Citizens Community Bancorp Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 57 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 58 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: 59 • 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 60 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of Citizens Community Bancorp, Inc. and Subsidiary 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 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 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 March 10, 2020 61 CITIZENS COMMUNITY BANCORP, INC. Consolidated Balance Sheets (in thousands, except share data) December 31, 2020 December 31, 2019 Assets Cash and cash equivalents $ 119,440 $ 55,840 Other interest bearing deposits 3,752 4,744 Securities available for sale "AFS" 144,233 180,119 Securities held to maturity "HTM" 43,551 2,851 Equity securities with readily determinable fair value 200 246 Other investments 14,948 15,005 Loans receivable 1,237,581 1,177,380 Allowance for loan losses ( 17,043 ) ( 10,320 ) Loans receivable, net 1,220,538 1,167,060 Loans held for sale 3,075 5,893 Mortgage servicing rights, net 3,252 4,282 Office properties and equipment, net 21,165 21,106 Accrued interest receivable 5,652 4,738 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 Liabilities: 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 Other liabilities 11,449 10,463 Total liabilities 1,488,531 1,380,696 Stockholders’ Equity: Common stock— $ 0.01 par value, authorized 30,000,000 ; 11,056,349 and 11,266,954 shares issued and outstanding, respectively 111 113 Additional paid-in capital 126,704 128,856 Retained earnings 32,809 22,517 Unearned deferred compensation ( 550 ) ( 462 ) Accumulated other comprehensive income (loss) 1,490 ( 471 ) Total stockholders’ equity 160,564 150,553 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 1,649,095 $ 1,531,249 See accompanying notes to audited consolidated financial statements. 62 CITIZENS COMMUNITY BANCORP, INC. Consolidated Statements of Operations (in thousands, except per share data) For the year ended December 31, 2020 For the year ended December 31, 2019 Interest and dividend income: Interest and fees on loans $ 59,763 $ 54,647 Interest on investments 4,764 5,776 Total interest and dividend income 64,527 60,423 Interest expense: Interest on deposits 10,000 12,174 Interest on FHLB and FRB borrowed funds 1,814 2,721 Interest on other borrowed funds 2,458 2,015 Total interest expense 14,272 16,910 Net interest income before provision for loan losses 50,255 43,513 Provision for loan losses 7,750 3,525 Net interest income after provision for loan losses 42,505 39,988 Non-interest income: Service charges on deposit accounts 1,832 2,368 Interchange income 2,029 1,735 Loan servicing income 4,158 2,674 Gain on sale of loans 6,693 2,462 Loan fees and service charges 1,383 1,145 Insurance commission income 475 734 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 Non-interest expense: 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 Mortgage servicing rights expense 3,050 1,108 Advertising, marketing and public relations 967 1,214 FDIC premium assessment 584 258 Professional services 1,829 2,457 Gain on repossessed assets, net ( 259 ) ( 125 ) Other 3,117 6,130 Total non-interest expense 43,673 42,686 Income before provision for income tax 17,280 12,277 Provision for income taxes 4,555 2,814 Net income attributable to common stockholders $ 12,725 $ 9,463 Per share information: Basic earnings $ 1.14 $ 0.85 Diluted earnings $ 1.14 $ 0.85 Cash dividends paid $ 0.21 $ 0.20 See accompanying notes to audited consolidated financial statements. 63 CITIZENS COMMUNITY BANCORP, INC. Consolidated Statements of Comprehensive Income (in thousands) 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, net of tax: Securities available for sale 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 See accompanying notes to audited consolidated financial statements. 64 CITIZENS COMMUNITY BANCORP, INC. Consolidated Statements of Changes in Stockholders’ Equity (in thousands, except Shares) 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 — — Surrender of restricted shares of common stock ( 4,667 ) — ( 53 ) — — — ( 53 ) Restricted common stock awarded under the equity incentive plan 12,847 — 274 — ( 274 ) — — Common stock issued to F&M shareholders 288,999 3 3,102 — — — 3,105 Common stock options exercised 28,430 1 202 — — — 203 Stock option expense — — 18 — — — 18 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) — — — ( 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 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 ) Stock option expense — — 14 — — — 14 Amortization of restricted stock — — — — 530 — 530 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) Amount reclassified to retained earnings due to January 1, 2019 adoption of ASU 2016-02. For further information, refer to Note 1, “Nature of Business and Summary of Significant Accounting Policies; Recent Pronouncements - Adopted” See accompanying notes to audited consolidated financial statements. 65 CITIZENS COMMUNITY BANCORP, INC. Consolidated Statements of Cash Flows (in thousands) For the year ended December 31, 2020 For the year ended December 31, 2019 Cash flows from operating activities: Net income attributable to common stockholders $ 12,725 $ 9,463 Adjustments to reconcile net income to net cash provided by operating activities: 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 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 Amortization of restricted stock 530 470 Net stock based compensation expense 14 18 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 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 ) (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 Net cash provided by operating activities 23,785 12,836 Cash flows from investing activities: Net decrease in other interest bearing deposits 992 3,708 Purchase of available for sale securities ( 28,218 ) ( 53,915 ) Purchase of held to maturity securities ( 44,441 ) — Proceeds from principal payments and sale of available for sale securities 66,872 58,618 Proceeds from principal payments and maturities of held to maturity securities 3,692 1,999 Net purchases (sales) of other investments 57 ( 1,299 ) Proceeds from sale of foreclosed and repossessed assets 2,780 3,038 Net increase in loans ( 62,486 ) ( 60,874 ) Net capital expenditures ( 2,573 ) ( 6,771 ) 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 (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 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 ) — Surrender of restricted shares of common stock ( 27 ) ( 53 ) 66 Common stock options exercised — 203 Cash dividends paid ( 2,372 ) ( 2,198 ) Net cash provided by financing activities 101,630 60,559 Net increase in cash and cash equivalents 63,600 10,062 Cash and cash equivalents at beginning of period 55,840 45,778 Cash and cash equivalents at end of period $ 119,440 $ 55,840 Supplemental cash flow information: Cash paid during the period for: Interest on deposits $ 9,980 $ 12,665 Interest on borrowings $ 3,950 $ 5,128 Income taxes $ 7,870 $ 3,847 Supplemental noncash disclosure: Transfers from loans receivable to foreclosed and repossessed assets $ 1,057 $ 1,803 Fair value of assets acquired, net of cash and cash equivalents $ — $ 177,494 Fair value of liabilities assumed, net of cash and cash equivalents $ — $ 169,724 See accompanying notes to audited consolidated financial statements. 67 CITIZENS COMMUNITY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share data) NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of Citizens Community Federal N.A. (the “Bank”) included herein have been included by its parent company, Citizens Community Bancorp, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). As used in this annual report, the terms “we”, “us”, “our”, and “Citizens Community Bancorp, Inc.” mean the Company and its wholly owned subsidiary, the Bank, unless the context indicates other meaning. The Bank is a national banking association (a “National Bank”) and operates under the title of Citizens Community Federal National Association (“Citizens Community Federal N.A.” or “Bank”). The Company is a bank holding company, supervised by the Federal Reserve Bank of Minneapolis (the “FRB”), and operates under the title of Citizens Community Bancorp, Inc. 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 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. The U.S. 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 25 branch locations. Its primary markets include the Chippewa Valley Region in Wisconsin, Mankato and Twin Cities markets in Minnesota, and various rural communities around these areas. The Bank offers traditional community banking services to businesses, agricultural operators and consumers, including one-to-four family residential mortgages. 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. The branch sale included approximately $ 34 million in deposits and $ 300 in fixed assets. The Bank retained all loans associated with the branch. On July 1, 2019 the Company completed its previously announced acquisition of F. & M. Bancorp. 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, 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. All significant inter-company accounts and transactions have been eliminated. Use of Estimates— Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, fair value of financial instruments, the allowance for loan losses, mortgage servicing rights, foreclosed and repossessed assets, valuation of intangible assets arising from acquisitions, useful lives for depreciation and amortization, valuation of goodwill and long-lived assets, stock based compensation, deferred tax assets, uncertain income tax positions and contingencies. Management does not anticipate any material changes to estimates made herein in the near term. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: those items described under the caption “Risk Factors” in Item 1A of the accompanying 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 68 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; Held to Maturity and Available for Sale – Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of the date of each balance sheet. Securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Held to maturity securities are stated at amortized cost. Investment securities not classified as held to maturity are classified as available for sale. Available for sale securities are stated at fair value, with unrealized holding gains and losses being reported in other comprehensive income (loss), net of tax. Unrealized losses deemed other-than-temporary due to credit issues are reported in the Company’s net income in the period in which the losses arise. Interest income includes amortization of purchase premium or accretion of purchase discount. Amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the estimated lives of the securities. 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. As part of such monitoring, the credit quality of individual securities and their issuer is assessed. Significant inputs used to measure the amount of other-than-temporary impairment related to credit loss include, but are not limited to; the Company’s intent and ability to sell the debt security prior to recovery, that it is more likely than not that the Company will not sell the security prior to recovery, default and delinquency rates of the underlying collateral, remaining credit support, and historical loss severities. Adjustments to market value of available for sale securities that are considered temporary are recorded in other comprehensive income or loss as separate components of stockholders’ equity, net of tax. If the unrealized loss of a security is identified as other-than-temporary based on information available, such as the decline in the creditworthiness of the issuer, external market ratings, or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if credit loss exists. If there is a credit loss, it will be recorded in the Company’s consolidated statement of operations. Non-credit components of the unrealized losses on available for sale securities will continue to be recognized in other comprehensive income (loss), net of tax. Equity securities with readily determinable fair value - The Company is required to maintain an investment in Federal Agricultural Mortgage Corporation (“Farmer Mac”) equity securities. Farmer Mac equity securities are carried at their fair market value, which is readily determinable. Changes in fair value are recognized as net 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. These securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other exchange traded equity securities. As no ready market exists for these stocks, and they have no quoted 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 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. Management’s evaluation for impairment of these other investments, includes consideration of the financial condition and other available relevant information of the issuer. Based on management’s quarterly evaluation, no impairment has been recorded on these securities. Other investments totaling $ 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 $ 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 69 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. Interest income on commercial, mortgage and consumer loans is discontinued according to the following schedules: • Commercial/agricultural real estate loans past due 90 days or more; • Commercial and industrial/agricultural operating loans past due 90 days or more; • Closed end consumer installment loans past due 120 days or more; and • Residential mortgage loans and open ended installment loans past due 180 days or more. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for a loan placed on nonaccrual status is reversed against interest income. Interest received on such loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual status. Loans are returned to accrual status when 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”), 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. Loan losses are charged against the ALL when management believes that the collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the ALL. Management estimates the required ALL balance taking into account the following factors: past loan loss experience; the nature, volume and composition of our loan portfolio; known and inherent risks in our portfolio; information about specific borrowers’ ability to repay; estimated collateral values; current economic conditions; and other relevant factors determined by management. The ALL consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for certain qualitative factors. The entire ALL balance is available for any loan that, in management’s judgment, should be charged off. A loan is impaired when full payment under the loan terms is not expected. 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. 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. All TDRs are individually evaluated for impairment. See Note 4, “Loans, Allowance for Loan Losses and Impaired Loans” for more information on what we consider to be a TDR. For TDR’s or substandard loans deemed to be impaired, a specific ALL allocation may be established so that the loan is reported, net, at the lower of (a) its outstanding principal balance; (b) the present value of the loan’s estimated future cash flows using the loan’s existing rate; or (c) at the fair value of any loan collateral, less estimated disposal costs, if repayment is expected solely from the underlying collateral of the loan. For TDRs less than 90+ days past due, and certain substandard loans that are less than 90+ days delinquent, the likelihood of the loan migrating to over 90 days past due is also taken into account when determining the specific ALL allocation for these particular loans. Large groups of smaller balance homogeneous loans, such as non-TDR commercial, consumer and residential real estate loans, are collectively evaluated for ALL purposes, and accordingly, are not separately identified for ALL disclosures. Acquired Loans— Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value with no carryover of related allowance for credit losses. Any allowance for loan loss on these pools reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received). 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. 70 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. As such, we may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable yield. Loans acquired with deteriorated credit quality are accounted for in accordance with Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC 310-30) if, at acquisition, the loans have evidence of credit quality deterioration since origination and it is probable that all contractually required payments will not be collected. At acquisition, the Company considers several factors as indicators that an acquired loan has evidence of deterioration in credit quality. These factors include, but are not limited to; loans 90 days or more past due, loans with an internal risk grade of substandard or below, loans classified as non-accrual by the acquired institution, and loans that have been previously modified in a troubled debt restructuring. Under the ASC 310-30 model, the excess of cash flows expected to be collected at acquisition over recorded fair value is referred to as the accretable yield and is the interest component of expected cash flow. The accretable yield is recognized into income over the remaining life of the loan if the timing and/or amount of cash flows expected to be collected can be reasonably estimated (the accretion method). If the timing or amount of cash flows expected to be collected cannot be reasonably estimated, the cost recovery method of income recognition is used. The difference between the loan’s total scheduled principal and interest payments over all cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the non-accretable difference. The non-accretable difference represents contractually required principal and interest payments which the Company does not expect to collect. Over the life of the loan, management continues to estimate cash flows expected to be collected. Decreases in expected cash flows are recognized as impairments through a charge to the provision for loan losses resulting in an increase in the allowance for loan losses. Subsequent improvements in cash flows result in first, reversal of existing valuation allowances recognized subsequent to acquisition, if any, and next, an increase in the amount of accretable yield to be subsequently recognized in interest income on a prospective basis over the loan’s remaining life. Acquired loans that were not individually determined to be purchased with deteriorated credit quality are accounted for in accordance with ASC 310-20, Nonrefundable Fees and Other Costs (ASC 310-20), whereby the premium or discount derived from the fair market value adjustment, on a loan-by-loan or pooled basis, is recognized into interest income on a level yield basis over the remaining expected life of the loan or pool. For all acquired loans, the outstanding loan balances less any related accretable yield and/or non-accretable difference is referred to as the loans’ carrying amount. Loans Held for Sale — Loans held for sale are those loans the Company has the intent to sell in the foreseeable future. They are carried at the lower of aggregate cost or fair value. 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. 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 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 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 71 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. The Company amortizes acquired intangible assets, primarily Core Deposit Intangibles (CDI) with definite useful economic lives over their useful economic lives ranging from 48 to 111 months utilizing the straight-line method. On a periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amounts of the intangible assets may be impaired. 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. All of our existing leases have been determined to be operating leases under ASC 842. Right-of-use (“ROU”) assets are included in other assets in our consolidated balance sheets. Operating lease liabilities are included in other liabilities in our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date, based on the present value of lease payments over the lease term. As none of our existing leases provide an implicit rate, we use our incremental borrowing rate, based on information available at commencement date, in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease, when it is reasonably certain that we will exercise that option. Lease 72 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. Advertising, Marketing and Public Relations Expense— The Company expenses all advertising, marketing and public relations costs as they are incurred. Income Taxes – The Company accounts for income taxes in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes.” Under this guidance, deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. See Note 15, “Income Taxes” for details on the Company’s income taxes. 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. Consideration is given to various positive and negative factors that could affect the realization of the deferred tax assets. In evaluating this available evidence, management considers, among other things, historical performance, expectations of future earnings, the ability to carry back losses to recoup taxes previously paid, the length of statutory carry forward periods, any experience with utilization of operating loss and tax credit carry forwards not expiring, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. Accordingly, the Company’s evaluation is based on current tax laws as well as management’s expectations of future performance. Revenue Recognition - The Company recognizes revenue in the consolidated statements of operations as it is earned and when collectability is reasonably assured. The primary source of revenue is interest income from interest earning assets, which is recognized on the accrual basis of accounting using the effective interest method. The recognition of revenues from interest earning assets is based upon formulas from underlying loan agreements, securities contracts or other similar contracts. 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 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. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable during the period, consisting of stock options outstanding under the Company’s stock incentive plans that have an exercise price that is less than the Company’s stock price on the reporting date. Loss Contingencies— Loss contingencies, including claims and legal actions arising in the normal course of business, are recorded as liabilities when the likelihood of loss is probable and an amount of loss can be reasonably estimated. Off-Balance-Sheet Financial Instruments— In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit and commitments under lines of credit arrangements, issued to meet customer financial needs. Such financial instruments are recorded in the financial statements when they become payable. See Note 12, “Commitments and Contingencies” in Notes to Consolidated Financial Statements. Derivatives--Rate-lock Commitments and Forward Sale Agreements — The Company enters into commitments to originate loans, whereby the interest rate on the loan is determined prior to funding (rate-lock commitment). Rate-lock commitments on mortgage loans held for sale are derivative instruments. If material, derivative instruments are carried on the 73 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. 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 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. In the event that interest rates rise after the Company enters into an interest rate lock, the fair value of the loan commitment will decline. However, the fair value of the forward loan sale agreement related to such loan commitment should increase by substantially the same amount, effectively eliminating the Company’s interest rate and price risks. At December 31, 2020, the Company had $ 23,650 of loan commitments outstanding related to loans being originated for sale, all of which were subject to interest rate lock commitments and corresponding forward loan sale agreements, as described above. The net fair values of outstanding interest rate-lock commitments and forward sale agreements were considered immaterial to the Company’s consolidated financial statements as of December 31, 2020. Other Comprehensive Income — Accumulated and other comprehensive income or loss is comprised of the unrealized and realized gains and losses on securities available for sale and pension liability adjustments, net of tax, and is shown on the accompanying consolidated statements of other comprehensive income. Operating Segments— While our executive officers monitor the revenue streams of the various banking products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company’s banking operations are considered by management to be aggregated in one reportable operating segment. Recognition of a prior period error- In April 2019 the Company determined that certain state franchise returns had not ever been filed. The franchise liability calculation is primarily based on the Company's stockholders’ equity. The initial franchise return should have been filed in 2006 as part of the Company’s initial public offering. Additionally, with the Company's 2018 capital raise, an additional franchise liability should have been recorded in fiscal 2018. The Company should have recorded a $ 140 pre-tax charge related to the 2006 initial public offering in the fiscal year ended September 30, 2006 and a $ 160 pre-tax charge related to the 2018 capital raise in the fiscal year ended September 30, 2018. The correction of these prior period errors to record both the 2006 and 2018 franchise liability totaling $ 300 , was recorded during the three months ended March 31, 2019. The impact on results of operations for the three months ended March 31, 2019 and year ended December 31, 2019 were as follows: pre-tax income was understated by $ 300 , tax expense was overstated by $ 81 and net income was understated by $ 219 or $ 0.02 per share. 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. Reclassifications— Certain items previously reported were reclassified for consistency with the current presentation. Recent Accounting Pronouncements— The Financial Accounting Standards Board (FASB) issues Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification (ASC). This section provides a summary description of recent ASUs that have significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on financial statements issued in the near future. Recent Accounting Pronouncements—Adopted ASU 2014-09; 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. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company applied the five-step method outlined in the ASU to all revenue streams scoped-in by the ASU and elected the modified retrospective implementation method. Substantially all of the Company’s interest income and certain non-interest income were not impacted by the adoption of this ASU because the revenue from those contracts with customers is covered by other guidance in U.S. GAAP. 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 2014-09, as amended, became 74 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. The Company has made all required additional disclosures related to non-interest income in the consolidated financial statements, primarily in Revenue Recognition policy included herein in Note 1. ASU 2016-01; Recognition and Measurement of Financial Assets and Liabilities— The guidance requires certain equity investments to be measured at fair value, with changes in fair value recognized in net income. The Company’s adoption of ASU 2016-01 as of January 1, 2019, constitutes a change in accounting principle. The Company recorded a cumulative effect adjustment to retained earnings of $ 45 as of January 1, 2019, as a result of implementing this new accounting standard. ASU 2016-02; Leases (Topic 842)— The ASU changed current GAAP by requiring that lease assets and liabilities arising from operating leases be recognized on the balance sheet. In July 2018, the FASB issued ASU 2018-10 and ASU 2018-11, Codification Improvements to Topic 842, Leases, amending various aspects of Topic 842. Topic 842 does not significantly change the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee from current U.S. GAAP. For leases with a term of 12 months or less, a lessee would be permitted to make an accounting policy election, by class of underlying asset, not to recognize lease assets and liabilities. Topic 842 became effective for the Company for annual and interim periods beginning in the first quarter 2019. 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. Adoption of Topic 842 did not have a material impact on the Company’s consolidated statement of operations. Management adopted the guidance on January 1, 2019, and elected certain practical expedients offered by the FASB, including foregoing the restatement of comparative periods upon adoption. Management also excluded short-term leases from the recognition of right-of-use asset and lease liabilities. Additionally, the Company elected the transition relief allowed by FASB in foregoing reassessment of the following: 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, 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. ASU 2017-04; Intangibles - Goodwill and Other (Topic 350)— The ASU simplifies the accounting for goodwill impairment. This guidance, among other things, removes step two of the goodwill impairment test thus eliminating the need to determine the fair value of individual assets and liabilities of the reporting unit. Upon adoption of this ASU, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This may result in either greater or less impairment being recognized than under current guidance. 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 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 75 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 ASU 2016-13; Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments-- The ASU changes accounting for credit losses on loans receivable and debt securities from an incurred loss methodology to an expected credit loss methodology. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, ASU 2016-13 requires the use of forward-looking information to form credit loss estimates. 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 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. Earlier adoption is permitted; however, the Company does not currently plan to adopt the ASU early. Management is assessing alternative loss estimation methodologies and the Company’s data and system needs in order to evaluate the impact that adoption of this standard will have on the Company’s financial condition and results of operations. 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. NOTE 2 – ACQUISITION F. & M. Bancorp. of Tomah, Inc. On July 1, 2019 the Company completed its previously announced acquisition of F. & M. Bancorp. 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. Under the terms of the merger agreement, each issued and outstanding share of F&M common stock, $ 0.25 par value, other than F&M common stock held by dissenting shareholders, or shares of F&M common stock held by F&M as treasury stock or owned by the Company, was converted into the right to receive, without interest (i) $ 94.92 in cash, (ii) 1.3350 shares of Citizens common stock, and (iii) cash in lieu of fractional shares. The value of the aggregate consideration paid to F&M shareholders was approximately $ 23.9 million, consisting of $ 20.8 million cash, and shares of the Company’s common stock valued at approximately $ 3.1 million. The merger added $ 193.6 million in assets, gross loans of $ 130.3 million, $ 148.6 million in deposits, $ 0.024 million of goodwill and $ 1.6 million of a core deposit intangible. The goodwill is not deductible for tax purposes, as the acquisition is accounted for as a tax-free exchange for tax purposes. In connection with the F&M 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 $ 3,121 for the year ended December 31, 2019, and were included in other non-interest expense on the consolidated statement of operations. 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 76 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 F&M acquisition occurred on January 1, 2019, not considering potential cost savings and other business synergies we expect to receive as a result of the acquisition: Citizens Community Bancorp, Inc. F&M Pro Forma Adjustments Pro Forma Combined Year ended December 31, 2019 Revenue (net interest income and non-interest income) $ 51,826 $ 6,743 $ ( 612 ) $ 57,957 Net income attributable to common stockholders $ 8,614 $ 1,895 $ ( 579 ) $ 9,930 Earnings per share--basic $ 0.76 $ 0.17 $ ( 0.05 ) $ 0.88 Earnings per share-diluted $ 0.74 $ 0.14 $ ( 0.05 ) $ 0.83 These 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 F&M from the acquisition date of July 1, 2019 to December 31, 2019 were approximately $ 3,100 and $ 850 , respectively. 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: 77 F&M Fair value of consideration paid $ 23,894 Fair value of identifiable assets acquired: Cash and cash equivalents 15,757 Fed funds sold — Interest bearing deposits 992 Securities available for sale “AFS” 37,069 Non-marketable equity securities, at cost 2,413 Loans held for sale — Loans receivable, net 126,732 Mortgage servicing assets — Premises and equipment, net 2,654 Core deposit intangible assets 1,582 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 Other liabilities 965 Total liabilities assumed 169,724 Fair value of net identifiable assets acquired 23,870 Goodwill recognized $ 24 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. 78 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 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value December 31, 2020 U.S. government agency obligations $ 33,048 $ 387 $ 70 $ 33,365 Obligations of states and political subdivisions 140 — — 140 Mortgage-backed securities 39,454 1,537 — 40,991 Corporate debt securities 17,199 372 109 17,462 Corporate asset-backed securities 36,039 104 316 35,827 Trust preferred securities 16,297 189 38 16,448 Total available for sale securities $ 142,177 $ 2,589 $ 533 $ 144,233 December 31, 2019 U.S. government agency obligations $ 52,020 $ 132 $ 347 $ 51,805 Obligations of states and political subdivisions 281 — — 281 Mortgage-backed securities 70,806 635 110 71,331 Corporate debt securities 18,776 66 117 18,725 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 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value December 31, 2020 Obligations of states and political subdivisions $ 600 $ 2 $ — $ 602 Mortgage-backed securities 42,951 265 34 43,182 Total held to maturity securities $ 43,551 $ 267 $ 34 $ 43,784 December 31, 2019 Obligations of states and political subdivisions $ 300 $ 2 $ — $ 302 Mortgage-backed securities 2,551 104 — 2,655 Total held to maturity securities $ 2,851 $ 106 $ — $ 2,957 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. As of December 31, 2020, the Bank has pledged certain of its U.S. Government Agency securities with a carrying value of $ 576 and mortgage-backed securities with a carrying value of $ 3,028 as collateral against specific municipal deposits. 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. Expected maturities will differ from contractual maturities on mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Expected maturities may differ from contractual maturities on certain agency and securities due to the call feature. 79 December 31, 2020 December 31, 2019 Available for sale securities Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Due in one year or less $ — $ — $ 141 $ 141 Due after one year through five years 3,833 4,095 5,900 5,959 Due after five years through ten years 44,405 44,880 43,269 43,180 Due after ten years 54,485 54,267 60,652 59,508 Total securities with contractual maturities 102,723 103,242 109,962 108,788 Mortgage-backed securities 39,454 40,991 70,806 71,331 Total available for sale securities $ 142,177 $ 144,233 $ 180,768 $ 180,119 December 31, 2020 December 31, 2019 Held to maturity securities Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value 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 Mortgage-backed securities 42,951 43,182 2,551 2,655 Total held to maturity securities $ 43,551 $ 43,784 $ 2,851 $ 2,957 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 Total Available for sale securities Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss December 31, 2020 U.S. government agency obligations $ 7,654 $ 17 $ 6,834 $ 53 $ 14,488 $ 70 Corporate debt securities 3,447 27 1,418 82 4,865 109 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 U.S. government agency obligations $ 14,593 $ 156 $ 10,540 $ 191 $ 25,133 $ 347 Mortgage-backed securities 22,537 62 5,883 48 28,420 110 Corporate debt securities 7,001 15 1,398 102 8,399 117 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 80 Less than 12 Months 12 Months or More Total Held to maturity securities Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss December 31, 2020 Mortgage-backed securities $ 16,538 $ 34 $ — $ — $ 16,538 $ 34 Total $ 16,538 $ 34 $ — $ — $ 16,538 $ 34 December 31, 2019 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. As part of such monitoring, the credit quality of individual securities and their issuer is assessed. Significant inputs used to measure the amount of other-than-temporary impairment related to credit loss include, but are not limited to; the Company’s intent and ability to sell the debt security prior to recovery, that it is more likely than not that the Company will not sell the security prior to recovery, default and delinquency rates of the underlying collateral, remaining credit support, and historical loss severities. Adjustments to market value of available for sale securities that are considered temporary are recorded as separate components of shareholders’ equity, net of tax. If the unrealized loss of a security is identified as other-than-temporary based on information available, such as the decline in the creditworthiness of the issuer, external market ratings, or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if credit loss exists. If there is a credit loss, it will be recorded in the Company’s consolidated statement of operations. Non-credit components of the unrealized losses on available for sale securities will continue to be recognized in other comprehensive income (loss), net of tax. Unrealized losses reflected in the preceding tables have not been included in results of operations because the unrealized loss was not deemed other-than-temporary. 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. 81 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. 82 Loans by classes within portfolio segments were as follows: December 31, 2020 December 31, 2019 Originated Loans: Commercial/Agricultural real estate: Commercial real estate $ 351,113 $ 302,546 Agricultural real estate 31,741 34,026 Multi-family real estate 112,731 71,877 Construction and land development 91,241 71,467 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 installment: Originated indirect paper 25,851 39,585 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 Acquired Loans: Commercial/Agricultural real estate: Commercial real estate $ 156,562 $ 211,913 Agricultural real estate 37,054 51,337 Multi-family real estate 9,421 15,131 Construction and land development 7,276 14,943 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 Total acquired loans $ 286,164 $ 424,744 Total Loans: Commercial/Agricultural real estate: Commercial real estate $ 507,675 $ 514,459 Agricultural real estate 68,795 85,363 Multi-family real estate 122,152 87,008 Construction and land development 98,517 86,410 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 installment: Originated indirect paper 25,851 39,585 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 Less: Unearned net deferred fees and costs and loans in process ( 4,245 ) ( 393 ) Unamortized discount on acquired loans ( 5,063 ) ( 9,491 ) Allowance for loan losses ( 17,043 ) ( 10,320 ) Loans receivable, net $ 1,220,538 $ 1,167,060 83 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. 5 - Watch. 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. 9 - Loss. 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. 84 Below is a breakdown of loans by risk rating as of December 31, 2020: 1 to 5 6 7 8 9 TOTAL Originated Loans: Commercial/Agricultural real estate: Commercial real estate $ 349,482 $ 543 $ 1,088 $ — $ — $ 351,113 Agricultural real estate 30,041 446 1,254 — — 31,741 Multi-family real estate 112,423 308 — — — 112,731 Construction and land development 87,763 — 3,478 — — 91,241 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 installment: — Originated indirect paper 25,616 — 235 — — 25,851 Other Consumer 11,986 — 70 — — 12,056 Total originated loans $ 943,005 $ 2,258 $ 15,462 $ — $ — $ 960,725 Acquired Loans: Commercial/Agricultural real estate: Commercial real estate $ 148,303 $ 4,274 $ 3,985 $ — $ — $ 156,562 Agricultural real estate 31,147 — 5,907 — — 37,054 Multi-family real estate 9,273 — 148 — — 9,421 Construction and land development 7,237 — 39 — — 7,276 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 Total acquired loans $ 268,671 $ 4,414 $ 13,079 $ — $ — $ 286,164 Total Loans: Commercial/Agricultural real estate: Commercial real estate $ 497,785 $ 4,817 $ 5,073 $ — $ — $ 507,675 Agricultural real estate 61,188 446 7,161 — — 68,795 Multi-family real estate 121,696 308 148 — — 122,152 Construction and land development 95,000 — 3,517 — — 98,517 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 installment: Originated indirect paper 25,616 — 235 — — 25,851 Other Consumer 13,136 — 77 — — 13,213 Gross loans $ 1,211,676 $ 6,672 $ 28,541 $ — $ — $ 1,246,889 Less: Unearned net deferred fees and costs and loans in process ( 4,245 ) Unamortized discount on acquired loans ( 5,063 ) Allowance for loan losses ( 17,043 ) Loans receivable, net $ 1,220,538 85 Below is a breakdown of loans by risk rating as of December 31, 2019: 1 to 5 6 7 8 9 TOTAL Originated Loans: Commercial/Agricultural real estate: Commercial real estate $ 301,381 $ 266 $ 899 $ — $ — $ 302,546 Agricultural real estate 31,129 829 2,068 — — 34,026 Multi-family real estate 71,877 — — — — 71,877 Construction and land development 67,989 — 3,478 — — 71,467 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 installment: — Originated indirect paper 39,339 — 246 — — 39,585 Other Consumer 15,425 — 121 — — 15,546 Total originated loans $ 744,768 $ 2,520 $ 15,232 $ — $ — $ 762,520 Acquired Loans: Commercial/Agricultural real estate: Commercial real estate $ 196,692 $ 6,084 $ 9,137 $ — $ — $ 211,913 Agricultural real estate 42,381 534 8,422 — — 51,337 Multi-family real estate 13,533 — 1,598 — — 15,131 Construction and land development 14,181 — 762 — — 14,943 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 Total acquired loans $ 391,748 $ 8,336 $ 24,660 $ — $ — $ 424,744 Total Loans: Commercial/Agricultural real estate: Commercial real estate $ 498,073 $ 6,350 $ 10,036 $ — $ — $ 514,459 Agricultural real estate 73,510 1,363 10,490 — — 85,363 Multi-family real estate 85,410 — 1,598 — — 87,008 Construction and land development 82,170 — 4,240 — — 86,410 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 installment: Originated indirect paper 39,339 — 246 — — 39,585 Other Consumer 18,053 — 133 — — 18,186 Gross loans $ 1,136,516 $ 10,856 $ 39,892 $ — $ — $ 1,187,264 Less: Unearned net deferred fees and costs and loans in process ( 393 ) Unamortized discount on acquired loans ( 9,491 ) Allowance for loan losses ( 10,320 ) Loans receivable, net $ 1,167,060 86 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 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 Twelve months ended December 31, 2020 December 31, 2019 Balance—beginning of period $ 20,367 $ 11,104 New loan originations 7,230 10,243 Repayments ( 1,114 ) ( 980 ) Balance—end of period $ 26,483 $ 20,367 Available and unused lines of credit $ 187 $ 7,017 Allowance for Loan Losses —The ALL represents management’s estimate of probable and inherent credit losses in the Bank’s loan portfolio. Estimating the amount of the ALL requires the exercise of significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of other qualitative factors such as current economic trends and conditions, all of which may be susceptible to significant change. There are many factors affecting the ALL; some are quantitative, while others require qualitative judgment. The process for determining the ALL (which management believes adequately considers potential factors which result in probable credit losses), includes subjective elements and, therefore, may be susceptible to significant change. 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. As an integral part of their examination process, various regulatory agencies also review the Bank’s ALL. Such agencies may require that changes in the ALL be recognized when such regulators’ credit evaluations differ from those of our management based on information available to the regulators at the time of their examinations. 87 Changes in the ALL by loan type for the periods presented below were as follows: Commercial/Agricultural Real Estate C&I/Agricultural operating Residential Mortgage Consumer Installment Unallocated Total Twelve months ended December 31, 2020: Allowance for Loan Losses: 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 Purchased credit impaired loans — — — — — — Other acquired loans: 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 Total allowance on acquired loans $ 1,684 $ 141 $ 335 $ 64 $ — $ 2,224 Ending Balance, December 31, 2020 $ 11,955 $ 2,253 $ 1,376 $ 553 $ 906 $ 17,043 Allowance for Loan Losses at December 31, 2020: Amount of allowance for loan losses arising from loans individually evaluated for impairment $ 698 $ 190 $ 226 $ 1 $ — $ 1,115 Amount of allowance for loan losses arising from loans collectively evaluated for impairment $ 11,257 $ 2,063 $ 1,150 $ 552 $ 906 $ 15,928 Loans Receivable as of December 31, 2020: Ending balance of originated loans $ 586,826 $ 243,449 $ 92,543 $ 37,907 $ — $ 960,725 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 Ending balance of loans $ 797,139 $ 273,040 $ 137,646 $ 39,064 $ — $ 1,246,889 Ending balance: individually evaluated for impairment $ 26,303 $ 7,115 $ 9,621 $ 358 $ — $ 43,397 Ending balance: collectively evaluated for impairment $ 770,836 $ 265,925 $ 128,025 $ 38,706 $ — $ 1,203,492 88 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, 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 Purchased credit impaired loans — — — — — — Other acquired loans: 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 Total Allowance on acquired loans $ 526 $ 27 $ 163 $ 53 $ — $ 769 Ending balance, December 31, 2019 $ 6,731 $ 1,670 $ 1,042 $ 520 $ 357 $ 10,320 Allowance for Loan Losses at December 31, 2019: Amount of allowance for loan losses arising from loans individually evaluated for impairment $ 495 $ 312 $ 136 $ 13 $ — $ 956 Amount of allowance for loan losses arising from loans collectively evaluated for impairment $ 6,236 $ 1,358 $ 906 $ 507 $ 357 $ 9,364 Loans Receivable as of December 31, 2019: Ending balance of originated loans $ 479,916 $ 110,447 $ 117,026 $ 55,131 $ — $ 762,520 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 Ending balance of loans $ 773,240 $ 171,514 $ 184,739 $ 57,771 $ — $ 1,187,264 Ending balance: individually evaluated for impairment $ 42,658 $ 9,966 $ 10,126 $ 446 $ — $ 63,196 Ending balance: collectively evaluated for impairment $ 730,582 $ 161,548 $ 174,613 $ 57,325 $ — $ 1,124,068 89 Loans receivable by loan type as of the end of the periods shown below were as follows: 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 Performing TDR loans $ 4,695 $ 1,730 $ 3,836 $ 366 $ 3,142 $ 3,206 $ 49 $ 68 $ 11,722 $ 5,370 Performing loans other 786,533 758,237 266,975 167,596 131,470 178,415 38,856 57,486 1,223,834 1,161,734 Total performing loans 791,228 759,967 270,811 167,962 134,612 181,621 38,905 57,554 1,235,556 1,167,104 Nonperforming loans (1) Nonperforming TDR loans 4,691 4,868 1,287 1,973 777 383 — — 6,755 7,224 Nonperforming loans other 1,220 8,405 942 1,579 2,257 2,735 159 217 4,578 12,936 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. 90 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 Current Total Loans December 31, 2020 Commercial/Agricultural real estate: Commercial real estate $ 9,568 $ 467 $ — $ 10,035 $ 679 $ 496,961 $ 507,675 Agricultural real estate 411 48 — 459 5,084 63,252 68,795 Multi-family real estate 308 — — 308 148 121,696 122,152 Construction and land development 3,898 — — 3,898 — 94,619 98,517 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 installment: Originated indirect paper 90 37 — 127 133 25,591 25,851 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 Commercial/Agricultural real estate: Commercial real estate $ 2,804 $ 847 $ — $ 3,651 $ 4,214 $ 506,594 $ 514,459 Agricultural real estate 509 — — 509 7,568 77,286 85,363 Multi-family real estate — — — — 1,449 85,559 87,008 Construction and land development 436 — — 436 42 85,932 86,410 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 installment: Originated indirect paper 168 52 20 240 137 39,208 39,585 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 91 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. The $ 43,397 total of impaired loans includes $ 11,722 of performing TDR loans. At December 31, 2019, the Company had identified impaired loans of $ 63,196 , consisting of $ 12,594 TDR loans, the carrying amount of purchased credit impaired loans of $ 31,978 and $ 18,624 of substandard non-TDR loans. The $ 63,196 total of impaired loans includes $ 5,370 of performing TDR loans. Loans evaluated for impairment include all TDRs, all purchased credit impaired loans and all other loans with a risk rating of substandard or worse. 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, 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/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/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/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 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 . 92 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/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/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/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 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 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 2020 2019 Troubled debt restructure loans: Accrual status $ 11,742 $ 5,396 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. 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. 93 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 TDRs: Commercial/Agricultural real estate 12 $ 4,441 $ 198 $ 293 $ — $ 4,932 $ 4,932 $ — 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 TDRs: Commercial/Agricultural real estate 18 $ 2,028 $ 159 $ 3,224 $ — $ 5,411 $ 5,411 $ 317,867 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, 2020 December 31, 2019 Number of Modifications Recorded Investment Number of Modifications Recorded Investment Troubled debt restructurings: Commercial/Agricultural real estate 31 $ 9,386 27 $ 6,599 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 94 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 Number of Modifications Recorded Investment 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 Number of Modifications Recorded Investment Troubled debt restructurings: Commercial/Agricultural real estate 13 $ 4,868 C&I/Agricultural operating 14 1,973 Residential mortgage 3 357 Consumer installment — — Total troubled debt restructurings 30 $ 7,198 All acquired loans were initially recorded at fair value at the acquisition date. The outstanding balance and the carrying amount of acquired loans included in the consolidated balance sheet are as follows: December 31, 2020 Accountable for under ASC 310-30 (PCI loans) Outstanding balance $ 17,946 Carrying amount $ 16,859 Accountable for under ASC 310-20 (non-PCI loans) Outstanding balance $ 268,218 Carrying amount $ 264,242 Total acquired loans Outstanding balance $ 286,164 Carrying amount $ 281,101 95 The following table provides changes in accretable yield for all acquired loans from prior acquisitions with deteriorated credit quality: 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 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 $ 18,355 $ 111,919 $ 130,274 Non-accretable difference (expected losses and foregone interest) ( 2,728 ) — ( 2,728 ) Cash flows expected to be collected at acquisition 15,627 111,919 127,546 Accretable yield — ( 814 ) ( 814 ) Fair value of acquired loans at acquisition $ 15,627 $ 111,105 $ 126,732 96 NOTE 5 – MORTGAGE SERVICING RIGHTS 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 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, 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 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 ) 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 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. The timing of amortization expense actually recognized in future periods may differ significantly based on actual prepayment speeds, mortgage interest rates and other factors. Amortization Expense 2021 $ 1,696 2022 1,338 2023 980 2024 630 2025 403 After 2025 219 Total $ 5,266 97 NOTE 6 - OFFICE PROPERTIES AND EQUIPMENT Office properties and equipment for each of the periods shown below consisted of the following: 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 $ 1,954 for the year ended December 31, 2020 and $ 1,564 for the year ended December 31, 2019. NOTE 7 - GOODWILL AND INTANGIBLE ASSETS Goodwill— 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 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, until its disposition in June 2020. A summary of intangible assets and related amortization for the periods shown below follows: Year ended Year Ended December 31, 2020 December 31, 2019 Gross carrying amount $ 12,180 $ 12,798 Accumulated amortization ( 6,686 ) ( 5,211 ) Net book value $ 5,494 $ 7,587 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 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 2021 $ 1,596 2022 1,449 2023 755 2024 715 2025 584 After 2025 395 Total $ 5,494 98 NOTE 8— LEASES 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. 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: Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 638 $ 824 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 508 $ — December, 31 2020 December 31, 2019 Supplemental balance sheet information related to leases was as follows: Operating lease right-of-use assets $ 2,657 $ 2,787 Operating lease liabilities $ 2,762 $ 2,845 Weighted average remaining lease term in years; operating leases 6.32 6.63 Weighted average discount rate; operating leases 2.70 % 3.07 % Future payments due under operating leases as of December 31, 2020 are as follows: Fiscal years ending December 31, 2021 $ 592 2022 558 2023 506 2024 419 2025 403 Thereafter 826 Total lease payments 3,304 Less: effects of discounting ( 542 ) Lease liability recognized $ 2,762 99 NOTE 9— DEPOSITS The following is a summary of deposits by type at December 31, 2020 and December 31, 2019, respectively: December 31, 2020 December 31, 2019 Non interest bearing demand deposits $ 238,348 $ 168,157 Interest bearing demand deposits 301,764 223,102 Savings accounts 196,348 156,599 Money market accounts 245,549 246,430 Certificate accounts 313,247 401,414 Total deposits $ 1,295,256 $ 1,195,702 Brokered deposits included above: $ 2,516 $ 50,377 At December 31, 2020, the scheduled maturities of time deposits were as follows: 2021 $ 206,713 2022 94,561 2023 7,905 2024 3,492 2025 576 After 2025 — 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. 100 NOTE 10 – FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS A summary of Federal Home Loan Bank (FHLB) advances and other borrowings at December 31, 2020 and December 31, 2019 is as follows: December 31, 2020 2019 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 % $ 30,000 Unamortized debt issuance costs ( 528 ) ( 296 ) Total other borrowings $ 58,328 $ 43,560 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 $ 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 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 %. 101 (b) A $ 5,000 line of credit, maturing in August 2021, that remains undrawn upon. (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 The Bank has an irrevocable Standby Letter of Credit Master Reimbursement Agreement with the Federal Home Loan Bank. This irrevocable standby letter of credit (“LOC”) is supported by loan collateral as an alternative to directly pledging investment securities on behalf of a municipal customer as collateral for their interest bearing deposit balances. 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 Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Although these terms are not used to represent overall financial condition, if adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. 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. 102 The Bank’s Tier 1 (leverage) and risk-based capital ratios at December 31, 2020 and 2019, respectively, are presented below (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) $ 171,702,000 14.7 % $ 93,381,000 > = 8.0 % $ 116,726,000 > = 10.0 % Tier 1 capital (to risk weighted assets) 157,081,000 13.5 % 70,035,000 > = 6.0 % 93,381,000 > = 8.0 % Common equity tier 1 capital (to risk weighted assets) 157,081,000 13.5 % 52,527,000 > = 4.5 % 75,872,000 > = 6.5 % Tier 1 leverage ratio (to adjusted total assets) 157,081,000 9.9 % 63,718,000 > = 4.0 % 79,647,000 > = 5.0 % As of December 31, 2019 Total capital (to risk weighted assets) $ 160,302,000 13.1 % $ 98,174,000 > = 8.0 % $ 122,718,000 > = 10.0 % Tier 1 capital (to risk weighted assets) 149,982,000 12.2 % 73,631,000 > = 6.0 % 98,174,000 > = 8.0 % Common equity tier 1 capital (to risk weighted assets) 149,982,000 12.2 % 55,223,000 > = 4.5 % 79,767,000 > = 6.5 % Tier 1 leverage ratio (to adjusted total assets) 149,982,000 10.4 % 57,834,000 > = 4.0 % 72,293,000 > = 5.0 % The Company’s Tier 1 (leverage) and risk-based capital ratios at December 31, 2020 and 2019, respectively, are presented below: (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) $ 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 Total capital (to risk weighted assets) $ 137,259,000 11.2 % $ 98,174,000 > = 8.0 % $ 122,718,000 > = 10.0 % Tier 1 capital (to risk weighted assets) 111,939,000 9.1 % 73,631,000 > = 6.0 % 98,174,000 > = 8.0 % Common equity tier 1 capital (to risk weighted assets) 111,939,000 9.1 % 55,223,000 > = 4.5 % 79,767,000 > = 6.5 % Tier 1 leverage ratio (to adjusted total assets) 111,939,000 7.7 % 57,834,000 > = 4.0 % 72,293,000 > = 5.0 % The Company is a legal entity separate and distinct from its banking subsidiary. 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 103 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 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 Stockholder record date 02/05/2020 02/08/2019 Dividend payment date 02/19/2020 03/08/2019 NOTE 12— COMMITMENTS AND CONTINGENCIES Financial Instruments with Off-Balance-Sheet Risk— The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include off-balance-sheet credit instruments consisting of commitments to make loans. The face amounts for these items represent the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contract or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. 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, 2020 2019 Commitments to extend credit $ 247,324 $ 243,642 Commercial standby letter of credit $ 524 $ 3,011 Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The credit and collateral policy for commitments and letters of credit is comparable to that for granting loans. The Company has recorded no liability associated with standby letters of credit as of December 31, 2020 and 2019. 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 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 $ 610 and $ 524 for the year ended December 31, 2020 and 2019, respectively. NOTE 14 - STOCK-BASED COMPENSATION 104 In February 2008, the Company’s stockholders approved the Company’s 2008 Equity Incentive Plan for a term of 10 years. As of December 31, 2020, 89,183 restricted shares and 181,000 options had been granted to eligible participants. Due to the plan’s expiration, no new awards can be granted under this plan. 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. 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. On March 27, 2018, the stockholders of Citizens Community Bancorp, Inc. approved the 2018 Equity Incentive Plan. The aggregate number of shares of common stock reserved and available for issuance under the 2018 Equity Incentive Plan is 350,000 shares. As of December 31, 2020, 99,575 restricted shares had been granted under this plan. 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 $ 530 and $ 470 for the years ended December 31, 2020 and 2019, respectively. Restricted Common Stock Awards Year ended Year ended December 31, 2020 December 31, 2019 Number of Shares Weighted Average Grant Price Number of Shares Weighted Average Grant Price 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 The Company accounts for stock-based employee compensation related to the Company’s 2008 Equity Incentive Plan using the fair-value-based method. 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 this plan for the years ended December 31, 2020 and 2019 was $ 14 and $ 18 , respectively. Common Stock Option Awards Option Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Year ended December 31, 2020 Outstanding at beginning of year 78,100 $ 11.18 Forfeited or expired ( 5,800 ) 11.95 Outstanding at end of year 72,300 11.05 5.49 Exercisable at end of year 54,100 $ 10.82 5.37 $ 4 Fully vested and expected to vest 72,300 $ 11.05 5.49 $ — 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 Outstanding at end of year 78,100 11.18 6.55 Exercisable at end of year 44,700 $ 10.73 6.30 $ 67 Fully vested and expected to vest 78,100 $ 11.18 6.55 $ 81 105 Information related to the 2008 Equity Incentive Plan during each period follows: Year ended December 31, Year ended December 31, 2020 2019 Intrinsic value of options exercised $ — $ 130 Cash received from options exercised $ — $ 203 Tax benefit realized from options exercised $ — $ — 106 NOTE 15 – INCOME TAXES Income tax expense (benefit) for each of the periods shown below consisted of the following: Year ended December 31, Year ended December 31, 2020 2019 Current tax provision Federal $ 5,000 $ 2,535 State 2,081 1,081 7,081 3,616 Deferred tax provision (benefit) Federal ( 1,866 ) ( 305 ) Bank owned life insurance - Tax Act clarification ( 660 ) ( 300 ) 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, Year ended December 31, 2020 2019 Amount Rate Amount Rate Tax expense at statutory rate $ 3,629 21.0 % $ 2,577 21.0 % State income taxes, net of federal 1,123 6.5 % 813 6.6 % Bank owned life insurance - Tax Act clarification — — % ( 300 ) ( 2.4 ) % Bank owned life insurance ( 130 ) ( 0.8 ) % ( 116 ) ( 0.9 ) % Tax exempt interest ( 61 ) ( 0.3 ) % ( 153 ) ( 1.3 ) % Other ( 6 ) — % ( 7 ) ( 0.1 ) % Total $ 4,555 26.4 % $ 2,814 22.9 % 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. 107 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, 2020 and December 31, 2019, respectively: Year ended December 31, Year ended December 31, 2020 2019 Deferred tax assets: Allowance for loan losses $ 4,567 $ 2,694 Deferred loan costs/fees 1,117 209 Director/officer compensation plans 116 83 Net unrealized loss on securities available for sale — 179 Economic performance accruals 694 504 Other real estate 89 31 Deferred revenue 64 87 Loan Discounts 1,218 2,391 FHLB Advances 55 107 Lease Liability 758 768 Other 70 58 Deferred tax assets $ 8,748 $ 7,111 Deferred tax liabilities: Office properties and equipment ( 1,551 ) ( 1,574 ) Federal Home Loan Bank stock ( 129 ) ( 129 ) Core Deposit Intangible ( 1,615 ) ( 1,937 ) Net gain on equity securities ( 442 ) ( 456 ) Prepaid expenses ( 204 ) ( 137 ) Mortgage servicing rights ( 893 ) ( 1,177 ) Leases; right of use asset ( 730 ) ( 753 ) 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, 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. As of December 31, 2020, years open to examination by the U.S. Internal Revenue Service include taxable years ended September 30, 2017 to present. The years open to examination by state and local government authorities varies by jurisdiction. The tax effects from uncertain tax positions can be recognized in the consolidated financial statements, provided the position is more likely than not to be sustained on audit, based on the technical merits of the position. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized, upon ultimate settlement with the relevant tax authority. 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. 108 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. NOTE 16 – FAIR VALUE ACCOUNTING ASC Topic 820-10, “ Fair Value Measurements and Disclosures ” establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The topic describes three levels of inputs that may be used to measure fair value: Level 1- Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date. Level 2- Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3- Significant unobservable inputs that reflect the Company’s assumptions about the factors that market participants would use in pricing an asset or liability. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the fair value measurement. The fair value of securities available for sale is determined by obtaining market price quotes from independent third parties wherever such quotes are available (Level 1 inputs); or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Where such quotes are not available, we utilize independent third party valuation analysis to support our own estimates and judgments in determining fair value (Level 3 inputs). 109 Assets Measured on a Recurring Basis The following tables present the financial instruments measured at fair value on a recurring basis as of December 31, 2020 and December 31, 2019. Fair Value Quoted Prices in Active Markets for Identical Instruments (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2020 Investment securities: U.S. government agency obligations $ 33,365 $ — $ 33,365 $ — Obligations of states and political subdivisions 140 — 140 — Mortgage-backed securities 40,991 — 40,991 — Corporate debt securities 17,462 — 17,462 — Corporate asset-backed securities 35,827 — 35,827 — Trust preferred securities 16,448 — 16,448 — Total $ 144,233 $ — $ 144,233 $ — December 31, 2019 Investment securities: U.S. government agency obligations $ 51,805 $ — $ 51,805 $ — Obligations of states and political subdivisions 281 — 281 — Mortgage-backed securities 71,331 — 71,331 — Corporate debt securities 18,725 — 18,725 — 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. 110 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: Carrying Value Quoted Prices in Active Markets for Identical Instruments (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2020 Foreclosed and repossessed assets, net $ 197 $ — $ — $ 197 Impaired loans with allocated allowances 3,037 — — 3,037 Mortgage servicing rights 3,252 — — 3,285 Total $ 6,486 $ — $ — $ 6,519 December 31, 2019 Foreclosed and repossessed assets, net $ 1,460 $ — $ — $ 1,460 Impaired loans with allocated allowances 4,131 — — 4,131 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. The fair value of foreclosed and repossessed assets referenced above was determined by obtaining market price valuations from independent third parties wherever such quotes were available for other collateral owned. The Company utilized independent third party appraisals to support the Company’s estimates and judgments in determining fair value for other real estate owned. The fair value of mortgage servicing rights referenced above was determined based on a third party discounted cash flow analysis utilizing both observable and unobservable inputs. 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. Fair Value Valuation Techniques (1) Significant Unobservable Inputs (2) Range December 31, 2020 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 $ 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 collateral, which generally includes various level 3 inputs which are not observable. (2) The fair value basis of impaired loans and real estate owned may be adjusted to reflect management estimates of disposal costs including, but not limited to, real estate brokerage commissions, legal fees, and delinquent property taxes. 111 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, 2020 December 31, 2019 Valuation Method Used Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Financial assets: 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: 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) 796 796 453 453 112 NOTE 17— EARNINGS PER SHARE Earnings per share is based on the weighted average number of shares outstanding for the year. A reconciliation of the basic and diluted earnings per share is as follows: Year ended Year ended December 31, 2020 December 31, 2019 Basic Net income attributable to common shareholders $ 12,725 $ 9,463 Weighted average common shares outstanding 11,161,551 11,114,328 Basic earnings per share $ 1.14 $ 0.85 Diluted Net income attributable to common shareholders $ 12,725 $ 9,463 Weighted average common shares outstanding 11,161,551 11,114,328 Add: Dilutive stock options outstanding 260 6,961 Average shares and dilutive potential common shares 11,161,811 11,121,289 Diluted earnings per share $ 1.14 $ 0.85 Additional common stock option shares that have not been included due to their antidilutive effect 68,800 26,200 113 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 year ended, December 31, 2020 2019 Before-Tax Amount Tax Expense Net-of-Tax Amount Before-Tax Amount Tax Expense Net-of-Tax Amount 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 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; Equity securities (1) ( 45 ) ( 45 ) Ending balance, December 31, 2019 $ ( 334 ) $ ( 471 ) 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. For further information, refer to Note 1, “Nature of Business and Summary of Significant Accounting Policies; Recent Pronouncements-Adopted”. 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) (1) Affected Line Item on the Statement of Operations Unrealized gains and losses 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 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 $ 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. 114 NOTE 19— CONDENSED FINANCIAL INFORMATION – PARENT COMPANY ONLY 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, 2020 2,019 Assets 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 Other borrowings $ 58,328 $ 43,560 Other liabilities 379 66 Total liabilities 58,707 43,626 Total stockholders’ equity 160,564 150,553 Total liabilities and stockholders’ equity $ 219,271 $ 194,179 Statements of Operations Year ended December 31, Year ended December 31, 2020 2019 Interest income $ — $ — Interest expense 2,458 2,015 Net interest expense ( 2,458 ) ( 2,015 ) Dividend income from bank subsidiary 10,500 7,350 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 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 $ 9,463 115 Statements of Cash Flows Year ended December 31, Year ended December 31, 2020 2019 Change in cash and cash equivalents: Cash flows from operating activities: Net income $ 12,725 $ 9,463 Depreciation expense 12 12 Stock based compensation expense 14 18 Adjustments to reconcile net income to net cash provided by operating activities - Equity in undistributed income of subsidiary ( 14,978 ) ( 12,170 ) (Increase) decrease in other assets ( 55 ) 101 Decrease (increase) in other liabilities 313 ( 391 ) Net cash used in operating activities ( 1,969 ) ( 2,967 ) Cash flows from investing activities: Cash consideration paid in business combination — ( 20,970 ) 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 ) Repurchase shares of common stock ( 2,820 ) — Surrender of restricted shares of common stock ( 27 ) ( 53 ) Common stock options exercised — 203 Dividend from bank to holding company 10,500 7,350 Cash dividends paid ( 2,372 ) ( 2,198 ) 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 Cash and cash equivalents at end of year $ 23,333 $ 5,253 ITEM 9. 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.