Citizens Community Bancorp Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS 4 CITIZENS COMMUNITY BANCORP, INC. Consolidated Balance Sheets March 31, 2022 (unaudited) and December 31, 2021 (derived from audited financial statements) (in thousands, except share and per share data) March 31, 2022 December 31, 2021 Assets Cash and cash equivalents $ 84,364 $ 47,691 Other interest bearing deposits 1,511 1,511 Securities available for sale "AFS" 187,905 203,068 Securities held to maturity "HTM" 104,894 71,141 Equity investments 1,291 1,328 Other investments 15,084 15,305 Loans receivable 1,290,176 1,310,963 Allowance for loan losses ( 16,818 ) ( 16,913 ) Loans receivable, net 1,273,358 1,294,050 Loans held for sale 2,528 6,670 Mortgage servicing rights, net 4,614 4,161 Office properties and equipment, net 21,393 21,169 Accrued interest receivable 4,179 3,916 Intangible assets 3,499 3,898 Goodwill 31,498 31,498 Foreclosed and repossessed assets, net 1,368 1,408 Bank owned life insurance ("BOLI") 24,464 24,312 Other assets 13,519 8,502 TOTAL ASSETS $ 1,775,469 $ 1,739,628 Liabilities and Stockholders’ Equity Liabilities: Deposits $ 1,428,223 $ 1,387,535 Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) advances 85,530 111,527 Other borrowings 87,062 58,426 Other liabilities 9,160 11,274 Total liabilities 1,609,975 1,568,762 Stockholders’ Equity: Common stock—$ 0.01 par value, authorized 30,000,000 ; 10,526,781 and 10,502,442 shares issued and outstanding, respectively 105 105 Additional paid-in capital 119,789 119,925 Retained earnings 52,562 50,675 Accumulated other comprehensive (loss) income ( 6,962 ) 161 Total stockholders’ equity 165,494 170,866 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 1,775,469 $ 1,739,628 See accompanying condensed notes to unaudited consolidated financial statements. 5 CITIZENS COMMUNITY BANCORP, INC. Consolidated Statements of Operations (unaudited) Three Months Ended March 31, 2022 and 2021 (in thousands, except per share data) Three Months Ended March 31, 2022 March 31, 2021 Interest and dividend income: Interest and fees on loans $ 13,767 $ 14,517 Interest on investments 1,609 1,103 Total interest and dividend income 15,376 15,620 Interest expense: Interest on deposits 1,068 1,714 Interest on FHLB and FRB borrowed funds 311 411 Interest on other borrowed funds 830 731 Total interest expense 2,209 2,856 Net interest income before provision for loan losses 13,167 12,764 Provision for loan losses — — Net interest income after provision for loan losses 13,167 12,764 Non-interest income: Service charges on deposit accounts 488 398 Interchange income 549 530 Loan servicing income 701 893 Gain on sale of loans 722 1,595 Loan fees and service charges 92 278 Net gains (losses) on investment securities ( 37 ) 235 Other 198 247 Total non-interest income 2,713 4,176 Non-interest expense: Compensation and related benefits 5,398 5,569 Occupancy 1,365 1,316 Data processing 1,301 1,370 Amortization of intangible assets 399 399 Mortgage servicing rights expense, net ( 327 ) ( 450 ) Advertising, marketing and public relations 212 163 FDIC premium assessment 115 165 Professional services 402 502 Gain on repossessed assets, net ( 7 ) ( 117 ) New market tax credit depletion 163 — Other 647 572 Total non-interest expense 9,668 9,489 Income before provision for income tax 6,212 7,451 Provision for income taxes 1,506 1,945 Net income attributable to common stockholders $ 4,706 $ 5,506 Per share information: Basic earnings $ 0.45 $ 0.50 Diluted earnings $ 0.45 $ 0.50 Cash dividends paid $ 0.26 $ 0.23 See accompanying condensed notes to unaudited consolidated financial statements. 6 CITIZENS COMMUNITY BANCORP, INC. Consolidated Statements of Comprehensive (Loss) Income (unaudited) Three months ended March 31, 2022 and 2021 (in thousands) Three Months Ended March 31, 2022 March 31, 2021 Net income attributable to common stockholders $ 4,706 $ 5,506 Other comprehensive loss, net of tax: Securities available for sale Net unrealized losses arising during period, net of tax ( 7,123 ) ( 486 ) Other comprehensive loss, net of tax ( 7,123 ) ( 486 ) Comprehensive (loss) income $ ( 2,417 ) $ 5,020 See accompanying condensed notes to unaudited consolidated financial statements. 7 CITIZENS COMMUNITY BANCORP, INC. Consolidated Statement of Changes in Stockholders’ Equity (unaudited) Three Months Ended March 31, 2022 (in thousands, except shares and per share data) Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (loss) Total Stockholders’ Equity Common Stock Shares Amount Balance, January 1, 2022 10,502,442 $ 105 $ 119,925 $ 50,675 $ 161 $ 170,866 Net income — — — 4,706 — 4,706 Other comprehensive loss, net of tax — — — — ( 7,123 ) ( 7,123 ) Surrender of restricted shares of common stock ( 10,119 ) — ( 141 ) — — ( 141 ) Restricted common stock awarded under the equity incentive plan 38,586 — — — — — Restricted common stock issued upon achievement of the 2019 performance criteria 11,834 — — — — — Common stock options exercised 2,500 — 20 — — 20 Common stock repurchased ( 18,462 ) — ( 211 ) ( 77 ) — ( 288 ) Stock option expense — — 1 — — 1 Amortization of restricted stock — — 195 — — 195 Cash dividends ($ 0.26 per share) — — — ( 2,742 ) — ( 2,742 ) Balance at March 31, 2022 10,526,781 $ 105 $ 119,789 $ 52,562 $ ( 6,962 ) $ 165,494 See accompanying condensed notes to unaudited consolidated financial statements. 8 CITIZENS COMMUNITY BANCORP, INC. Consolidated Statement of Changes in Stockholders’ Equity (unaudited) Twelve Months Ended December 31, 2021 (in thousands, except shares and per share data) Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Common Stock Shares Amount Balance, January 1, 2021 11,056,349 $ 111 $ 126,154 $ 32,809 $ 1,490 $ 160,564 Net income — — — 5,506 — 5,506 Other comprehensive loss, net of tax — — — — ( 486 ) ( 486 ) Forfeiture of unvested shares ( 1,500 ) — — — — — Surrender of restricted shares of common stock ( 895 ) — ( 10 ) — — ( 10 ) Restricted common stock awarded under the equity incentive plan 64,399 — — — — — Common stock repurchased ( 224,481 ) ( 2 ) ( 2,552 ) ( 21 ) — ( 2,575 ) Stock option expense — — 3 — — 3 Amortization of restricted stock — — 171 — — 171 Cash dividends ($ 0.23 per share) — — — ( 2,511 ) — ( 2,511 ) Balance at March 31, 2021 10,893,872 109 123,766 35,783 1,004 160,662 Net income — — — 4,706 — 4,706 Other comprehensive income, net of tax — — — — 1,056 1,056 Surrender of restricted shares of common stock ( 1,149 ) — ( 15 ) — — ( 15 ) Common stock options exercised 2,000 — 17 — — 17 Common stock repurchased ( 198,648 ) ( 2 ) ( 2,260 ) ( 372 ) — ( 2,634 ) Stock option expense — — 2 — — 2 Amortization of restricted stock — — 222 — — 222 Balance at June 30, 2021 10,696,075 107 121,732 40,117 2,060 164,016 Net income — — — 4,997 — 4,997 Other comprehensive income, net of tax — — — — ( 828 ) ( 828 ) Surrender of restricted shares of common stock ( 222 ) — ( 3 ) — — ( 3 ) Common stock options exercised 3,800 — 35 — — 35 Common stock repurchased ( 180,768 ) ( 2 ) ( 2,058 ) ( 454 ) — ( 2,514 ) Stock option expense — — 2 — — 2 Amortization of restricted stock — — 393 — — 393 Balance, September 30, 2021 10,518,885 105 120,101 44,660 1,232 166,098 Net income — — — 6,057 — 6,057 Other comprehensive income, net of tax — — — — ( 1,071 ) ( 1,071 ) Surrender of restricted shares of common stock ( 143 ) — ( 2 ) — — ( 2 ) Common stock repurchased ( 16,300 ) — ( 186 ) ( 42 ) — ( 228 ) Stock option expense — — 1 — — 1 Amortization of restricted stock — — 11 — — 11 Balance, December 31, 2021 10,502,442 $ 105 $ 119,925 $ 50,675 $ 161 $ 170,866 See accompanying condensed notes to unaudited consolidated financial statements. 9 CITIZENS COMMUNITY BANCORP, INC. Consolidated Statements of Cash Flows (unaudited) Three Months Ended March 31, 2022 and 2021 (in thousands) Three Months Ended March 31, 2022 March 31, 2021 Cash flows from operating activities: Net income attributable to common stockholders $ 4,706 $ 5,506 Adjustments to reconcile net income to net cash provided by operating activities: Premium amortization, net of discount accretion on investment securities 33 23 Depreciation expense 573 530 Net realized loss (gain) on equity securities 37 ( 235 ) Increase in mortgage servicing rights resulting from transfers of financial assets ( 126 ) ( 297 ) Mortgage servicing rights amortization and impairment, net ( 327 ) ( 450 ) Amortization of intangible assets 399 399 Amortization of restricted stock 195 171 Net stock based compensation expense 1 3 Loss on sale of office properties and equipment — 6 Decrease in deferred income taxes 911 765 Increase in cash surrender value of life insurance ( 152 ) ( 153 ) Net gain from disposals of foreclosed and repossessed assets ( 7 ) ( 117 ) Gain on sale of loans held for sale, net ( 722 ) ( 1,595 ) New market tax credit depletion 163 — Net change in: Loans held for sale 4,864 2,403 Accrued interest receivable and other assets 410 322 Other liabilities ( 2,099 ) 6,248 Total adjustments 4,153 8,023 Net cash provided by operating activities 8,859 13,529 Cash flows from investing activities: Net decrease in other interest bearing deposits — 1,736 Purchase of available for sale securities ( 1,750 ) ( 50,956 ) Proceeds from principal payments of available for sale securities 7,076 9,368 Purchase of held to maturity securities ( 35,342 ) ( 16,530 ) Proceeds from principal payments and maturities of held to maturity securities 1,569 2,629 Net sales of other investments 221 17 Proceeds from sales of foreclosed and repossessed assets 28 312 Net decrease in loans 20,704 45,189 Net capital expenditures ( 797 ) ( 462 ) Proceeds from disposal of office properties and equipment — 10 New market tax credit investment ( 4,056 ) — Net cash used in investing activities ( 12,347 ) ( 8,687 ) Cash flows from financing activities: Amortization of fair value adjustments for acquired Federal Home Loan Bank advances 3 — Federal Home Loan Bank advance termination payments ( 15,015 ) ( 8,119 ) Federal Home Loan Bank maturities ( 11,000 ) — Amortization of debt issuance costs 41 26 Proceeds from other borrowings, net of origination costs 34,201 — Other borrowings principal reductions ( 5,606 ) — Net increase in deposits 40,688 84,946 Repurchase shares of common stock ( 288 ) ( 2,575 ) Surrender of restricted shares of common stock ( 141 ) ( 10 ) Common stock options exercised 20 — Cash dividends paid ( 2,742 ) ( 2,511 ) Net cash provided by financing activities 40,161 71,757 Net increase in cash and cash equivalents 36,673 76,599 Cash and cash equivalents at beginning of period 47,691 119,440 Cash and cash equivalents at end of period $ 84,364 $ 196,039 10 Supplemental cash flow information: Cash paid during the period for: Interest on deposits $ 1,096 $ 1,658 Interest on borrowings $ 1,323 $ 1,391 Supplemental noncash disclosure: Transfers from loans receivable to other real estate owned ("OREO") $ — $ 45 See accompanying condensed notes to unaudited consolidated financial statements. 11 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) (UNAUDITED) NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of Citizens Community Federal N.A. (the “Bank”) included herein have been included by its parent company, Citizens Community Bancorp, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. As used in this quarterly report, the terms “we”, “us”, “our”, and “Citizens Community Bancorp, Inc.” mean the Company and its wholly owned subsidiary, the Bank, unless the context indicates other meaning. The Bank is a national banking association (a “National Bank”) and operates under the title of Citizens Community Federal National Association (“Citizens Community Federal N.A.” or “Bank” or “CCFBank”). The Company is a bank holding company, supervised by the Federal Reserve Bank of Minneapolis, and operates under the title of Citizens Community Bancorp, Inc. The U.S. Office of the Comptroller of the Currency (the “OCC”), is the primary federal regulator for the Bank. The consolidated income of the Company is principally derived from the income of the Bank, the Company’s wholly owned subsidiary, serving customers in Wisconsin and Minnesota through 25 branch locations. Its primary markets include the Chippewa Valley Region in Wisconsin, the Mankato and Twin Cities markets in Minnesota, and various rural communities around these areas. The Bank offers traditional community banking services to businesses, agricultural operators and consumers, including one-to-four family residential mortgages. The Bank is subject to competition from other financial institutions and non-financial institutions providing financial products. Additionally, the Bank is subject to the regulations of certain regulatory agencies and undergoes periodic examination by those regulatory agencies. In preparing these consolidated financial statements, we evaluated the events and transactions that occurred subsequent to the March 31, 2022 balance sheet date and through the date the financial statements were available to be issued for items that should potentially be recognized or disclosed in these consolidated financial statements. The accompanying consolidated interim financial statements are unaudited. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Unless otherwise stated herein, and except for shares 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 intercompany accounts and transactions have been eliminated. Use of Estimates –Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, fair value of financial instruments, the allowance for loan losses, mortgage servicing rights, foreclosed and repossessed assets, valuation of intangible assets arising from acquisitions, useful lives for depreciation and amortization, valuation of goodwill and long-lived assets, stock based compensation, deferred tax assets, uncertain income tax positions and contingencies. Management does not anticipate any material changes to estimates made herein in the near term. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: those items described under the caption “Risk Factors” in Item 1A of the annual report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 2, 2022; the matters described in “Risk Factors” in Item 1A of this Form 10-Q; 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. Investment Securities; Held to Maturity and Available for Sale – Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of the date of each balance sheet. Securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Held to maturity securities are stated at amortized cost. Investment securities not classified as held to maturity are classified as available for sale. Available for sale securities are stated at fair value, with unrealized holding gains and losses being reported in other comprehensive income (loss), net of tax. Unrealized losses deemed other-than-temporary due to credit issues are reported in the 12 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. Amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the estimated lives of the securities. The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. As part of such monitoring, the credit quality of individual securities and their issuer is assessed. Significant inputs used to measure the amount of other-than-temporary impairment related to credit loss include, but are not limited to: the Company’s intent and ability to sell the debt security prior to recovery, that it is more likely than not that the Company will not sell the security prior to recovery, default and delinquency rates of the underlying collateral, remaining credit support, and historical loss severities. Adjustments to market value of available for sale securities that are considered temporary are recorded in other comprehensive income or loss as separate components of stockholders’ equity, net of tax. If the unrealized loss of a security is identified as other-than-temporary based on information available, such as the decline in the creditworthiness of the issuer, external market ratings, or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if credit loss exists. If there is a credit loss, it will be recorded in the Company’s consolidated statement of operations. Non-credit components of the unrealized losses on available for sale securities will continue to be recognized in other comprehensive income (loss), net of tax. Equity 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. 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 (“FRB”) System and the Federal Home Loan Bank (“FHLB”) System, the Bank is required to maintain an investment in the capital stock of these entities. These securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other exchange traded equity securities. As no ready market exists for these stocks, and they have no quoted market value, these investments are carried at cost and periodically evaluated for impairment based on the ultimate recovery of par value. Cash dividends are reported as other income in the consolidated statement of operations. Also included in other investments is stock of our correspondent bank, Bankers’ Bank, without readily determinable fair value. This stock is carried at cost plus or minus changes resulting from observable price changes in orderly transactions for this stock, less other-than-temporary impairment charges, if any. Management’s evaluation for impairment of these other investments, includes consideration of the financial condition and other available relevant information of the issuer. Based on management’s quarterly evaluation, no impairment has been recorded on these securities. Other investments totaling $ 15,084 at March 31, 2022 consisted of $ 7,650 of FHLB stock, $ 5,205 of Federal Reserve Bank stock and $ 2,229 of Bankers’ Bank stock. Other investments totaling $ 15,305 at December 31, 2021 consisted of $ 7,877 of FHLB stock and $ 5,200 of Federal Reserve Bank stock and $ 2,228 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 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 unamortized net fee is recognized at this time. Late charge fees are recognized into income when collected. Interest income on commercial, mortgage and consumer loans is discontinued according to the following schedules: 13 • Commercial/agricultural real estate loans past due 90 days or more; • Commercial and industrial/agricultural operating loans past due 90 days or more; • Closed end consumer installment loans past due 120 days or more; and • Residential mortgage loans and open ended consumer installment loans past due 180 days or more. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for a loan placed on nonaccrual status is reversed against interest income. Interest received on such loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual status. Loans are returned to accrual status when 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 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 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. Loan losses are charged against the ALL when management believes that the collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the ALL. Management estimates the required ALL balance taking into account the following factors: past loan loss experience; the nature, volume and composition of our loan portfolio; known and inherent risks in our portfolio; information about specific borrowers’ ability to repay; estimated collateral values; current economic conditions; and other relevant factors determined by management. The ALL consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for certain qualitative factors. The entire ALL balance is available for any loan that, in management’s judgment, should be charged off. A loan is impaired when full payment under the loan terms is not expected. Impaired loans consist of all TDRs, as well as individual loans not considered a TDR, that are either (1) rated substandard or worse, (2) on nonaccrual status or (3) PCI loans which are impaired at the time of acquisition. Substandard loans, as defined by the OCC, our primary banking regulator, are loans that are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. All TDRs are individually evaluated for impairment. See Note 3, “Loans, Allowance for Loan Losses and Impaired Loans” for more information on what we consider to be a TDR. For TDR’s or substandard loans deemed to be impaired, a specific ALL allocation may be established so that the loan is reported, net, at the lower of (a) its outstanding principal balance; (b) the present value of the loan’s estimated future cash flows using the loan’s existing rate; or (c) at the fair value of any loan collateral, less estimated disposal costs, if repayment is expected solely from the underlying collateral of the loan. For TDRs less than 90+ days past due, and certain substandard loans that are less than 90+ days delinquent, the likelihood of the loan migrating to over 90 days past due is also taken into account when determining the specific ALL allocation for these particular loans. Large groups of smaller balance homogeneous loans, such as non-TDR commercial, consumer and residential real estate loans, are collectively evaluated for ALL purposes, and accordingly, are not separately identified for ALL disclosures. Acquired Loans— Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value with no carryover of related allowance for loan losses. Any allowance for loan loss on these pools reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that no longer are expected to be received). Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition-date fair value including: the remaining life of the acquired loans, delinquency status, estimated prepayments, payment options and other loan features, internal risk grade, estimated value of the underlying collateral and interest rate environment. Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if we can reasonably estimate the timing and amount of the expected cash flows on such loans and if we expect to fully collect the new carrying value of the loans. As such, we may 14 no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable yield. Loans acquired with deteriorated credit quality are accounted for in accordance with Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC 310-30) if, at acquisition, the loans have evidence of credit quality deterioration since origination and it is probable that all contractually required payments will not be collected. At acquisition, the Company considers several factors as indicators that an acquired loan has evidence of deterioration in credit quality. These factors include, but are not limited to: loans 90 days or more past due, loans with an internal risk grade of substandard or below, loans classified as non-accrual by the acquired institution, and loans that have been previously modified in a troubled debt restructuring. Under the ASC 310-30 model, the excess of cash flows expected to be collected at acquisition over recorded fair value is referred to as the accretable yield and is the interest component of expected cash flow. The accretable 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. The difference between the loan’s total scheduled principal and interest payments over all cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the non-accretable difference. The non-accretable difference represents contractually required principal and interest payments which the Company does not expect to collect. Over the life of the loan, management continues to estimate cash flows expected to be collected. Decreases in expected cash flows are recognized as impairments through a charge to the provision for loan losses resulting in an increase in the allowance for loan losses. Subsequent improvements in cash flows result in first, reversal of existing valuation allowances recognized subsequent to acquisition, if any, and next, an increase in the amount of accretable 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 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. They are carried at the lower of aggregate cost or fair value. Gains and losses on sales of loans are recognized at settlement dates, and are determined by the difference between the sales proceeds and the carrying value of the loans after allocating costs to servicing rights retained. Such gains and losses are included as non-interest income in the consolidated statements 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. Transfers of financial assets— Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the entity, (2) the transferee obtains the right, free of conditions that constrain it from taking advantage of that right, to pledge or exchange the transferred assets, and (3) the entity does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity. Mortgage Servicing Rights— Mortgage servicing rights (“MSR”) assets result as the Company sells loans to investors in the secondary market and retains the rights to service mortgage loans sold to others. MSR assets are initially measured at fair value; assessed for impairment at least annually; carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value. MSR assets are amortized in proportion to and over the period of estimated net servicing income, with the amortization recorded in non-interest expense in the consolidated statement of operations. The valuation of MSRs and related amortization, included in mortgage servicing rights expense in the consolidated statements of operations, thereon are based on numerous factors, assumptions and judgments, such as those for: changes in the mix of loans, interest rates, prepayment speeds, and default rates. Changes in these factors, assumptions and judgments may have a material effect on the valuation and amortization of MSRs. Although management believes that the assumptions used to 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. 15 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 fees are based on a contractual percentage of outstanding principal; or a fixed amount per loan and are recorded as income when earned. 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. On a periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amounts of the intangible assets may be impaired. Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A reporting unit is defined as any distinct, separately identifiable component of the Company’s one operating segment for which complete, discrete financial information is available and reviewed regularly by the segment’s management. The Company has one reporting unit as of March 31, 2022 which is related to its banking activities. The impairment testing process is conducted by assigning net assets and goodwill to the Company’s reporting unit. An initial qualitative evaluation is made to assess the likelihood of impairment and determine whether further quantitative testing to calculate the fair value is necessary. When the qualitative evaluation indicates that impairment is more likely than not, quantitative testing is required whereby the fair value of the Company’s reporting unit is calculated and compared to the recorded book value, “step one.” If the calculated fair value of the Company’s reporting unit exceeds its carrying value, goodwill is not considered impaired and “step two” is not considered necessary. If the carrying value of the Company’s reporting unit exceeds its calculated fair value, the impairment test continues (“step two”) by comparing the carrying value of the Company’s reporting unit’s goodwill to the implied fair value of goodwill. An impairment charge is recognized if the carrying value of goodwill exceeds the implied fair value of goodwill. The Company has performed the required goodwill impairment test and has determined that goodwill was not impaired as of December 31, 2021. Foreclosed and Repossessed Assets, net – Assets acquired through foreclosure or repossession are initially recorded at fair value, less estimated costs to sell, which establishes a new cost basis. If the fair value declines subsequent to foreclosure or repossession, a write-down is recorded through expense. Costs incurred after acquisition are expensed and are included in non-interest expense, other in the consolidated statements of operations. New Markets Tax Credits - As a part of its commitment to the communities it serves, in the first quarter of 2022 the Company made an investment in an LLC that is sponsoring a community development project that has been awarded a New Markets Tax Credit (NMTC) through the U.S. Department of the Treasury’s Community Development Financial Institutions Fund. This investment is Community Reinvestment Act eligible and is designed to generate a return primarily through the realization of the tax credit. This LLC is considered a Variable Interest Entity (VIE) as the Company represents the holder of the equity investment at risk, but does not have the ability to direct the activities that most significantly affect the performance of the LLC. As such, the Company is not the primary beneficiary of the VIE and the LLC has not been consolidated. The investment is accounted for using the equity method of accounting and is amortized through non-interest expense as the related tax credits are utilized. The utilization of the tax credit is recognized as a reduction in income tax expense. As of March 31, 2022, the carrying amount of this investment, which is included in other assets in the consolidated balance sheets, was $ 3,833 . The risk of loss with this investment is limited to its carrying value and is tied to its ability to operate in compliance with the rules and regulations necessary for the qualification of the tax credit generated by the investment. As of March 31, 2022 there were no known instances of noncompliance associated with the investment. Leases - We determine if an arrangement is a lease at inception. All of our existing leases have been determined to be operating leases under ASC 842. Right-of-use (“ROU”) assets are included in other assets in our consolidated balance sheets. Operating lease liabilities are included in other liabilities in our consolidated balance sheets. 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. As none of our existing leases provide an implicit rate, we use our incremental borrowing rate, based on information available at commencement date, in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease, when it is reasonably certain that we will exercise that option. Lease 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 16 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. 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 sheets, in the period of the share issuance. Advertising, Marketing and Public Relations Expense— The Company expenses all advertising, marketing and public relations costs as they are incurred. Income Taxes – The Company accounts for income taxes in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes.” Under this guidance, deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. 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. Consideration is given to various positive and negative factors that could affect the realization of the deferred tax assets. In evaluating this available evidence, management considers, among other things, historical performance, expectations of future earnings, the ability to carry back losses to recoup taxes previously paid, the length of statutory carry forward periods, any experience with utilization of operating loss and tax credit carry forwards not expiring, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. Accordingly, the Company’s evaluation is based on current tax laws as well as management’s expectations of future performance. Revenue Recognition - The Company’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. 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. Gain (loss) on repossessed assets - The Company records a gain or loss from the sale of repossessed assets, when control of the property or asset transfers to the buyer, which generally occurs at the time of an executed deed or sales agreement. When the company finances the sale of repossessed assets to a buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the repossessed asset is derecognized and the gain or loss on sale is recorded 17 upon transfer of control of the property to the buyer. In determining the gain on sale or loss on the sale, the Company adjust the transaction price and related gain or loss on sale if a significant financing component is present. 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, 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. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable during the period, consisting of stock options outstanding under the Company’s stock incentive plans that have an exercise price that is less than the Company’s stock price on the reporting date. Loss Contingencies— Loss contingencies, including claims and legal actions arising in the normal course of business, are recorded as liabilities when the likelihood of loss is probable and an amount of loss can be reasonably estimated. 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. Reclassifications – Certain items previously reported were reclassified for consistency with the current presentation. Recent Accounting Pronouncements— The Financial Accounting Standards Board (FASB) issues Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification (ASC). This section provides a summary description of recent ASUs that have potentially significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on financial statements issued in the near future. Recent Accounting Pronouncements—Adopted ASU 2020-04 and ASU 2021-01, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting-- These ASUs provide optional and temporary relief, in the form of optional expedients and exceptions, for applying GAAP to modifications of contacts, hedging relationships and other transactions affected by reference rate (e.g. LIBOR) reforms. ASU 2020-04 and ASU 2021-01 are effective for the Company immediately and through December 31, 2022. The Company utilizes LIBOR, among other indexes, as a reference rate for underwriting variable rate loans. Reference rate reform has not had, nor does the Company expect it to have, a material effect on the Company’s consolidated balance sheet, operations or cash flows. Recently Issued, But Not Yet Effective Accounting Pronouncements ASU 2016-13; Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments-- The ASU changes accounting for credit losses on loans receivable and debt securities from an incurred loss methodology to an expected credit loss methodology. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, ASU 2016-13 requires the use of forward-looking information to form credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, though the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. In November, 2019, the FASB issued ASU 2019-10, which delayed the effective date for ASU 2016-13 for smaller reporting companies, resulting in ASU 2016-13 becoming effective in the first quarter of 2023 for the Company. Earlier adoption is permitted; however, the Company does not currently plan to adopt the ASU early. Management is assessing alternative loss estimation methodologies and the Company’s data and system needs in order to evaluate the impact that adoption of this standard will have on the Company’s financial condition and results of operations. The Company anticipates recording the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which the ASU is effective, which will be January 1, 2023. ASU 2022-02; Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures - The ASU addresses and amends areas identified by the FASB as part of its post-implementation review of the accounting standard that introduced the current expected credit losses model. The amendments eliminate the accounting 18 guidance for troubled debt restructurings by creditors that have adopted the current expected credit losses model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. As the Company has not yet adopted the amendments in ASU 2016-13, ASU 2022-02 becomes effective in the first quarter of 2023. Management is assessing the impact that adoption of this standard will have on the Company’s financial condition and results of operations in conjunction with its assessment of the impact of ASU 2016-13. The Company expects to adopt the guidance for our fiscal year beginning January 1, 2023. NOTE 2 – INVESTMENT SECURITIES The amortized cost, estimated fair value and related unrealized gains and losses on securities available for sale and held to maturity as of March 31, 2022 and December 31, 2021, respectively, were as follows: Available for sale securities Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value March 31, 2022 U.S. government agency obligations $ 23,686 $ 298 $ 103 $ 23,881 Mortgage-backed securities 103,723 9 8,181 95,551 Corporate debt securities 37,087 54 1,195 35,946 Corporate asset-based securities 33,011 — 484 32,527 Total available for sale securities $ 197,507 $ 361 $ 9,963 $ 187,905 December 31, 2021 U.S. government agency obligations $ 25,826 $ 440 $ 1 $ 26,265 Obligations of states and political subdivisions 140 — — 140 Mortgage-backed securities 107,636 409 878 107,167 Corporate debt securities 35,342 403 157 35,588 Corporate asset-based securities 33,902 133 127 33,908 Total available for sale securities $ 202,846 $ 1,385 $ 1,163 $ 203,068 Held to maturity securities Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value March 31, 2022 Obligations of states and political subdivisions $ 4,600 $ — $ 32 $ 4,568 Mortgage-backed securities 100,294 29 8,916 91,407 Total held to maturity securities $ 104,894 $ 29 $ 8,948 $ 95,975 December 31, 2021 Obligations of states and political subdivisions $ 4,600 $ — $ 7 $ 4,593 Mortgage-backed securities 66,541 104 2,061 64,584 Total held to maturity securities $ 71,141 $ 104 $ 2,068 $ 69,177 At March 31, 2022, the Bank has pledged mortgage-backed securities with a carrying value of $ 5,813 as collateral against a borrowing line of credit with the Federal Reserve Bank. However, as of March 31, 2022, there were no borrowings outstanding on this Federal Reserve Bank line of credit. As of March 31, 2022, the Bank has pledged U.S. Government Agency securities with a carrying value of $ 3,570 and mortgage-backed securities with a carrying value of $ 2,645 as collateral against specific municipal deposits. As of March 31, 2022, the Bank also has mortgage-backed securities with a carrying value of $ 220 pledged as collateral to the Federal Home Loan Bank of Des Moines. At December 31, 2021, the Bank has pledged certain of its mortgage-backed securities with a carrying value of $ 863 as collateral to secure a line of credit with the Federal Reserve Bank. As of December 31, 2021, there were no borrowings outstanding on this Federal Reserve Bank line of credit. As of December 31, 2021, the Bank has pledged certain of its U.S. Government Agency securities with a carrying value of $ 3,934 and mortgage-backed securities with a carrying value of $ 2,879 19 as collateral against specific municipal deposits. 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. For the three month periods ended March 31, 2022 and March 31, 2021, there were no sales of available for sale securities. The estimated fair value of securities at March 31, 2022 and December 31, 2021, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities on mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Expected maturities may differ from contractual maturities on certain agency and municipal securities due to the call feature. March 31, 2022 December 31, 2021 Available for sale securities Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Due in one year or less $ — $ — $ 140 $ 140 Due after one year through five years 4,670 4,524 4,903 4,971 Due after five years through ten years 42,629 41,673 40,410 40,818 Due after ten years 46,485 46,157 49,757 49,972 Total securities with contractual maturities $ 93,784 $ 92,354 $ 95,210 $ 95,901 Mortgage-backed securities 103,723 95,551 107,636 107,167 Total available for sale securities $ 197,507 $ 187,905 $ 202,846 $ 203,068 March 31, 2022 December 31, 2021 Held to maturity securities Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Due after one year through five years $ 4,450 $ 4,425 $ 4,300 $ 4,298 Due after five years through ten years 150 143 300 295 Total securities with contractual maturities 4,600 4,568 4,600 4,593 Mortgage-backed securities 100,294 91,407 66,541 64,584 Total held to maturity securities $ 104,894 $ 95,975 $ 71,141 $ 69,177 20 Securities with unrealized losses at March 31, 2022 and December 31, 2021, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows: Less than 12 Months 12 Months or More Total Available for sale securities Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss March 31, 2022 U.S. government agency obligations $ 3,716 $ 103 $ — $ — $ 3,716 $ 103 Mortgage-backed securities 84,939 7,358 7,469 823 92,408 8,181 Corporate debt securities 29,871 1,157 712 38 30,583 1,195 Corporate asset-based securities 32,527 484 — — 32,527 484 Total $ 151,053 $ 9,102 $ 8,181 $ 861 $ 159,234 $ 9,963 December 31, 2021 U.S. 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-based securities 19,296 127 — — 19,296 127 Total $ 126,715 $ 1,148 $ 735 $ 15 $ 127,450 $ 1,163 Less than 12 Months 12 Months or More Total Held to maturity securities Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss March 31, 2022 Obligations of states and political subdivisions $ 4,568 $ 32 $ — $ — $ 4,568 $ 32 Mortgage-backed securities 56,503 4,105 33,773 4,811 90,276 8,916 Total $ 61,071 $ 4,137 $ 33,773 $ 4,811 $ 94,844 $ 8,948 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 Total $ 47,562 $ 1,353 $ 14,716 $ 715 $ 62,278 $ 2,068 The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. As part of such monitoring, the credit quality of individual securities and their issuer is assessed. Significant inputs used to measure the amount of other-than-temporary impairment related to credit loss include, but are not limited to; the Company’s intent and ability to sell the debt security prior to recovery, that it is more likely than not that the Company will not sell the security prior to recovery, default and delinquency rates of the underlying collateral, remaining credit support, and historical loss severities. Adjustments to market value of available for sale securities that are considered temporary are recorded as separate components of stockholders’ equity, net of tax. If the unrealized loss of a security is identified as other-than-temporary based on information available, such as the decline in the creditworthiness of the issuer, external market ratings, or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if credit loss exists. If there is a credit loss, it will be recorded in the Company’s consolidated statement of operations. Non-credit components of the unrealized losses on available for sale securities will continue to be recognized in other comprehensive income (loss), net of tax. Unrealized losses reflected in the preceding tables have not been included in results of operations because the unrealized loss was not deemed other-than-temporary. Management has determined that more likely than not, the Company neither intends to sell, nor will it be required to sell each debt security before its anticipated recovery, and therefore recovery of cost will occur. 21 NOTE 3 – LOANS, ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS Portfolio Segments: Commercial and agricultural real estate loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and prudently expand its business. Management examines current and projected cash flows to determine the ability of the borrower to repay its obligations as agreed. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The level of owner-occupied property versus non-owner-occupied property are tracked and monitored on a regular basis. Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Loan-to-value ratios on loans secured by farmland generally do not exceed 75 %. Commercial and industrial (“C&I”) loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. These cash flows, however, may not be as expected and the value of collateral securing the loans may fluctuate. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. Agricultural operating loans are generally comprised of term loans to fund the purchase of equipment, livestock and seasonal operating lines. Operating lines are typically written for one year and secured by the crop and other farm assets or other business assets, as considered necessary. Agricultural loans carry significant credit risks as they may involve larger balances concentrated with single borrowers or groups of related borrowers. In addition, repayment of such loans depends on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. Farming operations may be affected by adverse weather conditions such as drought, hail or floods that can severely limit crop yields. SBA PPP loan balances are 100% guaranteed under the Small Business Association’s Paycheck Protection Program and may be forgiven in full, depending on use of funds and eligibility. These SBA-backed loans helped businesses keep their workforce employed during the COVID-19 crisis. Eligible borrowers, who qualify for full loan forgiveness during the eight to twenty four week period following loan disbursement, can apply for forgiveness, once all proceeds for which the borrower requested forgiveness has been used. Borrowers can apply for forgiveness any time up to the maturity date of the loan. Residential mortgage loans are collateralized by primary and secondary positions on real estate and are underwritten primarily based on borrower’s documented income, credit scores, and collateral values. Under consumer home equity loan guidelines, the borrower will be approved for a loan based on a percentage of their home’s appraised value less the balance owed on the existing first mortgage. Credit risk is minimized within the residential mortgage portfolio due to relatively small loan account balances spread across many individual borrowers. Management evaluates trends in past due loans and current economic factors such as the housing price index on a regular basis. Consumer installment loans are comprised of originated indirect paper loans secured primarily by boats and recreational vehicles and other consumer loans secured primarily by automobiles and other personal assets. Consumer loan underwriting terms often depend on the collateral type, debt to income ratio and the borrower’s creditworthiness as evidenced by their credit score. In the event of a consumer installment loan default, collateral value alone may not provide an adequate source of repayment of the outstanding loan balance. This shortage is a result of the greater likelihood of damage, loss and depreciation for consumer based collateral. 22 Credit Quality/Risk Ratings: Management utilizes a numeric risk rating system to identify and quantify the Bank’s risk of loss within its loan portfolio. Ratings are initially assigned prior to funding the loan, and may be changed at any time as circumstances warrant. Ratings range from the highest to lowest quality based on factors that include measurements of ability to pay, collateral type and value, borrower stability and management experience. The Bank’s loan portfolio ratings are presented below in accordance with the risk rating framework that has been commonly adopted by the federal banking agencies. The definitions of the various risk rating categories are as follows: 1 through 4 - Pass. A “Pass” loan means that the condition of the borrower and the performance of the loan is satisfactory or better. 5 - Watch. A “Watch” loan has clearly identifiable developing weaknesses that deserve additional attention from management. Weaknesses that are not corrected or mitigated, may jeopardize the ability of the borrower to repay the loan in the future. 6 - Special Mention. A “Special Mention” loan has one or more potential weakness that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position in the future. 7 - Substandard. A “Substandard” loan is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Assets classified as substandard must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. 8 - Doubtful. A “Doubtful” loan has all the weaknesses inherent in a Substandard loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. 9 - Loss. Loans classified as “Loss” are considered uncollectible, and their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, and a partial recovery may occur in the future. 23 Below is a summary of originated and acquired loans by type and risk rating as of March 31, 2022: 1 to 5 6 7 8 9 TOTAL Originated Loans: Commercial/Agricultural real estate: Commercial real estate $ 569,560 $ 659 $ 5,070 $ — $ — $ 575,289 Agricultural real estate 50,111 784 1,788 — — 52,683 Multi-family real estate 175,186 285 — — — 175,471 Construction and land development 86,869 — 128 — — 86,997 C&I/Agricultural operating: Commercial and industrial 108,370 48 4 — — 108,422 Agricultural operating 18,792 68 5,160 — — 24,020 Residential mortgage: Residential mortgage 57,145 — 2,730 — — 59,875 Purchased HELOC loans 3,487 — — — — 3,487 Consumer installment: Originated indirect paper 14,396 — 112 — — 14,508 Other consumer 7,772 — 70 — — 7,842 Total originated loans before SBA PPP loans 1,091,688 1,844 15,062 — — 1,108,594 SBA PPP loans 2,071 — — — — 2,071 Total originated loans $ 1,093,759 $ 1,844 $ 15,062 $ — $ — $ 1,110,665 Acquired Loans: Commercial/Agricultural real estate: Commercial real estate $ 111,371 $ — $ 3,114 $ — $ — $ 114,485 Agricultural real estate 18,424 — 4,609 — — 23,033 Multi-family real estate 4,016 — — — — 4,016 Construction and land development 729 — 154 — — 883 C&I/Agricultural operating: Commercial and industrial 12,342 5 253 — — 12,600 Agricultural operating 4,501 — 236 — — 4,737 Residential mortgage: Residential mortgage 23,507 — 1,391 — — 24,898 Consumer installment: Other consumer 346 — 3 — — 349 Total acquired loans $ 175,236 $ 5 $ 9,760 $ — $ — $ 185,001 Total Loans: Commercial/Agricultural real estate: Commercial real estate $ 680,931 $ 659 $ 8,184 $ — $ — $ 689,774 Agricultural real estate 68,535 784 6,397 — — 75,716 Multi-family real estate 179,202 285 — — — 179,487 Construction and land development 87,598 — 282 — — 87,880 Commercial/Agricultural non-real estate: Commercial and industrial 120,712 53 257 — — 121,022 Agricultural operating 23,293 68 5,396 — — 28,757 Residential mortgage: Residential mortgage 80,652 — 4,121 — — 84,773 Purchased HELOC loans 3,487 — — — — 3,487 Consumer installment: Originated indirect paper 14,396 — 112 — — 14,508 Other consumer 8,118 — 73 — — 8,191 Gross loans before SBA PPP Loans 1,266,924 1,849 24,822 — — 1,293,595 SBA PPP loans 2,071 — — — — $ 2,071 Gross loans $ 1,268,995 $ 1,849 $ 24,822 $ — $ — $ 1,295,666 Less: Unearned net deferred fees and costs and loans in process ( 2,223 ) Unamortized discount on acquired loans ( 3,267 ) Allowance for loan losses ( 16,818 ) Loans receivable, net $ 1,273,358 24 Below is a summary of originated and acquired loans by type and risk rating as of December 31, 2021: 1 to 5 6 7 8 9 TOTAL Originated Loans: Commercial/Agricultural real estate: Commercial real estate $ 572,724 $ 667 $ 5,004 $ — $ — $ 578,395 Agricultural real estate 50,834 1,267 271 — — 52,372 Multi-family real estate 173,760 290 — — — 174,050 Construction and land development 75,146 — 3,467 — — 78,613 C&I/Agricultural operating: Commercial and industrial 107,798 57 82 — — 107,937 Agricultural operating 23,935 764 1,503 — — 26,202 Residential mortgage: Residential mortgage 60,754 — 3,101 — — 63,855 Purchased HELOC loans 3,706 — 165 — — 3,871 Consumer installment: Originated indirect paper 15,818 — 153 — — 15,971 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 Acquired Loans: Commercial/Agricultural real estate: Commercial real estate $ 116,839 $ 1,314 $ 1,917 $ — $ — $ 120,070 Agricultural real estate 21,051 — 5,072 — — 26,123 Multi-family real estate 4,299 — — — — 4,299 Construction and land development 735 172 — — — 907 C&I/Agricultural operating: Commercial and industrial 13,931 5 294 — — 14,230 Agricultural operating 4,936 — 450 — — 5,386 Residential mortgage: Residential mortgage 25,869 — 1,266 — — 27,135 Consumer installment: Other consumer 398 — 3 — — 401 Total acquired loans $ 188,058 $ 1,491 $ 9,002 $ — $ — $ 198,551 Total Loans: Commercial/Agricultural real estate: Commercial real estate $ 689,563 $ 1,981 $ 6,921 $ — $ — 698,465 Agricultural real estate 71,885 1,267 5,343 — — 78,495 Multi-family real estate 178,059 290 — — — 178,349 Construction and land development 75,881 172 3,467 — — 79,520 C&I/Agricultural operating: Commercial and industrial 121,729 62 376 — — 122,167 Agricultural operating 28,871 764 1,953 — — 31,588 Residential mortgage: Residential mortgage 86,623 — 4,367 — — 90,990 Purchased HELOC loans 3,706 — 165 — — 3,871 Consumer installment: Originated indirect paper 15,818 — 153 — — 15,971 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 Less: Unearned net deferred fees and costs and loans in process ( 2,482 ) Unamortized discount on acquired loans ( 3,600 ) Allowance for loan losses ( 16,913 ) Loans receivable, net $ 1,294,050 25 Allowance for Loan Losses - The ALL represents management’s estimate of probable and inherent credit losses in the Bank’s loan portfolio. Estimating the amount of the ALL requires the exercise of significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of other qualitative factors such as current economic trends and conditions, all of which may be susceptible to significant change. There are many factors affecting the ALL; some are quantitative, while others require qualitative judgment. The process for determining the ALL (which management believes adequately considers potential factors which result in probable credit losses), includes subjective elements and, therefore, may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for loan losses could be required that could adversely affect the Company’s earnings or financial position in future periods. Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized. As an integral part of their examination process, various regulatory agencies also review the Bank’s ALL. Such agencies may require that changes in the ALL be recognized when such regulators’ credit evaluations differ from those of our management based on information available to the regulators at the time of their examinations. 26 Changes in the ALL by loan type for the periods presented below were as follows: Commercial/Agricultural Real Estate C&I/Agricultural operating Residential Mortgage Consumer Installment Unallocated Total Three months ended March 31, 2022 Allowance for Loan Losses: Beginning balance, January 1, 2022 $ 12,354 $ 1,959 $ 518 $ 225 $ 774 $ 15,830 Charge-offs ( 35 ) ( 63 ) — ( 9 ) — ( 107 ) Recoveries 3 10 1 10 — 24 Provision 72 198 ( 59 ) ( 66 ) 8 153 Total allowance on originated loans 12,394 2,104 460 160 782 15,900 Purchased credit impaired loans — — — — — — Other acquired loans: Beginning balance, January 1, 2022 856 69 130 28 — 1,083 Charge-offs — — ( 12 ) — — ( 12 ) Recoveries — — — — — — Provision ( 67 ) ( 11 ) ( 56 ) ( 19 ) — ( 153 ) Total allowance on other acquired loans 789 58 62 9 — 918 Total allowance on acquired loans 789 58 62 9 — 918 Ending balance, March 31, 2022 $ 13,183 $ 2,162 $ 522 $ 169 $ 782 $ 16,818 Allowance for Loan Losses at March 31, 2022: Amount of allowance for loan losses arising from loans individually evaluated for impairment $ 1,280 $ 373 $ 69 $ — $ — $ 1,722 Amount of allowance for loan losses arising from loans collectively evaluated for impairment $ 11,903 $ 1,789 $ 453 $ 169 $ 782 $ 15,096 Loans Receivable as of March 31, 2022: — Ending balance of originated loans $ 890,440 $ 134,513 $ 63,362 $ 22,350 $ — $ 1,110,665 Ending balance of purchased credit-impaired loans 8,672 1,023 1,024 — — 10,719 Ending balance of other acquired loans 133,745 16,314 23,874 349 — 174,282 Ending balance of loans $ 1,032,857 $ 151,850 $ 88,260 $ 22,699 $ — $ 1,295,666 Ending balance: individually evaluated for impairment $ 20,597 $ 6,605 $ 6,838 $ 210 $ — $ 34,250 Ending balance: collectively evaluated for impairment $ 1,012,260 $ 145,245 $ 81,422 $ 22,489 $ — $ 1,261,416 27 Commercial/Agricultural Real Estate C&I/Agricultural operating Residential Mortgage Consumer Installment Unallocated Total Three months ended March 31, 2021 Allowance for Loan Losses: Beginning balance, January 1, 2021 $ 10,271 $ 2,112 $ 1,041 $ 489 $ 906 $ 14,819 Charge-offs — — — ( 25 ) — ( 25 ) Recoveries 5 8 7 10 — 30 Provision 833 ( 487 ) ( 107 ) ( 24 ) ( 11 ) 204 Total allowance on originated loans $ 11,109 $ 1,633 $ 941 $ 450 $ 895 $ 15,028 Purchased credit impaired loans — — — — — — Other acquired loans Beginning balance, January 1, 2021 1,684 141 335 64 — 2,224 Charge-offs ( 200 ) — — — — ( 200 ) Recoveries — 7 1 4 — 12 Provision ( 183 ) ( 54 ) 52 ( 19 ) — ( 204 ) Total allowance on other acquired loans 1,301 94 388 49 — 1,832 Total allowance on acquired loans 1,301 94 388 49 — 1,832 Ending balance, March 31, 2021 $ 12,410 $ 1,727 $ 1,329 $ 499 $ 895 $ 16,860 Allowance for Loan Losses at March 31, 2021: Amount of allowance for loan losses arising from loans individually evaluated for impairment $ 1,094 $ 10 $ 157 $ — $ — $ 1,261 Amount of allowance for loan losses arising from loans collectively evaluated for impairment $ 11,316 $ 1,717 $ 1,172 $ 499 $ 895 $ 15,599 Loans Receivable as of March 31, 2021 Ending balance of originated loans $ 599,182 $ 216,773 $ 87,576 $ 34,137 $ — $ 937,668 Ending balance of purchased credit-impaired loans 14,856 1,367 1,218 — — 17,441 Ending balance of other acquired loans 181,438 24,974 38,828 913 — 246,153 Ending balance of loans $ 795,476 $ 243,114 $ 127,622 $ 35,050 $ — $ 1,201,262 Ending balance: individually evaluated for impairment $ 24,948 $ 6,197 $ 8,843 $ 255 $ — $ 40,243 Ending balance: collectively evaluated for impairment $ 770,528 $ 236,917 $ 118,779 $ 34,795 $ — $ 1,161,019 28 Commercial/Agricultural Real Estate C&I/Agricultural operating Residential Mortgage Consumer Installment Unallocated Total Allowance for Loan Losses at December 31, 2021: Amount of allowance for loan losses arising from loans individually evaluated for impairment $ 797 $ 99 $ 113 $ — $ — $ 1,009 Amount of allowance for loan losses arising from loans collectively evaluated for impairment $ 12,413 $ 1,929 $ 535 $ 253 $ 774 $ 15,904 Loans Receivable as of December 31, 2021: Ending balance of originated loans $ 883,430 $ 142,894 $ 67,726 $ 24,444 $ — $ 1,118,494 Ending balance of purchased credit-impaired loans 9,060 1,101 1,044 — — 11,205 Ending balance of other acquired loans 142,339 18,515 26,091 401 — 187,346 Ending balance of loans $ 1,034,829 $ 162,510 $ 94,861 $ 24,845 $ — $ 1,317,045 Ending balance: individually evaluated for impairment $ 21,792 $ 3,337 $ 7,007 $ 257 $ — $ 32,393 Ending balance: collectively evaluated for impairment $ 1,013,037 $ 159,173 $ 87,854 $ 24,588 $ — $ 1,284,652 Loans receivable by loan type as of the end of the periods shown below were as follows: Commercial/Agricultural Real Estate Loans C&I/Agricultural Operating Residential Mortgage Consumer Installment Totals March 31, 2022 December 31, 2021 March 31, 2022 December 31, 2021 March 31, 2022 December 31, 2021 March 31, 2022 December 31, 2021 March 31, 2022 December 31, 2021 Performing loans Performing TDR loans $ 2,085 $ 4,618 $ 608 $ 649 $ 2,924 $ 2,681 $ 28 $ 36 $ 5,645 $ 7,984 Performing loans other 1,021,686 1,021,346 149,894 160,570 83,604 90,591 22,581 24,729 1,277,765 1,297,236 Total performing loans 1,023,771 1,025,964 150,502 161,219 86,528 93,272 22,609 24,765 1,283,410 1,305,220 Nonperforming loans (1) Nonperforming TDR loans 3,502 3,389 639 554 443 593 2 3 4,586 4,539 Nonperforming loans other 5,584 5,476 709 737 1,289 996 88 77 7,670 7,286 Total nonperforming loans 9,086 8,865 1,348 1,291 1,732 1,589 90 80 12,256 11,825 Total loans $ 1,032,857 $ 1,034,829 $ 151,850 $ 162,510 $ 88,260 $ 94,861 $ 22,699 $ 24,845 $ 1,295,666 $ 1,317,045 (1) Nonperforming loans are either 90+ days past due or nonaccrual. As of March 31, 2022 the Company had $ 288,001 in unused commitments, compared to $ 270,985 in unused commitments as of December 31, 2021. 29 An aging analysis of the Company’s commercial/agricultural real estate, C&I, agricultural operating, residential mortgage, consumer installment and purchased third party loans as of March 31, 2022 and December 31, 2021, 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 and Accruing Nonaccrual Loans Total Past Due Accruing and Nonaccrual Loans Current Total Loans March 31, 2022 Commercial/Agricultural real estate: Commercial real estate $ 1,996 $ — $ — $ 1,996 $ 5,503 $ 7,499 $ 682,275 $ 689,774 Agricultural real estate 895 — — 895 3,454 4,349 71,367 75,716 Multi-family real estate — — — — — — 179,487 179,487 Construction and land development — — — — 129 129 87,751 87,880 C&I/Agricultural operating: Commercial and industrial — — — — 284 284 120,738 121,022 C&I SBA PPP loans — — — — — — 2,071 2,071 Agricultural operating 1,645 — — 1,645 1,064 2,709 26,048 28,757 Residential mortgage: Residential mortgage 1,444 392 398 2,234 1,334 3,568 81,205 84,773 Purchased HELOC loans — — — — — — 3,487 3,487 Consumer installment: Originated indirect paper 39 — — 39 60 99 14,409 14,508 Other consumer 38 3 — 41 30 71 8,120 8,191 Total $ 6,057 $ 395 $ 398 $ 6,850 $ 11,858 $ 18,708 $ 1,276,958 $ 1,295,666 December 31, 2021 Commercial/Agricultural real estate: Commercial real estate $ 36 $ — $ — $ 36 $ 5,374 $ 5,410 $ 693,055 $ 698,465 Agricultural real estate 498 4 — 502 3,490 3,992 74,503 78,495 Multi-family real estate — — — — — — 178,349 178,349 Construction and land development — — — — — — 79,520 79,520 C&I/Agricultural operating: Commercial and industrial — 32 — 32 298 330 121,837 122,167 SBA PPP loans — — — — — — 8,755 8,755 Agricultural operating 1,123 — — 1,123 993 2,116 29,472 31,588 Residential mortgage: Residential mortgage 1,471 487 156 2,114 1,268 3,382 87,608 90,990 Purchased HELOC loans 117 — — 117 165 282 3,589 3,871 Consumer installment: Originated indirect paper 38 27 — 65 55 120 15,851 15,971 Other consumer 58 10 4 72 22 94 8,780 8,874 Total $ 3,341 $ 560 $ 160 $ 4,061 $ 11,665 $ 15,726 $ 1,301,319 $ 1,317,045 30 At March 31, 2022, the Company individually evaluated loans for impairment with a recorded investment of $ 33,741 , consisting of (1) $ 10,719 purchased credit impaired (“PCI”) loans, with a carrying amount of $ 10,210 ; (2) $ 6,716 TDR loans, net of TDR PCI loans; and (3) $ 16,815 of substandard non-TDR, non-PCI loans. The $ 33,741 total of loans individually evaluated for impairment includes $ 5,645 of performing TDR loans. 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, non-PCI loans. The $ 31,740 total of loans individually evaluated for impairment includes $ 7,984 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. A summary of the Company’s loans individually evaluated for impairment as of March 31, 2022, December 31, 2021 and March 31, 2021 was as follows: Three Months Ended Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized March 31, 2022 With No Related Allowance Recorded: Commercial/Agricultural real estate $ 13,840 $ 14,116 $ — $ 16,626 $ 136 C&I/Agricultural operating 6,015 6,167 — 5,319 50 Residential mortgage 6,447 6,528 — 6,882 71 Consumer installment 210 210 — 258 2 Total $ 26,512 $ 27,021 $ — $ 29,085 $ 259 With An Allowance Recorded: Commercial/Agricultural real estate $ 6,481 $ 6,481 $ 1,280 $ 5,285 $ 11 C&I/Agricultural operating 438 438 373 415 10 Residential mortgage 310 310 69 600 1 Consumer installment — — — 1 — Total $ 7,229 $ 7,229 $ 1,722 $ 6,301 $ 22 March 31, 2022 Totals: Commercial/Agricultural real estate $ 20,321 $ 20,597 $ 1,280 $ 21,911 $ 147 C&I/Agricultural operating 6,453 6,605 373 5,734 60 Residential mortgage 6,757 6,838 69 7,482 72 Consumer installment 210 210 — 259 2 Total $ 33,741 $ 34,250 $ 1,722 $ 35,386 $ 281 31 Twelve Months Ended Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized December 31, 2021 With No Related Allowance Recorded: Commercial/Agricultural real estate $ 15,521 $ 15,905 $ — $ 19,412 $ 964 C&I/Agricultural operating 3,153 3,337 — 4,622 146 Residential mortgage 6,221 6,306 — 7,316 316 Consumer installment 256 256 — 306 85 Total $ 25,151 $ 25,804 $ — $ 31,656 $ 1,511 With An Allowance Recorded: Commercial/Agricultural real estate $ 5,887 $ 5,887 $ 797 $ 4,089 $ 62 C&I/Agricultural operating — — 99 391 84 Residential mortgage 701 701 113 890 17 Consumer installment 1 1 — 2 — Total $ 6,589 $ 6,589 $ 1,009 $ 5,372 $ 163 December 31, 2021 Totals Commercial/Agricultural real estate $ 21,408 $ 21,792 $ 797 $ 23,501 $ 1,026 C&I/Agricultural operating 3,153 3,337 99 5,013 230 Residential mortgage 6,922 7,007 113 8,206 333 Consumer installment 257 257 — 308 85 Total $ 31,740 $ 32,393 $ 1,009 $ 37,028 $ 1,674 Three Months Ended Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized March 31, 2021 With No Related Allowance Recorded: Commercial/Agricultural real estate $ 19,064 $ 19,714 $ — $ 21,183 $ 239 C&I/Agricultural operating 5,924 6,118 — 6,007 70 Residential mortgage 8,069 8,191 — 8,240 80 Consumer installment 255 255 — 306 3 Total $ 33,312 $ 34,278 $ — $ 35,736 $ 392 With An Allowance Recorded: Commercial/Agricultural real estate $ 5,234 $ 5,234 $ 1,094 $ 3,762 $ 62 C&I/Agricultural operating 79 79 10 430 — Residential mortgage 652 652 157 866 8 Consumer installment — — — 1 — Total $ 5,965 $ 5,965 $ 1,261 $ 5,059 $ 70 March 31, 2021 Totals: Commercial/Agricultural real estate $ 24,298 $ 24,948 $ 1,094 $ 24,945 $ 301 C&I/Agricultural operating 6,003 6,197 10 6,437 70 Residential mortgage 8,721 8,843 157 9,106 88 Consumer installment 255 255 — 307 3 Total $ 39,277 $ 40,243 $ 1,261 $ 40,795 $ 462 32 Troubled Debt Restructuring – A TDR includes a loan modification where a borrower is experiencing financial difficulty, and the Bank grants a concession to that borrower that the Bank would not otherwise consider, except for the borrower’s financial difficulties. Concessions may include: extension of the loan’s term, renewals of existing balloon loans, reductions in interest rates and consolidating existing Bank loans at modified terms. A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability. If a TDR is placed on nonaccrual status, it remains there until a sufficient period of performance under the restructured terms has occurred at which time it is returned to accrual status. There were no delinquent accruing TDR loan greater than 60 days past due at March 31, 2022, compared to one such loan with a recorded investment of $ 4 at December 31, 2021. Following is a summary of TDR loans by accrual status as of March 31, 2022 and December 31, 2021. March 31, 2022 December 31, 2021 Troubled debt restructure loans: Accrual status $ 5,645 $ 7,984 Non-accrual status 4,586 4,539 Total $ 10,231 $ 12,523 There was one loan commitment for $ 27 meeting our TDR criteria as of March 31, 2022 and no loan commitments meeting our TDR criteria as of December 31, 2021. There were unused lines of credit totaling $ 49 and $ 10 meeting our TDR criteria as of March 31, 2022 and December 31, 2021, respectively. The following provides detail, including specific reserve and reasons for modification, related to loans identified as TDRs during the three months ended March 31, 2022 and March 31, 2021: Number of Contracts Maturity Extension Modified Payment Modified Under- writing Other Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific Reserve Three months ended March 31, 2022 TDRs: Commercial/Agricultural real estate 4 $ 1,241 $ — $ — $ — $ 1,241 $ 1,241 $ — C&I/Agricultural operating 1 — — 150 — 150 150 — Residential mortgage 4 31 — 507 — 538 538 — Consumer installment — — — — — — — — Totals 9 $ 1,272 $ — $ 657 $ — $ 1,929 $ 1,929 $ — 33 Number of Contracts Maturity Extension Modified Payment Modified Under- writing Other Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific Reserve Three months ended March 31, 2021 TDRs: Commercial/Agricultural real estate 2 $ 38 $ 81 $ — $ — $ 119 $ 119 $ — C&I/Agricultural operating 1 — — 240 — 240 240 — Residential mortgage 2 66 — 14 — 80 80 — Consumer installment 1 6 — — — 6 6 — Totals 6 $ 110 $ 81 $ 254 $ — $ 445 $ 445 $ — A summary of loans by loan segment modified in a troubled debt restructuring as of March 31, 2022 and March 31, 2021, was as follows: March 31, 2022 March 31, 2021 Number of Modifications Recorded Investment Number of Modifications Recorded Investment Troubled debt restructurings: Commercial/Agricultural real estate 20 $ 5,587 30 $ 8,656 C&I/Agricultural operating 7 1,247 14 4,800 Residential mortgage 42 3,367 52 3,937 Consumer installment 6 30 9 49 Total troubled debt restructurings 75 $ 10,231 105 $ 17,442 The following table provides the number of loans modified in a TDR during the previous twelve months which subsequently defaulted during the three months ended March 31, 2022 and March 31, 2021, as well as the recorded investment in these restructured loans as of March 31, 2022 and March 31, 2021: Three Months Ended March 31, 2022 March 31, 2021 Number of Modifications Recorded Investment Number of Modifications Recorded Investment Troubled debt restructurings: Commercial/Agricultural real estate — $ — — $ — C&I/Agricultural operating — — — — Residential mortgage — — 1 19 Consumer installment — — — — Total troubled debt restructurings — $ — 1 $ 19 34 All acquired loans were initially recorded at fair value at the acquisition date. The outstanding balance and the carrying amount of acquired loans included in the consolidated balance sheet are as follows: March 31, 2022 December 31, 2021 Accountable for under ASC 310-30 (Purchased Credit Impaired “PCI” loans) Outstanding balance $ 10,719 $ 11,205 Carrying amount $ 10,210 $ 10,552 Accountable for under ASC 310-20 (non-PCI loans) Outstanding balance $ 174,282 $ 187,346 Carrying amount $ 171,524 $ 184,399 Total acquired loans Outstanding balance $ 185,001 $ 198,551 Carrying amount $ 181,734 $ 194,951 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 $ 1.66 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 2022 $ 594 2023 279 2024 131 2025 96 Total $ 1,100 The following table provides changes in non-accretable yield for all acquired loans from prior acquisitions with deteriorated credit quality: March 31, 2022 December 31, 2021 Balance at beginning of period $ 653 $ 1,087 Additions to non-accretable difference for acquired purchased credit impaired loans — — Non-accretable difference realized as interest from payoffs of purchased credit impaired loans ( 26 ) ( 105 ) Transfers from non-accretable difference to accretable discount ( 86 ) ( 329 ) Non-accretable difference used to reduce loan principal balance ( 32 ) — Balance at end of period $ 509 $ 653 35 NOTE 4 – MORTGAGE SERVICING RIGHTS Mortgage servicing rights-- Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid balances of these loans as of March 31, 2022 and December 31, 2021 were $ 552,236 and $ 556,086 , respectively, and consisted of one to four family residential real estate loans. These loans are serviced primarily for the Federal Home Loan Mortgage Corporation, Federal Home Loan Bank and the Federal National Mortgage Association. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in deposits were $ 4,748 and $ 2,781 at March 31, 2022 and December 31, 2021, respectively. Mortgage servicing rights activity for the three month periods ended March 31, 2022 and March 31, 2021 were as follows: As of and for the Three Months Ended As of and for the Three Months Ended March 31, 2022 March 31, 2021 Mortgage servicing rights: Mortgage servicing rights, beginning of period $ 4,727 $ 5,266 Increase in mortgage servicing rights resulting from transfers of financial assets 126 297 Amortization during the period ( 239 ) ( 439 ) Mortgage servicing rights, end of period 4,614 5,124 Valuation allowance: Valuation allowance, beginning of period ( 566 ) ( 2,014 ) Additions — — Recoveries 566 889 Valuation allowance, end of period — ( 1,125 ) Mortgage servicing rights, net $ 4,614 $ 3,999 Fair value of mortgage servicing rights; end of period $ 5,267 $ 4,005 The current period change in valuation allowance is included in non-interest expense as mortgage servicing rights expense, net on the consolidated statement of operations. Servicing fees totaled $ 351 and $ 352 for the three months ended March 31, 2022 and March 31, 2021, respectively, and are included in loan servicing income on the consolidated statement of operations. 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. The valuation model incorporates various assumptions that would impact market participants’ estimations of future servicing income. Central to the valuation model is the discount rate. Fair value at both March 31, 2022 and March 31, 2021, 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. 36 NOTE 5 – LEASES We have operating leases for our corporate offices ( 1 ), bank branch offices ( 5 ), and an ATM location ( 1 ). Our leases have remaining lease terms ranging from approximately 1.00 to 6.25 years, some of which include options to extend the leases for up to 5 additional years. As of March 31, 2022, we have no additional lease commitments that have not yet commenced. The Company also leases a portion of some of its facilities and receives rental income from such lease agreements, all of which are considered operating leases. Three Months Ended March 31, 2022 March 31, 2021 The components of total lease cost were as follows: Operating lease cost $ 139 $ 139 Variable lease cost 10 7 Total lease cost $ 149 $ 146 The components of total lease income were as follows: Operating lease income $ 9 $ 7 Supplemental cash flow information related to leases was as follows: Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 139 $ 138 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ — $ — March 31, 2022 December 31, 2021 Supplemental balance sheet information related to leases was as follows: Operating lease right-of-use assets $ 2,034 $ 2,159 Operating lease liabilities $ 2,104 $ 2,228 Weighted average remaining lease term in years; operating leases 5.36 5.55 Weighted average discount rate; operating leases 2.75 % 2.73 % 37 Cash obligations and receipts under lease contracts are as follows: Fiscal years ending December 31, Payments Receipts 2022 $ 420 $ 26 2023 506 27 2024 419 10 2025 403 — 2026 346 Thereafter 480 Total 2,574 $ 63 Less: effects of discounting ( 470 ) Lease liability recognized $ 2,104 38 NOTE 6 – DEPOSITS The following is a summary of deposits by type at March 31, 2022 and December 31, 2021, respectively: March 31, 2022 December 31, 2021 Non-interest bearing demand deposits $ 269,481 $ 276,631 Interest bearing demand deposits 423,251 396,231 Savings accounts 241,072 222,674 Money market accounts 321,409 288,985 Certificate accounts 173,010 203,014 Total deposits $ 1,428,223 $ 1,387,535 At March 31, 2022, the scheduled maturities of time deposits were as follows for the year ended, except December 31, 2022 which is the nine months ended: December 31, 2022 $ 128,883 December 31, 2023 27,613 December 31, 2024 7,508 December 31, 2025 7,264 December 31, 2026 1,398 After December 31, 2027 344 Total $ 173,010 Time deposits of $250 or more were $ 19,762 and $ 22,381 at March 31, 2022 and December 31, 2021, respectively. Brokered deposits were $ 11 at both March 31, 2022 and December 31, 2021, respectively. 39 NOTE 7 – FEDERAL HOME LOAN BANK AND FEDERAL RESERVE BANK ADVANCES AND OTHER BORROWINGS A summary of Federal Home Loan Bank advances and other borrowings at March 31, 2022 and December 31, 2021 is as follows: March 31, 2022 December 31, 2021 Stated Maturity Amount Range of Stated Rates Amount Range of Stated Rates Federal Home Loan Bank advances (1), (2), (3), (4) 2022 $ — — % — % $ 11,000 2.45 % 2.45 % 2023 5,000 1.43 % 1.44 % 20,000 1.43 % 1.44 % 2024 20,530 0.00 % 1.45 % 20,530 0.00 % 1.45 % 2025 5,000 1.45 % 1.45 % 5,000 1.45 % 1.45 % 2029 42,500 1.00 % 1.13 % 42,500 1.00 % 1.13 % 2030 12,500 0.52 % 0.86 % 12,500 0.52 % 0.86 % Subtotal 85,530 111,530 Unamortized discount on acquired notes — ( 3 ) Federal Home Loan Bank advances, net $ 85,530 $ 111,527 Senior Notes (5) 2034 $ 23,250 3.00 % 3.00 % $ 28,856 3.00 % 3.50 % Subordinated Notes (6) 2027 $ 15,000 6.75 % 6.75 % $ 15,000 6.75 % 6.75 % 2030 15,000 6.00 % 6.00 % 15,000 6.00 % 6.00 % 2032 35,000 4.75 % 4.75 % — — % — % $ 65,000 $ 30,000 Unamortized debt issuance costs ( 1,188 ) ( 430 ) Total other borrowings $ 87,062 $ 58,426 Totals $ 172,592 $ 169,953 (1) The FHLB advances bear fixed rates, require interest-only monthly payments, and are collateralized by a blanket lien on pre-qualifying first mortgages, home equity lines, multi-family loans and certain other loans which had a pledged balance of $ 931,498 and $ 861,900 at March 31, 2022 and December 31, 2021, respectively. At March 31, 2022, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $ 240,412 compared to $ 204,271 as of December 31, 2021. (2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $ 111,530 and $ 123,530 , during the three months ended March 31, 2022 and the twelve months ended December 31, 2021, respectively. (3) There are no FHLB borrowings maturing within twelve months of March 31, 2022. The weighted-average interest rate on FHLB borrowings maturing within twelve months as of December 31, 2021 was 2.45 %. (4) FHLB term notes totaling $ 55,000 can be called or replaced by the FHLB on a quarterly basis, and if not called, will mature at various dates in 2029 and 2030. (5) Senior notes, entered into by the Company in June 2019 consist of the following: (a) A term note, which was subsequently refinanced in March 2022, requiring quarterly interest-only payments through March 2025, and quarterly principal and interest payments thereafter. Interest is variable, based on US Prime rate minus 75 basis points with a floor rate of 3.00 %. (b) A $ 5,000 line of credit, maturing in August 2022, that remains undrawn upon. 40 (6) Subordinated notes resulted from the following: (a) The Company’s private sale in August 2017, which bears a fixed interest rate of 6.75 % for five years . In August 2022, they convert to a three-month LIBOR plus 4.90 % rate, and the interest rate will reset quarterly thereafter. The note is callable by the Bank when, and anytime after, the floating rate is initially set. Interest-only payments are due quarterly. (b) The Company’s Subordinated Note Purchase Agreement entered into with certain purchasers in August 2020, which bears a fixed interest rate of 6.00 % for five years . In September 2025, the fixed interest rate will be reset quarterly to equal the three-month term Secured Overnight Financing Rate plus 591 basis points. 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. (c) The Company’s Subordinated Note Purchase Agreement entered into with certain purchasers in March 2022, which bears a fixed interest rate of 4.75 % for five years . In April 2027, the fixed interest rate will be reset quarterly to equal the three-month term Secured Overnight Financing Rate plus 329 basis points. The note is callable by the Bank when, and anytime after, the floating rate is initially set. Interest-only payments are due semi-annually each year during the fixed interest period and quarterly during the floating interest period. Federal Home Loan Bank Letters of Credit The Bank has an irrevocable Standby Letter of Credit Master Reimbursement Agreement with the Federal Home Loan Bank. This irrevocable standby letter of credit (“LOC”) is supported by loan collateral as an alternative to directly pledging investment securities on behalf of a municipal customer as collateral for their interest bearing deposit balances. These balances were $ 209,400 and $ 176,150 at March 31, 2022 and December 31, 2021, respectively. Federal Reserve Bank Paycheck Protection Program Liquidity Facility (“FRB PPPLF”) Program 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. This FRB PPPLF program expired on July 30, 2021. The Bank had no outstanding loan balances under this facility at March 31, 2022 and December 31, 2021. There were no month-end borrowed amounts outstanding under this agreement during the three months ended March 31, 2022 and the twelve months ended December 31, 2021, respectively. In July 2021, the Bank pledged these SBA PPP loans to the FHLB. 41 NOTE 8 - CAPITAL MATTERS Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Although these terms are not used to represent overall financial condition, if adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 2022, the Bank was categorized as “Well Capitalized”, under Prompt Corrective Action Provisions. The Bank’s Tier 1 (leverage) and risk-based capital ratios at March 31, 2022 and December 31, 2021, respectively, are presented below: Actual For Capital Adequacy Purposes To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio As of March 31, 2022 Total capital (to risk weighted assets) $ 207,760 14.9 % $ 111,180 > = 8.0 % $ 138,975 > = 10.0 % Tier 1 capital (to risk weighted assets) 190,942 13.7 % $ 83,385 > = 6.0 % 10 111,180 > = 8.0 % Common equity tier 1 capital (to risk weighted assets) 190,942 13.7 % $ 62,539 > = 4.5 % 90,334 > = 6.5 % Tier 1 leverage ratio (to adjusted total assets) 190,942 11.1 % 68,584 > = 4.0 % 85,729 > = 5.0 % As of December 31, 2021 Total capital (to risk weighted assets) $ 187,783 13.4 % $ 111,694 > = 8.0 % $ 139,618 > = 10.0 % Tier 1 capital (to risk weighted assets) 170,870 12.2 % 83,771 > = 6.0 % 111,694 > = 8.0 % Common equity tier 1 capital (to risk weighted assets) 170,870 12.2 % 62,828 > = 4.5 % 90,752 > = 6.5 % Tier 1 leverage ratio (to adjusted total assets) 170,870 10.0 % 68,323 > = 4.0 % 85,403 > = 5.0 % 42 The Company’s Tier 1 (leverage) and risk-based capital ratios at March 31, 2022 and December 31, 2021, respectively, are presented below: Actual For Capital Adequacy Purposes Amount Ratio Amount Ratio As of March 31, 2022 Total capital (to risk weighted assets) $ 219,277 15.8 % 111,180 > = 8.0 % Tier 1 capital (to risk weighted assets) 137,459 9.9 % 83,385 > = 6.0 % Common equity tier 1 capital (to risk weighted assets) 137,459 9.9 % 62,539 > = 4.5 % Tier 1 leverage ratio (to adjusted total assets) 137,459 8.0 % 68,584 > = 4.0 % As of December 31, 2021 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 % 43 NOTE 9 – STOCK-BASED COMPENSATION On March 27, 2018, the stockholders of Citizens Community Bancorp, Inc. approved the 2018 Equity Incentive Plan. The aggregate number of shares of common stock reserved and available for issuance under the 2018 Equity Incentive Plan is 350,000 shares. As of March 31, 2022, 214,394 restricted shares had been granted under this plan. This amount includes 11,834 shares of performance based restricted stock granted in 2019 and issued in January 2022 upon achievement of the performance criteria and completion of the three year performance period beginning in January 2019 and ending December 31, 2021. As of March 31, 2022, no stock options had been granted under this plan. In February 2008, the Company’s stockholders approved the Company’s 2008 Equity Incentive Plan for a term of 10 years. Due to the plan’s expiration, no new awards can be granted under this plan. As of March 31, 2022, there are 400 awarded unvested restricted shares and 63,400 awarded unexercised options remaining from the plan. Restricted shares granted under the 2008 Equity Incentive Plan were awarded at no cost to the employee and vest pro rata over a two to five-year period from the grant date. Options granted to date under this plan vest pro rata over a five-year period from the grant date. Unexercised incentive stock options expire within 10 years of the grant date. Net compensation expense related to restricted stock awards from these plans was $ 195 for the three months ended March 31, 2022, compared to $ 171 for the three months ended March 31, 2021. Restricted Common Stock Award March 31, 2022 December 31, 2021 Number of Shares Weighted Average Grant Price Number of Shares Weighted Average Grant Price Restricted Shares Unvested and outstanding at beginning of year 75,630 $ 11.20 57,242 $ 12.23 Granted 38,586 14.00 64,399 10.78 Vested ( 23,649 ) 11.12 ( 44,511 ) 13.26 Forfeited — — ( 1,500 ) 10.78 Unvested and outstanding at end of period 90,567 $ 12.41 75,630 $ 11.20 The Company accounts for stock option-based employee compensation related to the Company’s 2008 Equity Incentive Plan and 2018 Equity Incentive Plan using the fair-value-based method. Accordingly, management records compensation expense based on the value of the award as measured on the grant date and then the Company recognizes that cost over the vesting period for the award. The compensation cost recognized for stock option-based employee compensation related to these plans for the three month period ended March 31, 2022 was $ 1 . The compensation cost recognized for stock option-based employee compensation related to these plans for the three month period ended March 31, 2021 was $ 3 . 44 Common Stock Option Awards Option Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term in Years Aggregate Intrinsic Value March 31, 2022 Outstanding at beginning of year 65,900 $ 11.20 Exercised ( 2,500 ) 8.00 Forfeited or expired — — Outstanding at end of period 63,400 $ 11.33 4.52 $ 240 Exercisable at end of period 59,200 $ 11.16 4.45 $ 234 December 31, 2021 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 65,900 $ 11.20 4.61 $ 169 Exercisable at end of year 61,700 $ 11.03 4.54 $ 169 Information related to the 2008 Equity Incentive Plan for the respective periods follows: Three months ended March 31, 2022 Twelve months ended December 31, 2021 Intrinsic value of options exercised $ 19 $ 28 Cash received from options exercised $ 20 $ 52 Tax benefit realized from options exercised $ — $ — 45 NOTE 10 – FAIR VALUE ACCOUNTING ASC Topic 820-10, “ Fair Value Measurements and Disclosures ” establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The topic describes three levels of inputs that may be used to measure fair value: Level 1- Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date. Level 2- Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3- Significant unobservable inputs that reflect the Company’s assumptions about the factors that market participants would use in pricing an asset or liability. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the fair value measurement. The fair value of securities available for sale is determined by obtaining market price quotes from independent third parties wherever such quotes are available (Level 1 inputs); or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Where such quotes are not available, we utilize independent third party valuation analysis to support our own estimates and judgments in determining fair value (Level 3 inputs). 46 Assets Measured on a Recurring Basis The following tables present the financial instruments measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021: Fair Value Quoted Prices in Active Markets for Identical Instruments (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) March 31, 2022 Investment securities: U.S. government agency obligations $ 23,881 $ — $ 23,881 $ — Mortgage-backed securities 95,551 — 95,551 — Corporate debt securities 35,946 — 35,946 — Corporate asset-backed securities 32,527 — 32,527 — Total investment securities 187,905 — 187,905 — Equity Investments: Equity Investments 331 331 — — Equity investments measured at NAV(1) 960 — — — Total equity investments 1,291 331 — — Total $ 189,196 $ 331 $ 187,905 $ — December 31, 2021 Investment securities: U.S. government agency obligations $ 26,265 $ — $ 26,265 $ — Obligations of states and political subdivisions 140 — 140 — Mortgage-backed securities 107,167 — 107,167 — Corporate debt securities 35,588 — 35,588 — Corporate asset backed securities 33,908 — 33,908 — Total investment securities 203,068 — 203,068 — Equity Investments: Equity Investments 368 368 — — Equity investments measured at NAV(1) 960 — — — Total equity investments 1,328 368 — — Total $ 204,396 $ 368 $ 203,068 $ — (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. 47 Assets Measured on Nonrecurring Basis The following tables present the financial instruments measured at fair value on a nonrecurring basis as of March 31, 2022 and December 31, 2021: Carrying Value Quoted Prices in Active Markets for Identical Instruments (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) March 31, 2022 Foreclosed and repossessed assets, net $ 1,368 $ — $ — $ 1,368 Impaired loans with allocated allowances 5,507 — — 5,507 Mortgage servicing rights 4,614 — — 5,267 Total $ 11,489 $ — $ — $ 12,142 December 31, 2021 Foreclosed and repossessed assets, net $ 1,408 $ — $ — $ 1,408 Impaired loans with allocated allowances 5,580 — — 5,580 Mortgage servicing rights 4,161 — — 4,312 Total $ 11,149 $ — $ — $ 11,300 The fair value of impaired loans referenced above was determined by obtaining independent third party appraisals and/or internally developed collateral valuations to support the Company’s estimates and judgments in determining the fair value of the underlying collateral supporting impaired loans. The fair value of foreclosed and repossessed assets was determined by obtaining market price valuations from independent third parties wherever such quotes were available for other collateral owned. The Company utilized independent third party appraisals to support the Company’s estimates and judgments in determining fair value for other real estate owned. The fair value of mortgage servicing rights was estimated using discounted cash flows based on current market rates and other factors. 48 The following table represents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which we have utilized Level 3 inputs to determine their fair value at March 31, 2022. Fair Value Valuation Techniques (1) Significant Unobservable Inputs (2) Range March 31, 2022 Foreclosed and repossessed assets, net $ 1,368 Appraisal value Estimated costs to sell 10 % - 15 % Impaired loans with allocated allowances $ 5,507 Appraisal value Estimated costs to sell 10 % - 15 % Mortgage servicing rights $ 5,267 Discounted cash flows Discounted rates 9 % - 12 % December 31, 2021 Foreclosed and repossessed assets, net $ 1,408 Appraisal value Estimated costs to sell 10 % - 15 % Impaired loans with allocated allowances $ 5,580 Appraisal value Estimated costs to sell 10 % - 15 % Mortgage servicing rights $ 4,312 Discounted cash flows Discounted rates 9 % - 12 % (1) Fair value is generally determined through independent third-party appraisals of the underlying collateral, which generally includes various level 3 inputs which are not observable. (2) The fair value basis of impaired loans and real estate owned may be adjusted to reflect management estimates of disposal costs including, but not limited to, real estate brokerage commissions, legal fees, and delinquent property taxes. 49 The table below represents what we would receive to sell an asset or what we would have to pay to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying amount and estimated fair value of the Company’s financial instruments as of the dates indicated below were as follows: March 31, 2022 December 31, 2021 Valuation Method Used Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Financial assets: Cash and cash equivalents (Level I) $ 84,364 $ 84,364 $ 47,691 $ 47,691 Other interest-bearing deposits (Level II) 1,511 1,527 1,511 1,535 Securities available for sale “AFS” (Level II) 187,905 187,905 203,068 203,068 Securities held to maturity “HTM” (Level II) 104,894 95,975 71,141 69,177 Equity investments (Level I) 331 331 368 368 Equity investments valued at NAV(1) N/A 960 960 960 960 Other investments (Level II) 15,084 15,084 15,305 15,305 Loans receivable, net (Level III) 1,273,358 1,343,482 1,294,050 1,319,293 Loans held for sale (Level II) 2,528 2,528 6,670 6,670 Mortgage servicing rights (Level III) 4,614 5,267 4,161 4,312 Accrued interest receivable (Level I) 4,179 4,179 3,916 3,916 Financial liabilities: Deposits (Level III) $ 1,428,223 $ 1,428,630 $ 1,387,535 $ 1,388,390 FHLB advances (Level II) 85,530 85,039 111,527 113,285 Other borrowings (Level I) 87,062 87,062 58,426 58,426 Accrued interest payable (Level I) 375 375 586 586 (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. 50 NOTE 11— EARNINGS PER SHARE Earnings per share is based on the weighted average number of shares outstanding for the period. A reconciliation of the basic and diluted earnings per share is as follows: Three Months Ended (Share count in thousands) March 31, 2022 March 31, 2021 Basic Net income attributable to common stockholders $ 4,706 $ 5,506 Weighted average common shares outstanding 10,527 10,980 Basic earnings per share $ 0.45 $ 0.50 Diluted Net income attributable to common stockholders $ 4,706 $ 5,506 Weighted average common shares outstanding 10,527 10,980 Add: Dilutive stock options outstanding 14 6 Average shares and dilutive potential common shares 10,541 10,986 Diluted earnings per share $ 0.45 $ 0.50 Additional common stock option shares that have not been included due to their antidilutive effect — 22,400 51 NOTE 12 – OTHER COMPREHENSIVE INCOME (LOSS) The following tables show the tax effects allocated to each component of other comprehensive income (loss) for the three months ended March 31, 2022 and 2021: Three months ended March 31, 2022 March 31, 2021 Before-Tax Amount Tax Benefit (Expense) Net-of-Tax Amount Before-Tax Amount Tax Benefit (Expense) Net-of-Tax Amount Unrealized losses on securities: Net unrealized losses arising during the period $ ( 9,824 ) $ 2,701 $ ( 7,123 ) $ ( 672 ) $ 186 $ ( 486 ) Other comprehensive loss $ ( 9,824 ) $ 2,701 $ ( 7,123 ) $ ( 672 ) $ 186 $ ( 486 ) The changes in the accumulated balances for each component of other comprehensive income (loss), net of tax for the twelve months ended December 31, 2021 and the three months ended March 31, 2022 were as follows: Unrealized Gains (Losses) on AFS Securities Other Accumulated Comprehensive Income (Loss), net of tax Beginning Balance, January 1, 2021 $ 2,056 $ 1,490 Current year-to-date other comprehensive loss ( 1,834 ) ( 1,329 ) Ending balance, December 31, 2021 $ 222 $ 161 Current year-to-date other comprehensive loss ( 9,824 ) ( 7,123 ) Ending balance, March 31, 2022 $ ( 9,602 ) $ ( 6,962 ) There were no reclassifications out of accumulated other comprehensive income (loss) for either of the three month periods ended March 31, 2022 or March 31, 2021, respectively. 52