such as the housing price index on a regular basis.

Consumer non-real estate loans are comprised of originated indirect paper loans secured primarily by boats and recreational vehicles and other bank originated consumer loans secured primarily by automobiles and other personal assets.

The Bank ceased new originations of indirect paper and purchased indirect paper loans in early fiscal 2017.

Consumer loans underwriting terms often depend on the collateral type, debt to income ratio and the borrower’s creditworthiness as evidenced by their credit score.

Collateral value alone may not provide an adequate source of repayment of the outstanding loan balance in the event of a consumer non-real estate default.

This shortage is a result of the greater likelihood of damage, loss and depreciation for consumer based collateral.

Credit Quality/Risk Ratings:

Management utilizes a numeric risk rating system to identify and quantify the Bank’s risk of loss within its loan portfolio.

Ratings are initially assigned prior to funding the loan, and may be changed at any time as circumstances warrant.

Ratings range from the highest to lowest quality based on factors that include measurements of ability to pay, collateral type and value, borrower stability and management experience.

The Bank’s loan portfolio ratings are presented below in accordance with the risk rating framework that has been commonly adopted by the federal banking agencies.

The definitions of the various risk rating categories are as follows:

1 through 4 - Pass.

A “Pass” loan means that the condition of the borrower and the performance of the loan is satisfactory or better.

A “Watch” loan has clearly identifiable developing weaknesses that deserve additional attention from management.

Weaknesses that are not corrected or mitigated, may jeopardize the ability of the borrower to repay the loan in the future.

6 - Special Mention.

A “Special Mention” loan has one or more potential weakness that deserve management’s close attention.

If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position in the future.

7 - Substandard.

A “Substandard” loan is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any.

Assets classified as substandard must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt.

They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

8 - Doubtful.

A “Doubtful” loan has all the weaknesses inherent in a Substandard loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loans classified as “Loss” are considered uncollectible, and their continuance as bankable assets is not warranted.

This classification does not mean that the loan has absolutely no recovery or salvage value, and a partial recovery may occur in the future.

Below is a breakdown of loans by risk rating as of December 31, 2020:

1 to 5 6 7 8 9 TOTAL

Originated Loans:

4 unchanged sentences

Construction and land development 87,763 — 3,478 — — 91,241

Commercial/Agricultural non-real estate:

Commercial non-real estate

Agricultural non-real estate

Residential real estate:

One to four family

C&I/Agricultural operating:

Commercial and industrial 91,474 20 3,796 — — 95,290

SBA PPP loans 123,702 — — — — 123,702

Agricultural operating 22,462 934 1,061 — — 24,457

Residential mortgage:

Residential mortgage 82,097 7 4,179 — — 86,283

Purchased HELOC loans 5,959 — 301 — — 6,260

Consumer non-real estate:

Consumer installment:

Originated indirect paper 25,616 — 235 — — 25,851

Purchased indirect paper

Other Consumer 11,986 — 70 — — 12,056

6 unchanged sentences

Construction and land development 7,237 — 39 — — 7,276

Commercial/Agricultural non-real estate:

Commercial non-real estate

Agricultural non-real estate

Residential real estate:

One to four family

Consumer non-real estate:

C&I/Agricultural operating:

Commercial and industrial 20,918 9 336 — — 21,263

Agricultural operating 7,838 — 490 — — 8,328

Residential mortgage:

Residential mortgage 42,805 131 2,167 — — 45,103

Consumer installment:

Other Consumer 1,150 — 7 — — 1,157

5 unchanged sentences

Construction and land development 95,000 — 3,517 — — 98,517

Commercial/Agricultural non-real estate:

Commercial non-real estate

Agricultural non-real estate

Residential real estate:

One to four family

C&I/Agricultural operating:

Commercial and industrial 112,392 29 4,132 — — 116,553

SBA PPP loans 123,702 — — — — 123,702

Agricultural operating 30,300 934 1,551 — — 32,785

Residential mortgage:

Residential mortgage 124,902 138 6,346 — — 131,386

Purchased HELOC loans 5,959 — 301 — — 6,260

Consumer non-real estate:

Consumer installment:

Originated indirect paper 25,616 — 235 — — 25,851

Purchased indirect paper

Other Consumer 13,136 — 77 — — 13,213

Gross loans $ 1,211,676 $ 6,672 $ 28,541 $ — $ — $ 1,246,889

Unearned net deferred fees and costs and loans in process ( 4,245 )

3 unchanged sentences

Below is a breakdown of loans by risk rating as of December 31, 2019:

1 to 5 6 7 8 9 TOTAL

Originated Loans:

4 unchanged sentences

Construction and land development 67,989 — 3,478 — — 71,467

Commercial/Agricultural non-real estate:

Commercial non-real estate

Agricultural non-real estate

Residential real estate:

One to four family

C&I/Agricultural operating:

Commercial and industrial 85,248 1,023 3,459 — — 89,730

Agricultural operating 19,545 402 770 — — 20,717

Residential mortgage:

Residential mortgage 104,428 — 4,191 — — 108,619

Purchased HELOC loans 8,407 — — — — 8,407

Consumer non-real estate:

Consumer installment:

Originated indirect paper 39,339 — 246 — — 39,585

Purchased indirect paper

Other Consumer 15,425 — 121 — — 15,546

6 unchanged sentences

Construction and land development 14,181 — 762 — — 14,943

Commercial/Agricultural non-real estate:

Commercial non-real estate

Agricultural non-real estate

Residential real estate:

One to four family

Consumer non-real estate:

C&I/Agricultural operating:

Commercial and industrial 41,587 932 1,485 — — 44,004

Agricultural operating 15,621 350 1,092 — — 17,063

Residential mortgage:

Residential mortgage 65,125 436 2,152 — — 67,713

Consumer installment:

Other Consumer 2,628 — 12 — — 2,640

5 unchanged sentences

Construction and land development 82,170 — 4,240 — — 86,410

Commercial/Agricultural non-real estate:

Commercial non-real estate

Agricultural non-real estate

Residential real estate:

One to four family

C&I/Agricultural operating:

Commercial and industrial 126,835 1,955 4,944 — — 133,734

Agricultural operating 35,166 752 1,862 — — 37,780

Residential mortgage:

Residential mortgage 169,553 436 6,343 — — 176,332

Purchased HELOC loans 8,407 — — — — 8,407

Consumer non-real estate:

Consumer installment:

Originated indirect paper 39,339 — 246 — — 39,585

Purchased indirect paper

Other Consumer 18,053 — 133 — — 18,186

Gross loans $ 1,136,516 $ 10,856 $ 39,892 $ — $ — $ 1,187,264

Unearned net deferred fees and costs and loans in process ( 393 )

2 unchanged sentences

Loans receivable, net $ 1,167,060

Credit Quality/Risk Ratings:

Management utilizes a numeric risk rating system to identify and quantify the Bank’s risk of loss within its loan portfolio.

Ratings are initially assigned prior to funding the loan, and may be changed at any time as circumstances warrant.

Ratings range from the highest to lowest quality based on factors that include measurements of ability to pay, collateral type and value, borrower stability and management experience.

The Bank’s loan portfolio is presented below in accordance with the risk rating framework that has been commonly adopted by the federal banking agencies.

The definitions of the various risk rating categories are as follows:

1 through 4 - Pass.

A “Pass” loan means that the condition of the borrower and the performance of the loan is satisfactory or better.

A “Watch” loan has clearly identifiable developing weaknesses that deserve additional attention from management.

Weaknesses that are not corrected or mitigated, may jeopardize the ability of the borrower to repay the loan in the future.

6 - Special Mention.

A “Special Mention” loan has one or more potential weakness that deserve management’s close attention.

If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position in the future.

7 - Substandard.

A “Substandard” loan is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any.

Assets classified as substandard must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt.

They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

8 - Doubtful.

Loans classified as “Loss” are considered uncollectible, and their continuance as bankable assets is not warranted.

This classification does not mean that the loan has absolutely no recovery or salvage value, and a partial recovery may occur in the future.

Certain directors and executive officers of the Company are defined as related parties.

These related parties, including their immediate families and companies in which they are principal owners, were loan customers of the Bank during the year ended December 31, 2019 , and the three months ended December 31, 2018.

These related parties, including their immediate families and companies in which they are principal owners, were loan customers of the Bank during the twelve months ended December 31, 2020, and the twelve months ended December 31, 2019.

A summary of the changes in those loans is as follows:

Twelve months ended

Three months ended

December 31, 2019

December 31, 2018

Twelve months ended Twelve months ended

December 31, 2020 December 31, 2019

Balance—beginning of period $ 20,367 $ 11,104

New loan originations 7,230 10,243

Acquired previously originated director loans

Repayments ( 1,114 ) ( 980 )

Balance—end of period $ 26,483 $ 20,367

6 unchanged sentences

To the extent actual outcomes differ from management estimates, additional provision for loan losses could be required that could adversely affect the Company’s earnings or financial position in future periods.

Allocations of the ALL may be made for specific loans but the

entire ALL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.

Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.

As an integral part of their examination process, various regulatory agencies also review the Bank’s ALL.

1 unchanged sentence

Changes in the ALL by loan type for the periods presented below were as follows:

Commercial/Agricultural Real Estate

Commercial/Agricultural Non-real Estate

Residential Real Estate

Consumer Non-real Estate

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

Twelve months ended December 31, 2020:

1 unchanged sentence

Beginning balance, January 1, 2020 $ 6,205 $ 1,643 $ 879 $ 467 $ 357 $ 9,551

Charge-offs — ( 932 ) ( 5 ) ( 145 ) — ( 1,082 )

Recoveries 75 8 7 69 — 159

Provision 3,991 1,393 160 98 549 6,191

Total Allowance on originated loans $ 10,271 $ 2,112 $ 1,041 $ 489 $ 906 $ 14,819

2 unchanged sentences

Beginning balance, January 1, 2020 $ 526 $ 27 $ 163 $ 53 $ — $ 769

Charge-offs — ( 159 ) ( 74 ) ( 3 ) — ( 236 )

Recoveries 77 33 15 7 — 132

Provision 1,081 240 231 7 — 1,559

Total allowance on other acquired loans $ 1,684 $ 141 $ 335 $ 64 $ — $ 2,224

6 unchanged sentences

Ending balance of originated loans $ 586,826 $ 243,449 $ 92,543 $ 37,907 $ — $ 960,725

Ending contractual balance of purchased credit-impaired loans

Ending balance of purchased credit-impaired loans 15,100 1,534 1,312 — — 17,946

Ending balance of other acquired loans 195,213 28,057 43,791 1,157 — 268,218

4 unchanged sentences

collectively evaluated for impairment $ 770,836 $ 265,925 $ 128,025 $ 38,706 $ — $ 1,203,492

Commercial/Agricultural Real Estate

Commercial/Agricultural Non-real Estate

Residential Real Estate

Consumer Non-real Estate

Three months ended December 31, 2018:

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

Twelve months ended December 31, 2019:

Allowance for Loan Losses:

Beginning balance, October 1, 2018

Beginning balance, January 1, 2019 $ 4,019 $ 1,258 $ 1,048 $ 641 $ 153 $ 7,119

Charge-offs ( 355 ) — ( 120 ) ( 257 ) — ( 732 )

Recoveries — — — 84 — 84

Provision 2,541 385 ( 49 ) ( 1 ) 204 3,080

Total Allowance on originated loans $ 6,205 $ 1,643 $ 879 $ 467 $ 357 $ 9,551

1 unchanged sentence

Other acquired loans:

Beginning balance, October 1, 2018

Beginning balance, January 1, 2019 $ 183 $ 32 $ 205 $ 65 $ — $ 485

Charge-offs ( 26 ) — ( 120 ) ( 33 ) — ( 179 )

Recoveries 3 — 5 10 — 18

Provision 366 ( 5 ) 73 11 — 445

Total Allowance on other acquired loans $ 526 $ 27 $ 163 $ 53 $ — $ 769

6 unchanged sentences

Ending balance of originated loans $ 479,916 $ 110,447 $ 117,026 $ 55,131 $ — $ 762,520

Ending contractual balance of purchased credit-impaired loans

Ending balance of purchased credit-impaired loans 31,408 4,666 2,194 — — 38,268

Ending balance of other acquired loans 261,916 56,401 65,519 2,640 — 386,476

5 unchanged sentences

Loans receivable by loan type as of the end of the periods shown below were as follows:

Commercial/Agriculture Real Estate Loans

Commercial/Agriculture Non-real Estate Loans

Residential Real Estate Loans

Consumer Non-real Estate Loans

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

Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31,

2020 2019 2020 2019 2020 2019 2020 2019 2020 2019

Performing loans

6 unchanged sentences

Total nonperforming loans 5,911 13,273 2,229 3,552 3,034 3,118 159 217 11,333 20,160

Total loans $ 797,139 $ 773,240 $ 273,040 $ 171,514 $ 137,646 $ 184,739 $ 39,064 $ 57,771 $ 1,246,889 $ 1,187,264

(1) Nonperforming loans are either 90+ days past due or nonaccrual.

An aging analysis of the Company’s commercial/agriculture real estate and non-real estate, consumer real estate and non-real estate and purchased third party loans as of December 31, 2020 and 2019, respectively, was as follows:

30-59 Days Past Due and Accruing

60-89 Days Past Due and Accruing

Greater Than 89 Days Past Due and Accruing

Total Past Due Accruing

Nonaccrual Loans

Total Past Due Accruing and Nonaccrual Loans

30-59 Days Past Due and Accruing 60-89 Days Past Due and Accruing Greater Than 89 Days Past Due and Accruing Total Past Due Accruing Nonaccrual Loans Current Total Loans

December 31, 2020

4 unchanged sentences

Construction and land development 3,898 — — 3,898 — 94,619 98,517

Commercial/Agricultural non-real estate:

Commercial non-real estate

Agricultural non-real estate

Residential real estate:

One to four family

C&I/Agricultural operating:

Commercial and industrial 436 491 — 927 357 115,269 116,553

SBA PPP loans — — — — — 123,702 123,702

Agricultural operating 1,499 200 — 1,699 1,872 29,214 32,785

Residential mortgage:

Residential mortgage 2,238 372 516 3,126 2,217 126,043 131,386

Purchased HELOC loans 338 94 67 499 234 5,527 6,260

Consumer non-real estate:

Consumer installment:

Originated indirect paper 90 37 — 127 133 25,591 25,851

Purchased indirect paper

Other Consumer 100 14 3 117 23 13,073 13,213

Total $ 18,886 $ 1,723 $ 586 $ 21,195 $ 10,747 $ 1,214,947 $ 1,246,889

December 31, 2019

4 unchanged sentences

Construction and land development 436 — — 436 42 85,932 86,410

Commercial/Agricultural non-real estate:

Commercial non-real estate

Agricultural non-real estate

Residential real estate:

One to four family

C&I/Agricultural operating:

Commercial and industrial 1,024 — — 1,024 1,850 130,860 133,734

Agricultural operating 73 49 — 122 1,702 35,956 37,780

Residential mortgage:

Residential mortgage 4,929 1,597 649 7,175 2,063 167,094 176,332

Purchased HELOC loans 293 378 407 1,078 — 7,329 8,407

Consumer non-real estate:

Consumer installment:

Originated indirect paper 168 52 20 240 137 39,208 39,585

Purchased indirect paper

Other Consumer 204 43 28 275 31 17,880 18,186

Total $ 10,440 $ 2,966 $ 1,104 $ 14,510 $ 19,056 $ 1,153,698 $ 1,187,264

At December 31, 2020, the Company has identified impaired loans of $ 43,397 , consisting of $ 18,477 TDR loans, the carrying amount of purchased credit impaired loans of $ 16,859 and $ 8,061 of substandard non-TDR loans.

4 unchanged sentences

Performing TDRs consist of loans that have been modified and are performing in accordance with the modified terms for a sufficient length of time, generally six months, or loans that were modified on a proactive basis.

A summary of loans evaluated for impairment as of December 31, 2019 and December 31, 2018 was as follows:

Recorded Investment

Unpaid Principal Balance

Related Allowance

Average Recorded Investment

Interest Income Recognized

A summary of loans evaluated for impairment as of December 31, 2020 was as follows:

Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized

December 31, 2020

With No Related Allowance Recorded:

Commercial/agriculture real estate

Commercial/agricultural non-real estate

Residential real estate

Consumer non-real estate

Commercial/Agricultural real estate $ 24,013 $ 24,013 $ — $ 32,264 $ 1,894

C&I/Agricultural operating 6,334 6,334 — 7,906 284

Residential mortgage 8,542 8,542 — 8,619 450

Consumer installment 356 356 — 368 30

Total $ 39,245 $ 39,245 $ — $ 49,157 $ 2,658

With An Allowance Recorded:

Commercial/agriculture real estate

Commercial/agricultural non-real estate

Residential real estate

Consumer non-real estate

Commercial/Agricultural real estate $ 2,290 $ 2,290 $ 698 $ 2,217 $ 100

C&I/Agricultural operating 781 781 190 636 22

Residential mortgage 1,079 1,079 226 1,255 54

Consumer installment 2 2 1 35 1

Total $ 4,152 $ 4,152 $ 1,115 $ 4,143 $ 177

December 31, 2020 Totals

Commercial/agriculture real estate

Commercial/agricultural non-real estate

Residential real estate

Consumer non-real estate

At December 31, 2019 , the Company had seven residential real estate loans, secured by residential real estate properties, for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction, with a recorded investment of $271 .

Commercial/Agricultural real estate $ 26,303 $ 26,303 $ 698 $ 34,481 $ 1,994

C&I/Agricultural operating 7,115 7,115 190 8,542 306

Residential mortgage 9,621 9,621 226 9,874 504

Consumer installment 358 358 1 403 31

Total $ 43,397 $ 43,397 $ 1,115 $ 53,300 $ 2,835

At December 31, 2020, the Company had nine residential real estate loans, secured by residential real estate properties, for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction, with a recorded investment of $ 685 .

At December 31, 2020.

the Company had eight commercial real estate loans, secured by commercial and agricultural real estate properties, for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction, with a recorded investment of $3,941 .

Recorded Investment

Unpaid Principal Balance

Related Allowance

Average Recorded Investment

Interest Income Recognized

the Company had ten commercial real estate loans, secured by commercial and agricultural real estate properties, for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction, with a recorded investment of $ 3,530 .

A summary of loans evaluated for impairment as of December 31, 2019 was as follows:

Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized

December 31, 2019

With No Related Allowance Recorded:

Commercial/agriculture real estate

Commercial/agricultural non-real estate

Residential real estate

Consumer non-real estate

Commercial/Agricultural real estate $ 40,514 $ 40,514 $ — $ 24,693 $ 699

C&I/Agricultural operating 9,477 9,477 — 19,163 119

Residential mortgage 8,695 8,695 — 4,461 128

Consumer installment 379 379 — 3,640 6

Total $ 59,065 $ 59,065 $ — $ 51,957 $ 952

With An Allowance Recorded:

Commercial/agriculture real estate

Commercial/agricultural non-real estate

Residential real estate

Consumer non-real estate

Commercial/Agricultural real estate $ 2,143 $ 2,143 $ 495 $ 1,738 $ 4

C&I/Agricultural operating 490 490 312 734 3

Residential mortgage 1,431 1,431 136 789 15

Consumer installment 67 67 13 47 —

Total $ 4,131 $ 4,131 $ 956 $ 3,308 $ 22

December 31, 2019 Totals

Commercial/agriculture real estate

Commercial/agricultural non-real estate

Residential real estate

Consumer non-real estate

Commercial/Agricultural real estate $ 42,657 $ 42,657 $ 495 $ 26,431 $ 703

C&I/Agricultural operating 9,967 9,967 312 19,897 122

Residential mortgage 10,126 10,126 136 5,250 143

Consumer installment 446 446 13 3,687 6

Total $ 63,196 $ 63,196 $ 956 $ 55,265 $ 974

Troubled Debt Restructuring – A TDR includes a loan modification where a borrower is experiencing financial difficulty, and the Bank grants a concession to that borrower that the Bank would not otherwise consider, except for the borrower’s financial difficulties.

Concessions include an extension of loan terms, renewals of existing balloon loans, reductions in interest rates and consolidating existing Bank loans at modified terms.

Concessions may include:

extension of the loan’s term, renewals of existing balloon loans, reductions in interest rates and consolidating existing Bank loans at modified terms.

A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability.

If a TDR is placed on nonaccrual status, it remains there until a sufficient period of performance under the restructured terms has occurred at which time it is returned to accrual status.

There were 2 accruing, delinquent TDR’s, greater than 60 days past due, with a recorded investment of $101 at December 31, 2019, compared to 0 accruing, delinquent TDRs, greater than 60 days past due at December 31, 2018.

There was one accruing, delinquent TDR, greater than 60 days past due, with a recorded investment of $ 20 at December 31, 2020, compared to two accruing, delinquent TDRs, greater than 60 days past due, with a recorded investment of $ 101 at December 31, 2019.

Following is a summary of TDR loans by accrual status as of December 31, 2020 and December 31, 2019.

December 31 December 31

Troubled debt restructure loans:

1 unchanged sentence

Non-accrual status 6,735 7,198

Total $ 18,477 $ 12,594

There were no TDR commitments meeting our TDR criteria as of December 31, 2020.

There were unused lines of credit totaling $ 15 meeting our TDR criteria as of December 31, 2020.

During the three months ended December 31, 2018, we committed to refinance two acquired loans totaling $139 at maturity.

These loans were considered TDR’s upon refinancing, subsequent to December 31, 2018.

There was $4 available on one unused line of credit loan meeting our TDR criteria as of December 31, 2018.

The following provides detail, including specific reserve and reasons for modification, related to loans identified as TDRs during the year ended December 31, 2019 , the three months ended December 31, 2018 and the year ended September 30, 2018:

Number of Contracts

Modified Rate

Modified Payment

Modified Under- writing

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Specific Reserve

There were no TDR commitments meeting our TDR criteria as of December 31, 2019.

There were unused lines of credit totaling $ 12 meeting our TDR criteria as of December 31, 2019.

The following provides detail, including specific reserve and reasons for modification, related to loans identified as TDRs during the years ended December 31, 2020 and December 31, 2019:

Number of Contracts Modified Rate Modified Payment Modified Under- writing Other Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific Reserve

Twelve months ended December 31, 2020

Commercial/Agricultural real estate 12 $ 4,441 $ 198 $ 293 $ — $ 4,932 $ 4,932 $ —

Commercial/Agricultural non-real estate

Residential real estate

Consumer non-real estate

Number of Contracts

Modified Rate

Modified Payment

Modified Under- writing

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Specific Reserve

Three months ended December 31, 2018

Commercial/Agricultural real estate

Commercial/Agricultural non-real estate

Residential real estate

Consumer non-real estate

Number of Contracts

Modified Rate

Modified Payment

Modified Under- writing

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Specific Reserve

Twelve months ended September 30, 2018

C&I/Agricultural operating 6 3,295 78 3,000 — 6,373 6,373 —

Residential mortgage 17 456 858 117 — 1,431 1,431 —

Consumer installment 3 6 — 4 — 10 10 —

Totals 38 $ 8,198 $ 1,134 $ 3,414 $ — $ 12,746 $ 12,746 $ —

Number of Contracts Modified Rate Modified Payment Modified Under- writing Other Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific Reserve

Twelve months ended December 31, 2019

Commercial/Agricultural real estate 18 $ 2,028 $ 159 $ 3,224 $ — $ 5,411 $ 5,411 $ 317,867

Commercial/Agricultural non-real estate

Residential real estate

Consumer non-real estate

C&I/Agricultural operating 11 184 364 996 — 1,544 1,544 98,152

Residential mortgage 14 823 — 212 — 1,035 1,035 42,035

Consumer installment 1 2 — — — 2 2 —

Totals 44 $ 3,037 $ 523 $ 4,432 $ — $ 7,992 $ 7,992 $ 458,054

A summary of loans by loan class modified in a troubled debt restructuring as of December 31, 2020 and December 31, 2019:

December 31, 2019

December 31, 2018

Modifications

December 31, 2020 December 31, 2019

Modifications Recorded

Investment Number of

Modifications Recorded

Troubled debt restructurings:

Commercial/Agricultural real estate 31 $ 9,386 27 $ 6,599

Commercial/Agricultural non-real estate

Residential real estate

Consumer non-real estate

The following table provides information related to restructured loans that were considered in default as of December 31, 2019 and December 31 2018:

C&I/Agricultural operating 16 5,123 16 2,338

Residential mortgage 52 3,919 43 3,589

Consumer installment 8 49 7 68

Total loans 107 $ 18,477 93 $ 12,594

The following table provides the number of loans modified in a TDR during the previous twelve months which subsequently defaulted during the year ended December 31, 2020, as well as the recorded investment in these restructured loans as of December 31, 2020:

December 31, 2020

Modifications Recorded

Troubled debt restructurings:

Commercial/Agricultural real estate 1 $ 100

C&I/Agricultural operating 1 224

Residential mortgage 4 404

Consumer installment — —

Total troubled debt restructurings 6 $ 728

The following table provides information related to restructured loans that were considered in default as of December 31, 2019:

December 31, 2019

Modifications

Modifications Recorded

Troubled debt restructurings:

Commercial/Agricultural real estate 13 $ 4,868

Commercial/Agricultural non-real estate

Residential real estate

Consumer non-real estate

C&I/Agricultural operating 14 1,973

Residential mortgage 3 357

Consumer installment — —

Total troubled debt restructurings 30 $ 7,198

Included above are thirteen TDR loans that became in default during the three months ended December 31, 2019 .

All acquired loans were initially recorded at fair value at the acquisition date.

11 unchanged sentences

The following table provides changes in accretable yield for all acquired loans from prior acquisitions with deteriorated credit quality:

December 31, 2019

December 31, 2018

September 30, 2018

December 31, 2020 December 31, 2019

Balance at beginning of period $ 3,201 $ 3,163

Acquisitions — 814

Reduction due to unexpected early payoffs ( 971 ) —

Reclass from non-accretable difference 2,754 80

Accretion ( 1,008 ) ( 856 )

Balance at end of period $ 3,976 $ 3,201

Non-accretable yield on purchased credit impaired loans was $6,290 and $4,123 , at December 31, 2019 and December 31, 2018, respectively.

Non-accretable yield on purchased credit impaired loans was $ 6,290 at December 31, 2019.

The following table provides changes in non-accretable yield for all acquired loans from prior acquisitions with deteriorated credit quality:

December 31, 2020

Balance at beginning of period $ 6,290

Additions to non-accretable difference for acquired purchased credit impaired loans —

Non-accretable difference realized as interest from payoffs of purchased credit impaired loans ( 1,693 )

Transfers from non-accretable difference to accretable discount ( 2,754 )

Non-accretable difference used to reduce loan principal balance ( 505 )

Non-accretable difference transferred to OREO due to loan foreclosure ( 251 )

Balance at end of period $ 1,087

The following table reflects amounts for all acquired credit impaired and acquired performing loans acquired from F&M at acquisition.

Acquired Credit Impaired Loans

Acquired Performing Loans

Total Acquired Loans

Contractually required cash flows at acquisition

Non-accretable difference (expected losses and foregone interest)

Cash flows expected to be collected at acquisition

Accretable yield

Fair value of acquired loans at acquisition

The following table reflects amounts for all acquired credit impaired and acquired performing loans acquired from United Bank at acquisition.

Acquired Credit Impaired Loans

Acquired Performing Loans

Total Acquired Loans

Acquired Credit Impaired Loans Acquired Performing Loans Total Acquired Loans

Contractually required cash flows at acquisition $ 18,355 $ 111,919 $ 130,274

5 unchanged sentences

Mortgage servicing rights-- Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets.

The unpaid balances of the one- to four-family residential real estate loans as of December 31, 2019 and December 31, 2018 were $524,715 and $518,476 , respectively.

The unpaid balances of the one- to four-family residential mortgage loans as of December 31, 2020 and December 31, 2019 were $ 553,655 and $ 524,715 , respectively.

These residential mortgage loans are serviced primarily for the Federal Home Loan Mortgage Corporation, Federal Home Loan Bank and the Federal National Mortgage Association.

Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in deposits were $ 2,890 and $ 2,868 , at December 31, 2020 and December 31, 2019, respectively.

Mortgage servicing rights activity for the year ended December 31, 2019 and the three months ended December 31, 2018 were as follows:

As of and for the twelve months ended

As of and for the three months ended

As of and for the twelve months ended

December 31, 2019

December 31, 2018

September 30, 2018

Mortgage servicing rights activity for the year ended December 31, 2020 and December 31, 2019 were as follows:

As of and for the twelve months ended As of and for the twelve months ended

December 31, 2020 December 31, 2019

Mortgage servicing rights:

Mortgage servicing assets, net;

beginning of period

MSR asset acquired

Increase in MSR assets resulting from transfers of financial assets

Mortgage servicing rights, beginning of period $ 4,541 $ 4,486

Increase in mortgage servicing rights resulting from transfers of financial assets 2,020 904

Amortization during the period ( 1,295 ) ( 849 )

Valuation Allowances:

Balance at beginning of period

Balance at end of period

Mortgage servicing assets, net;

end of period

Fair value of MSR asset;

end of period

Mortgage servicing rights, end of period 5,266 4,541

Valuation allowance, beginning of period ( 259 ) —

Additions ( 1,755 ) ( 259 )

Recoveries — —

Write-downs — —

Valuation allowance, end of period ( 2,014 ) ( 259 )

Mortgage servicing rights, net $ 3,252 $ 4,282

Fair value of mortgage servicing rights, end of period $ 3,285 $ 4,309

Residential mortgage loans serviced for others $ 553,655 $ 524,715

Net book value of MSR asset to loans serviced for others

At December 31, 2019 , the estimated future aggregate amortization expense for the MSRs is as follows.

Net book value of mortgage servicing rights to loans serviced for others 0.59 % 0.82 %

To estimate the fair value of the MSR asset, a valuation model is applied at the loan level to calculate the present value of the expected future cash flows.

The valuation model incorporates various assumptions that would impact market participants’ estimations of future servicing income.

Central to the valuation model is the discount rate.

Fair value at December 31, 2020 was determined using discount rates ranging from 9 % to 12 %.

Other assumptions utilized in the valuation model include, but are not limited to, prepayment speed, servicing costs, delinquencies, costs of advances, foreclosure costs, ancillary income, and income earned on float and escrow.

Servicing fees totaled $ 1,391 for the year ended December 31, 2020.

Late fees and ancillary fees related to loan servicing are not material.

At December 31, 2020, the estimated future aggregate amortization expense for the mortgage servicing rights is as follows.

The estimated amortization expense is based on existing mortgage servicing asset balances.

1 unchanged sentence

Amortization Expense

After 2025 219

Total $ 5,266

NOTE 6 - OFFICE PROPERTIES AND EQUIPMENT

Office properties and equipment for each of the periods shown below consisted of the following:

December 31, 2019

December 31, 2018

September 30, 2018

December 31, 2020 December 31, 2019

Land $ 4,298 $ 4,361

Buildings 16,008 15,781

Furniture, equipment and vehicles 7,493 6,701

Subtotals 27,799 26,843

Less--Accumulated depreciation ( 6,634 ) ( 5,737 )

Office properties and equipment, net $ 21,165 $ 21,106

Depreciation expense was $1,564 for the year ended December 31, 2019, $313 for the three months ended December 31, 2018 and $1,054 for the year ended September 30, 2018 .

Depreciation expense was $ 1,954 for the year ended December 31, 2020 and $ 1,564 for the year ended December 31, 2019.

NOTE 7 - GOODWILL AND INTANGIBLE ASSETS

Goodwill-- Goodwill was $31,498 , $31,474 and $10,444 as of December 31, 2019 , December 31, 2018 and September 30, 2018, respectively.

The following table provides changes in goodwill during the periods ended December 31, 2019 , December 31, 2018 and September 30, 2018:

Three months ended

December 31, 2019

December 31, 2018

September 30, 2018

Goodwill— The following table provides beginning and ending balances and changes in goodwill during the periods ended December 31, 2020 and December 31, 2019:

Year ended Year ended

December 31, 2020 December 31, 2019

Balance at beginning of period $ 31,498 $ 31,474

F&M acquisition (see Note 2) — 24

United Bank acquisition (see Note 2)

Balance at end of period $ 31,498 $ 31,498

Intangible assets-- Intangible assets consist of core deposit intangibles arising from various bank acquisitions and the premium on the Wells Insurance Agency customer relationships.

Intangible assets-- Intangible assets consist of core deposit intangibles arising from various bank acquisitions and the premium on the Wells Insurance Agency customer relationships, until its disposition in June 2020.

A summary of intangible assets and related amortization for the periods shown below follows:

Three months ended

December 31, 2019

December 31, 2018

September 30, 2018

Year ended Year Ended

December 31, 2020 December 31, 2019

Gross carrying amount $ 12,180 $ 12,798

2 unchanged sentences

Additions during the period (1) $ — $ 1,582

Sales during the period - carrying amount (2) $ 618 $ —

Sales during the period - accumulated amortization (2) $ 147 $ —

Amortization during the period $ 1,622 $ 1,496

(1) Intangible asset additions at December 31, 2019 and 2018, included the F&M and United Bank core deposit intangible assets in the amount of $1,582 and $3,021 , respectively.

(1) Intangible asset additions during the year ended December 31, 2019, consisted of F&M core deposit intangible assets in the amount of $ 1,582 .

(2) Intangible asset sales during the year ended December 31, 2020, consisted of Wells Insurance Agency customer relationships included in the sale of the Wells Insurance Agency.

Accumulated amortization at disposition was $ 147 .

The remaining carrying amount at disposition was $ 618 .

At December 31, 2020, the estimated future aggregate amortization expense for the intangible assets are as follows:

Intangible Assets

After 2025 395

Total $ 5,494

NOTE 8— LEASES

We have operating leases for our corporate offices ( 1 ), bank branch offices ( 6 ), other production offices ( 1 ) and certain office equipment.

In May 2019, the bank acquired the previously leased Mankato, MN branch office and in August 2019, the bank acquired the previously leased Rice Lake, WI and Lake Hallie, WI branch offices, which are now included in office properties and equipment on the consolidated balance sheet.

Our leases have remaining lease terms of 1 to 6.63 years , some of which include options to extend the leases for up to 5 years.

We have operating leases for our corporate offices ( 1 ), bank branch offices ( 5 ) and one production office ( 1 ).

Our leases have remaining lease terms of one month to 7.50 years, some of which include options to extend the leases for up to 5 years.

As of December 31, 2020, we have no additional lease commitments that have not yet commenced.

As of and for the twelve months ended December 31, 2019

For the twelve months ended December 31, 2020 operating lease costs were $ 619 and variable lease costs were $ 45 .

Lease costs are included in non-interest expense/occupancy in the consolidated statement of operations.

Twelve Months Ended

December 31, 2020 December 31, 2019

Supplemental cash flow information related to leases was as follows:

3 unchanged sentences

Operating leases $ 508 $ —

December, 31 2020 December 31, 2019

Supplemental balance sheet information related to leases was as follows:

7 unchanged sentences

Fiscal years ending December 31,

Thereafter 826

Total lease payments 3,304

3 unchanged sentences

The following is a summary of deposits by type at December 31, 2020 and December 31, 2019, respectively:

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Non interest bearing demand deposits $ 238,348 $ 168,157

5 unchanged sentences

Brokered deposits included above:

$ 2,516 $ 50,377

At December 31, 2020, the scheduled maturities of time deposits were as follows:

2021 $ 206,713

Total $ 313,247

Time deposits of $250 or more were $ 46,660 at December 31, 2020.

Deposits from the Company’s directors, executive officers, principal stockholders and their affiliates held by the Bank at December 31, 2020 and December 31, 2019 amounted to $ 48,596 , and $ 38,802 , respectively.

1 unchanged sentence

A summary of Federal Home Loan Bank (FHLB) advances and other borrowings at December 31, 2020 and December 31, 2019 is as follows:

Stated Maturity

Range of Stated Rates

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

Federal Home Loan Bank advances (1), (2), (3), (4), (5) 2020 $ — — % — % $ 69,000 1.67 % 2.05 %

2021 8,000 0.00 % 2.16 % 4,000 1.85 % 2.16 %

2022 15,000 2.34 % 2.45 % 15,000 2.34 % 2.45 %

2023 20,000 1.43 % 1.44 % — — % — %

2024 20,530 0.00 % 1.45 % 530 0.00 % 0.00 %

2025 5,000 1.45 % 1.45 % — — % — %

2029 42,500 1.00 % 1.13 % 42,500 1.00 % 1.13 %

2030 12,500 0.52 % 0.86 % — — % — %

Subtotal 123,530 131,030

Unamortized discount on acquired notes ( 32 ) ( 59 )

Federal Home Loan Bank advances, net $ 123,498 $ 130,971

Other borrowings:

Senior notes (6) 2031 $ 28,856 3.25 % 3.50 % $ 28,856 4.00 % 4.75 %

Subordinated notes (7) 2027 $ 15,000 6.75 % 6.75 % $ 15,000 6.75 % 6.75 %

2030 15,000 6.00 % 6.00 %

Unamortized debt issuance costs ( 528 ) ( 296 )

Total other borrowings $ 58,328 $ 43,560

(1) The FHLB advances bear fixed rates, require interest-only monthly payments, and are collateralized by a blanket lien on pre-qualifying first mortgages, home equity lines, multi-family loans and certain other loans which had a pledged balance of $792,909 and $589,731 at December 31, 2019 and 2018, respectively.

Totals $ 181,826 $ 174,531

(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 $ 723,862 and $ 792,909 at December 31, 2020 and 2019, respectively.

At December 31, 2020, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $ 118,391 compared to $ 203,935 as of December 31, 2019.

(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $151,530 and $109,813 , during the twelve months ended December 31, 2019 and the three month transition period ended December 31, 2018 , respectively.

(3) The weighted-average interest rates on FHLB short term borrowings outstanding as of December 31, 2019 and December 31, 2018 were 1.74% and 2.58% , respectively.

(4) The bank acquired ten FHLB notes totaling $14,030 , as a result of the F&M acquisition, that mature on various dates through 2024 with a weighted average rate of 1.97% and weighted average maturity of 18 months.

The Bank acquired one $11,000 FHLB note as a result of the United Bank acquisition, with a 2.45% rate and February 1, 2022 maturity date.

(5) FHLB term notes totaling $42,500 , with various maturity dates in 2029, can be called or replaced by the FHLB on a quarterly basis, beginning approximately three months after the initial advance.

In November 2019, a $5,000 note was called and replaced with a new 10 -year maturity note, which is also callable quarterly.

(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $ 162,530 and $ 151,530 , during the twelve months ended December 31, 2020 and December 31, 2019, respectively.

(3) The weighted-average interest rates on FHLB borrowings, with maturities less than twelve months, outstanding as of December 31, 2020 and December 31, 2019 were 0.50 % and 1.74 %, respectively.

(4) Five of the FHLB notes with remaining balances totaling $ 8,530 , were acquired as a result of the F&M acquisition.

These notes mature on various dates through 2024 with a weighted average rate of 2.05 % and weighted average maturity of 13 months.

(5) FHLB term notes totaling $ 55,000 , with various maturity dates in 2029 and 2030, can be called or replaced by the FHLB on a quarterly basis, beginning approximately three months after the initial advance.

(6) Senior notes, entered into by the Company in June 2019 consist of the following:

(a) A term note, requiring quarterly interest-only payments through June 2022, and quarterly principal and interest payments thereafter.

Interest is variable, based on US Prime rate.

This note included the refinancing of $10,074 of existing debt.

(a) A term note which was subsequently refinanced in October 2020, requiring quarterly interest-only payments through June 2022, and quarterly principal and interest payments thereafter.

Interest is variable, based on US Prime rate with a floor rate of 3.25 %.

(b) A $ 5,000 line of credit, maturing in August 2021, that remains undrawn upon.

(7) Subordinated notes resulted from the Company’s private sale in August 2017, and bear a fixed interest rate of 6.75% for five years .

(7) Subordinated notes resulted from the following:

(a) The Company’s private sale in August 2017, which bears a fixed interest rate of 6.75 % for five years .

In August 2022, they convert to a three-month LIBOR plus 4.90 % rate, and the interest rate will reset quarterly thereafter.

Interest-only payments are due quarterly.

(b) 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.

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 Letters of Credit

2 unchanged sentences

These balances were $ 179,400 and $ 147,991 at December 31, 2020 and 2019, respectively.

Federal Reserve Bank Paycheck Protection Program Liquidity Facility (“FRB PPPLF”) Program

The Bank has originated Small Business Association’s Paycheck Protection Program (“SBA PPP”) loans and has

complied with the requirements to pledge these loans to the FRB PPPLF program which provides 100% funding for SBA PPP

loans upon request.

At December 31, 2020, the Bank had $ 123,702 of borrowing capacity under the Federal Reserve SBA PPP Liquidity Facility, which the Federal Reserve established in 2020.

The Bank has no outstanding loan balances under this facility at December 31, 2020.

Maximum month-end borrowed amounts outstanding under this agreement were $ 25,136 , during the twelve months ended December 31, 2020.

NOTE 11— CAPITAL MATTERS

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If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

At December 31, 2019 , the Bank and Company were categorized as “Well Capitalized”, under Prompt Corrective Action Provisions.

As of December 31, 2020 and 2019, the most recent notifications from our regulatory agency categorized the Bank as “Well Capitalized” under the regulatory framework for Prompt Corrective Action.

There are no conditions or events since these notifications that management believes have changed the Bank’s category.

The Bank’s Tier 1 (leverage) and risk-based capital ratios at December 31, 2020 and 2019, respectively, are presented below

For Capital Adequacy

To Be Well Capitalized

(actual amount rounded to the nearest thousand)

Actual For Capital Adequacy

Purposes To Be Well Capitalized

Under Prompt Corrective

Action Provisions

Amount Ratio Amount Ratio Amount Ratio

As of December 31, 2020

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The Company’s Tier 1 (leverage) and risk-based capital ratios at December 31, 2020 and 2019, respectively, are presented below:

For Capital Adequacy

To Be Well Capitalized

(actual amount rounded to the nearest thousand)

Actual For Capital Adequacy

Purposes To Be Well Capitalized

Under Prompt Corrective

Action Provisions

Amount Ratio Amount Ratio Amount Ratio

As of December 31, 2020

Total capital (to risk weighted assets)

Tier 1 capital (to risk weighted assets)

Common equity tier 1 capital (to risk weighted assets)

Tier 1 leverage ratio (to adjusted total assets)

Total capital (to risk weighted assets) $ 166,703,000 14.3 % $ 93,381,000 > = 8.0 % N/A N/A

Tier 1 capital (to risk weighted assets) 122,082,000 10.5 % 70,035,000 > = 6.0 % N/A N/A

Common equity tier 1 capital (to risk weighted assets) 122,082,000 10.5 % 52,527,000 > = 4.5 % N/A N/A

Tier 1 leverage ratio (to adjusted total assets) 122,082,000 7.7 % 63,718,000 > = 4.0 % N/A N/A

As of December 31, 2019

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As a bank holding company, the Company is subject to certain restrictions on its ability to pay dividends under applicable banking laws and regulations.

Federal bank regulators are authorized to determine under certain circumstances relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof.

Federal bank regulators are authorized to determine, under certain circumstances relating to the financial condition of a

bank holding company or a bank, that the payment of dividends would be an unsafe or unsound practice, and to prohibit payment thereof.

In particular, federal bank regulators have stated that paying dividends that deplete a banking organization’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings.

In addition, in the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy

and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.

The Company’s ability to pay dividends is also subject to the terms of the Business Note Agreement dated August 1, 2018, which prohibits the Company from making dividend payments while an event of default has occurred and is continuing under the loan agreement or from allowing payment of a dividend which would create an event of default.

The following table reflects the annual cash dividend paid in the three months ended December 31, 2019 and years ended September 30, 2018 and 2018 respectively.

December 31, 2019

December 31, 2018

September 30, 2018

In addition, in the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.

The Company’s ability to pay dividends is also subject to the terms of its Subordinated Note Purchase Agreement dated August 27, 2020 and Business Note Agreement dated August 1, 2018, which prohibits the Company from making dividend payments while an event of default has occurred and is continuing under the loan agreement or from allowing payment of a dividend which would create an event of default.

The following table reflects the annual cash dividend paid in the years ended December 31, 2020 and 2019, respectively.

December 31, 2020 December 31, 2019

Cash dividends per share $ 0.21 $ 0.20

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Set forth below are the balances of the Company’s off-balance-sheet credit instruments consisting of commitments to make loans as of December 31, 2020 and December 31, 2019, respectively.

Contract or Notional

Amount at December 31,

Contract or Notional

Amount at December 31,

Contract or Notional Amount at December 31, Contract or Notional Amount at December 31,

Commitments to extend credit $ 247,324 $ 243,642

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Loss Contingencies— Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

NOTE 13—RETIREMENT PLANS

NOTE 13— RETIREMENT PLAN

401(k) Plan— The Company sponsors a 401(k) profit sharing plan that covers all employees who qualify based on minimum age and length of service requirements.

Employees may make pretax voluntary contributions to the plan, which are matched, in part, by the Company.

Employer matching contributions to the plan were $524 , $126 and $383 for the year ended December 31, 2019, the three months ended December 31, 2018 and the year ended September 30, 2018 , respectively.

Employer matching contributions to the plan were $ 610 and $ 524 for the year ended December 31, 2020 and 2019, respectively.

NOTE 14 - STOCK-BASED COMPENSATION

In February 2005, the Company’s stockholders approved the Company’s 2004 Recognition and Retention Plan and 2004 Stock Option and Incentive Plan.

These plans were terminated on January 18, 2018.

In February 2008, the Company’s stockholders approved the Company’s 2008 Equity Incentive Plan for a term of 10 years.

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Restricted shares granted under the 2008 Equity Incentive Plan were awarded at no cost to the employee and vest pro rata over a two to five -year period from the grant date.

granted to date under this plan vest pro rata over a five -year period from the grant date.

Options granted to date under this plan vest pro rata over a five -year period from the grant date.

Unexercised, nonqualified stock options expire within 15 years of the grant date and unexercised incentive stock options expire within 10 years of the grant date.

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As of December 31, 2020, no stock options had been granted under this plan.

Net compensation expense related to restricted stock awards from these plans was $470 , $127 and $271 for the year ended December 31, 2019 , the transition period ended December 31, 2018 and the year ended September 30, 2018 , respectively.

Net compensation expense related to restricted stock awards from these plans was $ 530 and $ 470 for the years ended December 31, 2020 and 2019, respectively.

Restricted Common Stock Awards

Transition period ended

December 31, 2019

December 31, 2018

September 30, 2018

Number of Shares

Year ended Year ended

December 31, 2020 December 31, 2019

Number of Shares Weighted

Grant Price Number of Shares Weighted

Restricted Shares

Unvested and outstanding at beginning of year 43,457 $ 12.76 75,407 $ 13.24

Granted 45,507 11.79 12,847 11.50

Vested ( 31,722 ) 12.32 ( 32,630 ) 12.89

Forfeited — — ( 12,167 ) 13.28

Unvested and outstanding at end of year 57,242 $ 12.23 43,457 $ 12.76

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Accordingly, management records compensation expense based on the value of the award as measured on the grant date and then the Company recognizes that cost over the vesting period for the award.

The net compensation cost recognized for stock-based employee compensation from both plans for the year ended December 31, 2019 , the transition period ended December 31, 2018 and the year ended September 30, 2018 was $18 , $5 and $12 , respectively.

The net compensation cost recognized for stock-based employee compensation from this plan for the years ended December 31, 2020 and 2019 was $ 14 and $ 18 , respectively.

Common Stock Option Awards

Option Shares

Option Shares Weighted

Price Weighted

Term Aggregate

Year ended December 31, 2020

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Fully vested and expected to vest 72,300 $ 11.05 5.49 $ —

Transition period ended December 31, 2018

Outstanding at beginning of year

Outstanding at end of year

Exercisable at end of year

Fully vested and expected to vest

Year ended September 30, 2018

Year ended December 31, 2019

Outstanding at beginning of year 108,930 $ 10.15

Exercised ( 28,430 ) 7.12

Forfeited or expired ( 2,400 ) 12.38

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Fully vested and expected to vest 78,100 $ 11.18 6.55 $ 81

Information related to the 2004 Stock Option and Incentive Plan and 2008 Equity Incentive Plan during each period follows:

Year ended December 31,

Transition period ended December 31,

Year ended September 30,

Information related to the 2008 Equity Incentive Plan during each period follows:

Year ended December 31, Year ended December 31,

Intrinsic value of options exercised $ — $ 130

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Tax benefit realized from options exercised $ — $ —

Set forth below is a table showing relevant assumptions used in calculating stock option expense related to the 2008 Equity Incentive Plan:

Year ended December 31,

Transition period ended December 31,

Year ended September 30,

Dividend yield

Risk-free interest rate

Weighted average expected life (years)

Expected volatility

NOTE 15 – INCOME TAXES

Income tax expense (benefit) for each of the periods shown below consisted of the following:

Year ended December 31,

Transition period ended December 31,

Year ended September 30,

Year ended December 31, Year ended December 31,

Current tax provision

Federal $ 5,000 $ 2,535

State 2,081 1,081

Deferred tax provision (benefit)

Federal ( 1,866 ) ( 305 )

Bank owned life insurance - Tax Act clarification ( 660 ) ( 300 )

Federal deferred tax adjustment - Tax Act

State — ( 197 )

( 2,526 ) ( 802 )

Total $ 4,555 $ 2,814

The provision for income taxes differs from the amount of income tax determined by applying statutory federal income tax rates to pretax income as result of the following differences:

Year ended December 31,

Transition period ended December 31,

Year ended September 30,

Year ended December 31, Year ended December 31,

Amount Rate Amount Rate

Tax expense at statutory rate $ 3,629 21.0 % $ 2,577 21.0 %

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Bank owned life insurance ( 130 ) ( 0.8 ) % ( 116 ) ( 0.9 ) %

Deferred tax adjustment - related to the Tax Act

Tax exempt interest ( 61 ) ( 0.3 ) % ( 153 ) ( 1.3 ) %

Other ( 6 ) — % ( 7 ) ( 0.1 ) %

Total $ 4,555 26.4 % $ 2,814 22.9 %

As a result, the Company reduced its related deferred tax liabilities by $342 thousand (F&M), and $300 thousand (United Bank) and F&M’s initial goodwill was reduced by $342 thousand on the December 31, 2019 consolidated balance sheet.

$300 thousand was recorded as a discrete tax credit reduction on the Company’s statement of operations for the three and twelve-months ended December 31, 2019.

The Tax Cuts and Jobs Act of 2017 (“Tax Act”), enacted on December 22, 2017, reduces corporate Federal income tax rates for the Company from 34% to 24.5% for fiscal 2018, and 21% for periods after September 30, 2018.

GAAP requires the impact of the provisions of the Tax Act be accounted for in the period of enactment.

At December 31, 2017, we had not completed our accounting for the tax effects of enactment of the Tax Act;

however, in certain cases, as described below, we made a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment.

The Company revalued its net deferred tax assets to account for the future impact of lower corporate taxes.

For the items for which we were able to determine a reasonable estimate, we recorded an increased provisional amount of income tax expense of $275 in December 2017, related to the revaluation of the deferred tax assets to both the revaluation of timing differences and the unrealized loss on securities.

In the fourth quarter of fiscal 2018, based on updated information obtained in connection with the filing of our tax return and analysis of our net deferred tax asset both from the return and 2018 tax provisions, we finalized the tax analysis and recorded an additional $63 of expense, or a net increase in our tax provision for the fiscal year ended September 30, 2018 of $338 related to the Tax Act.

$ 300 was recorded as a discrete tax credit reduction on the Company’s statement of operations for the twelve-months ended December 31, 2019.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

The following is a summary of the significant components of the Company’s deferred tax assets and liabilities as of December 31, 2019 , December 31, 2018 and September 30, 2018, respectively:

Year ended December 31,

Transition period ended December 31,

Year ended September 30,

The following is a summary of the significant components of the Company’s deferred tax assets and liabilities as of December 31, 2020 and December 31, 2019, respectively:

Year ended December 31, Year ended December 31,

Deferred tax assets:

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Core Deposit Intangible ( 1,615 ) ( 1,937 )

Bank Owned Life Insurance

Net gain on equity securities ( 442 ) ( 456 )

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Other acquired intangibles — ( 111 )

Net unrealized gains on securities available for sale ( 565 ) —

Deferred tax liabilities $ ( 6,129 ) $ ( 6,274 )

Net deferred tax assets $ 2,619 $ 837

The Company regularly reviews the carrying amount of its deferred tax assets to determine if the establishment of a valuation allowance is necessary, as further discussed in Note 1 “Nature of Business and Summary of Significant Accounting

Policies,” above.

At December 31, 2019 , December 31, 2018 and September 30, 2018, respectively, management determined that no valuation allowance was necessary.

At December 31, 2020 and December 31, 2019, respectively, management determined that no valuation allowance was necessary.

The Company’s income tax returns are subject to review and examination by federal, state and local government authorities.

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The Company applied the foregoing accounting standard to all of its tax positions for which the statute of limitations remained open as of the date of the accompanying consolidated financial statements.

The Company’s policy is to recognize interest and penalties related to income tax issues as components of other non-interest expense.

The Company’s policy is to recognize interest and penalties related to income tax issues as components of other noninterest expense.

The Company recognized no material expense on income tax related interest or penalties during any of the periods presented.

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The following tables present the financial instruments measured at fair value on a recurring basis as of December 31, 2020 and December 31, 2019.

Quoted Prices in

Value Quoted Prices in

Active Markets

for Identical

(Level 1) Significant

(Level 2) Significant

December 31, 2020

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Corporate debt securities 17,462 — 17,462 —

Corporate asset based securities

Corporate asset-backed securities 35,827 — 35,827 —

Trust preferred securities 16,448 — 16,448 —

Total $ 144,233 $ — $ 144,233 $ —

December 31, 2019

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Mortgage-backed securities 71,331 — 71,331 —

Agency Securities

Corporate debt securities 18,725 — 18,725 —

Corporate asset based securities

For the year ended December 31, 2019 and the transition period ended December 31, 2018, the Company did not own any securities for which the Company utilized significant unobservable inputs (Level 3 inputs) to determine fair value.

There were no transfers in or out of Level 1, Level 2 or Level 3 fair value measurements during the year ended December 31, 2019 or the transition period ended December 31, 2018 .

There were no losses included in earnings attributable to the change in unrealized gains or losses relating to the available-for-sale securities above with fair value measurements utilizing significant unobservable inputs for the year ended December 31, 2019 , the transition period ended December 31, 2018 or the year ended September 30, 2018 , respectively.

Corporate asset-backed securities 26,854 — 26,854 —

Trust preferred securities 11,123 — 11,123 —

Total $ 180,119 $ — $ 180,119 $ —

For the years ended December 31, 2020 and December 31, 2019, the Company did not own any securities for which the Company utilized significant unobservable inputs (Level 3 inputs) to determine fair value.

There were no transfers in or out of Level 1, Level 2 or Level 3 fair value measurements during the years ended December 31, 2020 or December 31, 2019.

There were no losses included in earnings attributable to the change in unrealized gains or losses relating to the available-for-sale securities above with fair value measurements utilizing significant unobservable inputs for the years ended December 31, 2020 or December 31, 2019, respectively.

Assets Measured on a Nonrecurring Basis

The following tables present the financial instruments measured at fair value on a nonrecurring basis as of December 31, 2020 and December 31, 2019:

Quoted Prices in

Value Quoted Prices in

Active Markets

for Identical

(Level 1) Significant

(Level 2) Significant

December 31, 2020

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Mortgage servicing rights 3,252 — — 3,285

Total $ 6,486 $ — $ — $ 6,519

December 31, 2019

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Mortgage servicing rights 4,309 — — 4,309

Total $ 9,900 $ — $ — $ 9,900

The fair value of impaired loans referenced above was determined by obtaining independent third party appraisals and/or internally developed collateral valuations to support the Company’s estimates and judgments in determining the fair value of the underlying collateral supporting impaired loans.

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The following table represents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which we have utilized Level 3 inputs to determine their fair value at December 31, 2020 and December 31, 2019.

Valuation Techniques (1)

Significant Unobservable Inputs (2)

Value Valuation Techniques (1) Significant Unobservable Inputs (2) Range

December 31, 2020

Foreclosed and repossessed assets, net

Appraisal value

Estimated costs to sell

Impaired loans with allocated allowances

Appraisal value / Internal collateral valuations

Estimated costs to sell

Mortgage servicing rights

Discounted cash flows

Prepayment Speeds & Discounted rates

Foreclosed and repossessed assets, net $ 197 Appraisal value Estimated costs to sell 10 % - 15 %

Impaired loans with allocated allowances $ 3,037 Appraisal value Estimated costs to sell 10 % - 15 %

Mortgage servicing rights $ 3,285 Discounted cash flows Discounted rates 9 % - 12 %

December 31, 2019

Foreclosed and repossessed assets, net

Appraisal value

Estimated costs to sell

Impaired loans with allocated allowances

Appraisal value / Internal collateral valuations

Estimated costs to sell

Mortgage servicing rights

Discounted cash flows

Prepayment Speeds & Discounted rates

Foreclosed and repossessed assets, net $ 1,460 Appraisal value Estimated costs to sell 10 % - 15 %

Impaired loans with allocated allowances $ 4,131 Appraisal value Estimated costs to sell 10 % - 15 %

Mortgage servicing rights $ 4,309 Discounted cash flows Discounted rates 9.5 % - 12.5 %

(1) Fair value is generally determined through independent third-party appraisals of the underlying

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and delinquent property taxes.

Fair Values of Financial Instruments

ASC 825-10 and ASC 270-10, Interim Disclosures about Fair Value Financial Instruments , require disclosures about fair value financial instruments and significant assumptions used to estimate fair value.

The estimated fair values of financial instruments not previously disclosed are determined as follows:

Cash and Cash Equivalents (carried at cost)

Due to their short-term nature, the carrying amounts of cash and cash equivalents are considered to be a reasonable estimate of fair value and represents a level 1 measurement.

Other Interest Bearing Deposits

Fair value of interest bearing deposits is estimated using a discounted cash flow analysis based on current interest rates being offered by instruments with similar terms and represents a level 2 measurement.

Equity securities with readily determinable fair value

Equity securities with readily determinable fair value are comprised of Federal Agricultural Mortgage Corporation (“Farmer Mac”) equity securities and represents a level 1 measurement.

Other investments

Other investments are non-marketable equity securities comprised of Federal Home Loan Bank stock and Federal Reserve Bank stock carried at cost, which are their redeemable fair value since the market for each category of this stock is restricted.

Also included in non-marketable equity securities is stock in a private company that does not have a quoted market price.

This stock is carried at cost plus or minus changes resulting from observable price changes in orderly transactions for this stock, less other-than-temporary impairment charges, if any.

Other investments represents a level 2 measurement.

Loans Receivable, net

Fair value is estimated for portfolios of loans with similar financial characteristics.

Loans are segregated by type such as real estate, C&I and consumer.

The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity date using market discount rates reflecting the credit and interest rate risk inherent in the loan, including estimates of prepayments and reasonable prepayment rates.

The estimate of maturity is based on the Bank’s repayment schedules for each loan classification.

The fair value of variable rate loans approximates carrying value.

The net carrying value of the loans acquired through the CBN, WFC, United Bank and F&M acquisitions approximates the fair value of the loans at December 31, 2019 .

The fair value of loans is considered to be a level 3 measurement.

Loans Held for Sale

Fair values are based on quoted market prices of similar loans sold on the secondary market.

Mortgage Servicing Rights

Fair values are estimated using discounted cash flows based on current market rates and other factors.

Impaired Loans (carried at fair value)

Impaired loans are loans in which the Company has measured impairment, generally based on the fair value of the loan’s collateral.

Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds.

These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Foreclosed Assets (carried at fair value)

Foreclosed assets are the only non-financial assets valued on a non-recurring basis which are held by the Company at fair value, less cost to sell.

At foreclosure or repossession, if the fair value, less estimated costs to sell, of the collateral acquired (real estate, vehicles, equipment) is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the ALL.

Additionally, valuations are periodically performed by management and any subsequent reduction in value is recognized by a charge to income.

The fair value of foreclosed assets held-for-sale is estimated using Level 3 inputs based on observable market data.

Accrued Interest Receivable and Payable

Due to their short-term nature, the carrying amounts of accrued interest receivable and payable are considered to be a reasonable estimate of fair value and represents a level 1 measurement.

The fair value of deposits with no stated maturity, such as demand deposits, savings accounts, and money market accounts, is the amount payable on demand at the reporting date.

The fair value of fixed rate certificate accounts is calculated by using discounted cash flows applying interest rates currently being offered on similar certificates and represents a level 3 measurement.

Federal Home Loan Bank (“FHLB”) Advances

The fair value of long-term borrowed funds is estimated using discounted cash flows based on the Bank’s current incremental borrowing rates for similar borrowing arrangements.

The carrying value of short-term borrowed funds approximates their fair value and represents a level 2 measurement.

Off-Balance-Sheet Instruments

The fair value of off-balance sheet commitments, if material, would be estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the customers.

Since this amount is immaterial to the Company’s consolidated financial statements, no amount for fair value is presented.

The table below represents what we would receive to sell an asset or what we would have to pay to transfer a liability in an orderly transaction between market participants at the measurement date.

The carrying amount and estimated fair value of the Company’s financial instruments as of the dates indicated below were as follows:

December 31, 2019

December 31, 2018

Valuation Method Used

December 31, 2020 December 31, 2019

Valuation Method Used Carrying

Amount Estimated

Value Carrying

Amount Estimated

Financial assets:

Cash and cash equivalents

Other interest-bearing deposits

Securities available for sale "AFS"

Securities held to maturity "HTM"

Equity securities with readily determinable fair value

Other investments

Loans receivable, net

Loans held for sale

Mortgage servicing rights

Accrued interest receivable

Cash and cash equivalents (Level I) $ 119,440 $ 119,440 $ 55,840 $ 55,840

Other interest bearing deposits (Level II) 3,752 3,818 4,744 4,792

Securities available for sale "AFS" (Level II) 144,233 144,233 180,119 180,119

Securities held to maturity "HTM" (Level II) 43,551 43,784 2,851 2,957

Equity securities with readily determinable fair value (Level I) 200 200 246 246

Other investments (Level II) 14,948 14,948 15,005 15,005

Loans receivable, net (Level III) 1,220,538 1,239,692 1,167,060 1,161,660

Loans held for sale (Level II) 3,075 3,075 5,893 5,893

Mortgage servicing rights (Level III) 3,252 3,285 4,282 4,309

Accrued interest receivable (Level I) 5,652 5,652 4,738 4,738

Financial liabilities:

FHLB advances

Other borrowings

Other liabilities

Accrued interest payable

Deposits (Level III) $ 1,295,256 $ 1,292,104 $ 1,195,702 $ 1,192,777

FHLB and FRB advances (Level II) 123,498 128,282 130,971 131,593

Other borrowings (Level I) 58,328 58,328 43,560 43,560

Other liabilities (Level I) — — 10,010 10,010

Accrued interest payable (Level I) 796 796 453 453

NOTE 17— EARNINGS PER SHARE

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A reconciliation of the basic and diluted earnings per share is as follows:

Three months ended

December 31, 2019

December 31, 2018

September 30, 2018

Year ended Year ended

December 31, 2020 December 31, 2019

Net income attributable to common shareholders $ 12,725 $ 9,463

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Weighted average common shares outstanding 11,161,551 11,114,328

Dilutive preferred shares impact prior to common stock conversion (2)

Dilutive stock options outstanding 260 6,961

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Additional common stock option shares that have not been included due to their antidilutive effect 68,800 26,200

(1) On September 28, 2018, 500,000 shares of Series A Preferred Stock was mandatorily converted into 10 Shares of Common Stock following receipt of stockholder approval, resulting in the issuance of 5,000,000 shares of common stock, which impacts basic and diluted earnings per share.

(2) On June 20, 2018, the Company entered into a Securities Purchase Agreement, pursuant to which the Company sold an aggregate of 500,000 shares of Series A Preferred Stock in a private placement at $130.00 per share, for aggregate gross proceeds of $65 million , which had an impact on diluted earnings per share.

NOTE 18 – OTHER COMPREHENSIVE INCOME (LOSS)

The following table shows the tax effects allocated to each component of other comprehensive income (loss):

For the year ended, December 31,

For the three months ended, December 31,

For the year ended, September 30,

Unrealized gains (losses) on securities:

Net unrealized gains (losses) arising during the period

reclassification adjustment for gains (losses) included in net income

Other comprehensive income (loss)

The following table shows the changes in the accumulated balances of other comprehensive income (loss):

Unrealized Losses on Securities

Accumulated Other

For the year ended, December 31, For the year ended, December 31,

Expense Net-of-Tax

Amount Before-Tax

Expense Net-of-Tax

Unrealized gains on securities:

Net unrealized gains arising during the period $ 2,546 ( 472 ) $ 2,074 $ 1,681 $ ( 462 ) $ 1,219

Reclassification adjustment for gains included in net income ( 156 ) 43 ( 113 ) 271 ( 75 ) 196

Other comprehensive income $ 2,390 $ ( 429 ) $ 1,961 $ 1,952 $ ( 537 ) $ 1,415

The changes in the accumulated balances for each component of other comprehensive income (loss), net of tax for the years ended December 31, 2020 and December 31, 2019 were as follows:

Unrealized Gains (Losses) on Securities Other Accumulated

Comprehensive

Balance, October 1, 2017

Current year-to-date other comprehensive loss, net of tax

Reclassification of certain deferred tax effects due to adoption of ASU 2018-01 (1)

Ending Balance, September 30, 2018

Current year-to-date other comprehensive income, net of tax

Ending balance, December 31, 2018

Current year-to-date other comprehensive income, net of tax

Income (Loss), net of tax

Beginning Balance, January 1, 2019 $ ( 1,704 ) $ ( 1,841 )

Current year-to-date other comprehensive income 1,415 1,415

Adoption of ASU 2016-01;

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Ending balance, December 31, 2019 $ ( 334 ) $ ( 471 )

(1) Amounts reclassified to retained earnings due to early adoption of ASU 2018-02.

For further information, refer to Note 15, “Income Taxes”.

Current year-to-date other comprehensive income 2,390 1,961

Ending balance, December 31, 2020 $ 2,056 $ 1,490

(1) Amount reclassified to retained earnings due to January 1, 2019 adoption of ASU 2016-02.

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Reclassifications out of accumulated other comprehensive income for the twelve months ended December 31, 2020 were as follows:

Details about Accumulated Other Comprehensive Income (Loss) Components

Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)

Affected Line Item on the Statement of Operations

Unrealized gains and losses

Sale of securities

Net gain on sale of available for sale securities

Provision for income taxes

Total reclassifications for the period

Net gain attributable to common shareholders

(1) Amounts in parentheses indicate decreases to profit/loss.

Reclassifications out of accumulated other comprehensive income for the three months ended December 31 2018 were as follows:

Details about Accumulated Other Comprehensive Income (Loss) Components

Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)

Affected Line Item on the Statement of Operations

Details about Accumulated Other Comprehensive Income (Loss) Components Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) (1) Affected Line Item on the Statement of Operations

Unrealized gains and losses

Sale of securities

Net gain on sale of available for sale securities

Provision for income taxes

Total reclassifications for the period

Net gain attributable to common shareholders

Sale of securities $ 156 Net gains on investment securities

Tax effect ( 43 ) Provision for income taxes

Total reclassifications for the period $ 113 Net gain attributable to common shareholders

(1) Amounts in parentheses indicate decreases to profit/loss.

Reclassifications out of accumulated other comprehensive income for the twelve months ended September 30, 2018 were as follows:

Details about Accumulated Other Comprehensive Income (Loss) Components

Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)

Affected Line Item on the Statement of Operations

Reclassifications out of accumulated other comprehensive income for the twelve months ended December 31, 2019 were as follows:

Details about Accumulated Other Comprehensive Income (Loss) Components Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) (1) Affected Line Item on the Statement of Operations

Unrealized gains and losses

Sale of securities

Net loss on sale of available for sale securities

Provision for income taxes

Total reclassifications for the period

Net loss attributable to common shareholders

Sale of securities $ 271 Net gains on investment securities

Tax effect ( 75 ) Provision for income taxes

Total reclassifications for the period $ 196 Net gain attributable to common shareholders

(1) Amounts in parentheses indicate decreases to profit/loss.

NOTE 19— CONDENSED FINANCIAL INFORMATION – PARENT COMPANY ONLY

The following condensed balance sheets as of December 31, 2019 and 2018 , and condensed statements of operations and cash flows for the year ended December 31, 2019 , for the transition period ended December 31, 2018 and the year ended September 30, 2018 , for Citizens Community Bancorp, Inc.

The following condensed balance sheets as of December 31, 2020 and 2019, and condensed statements of operations and cash flows for the years ended December 31, 2020 and 2019, for Citizens Community Bancorp, Inc.

should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.

Condensed Balance Sheets

December 31, December 31,

Cash and cash equivalents $ 23,333 $ 5,253

Other assets 375 332

Investment in subsidiary 195,563 188,594

Total assets $ 219,271 $ 194,179

Liabilities and Stockholders' Equity

5 unchanged sentences

Statements of Operations

Year ended December 31,

Transition period ended December 31,

Year ended September 30,

Year ended December 31, Year ended December 31,

Interest income $ — $ —

2 unchanged sentences

Dividend income from bank subsidiary 10,500 7,350

Operating income

Operating expenses

Net (loss) income before benefit for income taxes and equity in undistributed income (loss) of subsidiaries

Non-interest income 193 —

Non-interest expense ( 848 ) ( 1,596 )

Net income before benefit for income taxes and equity in undistributed income of subsidiaries 7,387 3,739

Benefit for income taxes 860 904

Net (loss) earnings before equity in undistributed income (loss) of subsidiaries

Equity in undistributed income (loss) of subsidiaries

Net earnings before equity in undistributed income of subsidiaries 8,247 4,643

Equity in undistributed income of subsidiaries 4,478 4,820

Net income $ 12,725 $ 9,463

Statements of Cash Flows

Year ended December 31,

Transition period ended December 31,

Year ended September 30,

Year ended December 31, Year ended December 31,

Change in cash and cash equivalents:

Cash flows from operating activities:

Net income $ 12,725 $ 9,463

Depreciation expense 12 12

1 unchanged sentence

Adjustments to reconcile net income to net cash provided by operating activities - Equity in undistributed income of subsidiary ( 14,978 ) ( 12,170 )

Decrease (increase) in other assets

(Increase) decrease in other assets ( 55 ) 101

Decrease (increase) in other liabilities 313 ( 391 )

1 unchanged sentence

Cash flows from investing activities:

Proceeds from maturities of interest bearing deposits

Proceeds from private placement stock offering, net of issuance costs

Cash consideration paid in business combination — ( 20,970 )

Net capital expenditures

Net cash provided by (used in) investing activities

Net cash used in investing activities — ( 20,970 )

Cash flows from financing activities:

Proceeds from other borrowings, net of issuance costs 14,677 29,913

Amortization of debt issuance costs 91 —

Repayments of other borrowings — ( 13,000 )

4 unchanged sentences

Cash dividends paid ( 2,372 ) ( 2,198 )

Net cash (used in) provided by financing activities

Net increase in cash and cash equivalents

Net cash provided by financing activities 20,049 22,215

Net increase (decrease) in cash and cash equivalents 18,080 ( 1,722 )

Cash and cash equivalents at beginning of year 5,253 6,975

1 unchanged sentence

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On March 12, 2020, the Company engaged Eide Bailly LLP to replace Baker Tilly Virchow Krause, LLP as its independent registered public accounting firm.

Information regarding the change in the independent registered public accounting firm was disclosed in the Company’s Current Report on Form 8-K dated March 16, 2020.

There were no disagreements or reportable events requiring disclosure under Item 304(b) of regulation S-K relating to this change in auditors.

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data