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Item 8. Financial Statements and Supplementary Data

2022-03-02 compared with 2021-03-08 · 251 added, 399 removed, 1430 unchanged (31% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm ( Eide Bailly LLP ;

Phoenix, Arizona ;

PCAOB ID 286 )

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Comprehensive Income

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

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

and Subsidiary (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of operations , comprehensive income, changes in stockholders’ equity, and cash flows for the years 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, 2021 and 2020, and the results of its operations and its cash flows for the years 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, 2021, 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 2, 2022, expressed an unmodified opinion.

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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.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our 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.

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

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

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

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

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

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

Critical Audit 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:

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

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

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and

we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses

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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.

• Obtaining an understanding of the Company’s process for determining the allowance for loan losses, which includes management’s determination of and changes to qualitative adjustments as of the balance sheet date.

• Evaluating the design and testing the operating effectiveness of controls relating to the development and approval of the allowance for loan loss methodology, controls around the reliability and accuracy of the information used in the calculation and management’s review and approval of the allowance for loan losses.

• 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.

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

Goodwill Impairment Evaluation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

/s/ Eide Bailly, LLP

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

Denver, Colorado

March 8, 2021

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

Phoenix, Arizona

March 2, 2022

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Securities held to maturity "HTM" 71,141 43,551

Equity securities with readily determinable fair value 200 246

Equity investments 1,328 200

Other investments 15,305 14,948

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Deposits $ 1,387,535 $ 1,295,256

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

Federal Home Loan Bank ("FHLB") advances 111,527 123,498

Other borrowings 58,426 58,328

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Retained earnings 50,675 32,809

Unearned deferred compensation ( 550 ) ( 462 )

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

Accumulated other comprehensive income 161 1,490

Total stockholders’ equity 170,866 160,564

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Insurance commission income — 475

Net gains on investment securities 110 271

Net gain on sale of branch — 2,295

Net gains (losses) on investment securities 1,224 110

Net gain on sale of acquired business lines — 432

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Occupancy 5,327 5,523

Office 2,152 2,188

Data processing 5,560 5,193

Amortization of intangible assets 1,596 1,622

Mortgage servicing rights expense 3,050 1,108

Mortgage servicing rights expense, net 191 3,050

Advertising, marketing and public relations 986 967

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Net income attributable to common stockholders $ 21,266 $ 12,725

Other comprehensive income, net of tax:

Other comprehensive (loss) income, net of tax:

Securities available for sale

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

Net unrealized (losses) gains arising during period, net of tax ( 909 ) 2,074

Reclassification adjustment for net gains included in net income, net of tax ( 420 ) ( 113 )

Other comprehensive income 1,961 1,415

Other comprehensive (loss) income, net of tax ( 1,329 ) 1,961

Comprehensive income $ 19,937 $ 14,686

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(in thousands, except Shares)

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

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

Shares Amount

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

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

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

Restricted common stock awarded under the equity incentive plan 45,507 — — — — —

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

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

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

Adoption of ASU 2016-01;

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

Adoption of ASU 2016-02;

Leases — — — ( 57 ) — — ( 57 )

Cash dividends ($ 0.21 per share)

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Other comprehensive income, net of tax — — — — ( 1,329 ) ( 1,329 )

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

Forfeiture of unvested shares ( 1,500 ) — — — — —

Surrender of restricted shares of common stock ( 2,409 ) — ( 30 ) — — ( 30 )

Restricted common stock awarded under the equity incentive plan 64,399 — — — — —

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

Common stock options exercised 5,800 — 52 — — 52

Common stock repurchased ( 620,197 ) ( 6 ) ( 7,056 ) ( 889 ) — ( 7,951 )

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Balance, December 31, 2021 10,502,442 $ 105 $ 119,925 $ 50,675 $ 161 $ 170,866

(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.

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Provision for loan losses — 7,750

Net realized loss (gain) on equity securities 46 —

Net realized (gain) loss on equity securities ( 651 ) 46

Net realized gain on debt securities ( 573 ) ( 156 )

Net realized loss on sale of securities — ( 271 )

Increase in mortgage servicing rights resulting from transfers of financial assets ( 1,100 ) ( 2,020 )

Mortgage servicing rights expense 3,050 1,108

Mortgage servicing rights amortization and impairment, net 191 3,050

Amortization of intangible assets 1,596 1,622

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Net stock based compensation expense 8 14

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

Deferred income taxes ( 2,237 ) ( 752 )

Loss on sale of office properties and equipment 31 178

Decrease (increase) deferred income taxes 930 ( 2,526 )

Increase in cash surrender value of life insurance ( 628 ) ( 621 )

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Gain on sale of loans held for sale, net ( 5,399 ) ( 6,693 )

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 )

Net change in:

Loans held for sale 1,804 9,511

Accrued interest receivable and other assets 1,241 ( 1,791 )

Other liabilities ( 73 ) 581

Total adjustments 333 11,060

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Purchase of held to maturity securities ( 39,784 ) ( 44,441 )

Proceeds from principal payments and sale of available for sale securities 66,872 58,618

Proceeds from sales of available for sale securities 38,239 12,091

Proceeds from principal payments of available for sale securities 32,218 54,781

Proceeds from principal payments and maturities of held to maturity securities 8,583 3,692

Net purchases (sales) of other investments 57 ( 1,299 )

Proceeds from sale of foreclosed and repossessed assets 2,780 3,038

Proceeds from calls of held to maturity securities 3,500 —

Purchase of equity investments ( 960 ) —

Net purchases of other investments 126 57

Proceeds from sales of foreclosed and repossessed assets 557 2,780

Net increase in loans ( 73,636 ) ( 62,486 )

Net capital expenditures ( 3,778 ) ( 2,573 )

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

Proceeds from disposal of office properties and equipment 38 382

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Cash flows from financing activities:

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

Net decrease in short-term Federal Home Loan Bank advances — ( 41,000 )

Amortization of fair value adjustments for acquired Federal Home Loan Bank advances 29 27

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

Long-term Federal Home Loan Bank maturities ( 4,000 ) ( 33,000 )

Federal Home Loan Bank advance termination payments ( 8,113 ) —

Amortization of debt issuance costs 98 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 92,279 99,554

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

Repurchase shares of common stock ( 7,951 ) ( 2,820 )

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Net cash provided by financing activities 69,853 101,630

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

Net (decrease) increase in cash and cash equivalents ( 71,749 ) 63,600

Cash and cash equivalents at beginning of period 119,440 55,840

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Transfers from loans receivable to foreclosed and repossessed assets $ 84 $ 1,057

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

Transfers from office properties and equipment to foreclosed and repossessed assets $ 1,434 $ —

See accompanying notes to audited consolidated financial statements.

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

Office of the Comptroller of the Currency (the “OCC”), is the primary federal regulator for the Bank.

The 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.

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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.

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.

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In preparing these consolidated financial statements, we evaluated the events and transactions occurring subsequent to the balance sheet date of December 31, 2021 through the date on which the consolidated financial statements were available to be issued on March 2, 2022, 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.

Unless otherwise stated herein, and except for share and per share amounts, all amounts are in thousands.

Principles of Consolidation – The accompanying consolidated financial statements include the accounts of the Company and the Bank.

All significant inter-company accounts and transactions have been eliminated.

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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

management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period.

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, 2021 and external market factors such as market interest rates and unemployment rates, changes to operating policies and procedures, and changes in applicable banking regulations.

Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period.

Cash and Cash Equivalents— For purposes of reporting cash flows in the consolidated financial statements, cash and cash equivalents include cash, due from banks, and interest bearing deposits with original maturities of three months or less.

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.

Other 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 8.97 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.

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, 2021 and December 31, 2020, there were no certificate of deposit accounts with a balance greater than $ 250 .

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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.

Realized gains or losses on sales of available for sale securities are calculated with the specific identification method and are included in the consolidated statements of operations under net gains on investment securities.

Interest income includes amortization of purchase premium or accretion of purchase discount.

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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.

Equity investments - The Company is required to maintain an investment in Federal Agricultural Mortgage Corporation (“Farmer Mac”) equity securities.

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

Changes in fair value are recognized as net 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.

Also included in equity investments are the Company’s investments in a Volker Rule-compliant Small Business Investment Company ("SBIC") and an investment fund.

The SBIC and investment fund meet the definition of investment companies, as defined in ASC 946, Financial Services - Investment Companies.

These investments seek returns by investing in various small businesses and do not have redemption rights.

Distributions from the investments will be received as the underlying investments, which generally have a life of 10 years, are liquidated.

We elected the practical expedient available in Topic 820, Fair Value Measurements, which permits the use of net asset value ("NAV") per share or equivalent to value investments in entities that are or are similar to investment companies.

SBICs and investment funds report their investments at estimated fair value.

We record the unrealized gains and losses resulting from changes in the fair value of these investments as gains or losses on equity securities in our consolidated statements of operations.

The carrying value of these investments is equal to the capital account balance per each entities' quarterly financial statements.

Other investments - As a member of the Federal Reserve Bank 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.

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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.

Also included in other investments is stock of our correspondent bank, Bankers’ Bank, without readily determinable fair value.

This stock is carried at cost plus or minus changes resulting from observable price changes in orderly transactions for this stock, less other-than-temporary impairment charges, if any.

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

Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, accretable discounts on loans purchased, and non-accretable differences on purchased credit impaired (PCI) loans.

Interest income is accrued on the unpaid principal balance

of these loans.

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

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 yield on acquired loans, and non-accretable discount on purchased credit impaired (PCI) loans.

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

Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the interest method over the contractual life of the loan with no prepayments assumed.

If the loan is prepaid, any amortized net fee is recognized at that time.

Late charge fees are recognized into income when collected.

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• Closed end consumer installment loans past due 120 days or more;

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

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

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

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Loans are returned to accrual status when payments are made that bring the loan account current with the contractual term of the loan and a six month payment history has been established.

Interest on impaired loans considered troubled debt restructurings (“TDRs”), 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.

Interest on accruing troubled debt restructured (“TDR”), 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.

Closed ended consumer installment loans are charged off to net realizable value at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 120 days or more.

Commercial/agricultural real estate, commercial and industrial and agricultural operating loans are charged off to net realizable value at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 90 days or more.

Allowance for Loan Losses – The allowance for loan losses (“ALL”) is a valuation allowance for probable and inherent credit losses in our loan portfolio.

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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.

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:

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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).

The accretable discount 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.

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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.

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 discount 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.

For all acquired loans, the outstanding loan balances less any related accretable discount 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.

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

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

Such gains and losses are included as non-interest income in the consolidated statement of operations.

All sales are made without recourse.

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.

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MSR assets are initially measured at fair value;

assessed for impairment;

assessed for impairment at least annually;

carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value.

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Changes in these factors, assumptions and judgments may have a material effect on the valuation and amortization of MSRs.

Although management believes that the assumptions used to

evaluate the MSRs for impairment are reasonable, future adjustment may be necessary if future economic conditions differ substantially from the economic assumptions used to determine the value of MSRs.

Although management believes that the assumptions used to evaluate the MSRs for impairment are reasonable, future adjustment may be necessary if future economic conditions differ substantially from the economic assumptions used to determine the value of MSRs.

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

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

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

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

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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.

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

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

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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.

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 statements of operations.

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

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Operating lease liabilities are included in other liabilities in our consolidated balance sheets.

Lease expense is included in non-interest expense, occupancy in the consolidated statements of operations.

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.

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.

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

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.

Lease 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 lenders, are deferred and included in other borrowings in the consolidated balance sheets.

Debt issuance costs with a Company call option that originated prior to 2020 and senior note 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 statements of operations.

Debt issuance costs that originated in 2020 and thereafter, are amortized through the first Company call option date of the corresponding debt, as a component of interest expense on other borrowed funds in the consolidated statements of operations.

Advertising, Marketing and Public Relations Expense— The Company expenses all advertising, marketing and public relations costs as they are incurred.

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See Note 14, “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.

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

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

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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.

Revenue Recognition - The company’s 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 accounts for revenue from contracts with customers in accordance with ASC Topic 606, “Revenue from Contracts with Customers.” Topic 606 provides that revenue from contracts with customers be recognized when performance obligations under the terms of a contract are satisfied.

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing service.

The company does not have any materially significant payment terms as payment is received shortly after the satisfaction of the performance obligation.

The non-interest income line items recognized under the scope of Topic 606 are as follows:

Service charges on deposit accounts - Service charges on accounts consist of monthly service fees, transaction-based fees, overdraft services and other deposit account related fees.

The Company’s performance obligation for monthly services fees is generally satisfied over the period in which the service is provided.

Revenue for these monthly fees is recognized during the service period.

Other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied at the time the service is provided.

Payment for service charges on deposit accounts are primarily received immediately or in the following month through a direct charge to a customer’s account.

Interchange income - The Company earns interchange fees when cardholder debit card transaction are processed through card association networks.

The interchange rates are generally set by the card association based upon purchase volumes and other factors.

Interchange fees represent a percentage of the underlying transaction value.

The Company has a continuous contract, based on customary business practices, with the card association networks to make funds

available for settlement of card transactions.

The Company’s performance obligation is satisfied over time as it makes funds available, and the related income is recognized when received.

Insurance commission income - 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.

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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.

Non-interest income outside of the scope of Revenue from Contracts with Customers, Topic 606 is recognized on the accrual basis of accounting as services are provided or as transactions occur.

Non-interest income outside of the scope of Topic 606 includes mortgage banking activities, loan fees and service charges, net gains (losses) on investment securities, Net gain on sale of acquired business lines, settlement proceeds, and other, which is primarily made up of BOLI related income.

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

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

If material, derivative instruments are carried on the

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

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

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

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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, 2021.

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.

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, net of tax, and is shown on the accompanying consolidated statements of 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.

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Recent Accounting Pronouncements—Adopted

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.

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

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.

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.

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.

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.

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

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.

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 contracts, hedging relationships and other transactions affected by reference rate (e.g.

LIBOR) reforms.

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

NOTE 2 – ACQUISITION

of Tomah, Inc.

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

of Tomah, Inc.

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

In connection with the acquisition, the Company merged Farmers & Merchants Bank with and into the Bank, with the Bank surviving the merger.

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

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:

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.

NOTE 2 – INVESTMENT SECURITIES

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Corporate asset-backed securities 33,902 133 127 33,908

Trust preferred securities 16,297 189 38 16,448

Total available for sale securities $ 202,846 $ 1,385 $ 1,163 $ 203,068

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As of December 31, 2021, the Bank also has mortgage-backed securities with a carrying value of $ 267 pledged as collateral to the Federal Home Loan Bank of Des Moines.

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, 2021, gross sales of available for sale securities were $ 38,239 , gross gains on sale of available for sale securities were $ 646 , and gross losses on sale of available for sale securities were $ 73 .

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

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, 2021 and 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.

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Cost Estimated

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

Due after one year through five years $ 4,300 $ 4,298 $ 200 $ 200

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government agency obligations $ 1,169 $ 1 $ — $ — $ 1,169 $ 1

Mortgage-backed securities 89,010 878 — — 89,010 878

Corporate debt securities 17,240 142 735 15 17,975 157

Corporate asset-backed securities 19,296 127 — — 19,296 127

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

Total $ 126,715 $ 1,148 $ 735 $ 15 $ 127,450 $ 1,163

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

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

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

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December 31, 2021

Obligations of states and political subdivisions $ 593 $ 7 $ — $ — $ 593 $ 7

Mortgage-backed securities 46,969 1,346 14,716 715 61,685 2,061

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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.

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Other Consumer 8,473 12,056

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

Total originated loans before SBA PPP loans $ 1,109,739 $ 837,023

SBA PPP loans 8,755 123,702

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6 - Special Mention.

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

A “Special Mention” loan has one or more potential weaknesses 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.

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Commercial and industrial 107,798 57 82 — — 107,937

SBA PPP loans 123,702 — — — — 123,702

Agricultural operating 23,935 764 1,503 — — 26,202

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Other Consumer 8,404 — 69 — — 8,473

Total originated loans before SBA PPP loans 1,092,879 3,045 13,815 — — 1,109,739

SBA PPP loans 8,755 — — — — 8,755

Total originated loans $ 1,101,634 $ 3,045 $ 13,815 $ — $ — $ 1,118,494

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Commercial and industrial 121,729 62 376 — — 122,167

SBA PPP loans 123,702 — — — — 123,702

Agricultural operating 28,871 764 1,953 — — 31,588

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Other Consumer 8,802 — 72 — — 8,874

Gross loans before SBA PPP loans $ 1,280,937 $ 4,536 $ 22,817 $ — $ — $ 1,308,290

SBA PPP loans 8,755 — — — — 8,755

Gross loans $ 1,289,692 $ 4,536 $ 22,817 $ — $ — 1,317,045

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Other Consumer 11,986 — 70 — — 12,056

Total originated loans before SBA PPP loans $ 819,303 $ 2,258 $ 15,462 $ — $ — $ 837,023

SBA PPP loans 123,702 — — — — 123,702

Total originated loans $ 943,005 $ 2,258 $ 15,462 $ — $ — $ 960,725

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Other Consumer 13,136 — 77 — — 13,213

Gross loans before SBA PPP loans $ 1,087,974 $ 6,672 $ 28,541 $ — $ — $ 1,123,187

SBA PPP loans 123,702 — — — — 123,702

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

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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:

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Total Allowance on originated loans $ 12,354 $ 1,959 $ 518 $ 225 $ 774 $ 15,830

Purchased credit impaired loans — — — — — —

Other acquired loans:

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

Purchased credit impaired loans — — — — — —

Other acquired loans:

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

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

An aging analysis of the Company’s commercial/agricultural real estate and non-real estate, consumer real estate and non-real estate and purchased third party loans as of December 31, 2021 and 2020, 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

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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

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

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.

At December 31, 2021, the Company individually evaluated loans for impairment with a recorded investment of $ 31,740 , consisting of (1) $ 11,205 PCI loans, with a carrying amount of $ 10,552 ;

(2) $ 9,860 TDR loans, net of TDR PCI loans;

and (3) $ 11,328 of substandard non-TDR loans, non-PCI loans.

The $ 31,740 total of loans individually evaluated for impairment includes $ 7,984 of performing TDR loans.

At December 31, 2020, the Company individually evaluated loans for impairment with a recorded investment of $ 42,310 , consisting of (1) $ 17,946 PCI loans, with a carrying amount of $ 16,859 ;

(2) $ 15,634 TDR loans, net of TDR PCI loans;

and (3) $ 9,817 of substandard non-TDR loans, non-PCI loans.

The $ 42,310 total of loans individually evaluated for impairment includes $ 11,742 of performing TDR loans.

A loan is identified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.

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.

20 unchanged sentences

Total $ 31,740 $ 32,393 $ 1,009 $ 37,028 $ 1,674

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 .

At December 31, 2021, the Company had two 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 $ 109 .

At December 31, 2021, the Company had five 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 $ 2,096 .

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

24 unchanged sentences

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.

There was one accruing, delinquent TDR, greater than 60 days past due, with a recorded investment of $ 4 at December 31, 2021, compared to one accruing, delinquent TDR, greater than 60 days past due, with a recorded investment of $ 20 at December 31, 2020.

Following is a summary of TDR loans by accrual status as of December 31, 2021 and December 31, 2020.

4 unchanged sentences

Total $ 12,523 $ 18,477

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.

There were no TDR commitments meeting our TDR criteria as of December 31, 2021 or as of December 31, 2020.

There were unused lines of credit totaling $ 10 and $ 14 meeting our TDR criteria as of December 31, 2021 and December 31, 2020, respectively.

The following provides detail, including specific reserve and reasons for modification, related to loans identified as TDRs during the years ended December 31, 2021 and December 31, 2020:

24 unchanged sentences

Total loans 76 $ 12,523 107 $ 18,477

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

The following table provides the number of loans modified in a TDR during the previous twelve months which subsequently defaulted during the years ended December 31, 2021 and December 31, 2020, as well as the recorded investment in these restructured loans as of December 31, 2021 and December 31, 2020:

December 31, 2021 December 31, 2020

Modifications Recorded

Troubled debt restructurings:

Commercial/Agricultural real estate 1 $ 100

C&I/Agricultural operating 1 224

Residential mortgage 4 404

Consumer installment — —

Total troubled debt restructurings 6 $ 728

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

December 31, 2019

Investment Number of

Modifications Recorded

7 unchanged sentences

The outstanding balance and the carrying amount of acquired loans included in the consolidated balance sheet are as follows:

December 31, 2020

December 31, 2021 December 31, 2020

Accountable for under ASC 310-30 (PCI loans)

7 unchanged sentences

Carrying amount $ 194,951 $ 281,101

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 table below shows scheduled accretion by year for the accretable difference recognized due to fair value purchase accounting on recent whole bank acquisitions.

In addition, the Company has $ 1.61 million of accretable discount from purchased impaired loans with the original non-accretable discount transferred to accretable discount.

The scheduled accretion on this balance is estimated to be $ 100 per year;

however, large balance payoffs, as seen in 2021 and 2020, would accelerate this accretion.

Fiscal years ending December 31, Purchase Accounting Accretable Discount

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

December 31, 2020

December 31, 2021 December 31, 2020

Balance at beginning of period $ 1,087 $ 6,290

5 unchanged sentences

Balance at end of period $ 653 $ 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

NOTE 4 – MORTGAGE SERVICING RIGHTS

1 unchanged sentence

The unpaid balances of the one- to four-family residential mortgage loans as of December 31, 2021 and December 31, 2020 were $ 556,086 and $ 553,655 , 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.

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

Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in deposits were $ 2,781 and $ 2,890 , at December 31, 2021 and December 31, 2020, respectively.

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

Mortgage servicing rights activity for the years ended December 31, 2021 and December 31, 2020 was as follows:

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

8 unchanged sentences

Recoveries 1,448 —

Write-downs — —

Valuation allowance, end of period ( 566 ) ( 2,014 )

2 unchanged sentences

Residential mortgage loans serviced for others $ 556,086 $ 553,655

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

The current period change in valuation allowance is included in expense as mortgage servicing rights expense, net on the consolidated statement of operations.

Servicing fees totaled $ 1,414 and $ 1,391 for the years ended December 31, 2021 and December 31, 2020, respectively.

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

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.

1 unchanged sentence

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 %.

Fair value at both December 31, 2021 and 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, 2021, the estimated future aggregate amortization expense for the mortgage servicing rights is as follows.

15 unchanged sentences

NOTE 6 - 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

Goodwill— The beginning and ending balance of goodwill was $ 31,498 during the periods ended December 31, 2021 and December 31, 2020.

There were no changes to goodwill during either period.

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.

5 unchanged sentences

Net book value $ 3,898 $ 5,494

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

Sales during the period - carrying amount (1) $ — $ 618

1 unchanged sentence

Amortization during the period $ 1,596 $ 1,622

(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 .

(1) 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.

3 unchanged sentences

Intangible Assets

After 2025 395

Total $ 3,898

NOTE 7— 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.

We have operating leases for our corporate offices ( 1 ), five bank branch offices ( 5 ) and an ATM location ( 1 ).

Our leases have remaining lease terms of 1.25 years to 6.50 years, some of which include options to extend the leases for up to 5 years.

As of December 31, 2021, 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.

1 unchanged sentence

December 31, 2021 December 31, 2020

The components of total lease costs were as follows:

Operating lease cost $ 558 $ 618

Variable lease cost 47 59

Total lease cost $ 605 $ 677

The components of total lease income were as follows:

Operating lease income $ 33 $ 32

Supplemental cash flow information related to leases was as follows:

11 unchanged sentences

operating leases 2.73 % 2.70 %

Future payments due under operating leases as of December 31, 2020 are as follows:

Fiscal years ending December 31,

Cash obligations and receipts under lease contracts as of December 31, 2021 are as follows:

Fiscal years ending December 31, Payments Receipts

2022 $ 558 $ 34

Thereafter 480 —

11 unchanged sentences

Total deposits $ 1,387,535 $ 1,295,256

Brokered deposits included above:

$ 2,516 $ 50,377

At December 31, 2021, the scheduled maturities of time deposits were as follows:

1 unchanged sentence

Total $ 203,014

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

Time deposits of $250 or more were $ 22,381 and $ 46,660 at December 31, 2021 and December 31, 2020, respectively.

Brokered deposits were $ 11 and $ 2,516 at December 31, 2021 and December 31, 2020, respectively.

Deposits from the Company’s directors, executive officers, principal stockholders and their affiliates held by the Bank at December 31, 2021 and December 31, 2020 amounted to $ 34,093 , and $ 48,596 , respectively.

9 unchanged sentences

2030 12,500 0.52 % 0.86 % 12,500 0.52 % 0.86 %

2030 12,500 0.52 % 0.86 % — — % — %

Subtotal 111,530 123,530

5 unchanged sentences

2030 15,000 6.00 % 6.00 % 15,000 6.00 % 6.00 %

$ 30,000 $ 30,000

Unamortized debt issuance costs ( 430 ) ( 528 )

5 unchanged sentences

(3) The weighted-average interest rates on FHLB borrowings, with maturities less than twelve months, outstanding as of December 31, 2021 and December 31, 2020 were 2.45 % and 1.02 %, 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.

(4) 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.

(5) 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 %.

(a) A term note which was subsequently refinanced in October 2020 and modified in October 2021, 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 3.00 %, due to the modification in October 2021.

(b) A $ 5,000 line of credit, maturing in August 2022, that remains undrawn upon.

2 unchanged sentences

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

The note is callable by the Bank when, and anytime after, the floating rate is initially set.

Interest-only payments are due quarterly.

1 unchanged sentence

In September 2025, the fixed interest rate will be reset quarterly to equal the three-month term Secured Overnight Financing Rate plus 591 basis points.

The note is callable by the Bank when, and anytime after, the floating rate is initially set.

Interest-only payments are due semi-annually each year during the fixed interest period and quarterly during the floating interest period.

4 unchanged sentences

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

The Bank has originated Small Business Administration’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.

This FRB PPPLF program expired on July 30, 2021.

The Bank has no outstanding loan balances under this facility at December 31, 2021 and December 31, 2020.

Maximum month-end borrowed amounts outstanding under this agreement were $ 0 and $ 25,136 , during the twelve months ended December 31, 2021 and December 31, 2020, respectively.

In July 2021, the bank pledged these SBA PPP loans to the FHLB.

NOTE 10— CAPITAL MATTERS

10 unchanged sentences

The Bank’s Tier 1 (leverage) and risk-based capital ratios at December 31, 2021 and 2020, respectively, are presented below:

(actual amount rounded to the nearest thousand)

Actual For Capital Adequacy

14 unchanged sentences

The Company’s Tier 1 (leverage) and risk-based capital ratios at December 31, 2021 and 2020, 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

Amount Ratio Amount Ratio

As of December 31, 2021

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

Total capital (to risk weighted assets) $ 182,242 13.1 % $ 111,694 > = 8.0 %

Tier 1 capital (to risk weighted assets) 135,329 9.7 % 83,771 > = 6.0 %

Common equity tier 1 capital (to risk weighted assets) 135,329 9.7 % 62,828 > = 4.5 %

Tier 1 leverage ratio (to adjusted total assets) 135,329 7.9 % 68,323 > = 4.0 %

As of December 31, 2020

5 unchanged sentences

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

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

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

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.

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

In particular, federal bank regulators have stated that paying dividends that deplete a banking

organization’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings.

In addition, in the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.

12 unchanged sentences

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.

The following table presents a summary of commitments described below as of December 31, 2021 and 2020, respectively:

Contract or Notional Amount at December 31, Contract or Notional Amount at December 31,

1 unchanged sentence

Commercial standby letter of credit $ 3,825 $ 524

Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract.

Commitment to contribute capital to SBIC $ 2,400 $ —

Commitment to contribute capital to investment company $ 2,640 $ —

Commitments to extend credit— 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.

Letters of credit— 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.

3 unchanged sentences

The Company has recorded no liability associated with standby letters of credit as of December 31, 2021 and 2020.

Capital Contributions— The Company has commitments to invest in a SBIC and investment company that call for capital contributions up to an amount specified in the partnership agreements.

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.

36 unchanged sentences

Outstanding at beginning of year 72,300 $ 11.05

Exercised ( 5,800 ) 8.99

Forfeited or expired ( 600 ) 13.76

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 $ —

Outstanding at end of period 65,900 11.20 4.61 $ 169

Exercisable at end of period 61,700 $ 11.03 4.54 $ 169

Year ended December 31, 2020

Outstanding at beginning of year 78,100 $ 11.18

Exercised ( 28,430 ) 7.12

Forfeited or expired ( 5,800 ) 11.95

1 unchanged sentence

Exercisable at end of year 54,100 $ 10.82 5.37 $ 4

Fully vested and expected to vest 78,100 $ 11.18 6.55 $ 81

Information related to the 2008 Equity Incentive Plan during each period follows:

12 unchanged sentences

Bank owned life insurance - Tax Act clarification — ( 660 )

State — ( 197 )

930 ( 2,526 )

5 unchanged sentences

State income taxes, net of federal 1,854 6.4 % 1,123 6.5 %

Bank owned life insurance - Tax Act clarification — — % ( 300 ) ( 2.4 ) %

Bank owned life insurance ( 132 ) ( 0.4 ) % ( 130 ) ( 0.8 ) %

2 unchanged sentences

Total $ 7,693 26.6 % $ 4,555 26.4 %

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

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

4 unchanged sentences

Deferred loan costs/fees 558 1,117

Director/officer compensation plans 116 83

Net unrealized loss on securities available for sale — 179

Restricted stock 189 116

Economic performance accruals 981 694

13 unchanged sentences

right of use asset ( 594 ) ( 730 )

Other acquired intangibles — ( 111 )

Net unrealized gains on securities available for sale ( 61 ) ( 565 )

39 unchanged sentences

Corporate asset-backed securities 33,908 — 33,908 —

Trust preferred securities 16,448 — 16,448 —

Total investment securities 203,068 — 203,068 —

Equity investments:

Equity investments 368 368 — —

Equity investments measured at NAV(1)

Total equity investments 1,328 368 — —

Total $ 204,396 $ 368 $ 203,068 $ —

7 unchanged sentences

Trust preferred securities 16,448 — 16,448 —

Total Investment Securities 144,233 — 144,233 —

Equity investments 200 200 — —

Total $ 144,433 $ 200 $ 144,233 $ —

(1) Investments valued at NAV are excluded from being reported under the fair value hierarchy but are presented to permit reconciliation with the balance sheet in accordance with ASC 820-10-35-54B.

For the years ended December 31, 2021 and December 31, 2020, the Company did not own any securities for which the Company utilized significant unobservable inputs (Level 3 inputs) to determine fair value.

40 unchanged sentences

December 31, 2021 December 31, 2020

Valuation Method Used Carrying

Amount Estimated

Valuation Method Used Carrying Amount Estimated

Value Carrying

5 unchanged sentences

Securities held to maturity "HTM" (Level II) 71,141 69,177 43,551 43,784

Equity securities with readily determinable fair value (Level I) 200 200 246 246

Equity investments (Level I) 368 368 200 200

Equity investments valued at NAV (1) N/A 960 960 — —

Other investments (Level II) 15,305 15,305 14,948 14,948

5 unchanged sentences

Deposits (Level III) $ 1,387,535 $ 1,388,390 $ 1,295,256 $ 1,292,104

FHLB and FRB advances (Level II) 123,498 128,282 130,971 131,593

FHLB advances (Level II) 111,527 113,285 123,498 128,282

Other borrowings (Level I) 58,426 58,426 58,328 58,328

Other liabilities (Level I) — — 10,010 10,010

Accrued interest payable (Level I) 586 586 796 796

(1) Investments valued at NAV are excluded from being reported under the fair value hierarchy but are presented to permit reconciliation with the balance sheet in accordance with ASC 820-10-35-54B.

NOTE 16— EARNINGS PER SHARE

2 unchanged sentences

Year ended Year ended

December 31, 2020 December 31, 2019

(Share count in thousands) December 31, 2021 December 31, 2020

Net income attributable to common shareholders $ 21,266 $ 12,725

10 unchanged sentences

For the year ended, December 31, For the year ended, December 31,

Amount Tax Benefit

(Expense) Net-of-Tax

Amount Before-Tax

Amount Tax Benefit

(Expense) Net-of-Tax

Unrealized gains on securities:

Net unrealized gains arising during the period $ 2,546 ( 472 ) $ 2,074 $ 1,681 $ ( 462 ) $ 1,219

Unrealized (losses) gains on securities:

Net unrealized (losses) gains arising during the period $ ( 1,261 ) 352 $ ( 909 ) $ 2,546 $ ( 472 ) $ 2,074

Reclassification adjustment for gains included in net income ( 573 ) 153 ( 420 ) ( 156 ) 43 ( 113 )

1 unchanged sentence

The changes in the accumulated balances for each component of other comprehensive income (loss), net of tax for the years ended December 31, 2021 and December 31, 2020 were as follows:

Unrealized Gains (Losses) on Securities Other Accumulated

Unrealized Gains (Losses) on AFS Securities Other Accumulated

Comprehensive

2 unchanged sentences

Current year-to-date other comprehensive income 2,705 1,961

Adoption of ASU 2016-01;

Equity securities (1) ( 45 ) ( 45 )

Ending balance, December 31, 2020 $ 2,056 $ 1,490

1 unchanged sentence

Ending balance, December 31, 2021 $ 222 $ 161

(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, 2021 were as follows:

1 unchanged sentence

Unrealized gains and losses

Sale of securities $ 156 Net gains on investment securities

Sale of securities $ 573 Net gains (losses) on investment securities

Tax effect ( 153 ) Provision for income taxes

Total reclassifications for the period $ 113 Net gain attributable to common shareholders

Total reclassifications for the period $ 420 Net income attributable to common shareholders

(1) Amounts in parentheses indicate decreases to profit/loss.

2 unchanged sentences

Unrealized gains and losses

Sale of securities $ 271 Net gains on investment securities

Sale of securities $ 156 Net gains (losses) on investment securities

Tax effect ( 43 ) Provision for income taxes

Total reclassifications for the period $ 196 Net gain attributable to common shareholders

Total reclassifications for the period $ 113 Net income attributable to common shareholders

(1) Amounts in parentheses indicate decreases to profit/loss.

5 unchanged sentences

Cash and cash equivalents $ 22,465 $ 23,333

Equity investments 360 —

Other assets 386 375

28 unchanged sentences

Adjustments to reconcile net income to net cash provided by operating activities - Equity in undistributed income of subsidiary ( 23,896 ) ( 14,978 )

(Increase) decrease in other assets ( 55 ) 101

Decrease (increase) in other liabilities 313 ( 391 )

Net change in:

Other assets ( 23 ) ( 55 )

Other liabilities ( 33 ) 313

Net cash used in operating activities ( 2,666 ) ( 1,969 )

Cash flows from investing activities:

Cash consideration paid in business combination — ( 20,970 )

Purchase of equity securities ( 360 ) —

Net cash used in investing activities ( 360 ) —

2 unchanged sentences

Amortization of debt issuance costs 98 91

Repayments of other borrowings — ( 13,000 )

Repurchase shares of common stock ( 7,951 ) ( 2,820 )

4 unchanged sentences

Net cash provided by financing activities 2,158 20,049

Net increase (decrease) in cash and cash equivalents 18,080 ( 1,722 )

Net (decrease) increase in cash and cash equivalents ( 868 ) 18,080

Cash and cash equivalents at beginning of year 23,333 5,253

5 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data