Citizens Community Bancorp Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ( Eide Bailly LLP ; Phoenix, Arizona ; PCAOB ID 286 ) Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Income Consolidated Statements of Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 52 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of Citizens Community Bancorp, Inc. and Subsidiary Eau Claire, Wisconsin Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Citizens Community Bancorp, Inc. and Subsidiary (the Company) as of December 31, 2022 and 2021, and the related consolidated statements of operations , comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with auditing standards generally accepted in the United States of America, the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 7, 2023, expressed an unmodified opinion. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risk of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 53 Allowance for Loan Losses As discussed in Notes 1 and 3 to the Company’s consolidated financial statements, the Company has a gross loan portfolio of $1.4 billion and related allowance for loan losses of $17.9 million as of December 31, 2022. The Company’s allowance for loan losses is a material and complex estimate requiring significant management’s judgment in the evaluation of the credit quality and the estimation of inherent losses within the loan portfolio. The allowance for loan losses includes a general reserve which is determined based on the results of a quantitative and a qualitative analysis of all loans not measured for impairment at the reporting date. The Company’s general reserves cover non-impaired loans and is based on historical loss rates and qualitative loss factors for each portfolio. In calculating the allowance for loan losses, the Company considers relevant credit quality indicators for each loan segment, and estimates losses for each loan type based upon their nature and risk profile. This process requires significant management judgment in the review of the loan portfolio and assignment of risk ratings based upon the characteristics of loans. In addition, estimation of losses inherent within the portfolio requires significant management judgment, particularly where the Company has not incurred sufficient historical losses and has utilized industry data in forming its estimate. Auditing these complex judgments and assumptions involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed. The primary procedures we performed to address this critical audit matter included: • Obtaining an understanding of the Company’s process for determining the allowance for loan losses, which includes management’s determination of and changes to qualitative adjustments as of the balance sheet date. • Evaluating the design and testing the operating effectiveness of controls relating to the development and approval of the allowance for loan loss methodology, controls around the reliability and accuracy of the information used in the calculation and management’s review and approval of the allowance for loan losses. • Evaluating the reasonableness of assumptions and reasonableness, accuracy and completeness of data used by management in forming the loss factors by performing retrospective review of historic loan loss experience and analyzing historical data used in developing the assumptions. • Evaluating the appropriateness of inputs and factors that the Company used in forming the qualitative loss factors and assessing whether such inputs and factors were relevant, reliable, and reasonable for the purpose used. • Testing the mathematical accuracy and computation of the allowance for loan losses. • Evaluated the period to period consistency with which qualitative loss factors are determined and applied. Evaluate the qualitative adjustments year over year for directional consistency and testing the reasonableness, including the qualitative adjustments attributed to the estimated impact of the COVID-19 pandemic on the Company’s loan portfolio. /s/ Eide Bailly, LLP We have served as the Company’s auditor since 2020. Phoenix, Arizona March 7, 2023 54 CITIZENS COMMUNITY BANCORP, INC. Consolidated Balance Sheets (in thousands, except share data) December 31, 2022 December 31, 2021 Assets Cash and cash equivalents $ 35,363 $ 47,691 Other interest bearing deposits 249 1,511 Securities available for sale "AFS" 165,991 203,068 Securities held to maturity "HTM" 96,379 71,141 Equity investments 1,794 1,328 Other investments 15,834 15,305 Loans receivable 1,411,784 1,310,963 Allowance for loan losses ( 17,939 ) ( 16,913 ) Loans receivable, net 1,393,845 1,294,050 Loans held for sale — 6,670 Mortgage servicing rights, net 4,262 4,161 Office properties and equipment, net 20,493 21,169 Accrued interest receivable 5,285 3,916 Intangible assets 2,449 3,898 Goodwill 31,498 31,498 Foreclosed and repossessed assets, net 1,271 1,408 Bank owned life insurance ("BOLI") 24,954 24,312 Other assets 16,719 8,502 TOTAL ASSETS $ 1,816,386 $ 1,739,628 Liabilities and Stockholders’ Equity Liabilities: Deposits $ 1,424,720 $ 1,387,535 Federal Home Loan Bank ("FHLB") advances 142,530 111,527 Other borrowings 72,409 58,426 Other liabilities 9,639 11,274 Total liabilities 1,649,298 1,568,762 Stockholders’ Equity: Common stock— $ 0.01 par value, authorized 30,000,000 ; 10,425,119 and 10,502,442 shares issued and outstanding, respectively 104 105 Additional paid-in capital 119,240 119,925 Retained earnings 65,400 50,675 Accumulated other comprehensive (loss) income ( 17,656 ) 161 Total stockholders’ equity 167,088 170,866 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 1,816,386 $ 1,739,628 See accompanying notes to audited consolidated financial statements. 55 CITIZENS COMMUNITY BANCORP, INC. Consolidated Statements of Operations (in thousands, except per share data) For the year ended December 31, 2022 For the year ended December 31, 2021 Interest and dividend income: Interest and fees on loans $ 61,639 $ 58,172 Interest on investments 7,758 5,863 Total interest and dividend income 69,397 64,035 Interest expense: Interest on deposits 6,429 5,850 Interest on FHLB borrowed funds 2,303 1,572 Interest on other borrowed funds 4,296 2,946 Total interest expense 13,028 10,368 Net interest income before provision for loan losses 56,369 53,667 Provision for loan losses 1,475 — Net interest income after provision for loan losses 54,894 53,667 Non-interest income: Service charges on deposit accounts 2,018 1,726 Interchange income 2,343 2,354 Loan servicing income 2,439 3,322 Gain on sale of loans 1,474 5,399 Loan fees and service charges 679 705 Net gains on investment securities 541 1,224 Other 936 1,094 Total non-interest income 10,430 15,824 Non-interest expense: Compensation and related benefits 22,128 22,723 Occupancy 5,490 5,327 Data processing 5,453 5,560 Amortization of intangible assets 1,449 1,596 Mortgage servicing rights expense, net 222 191 Advertising, marketing and public relations 1,017 986 FDIC premium assessment 470 551 Professional services 1,707 1,542 Gain on repossessed assets, net ( 395 ) ( 199 ) New market tax credit depletion 650 — Other 3,552 2,255 Total non-interest expense 41,743 40,532 Income before provision for income taxes 23,581 28,959 Provision for income taxes 5,820 7,693 Net income attributable to common stockholders $ 17,761 $ 21,266 Per share information: Basic earnings $ 1.69 $ 1.98 Diluted earnings $ 1.69 $ 1.98 Cash dividends paid $ 0.26 $ 0.23 See accompanying notes to audited consolidated financial statements. 56 CITIZENS COMMUNITY BANCORP, INC. Consolidated Statements of Comprehensive (Loss) Income (in thousands) For the year ended December 31, 2022 For the year ended December 31, 2021 Net income attributable to common stockholders $ 17,761 $ 21,266 Other comprehensive loss, net of tax: Securities available for sale Net unrealized losses arising during period, net of tax ( 17,817 ) ( 909 ) Reclassification adjustment for net gains included in net income, net of tax — ( 420 ) Other comprehensive loss, net of tax ( 17,817 ) ( 1,329 ) Comprehensive (loss) income $ ( 56 ) $ 19,937 See accompanying notes to audited consolidated financial statements. 57 CITIZENS COMMUNITY BANCORP, INC. Consolidated Statements of Changes in Stockholders’ Equity (in thousands, except Shares) Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Shares Amount Balance, December 31, 2020 11,056,349 $ 111 $ 126,154 $ 32,809 $ 1,490 $ 160,564 Net income — — — 21,266 — 21,266 Other comprehensive income, net of tax — — — — ( 1,329 ) ( 1,329 ) Forfeiture of unvested shares ( 1,500 ) — — — — — Surrender of restricted shares of common stock ( 2,409 ) — ( 30 ) — — ( 30 ) Restricted common stock awarded under the equity incentive plan 64,399 — — — — — Common stock options exercised 5,800 — 52 — — 52 Common stock repurchased ( 620,197 ) ( 6 ) ( 7,056 ) ( 889 ) — ( 7,951 ) Stock option expense — — 8 — — 8 Amortization of restricted stock — — 797 — — 797 Cash dividends ($ 0.23 per share) — — — ( 2,511 ) — ( 2,511 ) Balance, December 31, 2021 10,502,442 $ 105 $ 119,925 $ 50,675 $ 161 $ 170,866 Net income — — — 17,761 — 17,761 Other comprehensive income, net of tax — — — — ( 17,817 ) ( 17,817 ) Forfeiture of unvested shares ( 2,626 ) — — — — — Surrender of restricted shares of common stock ( 10,730 ) — ( 150 ) — — ( 150 ) Restricted common stock awarded under the equity incentive plan 45,222 — — — — — Restricted common stock issued upon achievement of the 2019 performance criteria 11,834 — — — — — Common stock options exercised 7,900 — 71 — — 71 Common stock repurchased ( 128,923 ) ( 1 ) ( 1,469 ) ( 294 ) — ( 1,764 ) Stock option expense — — 3 — — 3 Amortization of restricted stock — — 860 — — 860 Cash dividends ($ 0.26 per share) — — — ( 2,742 ) — ( 2,742 ) Balance, December 31, 2022 10,425,119 $ 104 $ 119,240 $ 65,400 $ ( 17,656 ) $ 167,088 See accompanying notes to audited consolidated financial statements. 58 CITIZENS COMMUNITY BANCORP, INC. Consolidated Statements of Cash Flows (in thousands) For the year ended December 31, 2022 For the year ended December 31, 2021 Cash flows from operating activities: Net income attributable to common stockholders $ 17,761 $ 21,266 Adjustments to reconcile net income to net cash provided by operating activities: Premium amortization, net of discount accretion on investment securities 41 103 Depreciation expense 2,357 2,255 Provision for loan losses 1,475 — Net valuation gain on equity securities ( 541 ) ( 651 ) Net realized gain on debt securities — ( 573 ) Increase in mortgage servicing rights resulting from transfers of financial assets ( 323 ) ( 1,100 ) Mortgage servicing rights amortization and impairment reversal, net 222 191 Amortization of intangible assets 1,449 1,596 Amortization of restricted stock 860 797 Net stock based compensation expense 3 8 Loss on sale of office properties and equipment — 31 Loss on closure of branch facilities 736 — Decrease deferred income taxes 506 930 Increase in cash surrender value of life insurance ( 642 ) ( 628 ) Net gain from disposals of foreclosed and repossessed assets ( 395 ) ( 199 ) Gain on sale of loans held for sale, net ( 1,474 ) ( 5,399 ) New market tax credit depletion 650 — Net change in: Loans held for sale 8,144 1,804 Accrued interest receivable and other assets 79 1,241 Other liabilities ( 1,620 ) ( 73 ) Total adjustments 11,527 333 Net cash provided by operating activities 29,288 21,599 Cash flows from investing activities: Net decrease in other interest bearing deposits 1,262 2,241 Purchase of available for sale securities ( 13,315 ) ( 130,545 ) Purchase of held to maturity securities ( 35,342 ) ( 39,784 ) Proceeds from sales of available for sale securities — 38,239 Proceeds from principal payments of available for sale securities 25,815 32,218 Proceeds from principal payments and maturities of held to maturity securities 10,065 8,583 Proceeds from calls of held to maturity securities — 3,500 Purchase of equity investments ( 300 ) ( 960 ) Equity investment capital distribution 136 — Net (purchases) sales of other investments ( 290 ) 126 Proceeds from sales of foreclosed and repossessed assets 1,797 557 Net increase in loans ( 101,371 ) ( 73,636 ) Net capital expenditures ( 3,602 ) ( 3,778 ) Proceeds from disposal of office properties and equipment 14 38 New market tax credit investment ( 4,056 ) — Net cash used in investing activities ( 119,187 ) ( 163,201 ) Cash flows from financing activities: Federal Home Loan Bank advances 112,000 — Amortization of fair value adjustments for acquired Federal Home Loan Bank advances 3 29 Federal Home Loan Bank advances called ( 55,000 ) — Federal Home Loan Bank advance termination payments ( 15,015 ) ( 8,113 ) Federal Home Loan Bank maturities ( 11,000 ) ( 4,000 ) Amortization of debt issuance costs 398 98 Proceeds from other borrowings, net of origination costs 34,191 — 59 Other borrowings principal reductions ( 5,606 ) — Other borrowings called and repaid ( 15,000 ) — Net increase in deposits 37,185 92,279 Repurchase shares of common stock ( 1,764 ) ( 7,951 ) Surrender of restricted shares of common stock ( 150 ) ( 30 ) Common stock options exercised 71 52 Cash dividends paid ( 2,742 ) ( 2,511 ) Net cash provided by financing activities 77,571 69,853 Net decrease in cash and cash equivalents ( 12,328 ) ( 71,749 ) Cash and cash equivalents at beginning of period 47,691 119,440 Cash and cash equivalents at end of period $ 35,363 $ 47,691 Supplemental cash flow information: Cash paid during the period for: Interest on deposits $ 6,435 $ 6,026 Interest on borrowings $ 6,210 $ 4,552 Income taxes $ 4,865 $ 6,825 Supplemental noncash disclosure: Transfers from loans receivable to foreclosed and repossessed assets $ 92 $ 84 Transfers from office properties and equipment to foreclosed and repossessed assets $ 1,171 $ 1,434 See accompanying notes to audited consolidated financial statements. 60 CITIZENS COMMUNITY BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share data) NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of Citizens Community Federal N.A. (the “Bank”) included herein have been included by its parent company, Citizens Community Bancorp, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). As used in this annual report, the terms “we”, “us”, “our”, and “Citizens Community Bancorp, Inc.” mean the Company and its wholly owned subsidiary, the Bank, unless the context indicates other meaning. The Bank is a national banking association (a “National Bank”) and operates under the title of Citizens Community Federal National Association (“Citizens Community Federal N.A.” or “Bank”). The Company is a bank holding company, supervised by the Federal Reserve Bank of Minneapolis (the “FRB”), and operates under the title of Citizens Community Bancorp, Inc. The Office of the Comptroller of the Currency (the “OCC”), is the primary federal regulator for the Bank. The consolidated income of the Company is principally derived from the income of the Bank, the Company’s wholly owned subsidiary, serving customers primarily in Wisconsin and Minnesota through 23 branch locations. Its primary markets include the Chippewa Valley Region in Wisconsin, Mankato and Twin Cities markets in Minnesota, and various rural communities around these areas. The Bank offers traditional community banking services to businesses, agricultural operators and consumers, including one-to-four family residential mortgages. The Bank is subject to competition from other financial institutions and non-financial institutions providing financial products. Additionally, the Bank is subject to the regulations of certain regulatory agencies and undergoes periodic examination by those regulatory agencies. In preparing these consolidated financial statements, we evaluated the events and transactions occurring subsequent to the balance sheet date of December 31, 2022 through the date on which the consolidated financial statements were available to be issued on March 7, 2023, for items that should potentially be recognized or disclosed in these consolidated financial statements. Unless otherwise stated herein, and except for share and per share amounts, all amounts are in thousands. Principles of Consolidation – The accompanying consolidated financial statements include the accounts of the Company and the Bank. All significant inter-company accounts and transactions have been eliminated. Use of Estimates— Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, fair value of financial instruments, the allowance for loan losses, mortgage servicing rights, foreclosed and repossessed assets, valuation of intangible assets arising from acquisitions, useful lives for depreciation and amortization, valuation of goodwill and long-lived assets, stock based compensation, deferred tax assets, uncertain income tax positions and contingencies. Management does not anticipate any material changes to estimates made herein in the near term. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: those items described under the caption “Risk Factors” in Item 1A of the accompanying annual report on Form 10-K for the year ended December 31, 2022 and external market factors such as market interest rates and unemployment rates, changes to operating policies and procedures, and changes in applicable banking regulations. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period. Cash and Cash Equivalents— For purposes of reporting cash flows in the consolidated financial statements, cash and cash equivalents include cash, due from banks, and interest bearing deposits with original maturities of three months or less. Other Interest Bearing Deposits— Other interest bearing deposits are certificate of deposit investments made by the Bank with other financial institutions that are carried at cost. The weighted average months to maturity of the interest bearing deposits is 3.00 months. Balances over $ 250 in those institutions are not insured by the FDIC and therefore pose a potential risk in the event the institution were to fail. As of December 31, 2022 and December 31, 2021, there were no certificate of deposit accounts with a balance greater than $ 250 . 61 Investment Securities; Held to Maturity and Available for Sale – Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of the date of each balance sheet. Securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Held to maturity securities are stated at amortized cost. Investment securities not classified as held to maturity are classified as available for sale. Available for sale securities are stated at fair value, with unrealized holding gains and losses being reported in other comprehensive income (loss), net of tax. Unrealized losses deemed other-than-temporary due to credit issues are reported in the Company’s net income in the period in which the losses arise. 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 Volcker 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 as provided by the investee and adjusted as necessary. Other investments - As a member of the Federal Reserve Bank System and the Federal Home Loan Bank (“FHLB”) System, the Bank is required to maintain an investment in the capital stock of these entities. These securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. 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 interest on investments 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 $ 15,834 at December 31, 2022 consisted of $ 7,652 of FHLB stock, $ 5,674 of Federal Reserve Bank stock and $ 2,508 of Bankers’ Bank stock. Other investments totaling $ 15,305 at December 31, 2021 consisted of $ 7,877 of FHLB stock, $ 5,200 of Federal Reserve Bank stock, and $ 2,228 of Bankers’ Bank stock. Loans receivable – 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 62 loans, and non-accretable discount on purchased credit impaired (PCI) loans. Interest income is accrued on the unpaid principal balance of these loans. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the interest method over the contractual life of the loan with no prepayments assumed. If the loan is prepaid, any amortized net fee is recognized at that time. Late charge fees are recognized into income when collected. Interest income on commercial, mortgage and consumer loans is discontinued according to the following schedules: • Commercial/agricultural real estate loans past due 90 days or more; • Commercial and industrial/agricultural operating loans past due 90 days or more; • Closed end consumer installment loans past due 120 days or more; and • Residential mortgage loans and open ended 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”) loans, 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 credit losses. Any allowance for loan loss on these pools reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received). Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition-date fair value including: the remaining life of the acquired loans, delinquency status, estimated 63 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 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 statement of operations. All sales are made without recourse. Interest rate lock commitments on mortgage loans to be funded and sold are valued at fair value, and are included in other assets or liabilities, if material. 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 64 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. 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. The amortization of mortgage servicing rights is netted against loan servicing fee income. Office Properties and Equipment— Premises and equipment are stated at cost less accumulated depreciation. Land is carried at cost. Maintenance and repair costs are charged to expense as incurred. Gains or losses on disposition of office properties and equipment are reflected in income. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 10 to 40 years. Furniture, fixtures and equipment are depreciated using the straight-line (or accelerated) method with useful lives ranging from 3 to 10 years. Leasehold improvements are depreciated using the straight-line (or accelerated) method with useful lives based on the lesser of (a) the estimated life of the lease, or (b) the estimated useful life of the leasehold improvement. Depreciation expense is included in non-interest expense on the consolidated statements of operations. Goodwill and other intangible assets— The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350, “Intangibles - Goodwill and Other.” The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, as goodwill. The Company amortizes acquired intangible assets, primarily Core Deposit Intangibles (CDI) with definite useful economic lives over their useful economic lives originally ranging from 48 to 111 months utilizing the straight-line method. On a periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amounts of the intangible assets may be impaired. Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A reporting unit is defined as any distinct, separately identifiable component of the Company’s one operating segment for which complete, discrete financial information is available and reviewed regularly by the segment’s management. The Company has one reporting unit as of December 31, 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, 2022. See Note 6 for additional information on goodwill and other intangible assets. Foreclosed and Repossessed Assets – Assets acquired through foreclosure or repossession are initially recorded at fair value, less estimated costs to sell, which establishes a new cost basis. If the fair value declines subsequent to foreclosure or repossession, a write-down is recorded through expense. Costs incurred after acquisition are expensed and are included in non-interest expense, other in the consolidated statements of operations. Bank Owned Life Insurance (BOLI)— The Bank invests in bank-owned life insurance (BOLI) as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by the Bank on a select group of employees. The Bank is the owner and beneficiary of the policies. Income from the increase in cash surrender value of the policies as well as the receipt of death benefits is included in non-interest income on the consolidated 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. However, the Company 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 65 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 December 31, 2022, the carrying amount of this investment, which is included in other assets in the consolidated balance sheets, was $ 3,350 . 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 December 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. Some of the Bank’s leases require it to make variable payments for the Bank’s share of property taxes, insurance, common area maintenance and other costs. These variable costs are recognized when incurred and are also included in lease expense. Debt and equity issuance costs— Debt issuance costs, which consist primarily of fees paid to note lenders, are deferred and included in other borrowings in the consolidated balance sheets. Debt issuance costs with a Company call option that originated prior to 2020 and senior note debt issuance costs, are amortized over the contractual term of the corresponding debt, as a component of interest expense on other borrowed funds in the consolidated statements of operations. Debt issuance costs that originated in 2020 and thereafter, are amortized through the first Company call option date of the corresponding debt, as a component of interest expense on other borrowed funds in the consolidated statements of operations. 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 bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. See Note 14, “Income Taxes” for details on the Company’s income taxes. The Company regularly reviews the carrying amount of its net deferred tax assets to determine if the establishment of a valuation allowance is necessary. 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 66 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 statement of operations 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 fees 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 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, 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. Off-Balance-Sheet Financial Instruments— In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit and commitments under lines of credit arrangements, issued to meet customer financial needs. Such financial instruments are recorded in the financial statements when they become payable. See Note 11, “Commitments and Contingencies” in Notes to Consolidated Financial Statements. Derivatives--Rate-lock Commitments and Forward Sale Agreements — The Company enters into commitments to originate loans, whereby the interest rate on the loan is determined prior to funding (rate-lock commitment). Rate-lock commitments on mortgage loans held for sale are derivative instruments. If material, derivative instruments are carried on the consolidated balance sheets at fair value, and changes in the fair value thereof are recognized in the consolidated statements of operations. The Company originates single-family residential loans for sale, pursuant to programs primarily with the Federal Home Loan Mortgage Corporation (FHLMC) and other similar third parties. In connection with these programs, at the time the Company initially issues a loan commitment, it does not lock in a specific interest rate. At the time the interest rate is locked in by the borrower, the Company concurrently enters into a forward loan sale agreement with the prospective loan purchaser, at a specific price, in order to manage the interest rate risk inherent to the rate-lock commitment. The forward sale agreement also meets the definition of a derivative instrument. Any change in the fair value of the loan commitment after the borrower locks in the interest rate is substantially offset by the corresponding change in the fair value of the forward loan sale agreement related to such loan. The period from the time the borrower locks in the interest rate, to the time the Company funds the loan and sells the loan to a third party varies, and could be up to 90 days. The fair value of each instrument will rise and fall in response to changes in market interest rates, subsequent to the dates the interest rate locks and forward sale agreements are entered into. In the event that interest rates rise after the Company enters into an interest rate lock, the fair value of the loan commitment will 67 decline. However, the fair value of the forward loan sale agreement related to such loan commitment should increase by substantially the same amount, effectively eliminating the Company’s interest rate and price risks. At December 31, 2022, the Company had $ 1,164 of loan commitments outstanding related to loans being originated for sale, all of which were subject to interest rate lock commitments and corresponding forward loan sale agreements, as described above. The net fair values of outstanding interest rate-lock commitments and forward sale agreements were considered immaterial to the Company’s consolidated financial statements as of December 31, 2022. 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 (loss) 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 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, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting-- The ASU provides optional and temporary relief, in the form of optional expedients and exceptions, for applying GAAP to modifications of contracts, hedging relationships and other transactions affected by reference rate (e.g. LIBOR) reforms. ASU 2020-04 is effective for the Company immediately and through December 31, 2024. 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 elected not to adopt the ASU early. The Company has selected a loss estimation methodology, utilizing a third-party model, and is refining the remaining facets of its CECL model, as well as finalizing internal controls. Company will record 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. Management estimates the adoption of the new standard will result in an increase in the Allowance for Credit Losses (“ACL”) in the range of 25 - 30 %. Approximately 30 % of the increase is due to the impact of the new guidance on the Company’s acquired loan portfolio. Approximately 40 % of the increase is the result of the new requirement to estimate losses over the full remaining expected life of the loans. This especially affected the Company’s Commercial/Agricultural real estate and Residential mortgage portfolio segments, which have longer maturities. Approximately 30 % of this increase is due to the requirement to record an allowance on non-cancelable off-balance sheet commitments. Post-tax retained earnings adjustment will reduce stockholders’ equity by approximately 0.2 %. At adoption, the Company will not record an allowance with respect to HTM securities as the portfolio consists almost entirely of agency-backed securities that inherently have minimal nonpayment risk. 68 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 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. Adoption of this amendment is not expected to have a material impact on the Company’s consolidated financial statements; however, it will result in new disclosures. The Company expects to adopt the guidance for our fiscal year beginning January 1, 2023. 69 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 December 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 December 31, 2022 U.S. government agency obligations $ 18,373 $ 173 $ 233 $ 18,313 Obligations of states and political subdivisions — — — — Mortgage-backed securities 97,458 — 18,848 78,610 Corporate debt securities 44,636 — 4,385 40,251 Corporate asset-backed securities 29,877 — 1,060 28,817 Total available for sale securities $ 190,344 $ 173 $ 24,526 $ 165,991 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-backed 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 December 31, 2022 Obligations of states and political subdivisions $ 600 $ — $ 54 $ 546 Mortgage-backed securities 95,779 7 19,553 76,233 Total held to maturity securities $ 96,379 $ 7 $ 19,607 $ 76,779 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 December 31, 2022, the Bank has pledged certain of its mortgage-backed securities with a carrying value of $ 5,421 as collateral to secure a line of credit with the Federal Reserve Bank. As of December 31, 2022, there were no borrowings outstanding on this Federal Reserve Bank line of credit. As of December 31, 2022, the Bank has pledged certain of its U.S. Government Agency securities with a carrying value of $ 2,602 and mortgage-backed securities with a carrying value of $ 2,219 as collateral against specific municipal deposits. As of December 31, 2022, the Bank also has mortgage-backed securities with a carrying value of $ 142 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 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 twelve months ended December 31, 2022, there were no sales of available for sale securities. For the twelve months ended December 31, 2021, gross sales of available for sale securities were $ 38,239 , gross gains on sale of available for sale securities were $ 646 , and gross losses on sale of available for sale securities were $ 73 . 70 The estimated fair value of available for sale securities at December 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 securities due to the call feature. December 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 8,525 8,184 4,903 4,971 Due after five years through ten years 45,622 41,427 40,410 40,818 Due after ten years 38,739 37,770 49,757 49,972 Total securities with contractual maturities 92,886 87,381 95,210 95,901 Mortgage-backed securities 97,458 78,610 107,636 107,167 Total available for sale securities $ 190,344 $ 165,991 $ 202,846 $ 203,068 December 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 $ 450 $ 415 $ 4,300 $ 4,298 Due after five years through ten years 150 131 300 295 Total securities with contractual maturities 600 546 4,600 4,593 Mortgage-backed securities 95,779 76,233 66,541 64,584 Total held to maturity securities $ 96,379 $ 76,779 $ 71,141 $ 69,177 Securities with unrealized losses at December 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 December 31, 2022 U.S. government agency obligations $ 3,169 $ 138 $ 1,138 $ 95 $ 4,307 $ 233 Mortgage-backed securities 9,654 896 68,907 17,952 78,561 18,848 Corporate debt securities 21,547 1,688 18,704 2,697 40,251 4,385 Corporate asset-backed securities 7,955 221 20,862 839 28,817 1,060 Total $ 42,325 $ 2,943 $ 109,611 $ 21,583 $ 151,936 $ 24,526 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-backed securities 19,296 127 — — 19,296 127 Total $ 126,715 $ 1,148 $ 735 $ 15 $ 127,450 $ 1,163 71 Less than 12 Months 12 Months or More Total Held to maturity securities Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss December 31, 2022 Obligations of states and political subdivisions $ — $ — $ 546 $ 54 $ 546 $ 54 Mortgage-backed securities 16,627 2,416 59,367 17,137 75,994 19,553 Total $ 16,627 $ 2,416 $ 59,913 $ 17,191 $ 76,540 $ 19,607 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 shareholders’ equity, net of tax. If the unrealized loss of a security is identified as other-than-temporary based on information available, such as the decline in the creditworthiness of the issuer, external market ratings, or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if credit loss exists. If there is a credit loss, it will be recorded in the Company’s consolidated statement of operations. Non-credit components of the unrealized losses on available for sale securities will continue to be recognized in other comprehensive income (loss), net of tax. Unrealized losses reflected in the preceding tables have not been included in results of operations because the unrealized loss was not deemed other-than-temporary. Management has determined that more likely than not, the Company neither intends to sell, nor will it be required to sell each debt security before its anticipated recovery, and therefore recovery of cost will occur. 72 NOTE 3 – LOANS, ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS Portfolio Segments: Commercial real estate loans, including multi-family, agricultural, and construction and land development 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. All of the SBA PPP originated loan balances were forgiven and repaid at June 30, 2022. 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. 73 Loans by classes within portfolio segments were as follows: December 31, 2022 December 31, 2021 Originated Loans: Commercial/Agricultural real estate: Commercial real estate $ 640,816 $ 578,395 Agricultural real estate 69,431 52,372 Multi-family real estate 205,601 174,050 Construction and land development 101,681 78,613 C&I/Agricultural operating: Commercial and industrial 127,115 107,937 Agricultural operating 23,124 26,202 Residential mortgage: Residential mortgage 84,783 63,855 Purchased HELOC loans 3,262 3,871 Consumer installment: Originated indirect paper 10,236 15,971 Other Consumer 6,894 8,473 Total originated loans before SBA PPP loans $ 1,272,943 $ 1,109,739 SBA PPP loans — 8,755 Total originated loans $ 1,272,943 $ 1,118,494 Acquired Loans: Commercial/Agricultural real estate: Commercial real estate $ 85,155 $ 120,070 Agricultural real estate 18,477 26,123 Multi-family real estate 3,307 4,299 Construction and land development 811 907 C&I/Agricultural operating: Commercial and industrial 8,898 14,230 Agricultural operating 5,682 5,386 Residential mortgage: Residential mortgage 20,606 27,135 Consumer installment: Other Consumer 256 401 Total acquired loans $ 143,192 $ 198,551 Total Loans: Commercial/Agricultural real estate: Commercial real estate $ 725,971 $ 698,465 Agricultural real estate 87,908 78,495 Multi-family real estate 208,908 178,349 Construction and land development 102,492 79,520 C&I/Agricultural operating: Commercial and industrial 136,013 122,167 Agricultural operating 28,806 31,588 Residential mortgage: Residential mortgage 105,389 90,990 Purchased HELOC loans 3,262 3,871 Consumer installment: Originated indirect paper 10,236 15,971 Other Consumer 7,150 8,874 Total loans before SBA PPP loans $ 1,416,135 $ 1,308,290 SBA PPP loans — 8,755 Gross loans $ 1,416,135 $ 1,317,045 Less: Unearned net deferred fees and costs and loans in process ( 2,585 ) ( 2,482 ) Unamortized discount on acquired loans ( 1,766 ) ( 3,600 ) Allowance for loan losses ( 17,939 ) ( 16,913 ) Loans receivable, net $ 1,393,845 $ 1,294,050 74 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 weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position in the future. 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. 75 Below is a breakdown of loans by risk rating as of December 31, 2022: 1 to 5 6 7 8 9 TOTAL Originated Loans: Commercial/Agricultural real estate: Commercial real estate $ 628,999 $ 5,771 $ 6,046 $ — $ — $ 640,816 Agricultural real estate 67,248 549 1,634 — — 69,431 Multi-family real estate 205,601 — — — — 205,601 Construction and land development 101,681 — — — — 101,681 C&I/Agricultural operating: Commercial and industrial 120,882 5,526 707 — — 127,115 Agricultural operating 20,896 324 1,904 — — 23,124 Residential mortgage: Residential mortgage 82,236 — 2,547 — — 84,783 Purchased HELOC loans 3,262 — — — — 3,262 Consumer installment: Originated indirect paper 10,190 — 46 — — 10,236 Other Consumer 6,878 — 16 — — 6,894 Total originated loans before SBA PPP loans 1,247,873 12,170 12,900 — — 1,272,943 SBA PPP loans — — — — — — Total originated loans $ 1,247,873 $ 12,170 $ 12,900 $ — $ — $ 1,272,943 Acquired Loans: Commercial/Agricultural real estate: Commercial real estate $ 83,659 $ — $ 1,496 $ — $ — $ 85,155 Agricultural real estate 16,967 — 1,510 — — 18,477 Multi-family real estate 3,307 — — — — 3,307 Construction and land development 704 — 107 — — 811 C&I/Agricultural operating: Commercial and industrial 8,866 — 32 — — 8,898 Agricultural operating 5,522 — 160 — — 5,682 Residential mortgage: Residential mortgage 19,494 — 1,112 — — 20,606 Consumer installment: Other Consumer 254 — 2 — — 256 Total acquired loans $ 138,773 $ — $ 4,419 $ — $ — $ 143,192 Total Loans: Commercial/Agricultural real estate: Commercial real estate $ 712,658 $ 5,771 $ 7,542 $ — $ — $ 725,971 Agricultural real estate 84,215 549 3,144 — — 87,908 Multi-family real estate 208,908 — — — — 208,908 Construction and land development 102,385 — 107 — — 102,492 C&I/Agricultural operating: Commercial and industrial 129,748 5,526 739 — — 136,013 Agricultural operating 26,418 324 2,064 — — 28,806 Residential mortgage: Residential mortgage 101,730 — 3,659 — — 105,389 Purchased HELOC loans 3,262 — — — — 3,262 Consumer installment: Originated indirect paper 10,190 — 46 — — 10,236 Other Consumer 7,132 — 18 — — 7,150 Gross loans before SBA PPP loans $ 1,386,646 $ 12,170 $ 17,319 $ — $ — $ 1,416,135 SBA PPP loans — — — — — — Gross loans $ 1,386,646 $ 12,170 $ 17,319 $ — $ — 1,416,135 Less: Unearned net deferred fees and costs and loans in process ( 2,585 ) Unamortized discount on acquired loans ( 1,766 ) Allowance for loan losses ( 17,939 ) Loans receivable, net $ 1,393,845 76 Below is a breakdown of loans by 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 77 Certain directors and executive officers of the Company are defined as related parties. These related parties, including their immediate families and companies in which they are principal owners, were loan customers of the Bank during the twelve months ended December 31, 2022 and December 31, 2021. A summary of the changes in those loans is as follows: Twelve months ended Twelve months ended December 31, 2022 December 31, 2021 Balance—beginning of period $ 32,423 $ 26,483 New loan originations 7,994 14,992 Repayments ( 2,007 ) ( 9,052 ) Balance—end of period $ 38,410 $ 32,423 Available and unused lines of credit $ — $ 75 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. 78 Changes in the ALL by loan type for the periods presented below were as follows: Commercial/Agricultural Real Estate C&I/Agricultural operating Residential Mortgage Consumer Installment Unallocated Total Twelve months ended December 31, 2022: Allowance for Loan Losses: Beginning balance, January 1, 2022 $ 12,354 $ 1,959 $ 518 $ 225 $ 774 $ 15,830 Charge-offs ( 157 ) ( 310 ) ( 35 ) ( 45 ) — ( 547 ) Recoveries 74 35 2 50 — 161 Provision 1,280 571 89 ( 109 ) 34 1,865 Total Allowance on originated loans 13,551 2,255 574 121 808 17,309 Other acquired loans: Beginning balance, January 1, 2022 856 69 130 28 — 1,083 Charge-offs ( 48 ) ( 36 ) ( 33 ) ( 3 ) — ( 120 ) Recoveries 28 1 27 1 — 57 Provision ( 302 ) 29 ( 99 ) ( 18 ) — ( 390 ) Total allowance on other acquired loans 534 63 25 8 — 630 Total allowance on acquired loans 534 63 25 8 — 630 Ending Balance, December 31, 2022 $ 14,085 $ 2,318 $ 599 $ 129 $ 808 $ 17,939 Allowance for Loan Losses at December 31, 2022: Amount of allowance for loan losses arising from loans individually evaluated for impairment $ 519 $ 249 $ 48 $ 10 $ — $ 826 Amount of allowance for loan losses arising from loans collectively evaluated for impairment $ 13,566 $ 2,069 $ 551 $ 119 $ 808 $ 17,113 Loans Receivable as of December 31, 2022: Ending balance of originated loans $ 1,017,529 $ 150,239 $ 88,045 $ 17,130 $ — $ 1,272,943 Ending balance of purchased credit-impaired loans 5,748 362 890 — — 7,000 Ending balance of other acquired loans 102,002 14,218 19,716 256 — 136,192 Ending balance of loans $ 1,125,279 $ 164,819 $ 108,651 $ 17,386 $ — $ 1,416,135 Ending balance: individually evaluated for impairment $ 16,874 $ 3,292 $ 5,998 $ 755 $ — $ 26,919 Ending balance: collectively evaluated for impairment $ 1,108,405 $ 161,527 $ 102,653 $ 16,631 $ — $ 1,389,216 79 Commercial/Agricultural Real Estate C&I/Agricultural operating Residential Mortgage Consumer Installment Unallocated Total Twelve months ended December 31, 2021: Allowance for Loan Losses: Beginning balance, January 1, 2021 $ 10,271 $ 2,112 $ 1,041 $ 489 $ 906 $ 14,819 Charge-offs ( 51 ) — — ( 54 ) — ( 105 ) Recoveries 14 110 9 41 — 174 Provision 2,120 ( 263 ) ( 532 ) ( 251 ) ( 132 ) 942 Total Allowance on originated loans 12,354 1,959 518 225 774 15,830 Other acquired loans: Beginning balance, January 1, 2021 1,684 141 335 64 — 2,224 Charge-offs ( 200 ) ( 7 ) — ( 27 ) — ( 234 ) Recoveries 14 13 4 4 — 35 Provision ( 642 ) ( 78 ) ( 209 ) ( 13 ) — ( 942 ) Total Allowance on other acquired loans 856 69 130 28 — 1,083 Total Allowance on acquired loans 856 69 130 28 — 1,083 Ending balance, December 31, 2021 $ 13,210 $ 2,028 $ 648 $ 253 $ 774 $ 16,913 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 80 Loans receivable by loan type as of the end of the periods shown below were as follows: Commercial/Agricultural Real Estate Loans C&I/Agricultural operating Residential Mortgage Consumer Installment Totals Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 Performing loans Performing TDR loans $ 1,336 $ 4,618 $ 960 $ 649 $ 2,875 $ 2,681 $ — $ 36 $ 5,171 $ 7,984 Performing loans other 1,115,465 1,021,346 162,417 160,570 104,287 90,591 17,345 24,729 1,399,514 1,297,236 Total performing loans 1,116,801 1,025,964 163,377 161,219 107,162 93,272 17,345 24,765 1,404,685 1,305,220 Nonperforming loans (1) Nonperforming TDR loans 1,878 3,389 391 554 348 593 — 3 2,617 4,539 Nonperforming loans other 6,600 5,476 1,051 737 1,141 996 41 77 8,833 7,286 Total nonperforming loans 8,478 8,865 1,442 1,291 1,489 1,589 41 80 11,450 11,825 Total loans $ 1,125,279 $ 1,034,829 $ 164,819 $ 162,510 $ 108,651 $ 94,861 $ 17,386 $ 24,845 $ 1,416,135 $ 1,317,045 (1) Nonperforming loans are either 90+ days past due or nonaccrual. 81 An aging analysis of the Company’s commercial/agricultural real estate and non-real estate, consumer real estate and non-real estate and purchased third party loans as of December 31, 2022 and 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 Accruing Nonaccrual Loans Total Past Due Accruing and Nonaccrual Loans Current Total Loans December 31, 2022 Commercial/Agricultural real estate: Commercial real estate $ 202 $ 88 $ — $ 290 $ 5,736 $ 6,026 $ 719,945 $ 725,971 Agricultural real estate 4,992 — — 4,992 2,742 7,734 80,174 87,908 Multi-family real estate — — — — — — 208,908 208,908 Construction and land development 3,975 — — 3,975 — 3,975 98,517 102,492 C&I/Agricultural operating: Commercial and industrial — 26 — 26 552 578 135,435 136,013 SBA PPP loans — — — — — — — — Agricultural operating 826 — — 826 890 1,716 27,090 28,806 Residential mortgage: Residential mortgage 767 479 236 1,482 1,253 2,735 102,654 105,389 Purchased HELOC loans — — — — — — 3,262 3,262 Consumer installment: Originated indirect paper 15 — — 15 27 42 10,194 10,236 Other Consumer 39 2 10 51 4 55 7,095 7,150 Total $ 10,816 $ 595 $ 246 $ 11,657 $ 11,204 $ 22,861 $ 1,393,274 $ 1,416,135 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 82 At December 31, 2022, the Company individually evaluated loans for impairment with a recorded investment of $ 26,823 , consisting of (1) $ 7,000 PCI loans, with a carrying amount of $ 6,904 ; (2) $ 7,018 TDR loans, net of TDR PCI loans; and (3) $ 12,901 of substandard non-TDR loans, non-PCI loans. The $ 26,823 total of loans individually evaluated for impairment includes $ 5,171 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 loans, 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 loans evaluated for impairment as of December 31, 2022 was as follows: Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized December 31, 2022 With No Related Allowance Recorded: Commercial/Agricultural real estate $ 9,741 $ 9,766 $ — $ 13,657 $ 549 C&I/Agricultural operating 2,744 2,754 — 4,467 200 Residential mortgage 5,846 5,907 — 6,304 276 Consumer installment 745 745 — 307 5 Total $ 19,076 $ 19,172 $ — $ 24,735 $ 1,030 With An Allowance Recorded: Commercial/Agricultural real estate $ 7,108 $ 7,108 $ 519 $ 6,028 $ 273 C&I/Agricultural operating 538 538 249 273 48 Residential mortgage 91 91 48 298 65 Consumer installment 10 10 10 2 2 Total $ 7,747 $ 7,747 $ 826 $ 6,601 $ 388 December 31, 2022 Totals Commercial/Agricultural real estate $ 16,849 $ 16,874 $ 519 $ 19,685 $ 822 C&I/Agricultural operating 3,282 3,292 249 4,741 248 Residential mortgage 5,937 5,998 48 6,603 341 Consumer installment 755 755 10 310 7 Total $ 26,823 $ 26,919 $ 826 $ 31,336 $ 1,418 At December 31, 2022, the Company had six residential real estate loans, secured by residential real estate properties, for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction, with a recorded investment of $ 258 . At December 31, 2022, the Company had three commercial real estate loans, secured by commercial and agricultural real estate properties, for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction, with a recorded investment of $ 6,294 . 83 A summary of loans evaluated for impairment as of December 31, 2021 was as follows: 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 Troubled Debt Restructuring – A TDR includes a loan modification where a borrower is experiencing financial difficulty, and the Bank grants a concession to that borrower that the Bank would not otherwise consider, except for the borrower’s financial difficulties. Concessions may include: extension of the loan’s term, renewals of existing balloon loans, reductions in interest rates and consolidating existing Bank loans at modified terms. A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability. If a TDR is placed on nonaccrual status, it remains there until a sufficient period of performance under the restructured terms has occurred at which time it is returned to accrual status. There was one accruing, delinquent TDR, greater than 60 days past due, with a recorded investment of $ 15 at December 31, 2022, compared to one accruing, delinquent TDR, greater than 60 days past due, with a recorded investment of $ 4 at December 31, 2021. Following is a summary of TDR loans by accrual status as of December 31, 2022 and December 31, 2021. December 31 December 31 2022 2021 Troubled debt restructure loans: Accrual status $ 5,171 $ 7,984 Non-accrual status 2,617 4,539 Total $ 7,788 $ 12,523 There was one TDR commitment totaling $ 26 meeting our TDR criteria as of December 31, 2022 and there were no TDR commitments meeting our TDR criteria as of December 31, 2021. There were unused lines of credit totaling $ 484 and $ 10 meeting our TDR criteria as of December 31, 2022 and December 31, 2021, respectively. 84 The following provides detail, including specific reserve and reasons for modification, related to loans identified as TDRs during the years ended December 31, 2022 and December 31, 2021: Number of Contracts Modified Rate Modified Payment Modified Under- writing Other Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific Reserve Twelve months ended December 31, 2022 TDRs: Commercial/Agricultural real estate 7 $ 1,241 $ — $ 1,964 $ — $ 3,205 $ 3,205 $ — C&I/Agricultural operating 5 1,424 — 736 — 2,160 2,160 — Residential mortgage 11 116 147 507 — 770 770 — Consumer installment — — — — — — — — Totals 23 $ 2,781 $ 147 $ 3,207 $ — $ 6,135 $ 6,135 $ — Number of Contracts Modified Rate Modified Payment Modified Under- writing Other Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific Reserve Twelve months ended December 31, 2021 TDRs: Commercial/Agricultural real estate 3 $ 39 $ 81 $ — $ — $ 120 $ 120 $ — C&I/Agricultural operating 1 — — 240 — 240 240 — Residential mortgage 8 252 295 202 — 749 749 — Consumer installment 3 6 — 18 — 24 24 — Totals 15 $ 297 $ 376 $ 460 $ — $ 1,133 $ 1,133 $ — A summary of loans by loan class modified in a troubled debt restructuring as of December 31, 2022 and December 31, 2021: December 31, 2022 December 31, 2021 Number of Modifications Recorded Investment Number of Modifications Recorded Investment Troubled debt restructurings: Commercial/Agricultural real estate 14 $ 3,214 19 $ 8,007 C&I/Agricultural operating 8 1,351 7 1,203 Residential mortgage 45 3,223 43 3,274 Consumer installment — — 7 39 Total loans 67 $ 7,788 76 $ 12,523 85 The following table provides the number of loans modified in a TDR during the previous twelve months which subsequently defaulted during the years ended December 31, 2022 and December 31, 2021, as well as the recorded investment in these restructured loans as of December 31, 2022 and December 31, 2021: December 31, 2022 December 31, 2021 Number of Modifications Recorded Investment Number of Modifications Recorded Investment Troubled debt restructurings: Commercial/Agricultural real estate — $ — — $ — C&I/Agricultural operating 1 231 — — Residential mortgage 2 40 — — Consumer installment — — 1 3 Total troubled debt restructurings 3 $ 271 1 $ 3 All acquired loans were initially recorded at fair value at the acquisition date. The outstanding balance and the carrying amount of acquired loans included in the consolidated balance sheet are as follows: December 31, 2022 December 31, 2021 Accountable for under ASC 310-30 (PCI loans) Outstanding balance $ 7,000 $ 11,205 Carrying amount $ 6,904 $ 10,552 Accountable for under ASC 310-20 (non-PCI loans) Outstanding balance $ 136,192 $ 187,346 Carrying amount $ 134,522 $ 184,399 Total acquired loans Outstanding balance $ 143,192 $ 198,551 Carrying amount $ 141,426 $ 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 table below includes $ 1,165 of accretable discount from purchased impaired loans with the original non-accretable discount transferred to accretable discount. The accretion on this balance is scheduled to be approximately $ 80 in 2023; however, large balance payoffs, as seen in 2022, 2021 and 2020, would accelerate this accretion and lower future years accretion. Fiscal years ending December 31, Purchase Accounting Accretable Discount 2023 $ 363 2024 215 2025 180 2026 84 2027 77 Thereafter 751 Total $ 1,670 86 The following table provides changes in non-accretable yield for all acquired loans from prior acquisitions with deteriorated credit quality: December 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 ( 239 ) ( 105 ) Transfers from non-accretable difference to accretable discount ( 126 ) ( 329 ) Non-accretable difference transferred to OREO due to loan foreclosure ( 192 ) — Balance at end of period $ 96 $ 653 87 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 the one- to four-family residential mortgage loans as of December 31, 2022 and December 31, 2021 were $ 523,736 and $ 556,086 , respectively. These residential mortgage loans are serviced primarily for the Federal Home Loan Mortgage Corporation, Federal Home Loan Bank and Federal National Mortgage Association. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in deposits were $ 2,649 and $ 2,781 , at December 31, 2022 and December 31, 2021, respectively. Mortgage servicing rights activity for the years ended December 31, 2022 and December 31, 2021 was as follows: As of and for the twelve months ended As of and for the twelve months ended December 31, 2022 December 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 323 1,100 Amortization during the period ( 788 ) ( 1,639 ) Mortgage servicing rights, end of period 4,262 4,727 Valuation allowance, beginning of period ( 566 ) ( 2,014 ) Additions — — Recoveries 566 1,448 Valuation allowance, end of period — ( 566 ) Mortgage servicing rights, net $ 4,262 $ 4,161 Fair value of mortgage servicing rights, end of period $ 5,665 $ 4,312 Residential mortgage loans serviced for others $ 523,736 $ 556,086 The current period change in valuation allowance is included in expense as mortgage servicing rights expense, net on the consolidated statement of operations. Servicing fees totaled $ 1,385 and $ 1,414 for the years ended December 31, 2022 and December 31, 2021, respectively. Late fees and ancillary fees related to loan servicing are not material. To estimate the fair value of the MSR asset, a valuation model is applied at the loan level to calculate the present value of the expected future cash flows. The valuation model incorporates various assumptions that would impact market participants’ estimations of future servicing income. Central to the valuation model is the discount rate. Fair value at December 31, 2022 was determined using discount rates ranging from 9.5 % to 12.5 %. Fair value at December 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. At December 31, 2022, the estimated future aggregate amortization expense for the mortgage servicing rights is as follows. The estimated amortization expense is based on existing mortgage servicing asset balances. The timing of amortization expense actually recognized in future periods may differ significantly based on actual prepayment speeds, mortgage interest rates and other factors. Amortization Expense 2023 $ 620 2024 568 2025 515 2026 462 2027 410 After 2027 1,687 Total $ 4,262 88 NOTE 5 - OFFICE PROPERTIES AND EQUIPMENT Office properties and equipment for each of the periods shown below consisted of the following: December 31, 2022 December 31, 2021 Land $ 3,856 $ 4,215 Buildings 16,856 16,781 Furniture, equipment and vehicles 10,255 8,854 Subtotals 30,967 29,850 Less--Accumulated depreciation ( 10,474 ) ( 8,681 ) Office properties and equipment, net $ 20,493 $ 21,169 Depreciation expense was $ 2,357 for the year ended December 31, 2022 and $ 2,255 for the year ended December 31, 2021. NOTE 6 - GOODWILL AND INTANGIBLE ASSETS Goodwill— The beginning and ending balance of goodwill was $ 31,498 during the periods ended December 31, 2022 and December 31, 2021. There were no changes to goodwill during either period. Intangible assets-- Intangible assets consist of core deposit intangibles arising from various bank acquisitions. A summary of intangible assets and related amortization for the periods shown below follows: Year ended Year Ended December 31, 2022 December 31, 2021 Gross carrying amount $ 12,180 $ 12,180 Accumulated amortization ( 9,731 ) ( 8,282 ) Net book value $ 2,449 $ 3,898 Amortization during the period $ 1,449 $ 1,596 At December 31, 2022, the estimated future aggregate amortization expense for the intangible assets are as follows: Intangible Assets 2023 $ 755 2024 715 2025 584 2026 395 Total $ 2,449 89 NOTE 7— LEASES We have operating leases for 1 corporate office, 4 bank branch offices, 1 former bank branch office, and 1 ATM location. Our leases have remaining lease terms of 0.83 years to 5.50 years. Some of the leases include an option to extend, the longest of which is for two 5 year terms. As of December 31, 2022, we have no additional lease commitments that have not yet commenced. Lease costs are included in non-interest expense/occupancy in the consolidated statement of operations. Twelve Months Ended December 31, 2022 December 31, 2021 The components of total lease costs were as follows: Operating lease cost $ 554 $ 558 Variable lease cost 47 47 Total lease cost $ 601 $ 605 The components of total lease income were as follows: Operating lease income $ 34 $ 33 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 $ 556 $ 553 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 215 $ 2 December 31, 2022 December 31, 2021 Supplemental balance sheet information related to leases was as follows: Operating lease right-of-use assets $ 1,700 $ 2,159 Operating lease liabilities $ 1,945 $ 2,228 Weighted average remaining lease term in years; operating leases 4.89 5.55 Weighted average discount rate; operating leases 2.98 % 2.73 % Cash obligations and receipts under lease contracts as of December 31, 2022 are as follows: Fiscal years ending December 31, Payments Receipts 2023 $ 539 $ 27 2024 467 10 2025 452 — 2026 396 — 2027 401 — Thereafter 141 — Total lease payments 2,396 $ 37 Less: effects of discounting ( 451 ) Lease liability recognized $ 1,945 In November of 2022 we closed our leased Red Wing, Minnesota branch. We considered the branch closure a triggering event that required us to test the right of use asset for impairment. The carrying amount of the right of use asset was compared 90 to its fair value, which was determined based on an estimate of future sublease income. It was determined that the right of use asset was impaired and a $ 180 impairment loss was recorded. This impairment loss is included in other non-interest expense in the consolidated statements of operations. NOTE 8— DEPOSITS The following is a summary of deposits by type at December 31, 2022 and December 31, 2021, respectively: December 31, 2022 December 31, 2021 Non interest bearing demand deposits $ 284,722 $ 276,631 Interest bearing demand deposits 371,210 396,231 Savings accounts 220,019 222,674 Money market accounts 323,435 288,985 Certificate accounts 225,334 203,014 Total deposits $ 1,424,720 $ 1,387,535 At December 31, 2022, the scheduled maturities of time deposits were as follows: 2023 $ 128,459 2024 84,604 2025 10,117 2026 1,548 2027 606 Total $ 225,334 Time deposits of $250 or more were $ 66,827 and $ 22,381 at December 31, 2022 and December 31, 2021, respectively. Brokered deposits were $ 39,841 and $ 11 at December 31, 2022 and December 31, 2021, respectively. Deposits from the Company’s directors, executive officers, principal stockholders and their affiliates held by the Bank at December 31, 2022 and December 31, 2021 amounted to $ 33,673 , and $ 34,093 , respectively. 91 NOTE 9 – FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS A summary of Federal Home Loan Bank (FHLB) advances and other borrowings at December 31, 2022 and December 31, 2021 is as follows: December 31, 2022 December 31, 2021 Stated Maturity Amount Range of Stated Rates Stated Maturity Amount Range of Stated Rates Federal Home Loan Bank advances (1), (2), (3), (4) 2022 $ — — % — % 2022 $ 11,000 2.45 % 2.45 % 2023 117,000 1.43 % 4.31 % 2023 20,000 1.43 % 1.44 % 2024 20,530 0.00 % 1.45 % 2024 20,530 0.00 % 1.45 % 2025 5,000 1.45 % 1.45 % 2025 5,000 1.45 % 1.45 % 2029 — — % — % 2029 42,500 1.00 % 1.13 % 2030 — — % — % 2030 12,500 0.52 % 0.86 % Subtotal 142,530 111,530 Unamortized discount on acquired notes — ( 3 ) Federal Home Loan Bank advances, net $ 142,530 $ 111,527 Other borrowings: Senior notes (5) 2034 $ 23,250 3.00 % 6.75 % 2031 $ 28,856 3.00 % 3.50 % Subordinated notes (6) 2027 $ — — % — % 2027 $ 15,000 6.75 % 6.75 % 2030 15,000 6.00 % 6.00 % 2030 15,000 6.00 % 6.00 % 2032 35,000 4.75 % 4.75 % 2032 — — % — % $ 50,000 $ 30,000 Unamortized debt issuance costs ( 841 ) ( 430 ) Total other borrowings $ 72,409 $ 58,426 Totals $ 214,939 $ 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 pledged balances of $ 984,878 and $ 861,900 at December 31, 2022 and 2021, respectively. At December 31, 2022, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $ 256,773 compared to $ 204,271 as of December 31, 2021. (2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $ 157,530 and $ 123,530 , during the twelve months ended December 31, 2022 and December 31, 2021, respectively. (3) The weighted-average interest rates on FHLB borrowings, with maturities less than twelve months, outstanding as of December 31, 2022 and December 31, 2021 were 4.09 % and 2.45 %, respectively. (4) At December 31, 2022, no FHLB term notes can be called by the FHLB. At December 31, 2021, FHLB term notes totaling $ 55,000 could be called by the FHLB on a quarterly basis, and if not called, would mature at various dates in 2029 and 2030. These notes were called by the FHLB in 2022. (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 2023, that remains undrawn upon. 92 (6) Subordinated notes resulted from the following: (a) The Company’s private sale in August 2017, which bore a fixed interest rate of 6.75 % for five years . In August 2022, they converted to a three-month LIBOR plus 4.90 % rate, and the interest rate will reset quarterly thereafter. The note was callable by the Bank when, and anytime after, the floating rate is initially set. Interest-only payments were due quarterly. The Company sent the required redemption notice to the note holders in June 2022, and this subordinated note was called and repaid in full on August 10, 2022. (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 $ 191,650 and $ 176,150 at December 31, 2022 and 2021, respectively. Federal Funds Purchased Lines of Credit The Bank maintains three unsecured federal funds purchased lines of credit with its banking partners which total $ 75,000 . These lines bear interest at the lender bank’s announced daily federal funds rate, mature daily and are revocable at the discretion of the lending institution. There were no borrowings outstanding on these lines of credit as of December 31, 2022 or December 31, 2021. Federal Reserve Borrowings At December 31, 2022 and 2021, the Bank had the ability to borrow $ 4,118 and $ 847 from the Federal Reserve Bank of Minneapolis. The ability to borrow is based on mortgage-backed securities pledged with a carrying value of $ 5,421 and $ 863 as of December 31, 2022 and 2021, respectively. There were no Federal Reserve borrowings outstanding as of December 31, 2022 and 2021. Federal Reserve Bank Paycheck Protection Program Liquidity Facility (“FRB PPPLF”) Program The Bank originated Small Business Administration’s Paycheck Protection Program (“SBA PPP”) loans and complied with the requirements to pledge these loans to the FRB PPPLF program which provided 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 December 31, 2021. There were no month-end borrowed amounts outstanding under this agreement during the twelve months ended December 31, 2021. In July 2021, the bank pledged these SBA PPP loans to the FHLB. 93 NOTE 10— CAPITAL MATTERS Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Although these terms are not used to represent overall financial condition, if adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. As of December 31, 2022 and 2021, the most recent notifications from our regulatory agency categorized the Bank as “Well Capitalized” under the regulatory framework for Prompt Corrective Action. There are no conditions or events since these notifications that management believes have changed the Bank’s category. The Bank’s Tier 1 (leverage) and risk-based capital ratios at December 31, 2022 and 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 December 31, 2022 Total capital (to risk weighted assets) $ 221,361 14.2 % $ 124,971 > = 8.0 % $ 156,213 > = 10.0 % Tier 1 capital (to risk weighted assets) 203,422 13.0 % 93,728 > = 6.0 % 124,971 > = 8.0 % Common equity tier 1 capital (to risk weighted assets) 203,422 13.0 % 70,296 > = 4.5 % 101,539 > = 6.5 % Tier 1 leverage ratio (to adjusted total assets) 203,422 11.5 % 70,610 > = 4.0 % 88,262 > = 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 % The Company’s Tier 1 (leverage) and risk-based capital ratios at December 31, 2022 and 2021, respectively, are presented below: 94 Actual For Capital Adequacy Purposes Amount Ratio Amount Ratio As of December 31, 2022 Total capital (to risk weighted assets) $ 218,737 14.0 % $ 124,971 > = 8.0 % Tier 1 capital (to risk weighted assets) 150,798 9.7 % 93,728 > = 6.0 % Common equity tier 1 capital (to risk weighted assets) 150,798 9.7 % 70,296 > = 4.5 % Tier 1 leverage ratio (to adjusted total assets) 150,798 8.5 % 70,610 > = 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 % The Company is a legal entity separate and distinct from its banking subsidiary. As a bank holding company, the Company is subject to certain restrictions on its ability to pay dividends under applicable banking laws and regulations. Federal bank regulators are authorized to determine, under certain circumstances relating to the financial condition of a bank holding company or a bank, that the payment of dividends would be an unsafe or unsound practice, and to prohibit payment thereof. In particular, federal bank regulators have stated that paying dividends that deplete a banking organization’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings. In addition, in the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong. The Company’s ability to pay dividends is also subject to the terms of its Subordinated Note Purchase Agreements dated August 27, 2020 and March 11, 2022, and Business Note Agreement dated June 26, 2019, which prohibits the Company from making dividend payments while an event of default has occurred and is continuing under the loan agreement or from allowing payment of a dividend which would create an event of default. The following table reflects the annual cash dividend paid in the years ended December 31, 2022 and 2021, respectively. December 31, 2022 December 31, 2021 Cash dividends per share $ 0.26 $ 0.23 Stockholder record date 02/14/2022 02/11/2021 Dividend payment date 02/28/2022 02/25/2021 NOTE 11— COMMITMENTS AND CONTINGENCIES Financial Instruments with Off-Balance-Sheet Risk— The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include off-balance-sheet credit instruments consisting of commitments to make loans. The face amounts for these items represent the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contract or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The following table presents a summary of commitments described below as of December 31, 2022 and 2021, respectively: 95 Contract or Notional Amount at December 31, Contract or Notional Amount at December 31, 2022 2021 Commitments to extend credit $ 243,045 $ 270,985 Commercial standby letter of credit $ 4,252 $ 3,825 Commitment to contribute capital to SBIC $ 2,400 $ 2,400 Commitment to contribute capital to investment company $ 2,340 $ 2,640 Commitments to extend credit— Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Letters of credit— Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The credit and collateral policy for commitments and letters of credit is comparable to that for granting loans. The Company has recorded no liability associated with standby letters of credit as of December 31, 2022 and 2021. Capital Contributions— The Company has commitments to invest in a SBIC and investment company that call for capital contributions up to an amount specified in the partnership agreements. Loss Contingencies— Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. NOTE 12— RETIREMENT PLAN 401(k) Plan— The Company sponsors a 401(k) profit sharing plan that covers all employees who qualify based on minimum age and length of service requirements. Employees may make pretax voluntary contributions to the plan, which are matched, in part, by the Company. Employer matching contributions to the plan were $ 621 and $ 613 for the year ended December 31, 2022 and 2021, respectively. NOTE 13 - STOCK-BASED COMPENSATION 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 December 31, 2022, there are no awarded unvested restricted shares and 58,000 awarded unexercised options remaining from the plan. 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. On March 27, 2018, the stockholders of Citizens Community Bancorp, Inc. approved the 2018 Equity Incentive Plan. The aggregate number of shares of common stock reserved and available for issuance under the 2018 Equity Incentive Plan is 350,000 shares. As of December 31, 2022, 221,030 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. In addition, it includes 1,119 shares of performance based restricted stock granted in 2020 and 638 shares of performance based restricted stock granted in 2021 issued in August of 2022. Both of these issuances were approved by the Compensation Committee in accordance with plan documents and were to a former employee. As of December 31, 2022, no stock options had been granted under this plan. Net compensation expense related to restricted stock awards from these plans was $ 860 and $ 797 for the years ended December 31, 2022 and 2021, respectively. 96 Restricted Common Stock Awards Year ended Year ended December 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 43,465 13.99 64,399 10.78 Vested ( 40,843 ) 12.12 ( 44,511 ) 13.26 Forfeited ( 2,626 ) 11.04 ( 1,500 ) 10.78 Unvested and outstanding at end of period 75,626 $ 12.30 75,630 $ 11.20 The Company accounts for stock-based employee compensation related to the Company’s 2008 Equity Incentive Plan using the fair-value-based method. Accordingly, management records compensation expense based on the value of the award as measured on the grant date and then the Company recognizes that cost over the vesting period for the award. The net compensation cost recognized for stock-based employee compensation from this plan for the years ended December 31, 2022 and 2021 was $ 3 and $ 8 , respectively. Common Stock Option Awards Option Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term in Years Aggregate Intrinsic Value Year ended December 31, 2022 Outstanding at beginning of year 65,900 $ 11.20 Exercised ( 7,900 ) 8.95 Forfeited or expired — — Outstanding at end of period 58,000 11.51 3.73 $ 65 Exercisable at end of period 58,000 $ 11.51 3.73 $ 65 Year ended 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 $ — Exercisable at end of year 61,700 $ 11.03 4.54 $ 4 Information related to the 2008 Equity Incentive Plan during each period follows: Year ended December 31, Year ended December 31, 2022 2021 Intrinsic value of options exercised $ 38 $ 28 Cash received from options exercised $ 71 $ 52 Tax benefit realized from options exercised $ — $ — 97 NOTE 14 – INCOME TAXES Income tax expense (benefit) for each of the periods shown below consisted of the following: Year ended December 31, Year ended December 31, 2022 2021 Current tax provision Federal $ 3,565 $ 4,761 State 1,749 2,002 5,314 6,763 Deferred tax provision (benefit) Federal 355 585 State 151 345 506 930 Total $ 5,820 $ 7,693 The provision for income taxes differs from the amount of income tax determined by applying statutory federal income tax rates to pretax income as result of the following differences: Year ended December 31, Year ended December 31, 2022 2021 Amount Rate Amount Rate Tax expense at statutory rate $ 4,952 21.0 % $ 6,082 21.0 % State income taxes, net of federal 1,501 6.4 % 1,854 6.4 % Tax credits ( 514 ) ( 2.2 ) % — — % Bank owned life insurance ( 135 ) ( 0.6 ) % ( 132 ) ( 0.4 ) % Tax exempt interest ( 59 ) ( 0.3 ) % ( 52 ) ( 0.2 ) % Other 75 0.4 % ( 59 ) ( 0.2 ) % Total $ 5,820 24.7 % $ 7,693 26.6 % 98 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following is a summary of the significant components of the Company’s deferred tax assets and liabilities as of December 31, 2022 and December 31, 2021, respectively: Year ended December 31, Year ended December 31, 2022 2021 Deferred tax assets: Allowance for loan losses $ 4,934 $ 4,587 Deferred loan costs/fees 591 558 Restricted stock 243 189 Economic performance accruals 871 981 Loan discounts 375 854 Lease liability 535 613 Net unrealized losses on securities available for sale 6,697 — Other 44 71 Deferred tax assets $ 14,290 $ 7,853 Deferred tax liabilities: Office properties and equipment ( 2,098 ) ( 1,595 ) Federal Home Loan Bank stock ( 129 ) ( 129 ) Core deposit intangible ( 1,019 ) ( 1,298 ) Net gain on equity securities ( 710 ) ( 641 ) Prepaid expenses ( 250 ) ( 198 ) Mortgage servicing rights ( 1,172 ) ( 1,144 ) Leases; right of use asset ( 467 ) ( 594 ) Net unrealized gains on securities available for sale — ( 61 ) Deferred tax liabilities $ ( 5,845 ) $ ( 5,660 ) Net deferred tax assets $ 8,445 $ 2,193 The Company regularly reviews the carrying amount of its deferred tax assets to determine if the establishment of a valuation allowance is necessary, as further discussed in Note 1 “Nature of Business and Summary of Significant Accounting Policies”, above. At December 31, 2022 and December 31, 2021, respectively, management determined that no valuation allowance was necessary. The Company’s income tax returns are subject to review and examination by federal, state and local government authorities. As of December 31, 2022, years open to examination by the U.S. Internal Revenue Service include taxable years ended December 31, 2019 to present. The years open to examination by state and local government authorities varies by jurisdiction. The tax effects from uncertain tax positions can be recognized in the consolidated financial statements, provided the position is more likely than not to be sustained on audit, based on the technical merits of the position. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized, upon ultimate settlement with the relevant tax authority. The Company applied the foregoing accounting standard to all of its tax positions for which the statute of limitations remained open as of the date of the accompanying consolidated financial statements. The Company’s policy is to recognize interest and penalties related to income tax issues as components of other noninterest expense. The Company recognized no material expense on income tax related interest or penalties during any of the periods presented. 99 NOTE 15 – 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). 100 Assets Measured on a Recurring Basis The following tables present the financial instruments measured at fair value on a recurring basis as of December 31, 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) December 31, 2022 Investment securities: U.S. government agency obligations $ 18,313 $ — $ 18,313 $ — Obligations of states and political subdivisions — — — — Mortgage-backed securities 78,610 — 78,610 — Corporate debt securities 40,251 — 40,251 — Corporate asset-backed securities 28,817 — 28,817 — Total investment securities 165,991 — 165,991 — Equity investments: Equity investments 338 338 — — Equity investments measured at NAV(1) 1,456 — — — Total equity investments 1,794 338 — — Total $ 167,785 $ 338 $ 165,991 $ — 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. For the years ended December 31, 2022 and December 31, 2021, the Company did not own any securities for which the Company utilized significant unobservable inputs (Level 3 inputs) to determine fair value. There were no transfers in or out of Level 1, Level 2 or Level 3 fair value measurements during the years ended December 31, 2022 or December 31, 2021. There were no losses included in earnings attributable to the change in unrealized gains or losses relating to the available-for-sale securities above with fair value measurements utilizing significant unobservable inputs for the years ended December 31, 2022 or December 31, 2021, respectively. 101 Assets Measured on a Nonrecurring Basis The following tables present the financial instruments measured at fair value on a nonrecurring basis as of December 31, 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) December 31, 2022 Foreclosed and repossessed assets, net $ 1,271 $ — $ — $ 1,271 Impaired loans with allocated allowances 6,920 — — 6,920 Mortgage servicing rights 4,262 — — 5,665 Total $ 12,453 $ — $ — $ 13,856 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 referenced above was determined by obtaining market price valuations from independent third parties wherever such quotes were available for other collateral owned. The Company utilized independent third party appraisals to support the Company’s estimates and judgments in determining fair value for other real estate owned. The fair value of mortgage servicing rights referenced above was determined based on a third party discounted cash flow analysis utilizing both observable and unobservable inputs. The following table represents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which we have utilized Level 3 inputs to determine their fair value at December 31, 2022 and December 31, 2021. Fair Value Valuation Techniques (1) Significant Unobservable Inputs (2) Range December 31, 2022 Foreclosed and repossessed assets, net $ 1,271 Appraisal value Estimated costs to sell 10 % - 15 % Impaired loans with allocated allowances $ 6,920 Appraisal value Estimated costs to sell 10 % - 15 % Mortgage servicing rights $ 5,665 Discounted cash flows Discounted rates 9.5 % - 12.5 % 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. 102 The table below represents what we would receive to sell an asset or what we would have to pay to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying amount and estimated fair value of the Company’s financial instruments as of the dates indicated below were as follows: December 31, 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) $ 35,363 $ 35,363 $ 47,691 $ 47,691 Other interest bearing deposits (Level II) 249 250 1,511 1,535 Securities available for sale "AFS" (Level II) 165,991 165,991 203,068 203,068 Securities held to maturity "HTM" (Level II) 96,379 76,779 71,141 69,177 Equity investments (Level I) 338 338 368 368 Equity investments valued at NAV (1) N/A 1,456 1,456 960 960 Other investments (Level II) 15,834 15,834 15,305 15,305 Loans receivable, net (Level III) 1,393,845 1,342,838 1,294,050 1,319,293 Loans held for sale - Residential mortgage (Level I) — — 1,224 1,250 Loans held for sale - SBA (Level II) — — 5,446 5,776 Mortgage servicing rights (Level III) 4,262 5,665 4,161 4,312 Accrued interest receivable (Level I) 5,285 5,285 3,916 3,916 Financial liabilities: Deposits (Level III) $ 1,424,720 $ 1,420,871 $ 1,387,535 $ 1,388,390 FHLB advances (Level II) 142,530 141,060 111,527 113,285 Other borrowings (Level I) 72,409 72,409 58,426 58,426 Accrued interest payable (Level I) 968 968 586 586 (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. 103 NOTE 16— EARNINGS PER SHARE Earnings per share is based on the weighted average number of shares outstanding for the year. A reconciliation of the basic and diluted earnings per share is as follows: Year ended Year ended (Share count in thousands) December 31, 2022 December 31, 2021 Basic Net income attributable to common shareholders $ 17,761 $ 21,266 Weighted average common shares outstanding 10,505 10,717 Basic earnings per share $ 1.69 $ 1.98 Diluted Net income attributable to common shareholders $ 17,761 $ 21,266 Weighted average common shares outstanding 10,505 10,717 Add: Dilutive stock options outstanding 9 10 Average shares and dilutive potential common shares 10,514 10,727 Diluted earnings per share $ 1.69 $ 1.98 Additional common stock option shares that have not been included due to their antidilutive effect 21 21 104 NOTE 17 – OTHER COMPREHENSIVE INCOME (LOSS) The following table shows the tax effects allocated to each component of other comprehensive income (loss): For the year ended, December 31, For the year ended, December 31, 2022 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 $ ( 24,575 ) $ 6,758 $ ( 17,817 ) $ ( 1,261 ) $ 352 $ ( 909 ) Reclassification adjustment for gains included in net income — — — ( 573 ) 153 ( 420 ) Other comprehensive loss $ ( 24,575 ) $ 6,758 $ ( 17,817 ) $ ( 1,834 ) $ 505 $ ( 1,329 ) The changes in the accumulated balances for each component of other comprehensive income (loss), net of tax for the years ended December 31, 2022 and December 31, 2021 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 ( 24,575 ) ( 17,817 ) Ending balance, December 31, 2022 $ ( 24,353 ) $ ( 17,656 ) Reclassifications out of accumulated other comprehensive income (loss) for the twelve months ended December 31, 2022 were as follows: Details about Accumulated Other Comprehensive Income (Loss) Components Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) (1) Affected Line Item on the Statement of Operations Unrealized gains and losses Sale of securities $ — Net gains (losses) on investment securities Tax effect — Provision for income taxes Total reclassifications for the period $ — Net income attributable to common shareholders (1) Amounts in parentheses indicate decreases to profit/loss. Reclassifications out of accumulated other comprehensive income (loss) for the twelve months ended December 31, 2021 were as follows: Details about Accumulated Other Comprehensive Income (Loss) Components Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) (1) Affected Line Item on the Statement of Operations Unrealized gains and losses Sale of securities $ 573 Net gains (losses) on investment securities Tax effect ( 153 ) Provision for income taxes Total reclassifications for the period $ 420 Net income attributable to common shareholders (1) Amounts in parentheses indicate decreases to profit/loss. 105 NOTE 18— CONDENSED FINANCIAL INFORMATION – PARENT COMPANY ONLY The following condensed balance sheets as of December 31, 2022 and 2021, and condensed statements of operations and cash flows for the years ended December 31, 2022 and 2021, for Citizens Community Bancorp, Inc. should be read in conjunction with the accompanying consolidated financial statements and the notes thereto. Condensed Balance Sheets December 31, December 31, 2022 2021 Assets Cash and cash equivalents $ 19,221 $ 22,465 Equity investments 946 360 Other assets 386 386 Investment in subsidiary 219,714 206,427 Total assets $ 240,267 $ 229,638 Liabilities and Stockholders' Equity Other borrowings $ 72,409 $ 58,426 Other liabilities 770 346 Total liabilities 73,179 58,772 Total stockholders’ equity 167,088 170,866 Total liabilities and stockholders’ equity $ 240,267 $ 229,638 Statements of Operations Year ended December 31, Year ended December 31, 2022 2021 Interest income $ — $ — Interest expense 4,296 2,946 Net interest expense ( 4,296 ) ( 2,946 ) Dividend income from bank subsidiary 6,000 12,500 Non-interest income 422 — Non-interest expense ( 918 ) ( 673 ) Net income before benefit for income taxes and equity in undistributed income of subsidiaries 1,208 8,881 Benefit for income taxes 1,310 989 Net earnings before equity in undistributed income of subsidiaries 2,518 9,870 Equity in undistributed income of subsidiaries 15,243 11,396 Net income $ 17,761 $ 21,266 106 Statements of Cash Flows Year ended December 31, Year ended December 31, 2022 2021 Change in cash and cash equivalents: Cash flows from operating activities: Net income $ 17,761 $ 21,266 Depreciation expense 13 12 Net valuation gain on equity securities ( 422 ) — Stock based compensation expense 3 8 Adjustments to reconcile net income to net cash provided by operating activities - Equity in undistributed income of subsidiary ( 21,243 ) ( 23,896 ) Net change in: Other assets ( 14 ) ( 23 ) Other liabilities 424 ( 33 ) Net cash used in operating activities ( 3,478 ) ( 2,666 ) Cash flows from investing activities: Purchase of equity investments ( 300 ) ( 360 ) Equity investment capital distribution 136 — Capital contribution to bank subsidiary ( 15,000 ) — Net cash used in investing activities ( 15,164 ) ( 360 ) Cash flows from financing activities: Proceeds from other borrowings, net of origination costs 34,191 — Amortization of debt issuance costs 398 98 Other borrowings principal reductions ( 5,606 ) — Other borrowings called and repaid ( 15,000 ) — Repurchase shares of common stock ( 1,764 ) ( 7,951 ) Surrender of restricted shares of common stock ( 150 ) ( 30 ) Common stock options exercised 71 52 Dividend from bank subsidiary 6,000 12,500 Cash dividends paid ( 2,742 ) ( 2,511 ) Net cash provided by financing activities 15,398 2,158 Net decrease in cash and cash equivalents ( 3,244 ) ( 868 ) Cash and cash equivalents at beginning of year 22,465 23,333 Cash and cash equivalents at end of year $ 19,221 $ 22,465 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None