Citizens Community Bancorp Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS 4 CITIZENS COMMUNITY BANCORP, INC. Consolidated Balance Sheets March 31, 2023 (unaudited) and December 31, 2022 (derived from audited financial statements) (in thousands, except share and per share data) March 31, 2023 December 31, 2022 Assets Cash and cash equivalents $ 65,050 $ 35,363 Other interest bearing deposits 249 249 Securities available for sale "AFS" 173,423 165,991 Securities held to maturity "HTM" 95,301 96,379 Equity investments 2,151 1,794 Other investments 17,428 15,834 Loans receivable 1,420,955 1,411,784 Allowance for credit losses ( 22,679 ) ( 17,939 ) Loans receivable, net 1,398,276 1,393,845 Loans held for sale 761 — Mortgage servicing rights, net 4,120 4,262 Office properties and equipment, net 20,197 20,493 Accrued interest receivable 5,550 5,285 Intangible assets 2,245 2,449 Goodwill 31,498 31,498 Foreclosed and repossessed assets, net 1,113 1,271 Bank owned life insurance ("BOLI") 25,118 24,954 Other assets 18,240 16,719 TOTAL ASSETS $ 1,860,720 $ 1,816,386 Liabilities and Stockholders’ Equity Liabilities: Deposits $ 1,436,793 $ 1,424,720 Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) advances 182,530 142,530 Other borrowings 67,300 72,409 Other liabilities 9,536 9,639 Total liabilities 1,696,159 1,649,298 Stockholders’ Equity: Common stock—$ 0.01 par value, authorized 30,000,000 ; 10,482,821 and 10,425,119 shares issued and outstanding, respectively 105 104 Additional paid-in capital 119,327 119,240 Retained earnings 61,720 65,400 Accumulated other comprehensive loss ( 16,591 ) ( 17,656 ) Total stockholders’ equity 164,561 167,088 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 1,860,720 $ 1,816,386 See accompanying condensed notes to unaudited consolidated financial statements. 5 CITIZENS COMMUNITY BANCORP, INC. Consolidated Statements of Operations (unaudited) Three Months Ended March 31, 2023 and 2022 (in thousands, except per share data) Three Months Ended March 31, 2023 March 31, 2022 Interest and dividend income: Interest and fees on loans $ 17,126 $ 13,767 Interest on investments 2,547 1,609 Total interest and dividend income 19,673 15,376 Interest expense: Interest on deposits 4,348 1,068 Interest on FHLB and FRB borrowed funds 1,493 311 Interest on other borrowed funds 1,037 830 Total interest expense 6,878 2,209 Net interest income before provision for credit losses 12,795 13,167 Provision for credit losses 50 — Net interest income after provision for credit losses 12,745 13,167 Non-interest income: Service charges on deposit accounts 485 488 Interchange income 551 549 Loan servicing income 569 701 Gain on sale of loans 298 722 Loan fees and service charges 80 92 Net gains on investment securities 56 ( 37 ) Other 253 198 Total non-interest income 2,292 2,713 Non-interest expense: Compensation and related benefits 5,338 5,398 Occupancy 1,423 1,365 Data processing 1,460 1,301 Amortization of intangible assets 204 399 Mortgage servicing rights expense, net 158 ( 327 ) Advertising, marketing and public relations 136 212 FDIC premium assessment 201 115 Professional services 505 402 Gain on repossessed assets, net ( 29 ) ( 7 ) New market tax credit depletion — 163 Other 725 647 Total non-interest expense 10,121 9,668 Income before provision for income taxes 4,916 6,212 Provision for income taxes 1,254 1,506 Net income attributable to common stockholders $ 3,662 $ 4,706 Per share information: Basic earnings $ 0.35 $ 0.45 Diluted earnings $ 0.35 $ 0.45 Cash dividends paid $ 0.29 $ 0.26 See accompanying condensed notes to unaudited consolidated financial statements. 6 CITIZENS COMMUNITY BANCORP, INC. Consolidated Statements of Comprehensive Income (Loss) (unaudited) Three months ended March 31, 2023 and 2022 (in thousands) Three Months Ended March 31, 2023 March 31, 2022 Net income attributable to common stockholders $ 3,662 $ 4,706 Other comprehensive gain (loss), net of tax: Securities available for sale Net unrealized gains (losses) arising during period, net of tax 1,065 ( 7,123 ) Other comprehensive gain (loss), net of tax 1,065 ( 7,123 ) Comprehensive income (loss) $ 4,727 $ ( 2,417 ) See accompanying condensed notes to unaudited consolidated financial statements. 7 CITIZENS COMMUNITY BANCORP, INC. Consolidated Statement of Changes in Stockholders’ Equity (unaudited) Three Months Ended March 31, 2023 (in thousands, except shares and per share data) Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (loss) Total Stockholders’ Equity Common Stock Shares Amount Balance, January 1, 2023 10,425,119 $ 104 $ 119,240 $ 65,400 $ ( 17,656 ) $ 167,088 Net income — — — 3,662 — 3,662 Other comprehensive income, net of tax — — — — 1,065 1,065 Forfeiture of unvested shares ( 1,168 ) — — — — — Surrender of restricted shares of common stock ( 10,287 ) — ( 129 ) — — ( 129 ) Restricted common stock awarded under the equity incentive plan 50,606 1 — — — 1 Restricted common stock issued upon achievement of the 2020 performance criteria 18,551 — — — — — Amortization of restricted stock — — 216 — — 216 Cumulative change in accounting principle for adoption of ASU 2016-13 — — — ( 4,432 ) — ( 4,432 ) Cumulative change in accounting principle for adoption of ASU 2023-02 — — — 130 — 130 Cash dividends ($ 0.29 per share) — — — ( 3,040 ) — ( 3,040 ) Balance at March 31, 2023 10,482,821 $ 105 $ 119,327 $ 61,720 $ ( 16,591 ) $ 164,561 See accompanying condensed notes to unaudited consolidated financial statements. 8 CITIZENS COMMUNITY BANCORP, INC. Consolidated Statement of Changes in Stockholders’ Equity (unaudited) Twelve Months Ended December 31, 2022 (in thousands, except shares and per share data) Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity Common Stock Shares Amount Balance, January 1, 2022 10,502,442 $ 105 $ 119,925 $ 50,675 $ 161 $ 170,866 Net income — — — 4,706 — 4,706 Other comprehensive loss, net of tax — — — — ( 7,123 ) ( 7,123 ) Surrender of restricted shares of common stock ( 10,119 ) — ( 141 ) — — ( 141 ) Restricted common stock awarded under the equity incentive plan 38,586 — — — — — Restricted stock issued upon achievement of the 2019 performance criteria 11,834 — — — — — Common stock options exercised 2,500 — 20 — — 20 Common stock repurchased ( 18,462 ) — ( 211 ) ( 77 ) — ( 288 ) Stock option expense — — 1 — — 1 Amortization of restricted stock — — 195 — — 195 Cash dividends ($ 0.26 per share) — — — ( 2,742 ) — ( 2,742 ) Balance at March 31, 2022 10,526,781 105 119,789 52,562 ( 6,962 ) 165,494 Net income — — — 4,366 — 4,366 Other comprehensive loss, net of tax — — — — ( 5,315 ) ( 5,315 ) Forfeiture of unvested shares ( 866 ) — — — — — Common stock awarded under the equity incentive plan 4,500 — — — — — Stock option expense — — 1 — — 1 Amortization of restricted stock — — 197 — — 197 Balance at June 30, 2022 10,530,415 105 119,987 56,928 ( 12,277 ) 164,743 Net income — — — 3,993 — 3,993 Other comprehensive loss, net of tax — — — — ( 4,980 ) ( 4,980 ) Forfeiture of unvested shares ( 1,260 ) — — — — — Surrender of restricted shares of common stock ( 120 ) — ( 2 ) — — ( 2 ) Restricted common stock awarded under the equity incentive plan 2,136 — — — — — Common stock repurchased ( 52,961 ) — ( 603 ) ( 88 ) — ( 691 ) Stock option expense — — 1 — — 1 Amortization of restricted stock — — 255 — — 255 Balance, September 30, 2022 10,478,210 105 119,638 60,833 ( 17,257 ) 163,319 Net income — — — 4,696 — 4,696 Other comprehensive loss, net of tax — — — — ( 399 ) ( 399 ) Forfeiture of unvested shares ( 500 ) — — — — — Surrender of restricted shares of common stock ( 491 ) — ( 7 ) — — ( 7 ) Common stock options exercised 5,400 — 51 — — 51 Common stock repurchased ( 57,500 ) ( 1 ) ( 655 ) ( 129 ) — ( 785 ) Amortization of restricted stock — — 213 — — 213 Balance, December 31, 2022 10,425,119 $ 104 $ 119,240 $ 65,400 $ ( 17,656 ) $ 167,088 See accompanying condensed notes to unaudited consolidated financial statements. 9 CITIZENS COMMUNITY BANCORP, INC. Consolidated Statements of Cash Flows (unaudited) Three Months Ended March 31, 2023 and 2022 (in thousands) Three Months Ended March 31, 2023 March 31, 2022 Cash flows from operating activities: Net income attributable to common stockholders $ 3,662 $ 4,706 Adjustments to reconcile net income to net cash provided by operating activities: Investment securities net (discount accretion) premium amortization ( 30 ) 33 Depreciation expense 606 573 Provision for credit losses 50 — Net realized (gain) loss on equity securities ( 56 ) 37 Increase in mortgage servicing rights resulting from transfers of financial assets ( 16 ) ( 126 ) Mortgage servicing rights amortization and impairment, net 158 ( 327 ) Amortization of intangible assets 204 399 Amortization of restricted stock 216 195 Net stock based compensation expense — 1 Decrease in deferred income taxes 457 911 Increase in cash surrender value of life insurance ( 164 ) ( 152 ) Net gain from disposals of foreclosed and repossessed assets ( 29 ) ( 7 ) Gain on sale of loans held for sale, net ( 298 ) ( 722 ) New market tax credit depletion expense — 163 Net change in: Loans held for sale ( 463 ) 4,864 Accrued interest receivable and other assets ( 837 ) 410 Other liabilities ( 1,640 ) ( 2,099 ) Total adjustments ( 1,842 ) 4,153 Net cash provided by operating activities 1,820 8,859 Cash flows from investing activities: Purchase of available for sale securities ( 11,007 ) ( 1,750 ) Proceeds from principal payments of available for sale securities 5,077 7,076 Purchase of held to maturity securities — ( 35,342 ) Proceeds from principal payments and maturities of held to maturity securities 1,075 1,569 Purchase of equity investments ( 300 ) — Net (purchases) sales of other investments ( 1,594 ) 221 Proceeds from sales of foreclosed and repossessed assets 212 28 Net (increase) decrease in loans ( 9,082 ) 20,704 Net capital expenditures ( 313 ) ( 797 ) Proceeds from disposal of office properties and equipment 3 — New market tax credit investment — ( 4,056 ) Net cash used in investing activities ( 15,929 ) ( 12,347 ) 10 Cash flows from financing activities: Federal Home Loan Bank advances 40,000 — Amortization of fair value adjustments for acquired Federal Home Loan Bank advances — 3 Federal Home Loan Bank advance termination payments — ( 15,015 ) Federal Home Loan Bank maturities — ( 11,000 ) Amortization of debt issuance costs 58 41 Proceeds from other borrowings, net of origination costs — 34,201 Other borrowings principal reductions ( 5,167 ) ( 5,606 ) Net increase in deposits 12,073 40,688 Common stock restricted shares 1 — Repurchase shares of common stock — ( 288 ) Surrender of restricted shares of common stock ( 129 ) ( 141 ) Common stock options exercised — 20 Cash dividends paid ( 3,040 ) ( 2,742 ) Net cash provided by financing activities 43,796 40,161 Net increase in cash and cash equivalents 29,687 36,673 Cash and cash equivalents at beginning of period 35,363 47,691 Cash and cash equivalents at end of period $ 65,050 $ 84,364 Supplemental cash flow information: Cash paid during the period for: Interest on deposits $ 4,325 $ 1,096 Interest on borrowings $ 2,947 $ 1,323 Income taxes $ — $ — Supplemental noncash disclosure: Transfers from loans receivable to other real estate owned ("OREO") $ 25 $ — See accompanying condensed notes to unaudited consolidated financial statements. 11 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) (UNAUDITED) NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of Citizens Community Federal N.A. (the “Bank”) included herein have been included by its parent company, Citizens Community Bancorp, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. As used in this quarterly report, the terms “we”, “us”, “our”, and “Citizens Community Bancorp, Inc.” mean the Company and its wholly owned subsidiary, the Bank, unless the context indicates other meaning. The Bank is a national banking association (a “National Bank”) and operates under the title of Citizens Community Federal National Association (“Citizens Community Federal N.A.” or “Bank” or “CCFBank”). The Company is a bank holding company, supervised by the Federal Reserve Bank of Minneapolis, and operates under the title of Citizens Community Bancorp, Inc. The U.S. Office of the Comptroller of the Currency (the “OCC”), is the primary federal regulator for the Bank. The consolidated income of the Company is principally derived from the income of the Bank, the Company’s wholly owned subsidiary, serving customers in Wisconsin and Minnesota through 24 branch locations. Its primary markets include the Chippewa Valley Region in Wisconsin, the Mankato and Twin Cities markets in Minnesota, and various rural communities around these areas. The Bank offers traditional community banking services to businesses, agricultural operators and consumers, including one-to-four family residential mortgages. The Bank is subject to competition from other financial institutions and non-financial institutions providing financial products. Additionally, the Bank is subject to the regulations of certain regulatory agencies and undergoes periodic examination by those regulatory agencies. In preparing these consolidated financial statements, we evaluated the events and transactions that occurred subsequent to the March 31, 2023, balance sheet date and through the date the financial statements were available to be issued for items that should potentially be recognized or disclosed in these consolidated financial statements. The accompanying consolidated interim financial statements are unaudited. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Unless otherwise stated herein, and except for shares and per share amounts, all amounts are in thousands. Principles of Consolidation – The accompanying consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts and transactions have been eliminated. Use of Estimates –Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, fair value of financial instruments, the allowance for credit losses, mortgage servicing rights, foreclosed and repossessed assets, valuation of intangible assets arising from acquisitions, useful lives for depreciation and amortization, valuation of goodwill and long-lived assets, stock based compensation, deferred tax assets, uncertain income tax positions and contingencies. Management does not anticipate any material changes to estimates made herein in the near term. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: those items described under the caption “Risk Factors” in Item 1A of the annual report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 7, 2023; the matters described in “Risk Factors” in Item 1A of this Form 10-Q; external market factors such as market interest rates and unemployment rates; changes to operating policies and procedures and changes in applicable banking regulations. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period. Investment Securities; Held to Maturity and Available for Sale – Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of the date of each balance sheet. Securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Held to maturity securities are stated at amortized cost. Investment securities not classified as held to maturity are classified as available for sale. Available for sale securities are stated at fair value, with unrealized holding gains and losses being reported in other comprehensive income (loss), net of tax. Unrealized losses deemed other-than-temporary due to credit issues are reported in the 12 Company’s net income in the period in which the losses arise. Realized gains or losses on sales of available for sale securities are calculated with the specific identification method and are included in the consolidated statements of operations under net gains on investment securities. Interest income includes amortization of purchase premium or accretion of purchase discount. Amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the estimated lives of the securities. The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. As part of such monitoring, the credit quality of individual securities and their issuer is assessed. Significant inputs used to measure the amount of other-than-temporary impairment related to credit loss include, but are not limited to: the Company’s intent and ability to sell the debt security prior to recovery, that it is more likely than not that the Company will not sell the security prior to recovery, default and delinquency rates of the underlying collateral, remaining credit support, and historical loss severities. Adjustments to market value of available for sale securities that are considered temporary are recorded in other comprehensive income or loss as separate components of stockholders’ equity, net of tax. If the unrealized loss of a security is identified as other-than-temporary based on information available, such as the decline in the creditworthiness of the issuer, external market ratings, or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if credit loss exists. If there is a credit loss, it will be recorded in the Company’s consolidated statement of operations. Non-credit components of the unrealized losses on available for sale securities will continue to be recognized in other comprehensive income (loss), net of tax. Equity investments - The Company is required to maintain an investment in Federal Agricultural Mortgage Corporation (“Farmer Mac”) equity securities. Farmer Mac equity securities are carried at their fair market value, which is readily determinable. Changes in fair value are recognized as net gains (losses) on investment securities in the consolidated Statement of Operations. Also included in equity investments are the Company’s investments in a Volker Rule-compliant Small Business Investment Company ("SBIC") and an investment fund. The SBIC and investment fund meet the definition of investment companies, as defined in ASC 946, Financial Services - Investment Companies. These investments seek returns by investing in various small businesses and do not have redemption rights. Distributions from the investments will be received as the underlying investments, which generally have a life of 10 years, are liquidated. We elected the practical expedient available in Topic 820, Fair Value Measurements, which permits the use of net asset value ("NAV") per share or equivalent to value investments in entities that are or are similar to investment companies. SBICs and investment funds report their investments at estimated fair value. We record the unrealized gains and losses resulting from changes in the fair value of these investments as gains or losses on equity securities in our consolidated statements of operations. The carrying value of these investments is equal to the capital account as provided by the investee and adjusted as necessary. Other Investments - As a member of the Federal Reserve Bank (“FRB”) System and the Federal Home Loan Bank (“FHLB”) System, the Bank is required to maintain an investment in the capital stock of these entities. These securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other exchange traded equity securities. As no ready market exists for these stocks, and they have no quoted market value, these investments are carried at cost and periodically evaluated for impairment based on the ultimate recovery of par value. Cash dividends are reported as other income in the consolidated statement of operations. Also included in other investments is stock of our correspondent bank, Bankers’ Bank, without readily determinable fair value. This stock is carried at cost plus or minus changes resulting from observable price changes in orderly transactions for this stock, less other-than-temporary impairment charges, if any. Management’s evaluation for impairment of these other investments, includes consideration of the financial condition and other available relevant information of the issuer. Based on management’s quarterly evaluation, no impairment has been recorded on these securities. Other investments totaling $ 17,428 at March 31, 2023 consisted of $ 9,240 of FHLB stock, $ 5,680 of Federal Reserve Bank stock and $ 2,508 of Bankers’ Bank stock. Other investments totaling $ 15,834 at December 31, 2022 consisted of $ 7,652 of FHLB stock and $ 5,674 of Federal Reserve Bank stock and $ 2,508 of Bankers’ Bank stock. Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of: deferred loan fees and costs, accretable yield on acquired loans and noncredit discount on purchased credit deteriorated (PCD) loans. Interest income is accrued on the unpaid principal balance of these loans and is presented as a separate line item on the consolidated balance sheets. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the interest method over the contractual life of the loan with no prepayments assumed. If the loan is prepaid, any unamortized net fee is recognized at this time. Late charge fees are recognized into income when collected. Interest income on commercial, mortgage and consumer loans is discontinued according to the following schedules: 13 • Commercial/agricultural real estate loans past due 90 days or more; • Commercial and industrial/agricultural operating loans past due 90 days or more; • Closed end consumer installment loans past due 120 days or more; and • Residential mortgage loans and open ended consumer installment loans past due 180 days or more. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for a loan placed on nonaccrual status is reversed against interest income. Interest received on such loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual status. Loans are returned to accrual status when payments are made that bring the loan account current with the contractual term of the loan and a six month payment history has been established. 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 Credit Losses – Loans The allowance for credit losses (“ACL”) is a valuation allowance for current expected credit losses in the Company’s loan portfolio. Prior to January 1, 2023, the valuation allowance was established for probable and inherent credit losses. Loan losses are charged against the ACL when management believes that the collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the ACL. In determining the allowance, the company estimates credit losses over the loan’s entire contractual term, adjusted for expected prepayments when appropriate. The allowance estimate considers relevant available information from internal and external sources relating to historical loss experience; known and inherent risks in our portfolio; information about specific borrowers’ ability to repay; estimated collateral values; current economic conditions; reasonable and supportable forecasts for future conditions; and other relevant factors determined by management. To ensure that the ACL is maintained at an adequate level, a detailed analysis is performed on a quarterly basis and an appropriate provision is made to adjust the allowance. The entire ACL balance is available for any loan that, in management’s judgment, should be charged off. The determination of the ACL requires significant judgement to estimate credit losses. The ACL on loans is measured collectively on a pooled basis when similar risk characteristics exist, and on an individual basis when management determines that the loan does not share similar risk characteristics with other loans. The ACL on loans collectively evaluated is measured using the loss rate model. The Company categorizes its loan portfolio into four segments based on similar risk characteristics. Loans within each segment are pooled based on individual loan characteristics. Aggregated risk drivers are then calculated at a pool level. Risk drivers are identified attributes that have proven to be predictive of loan loss rates and vary based on loan segment and type. A loss rate is calculated and applied to the pool utilizing a model that combines the pool’s risk drivers, historical loss experience, and reasonable and supportable future economic forecasts to project lifetime losses. The loss rate is then combined with the loans balance and contractual maturity, adjusted for expected prepayments, to determine expected future losses. Future and supportable economic forecasts are based on national economic conditions and their reversion to the mean is implicit in the model and generally occurs over a period of two years. Qualitative adjustments are made to the allowance calculated on collectively evaluated loans to incorporate factors not included in the model. Qualitative factors include but are not limited to, lending policies and procedures, the experience and ability of lending and other staff, the volume and severity of problem credits, quality of the loan review system, and other external factors. Loans that exhibit different risk characteristics from the pool are individually evaluated for impairment. Loans can be identified for individual evaluation for a variety of reasons including delinquency, nonaccrual status, risk rating and loan modification. Accruing loans that exhibit different risk characteristics from their pool may also be within scope. On these loans, an allowance may be established so that the loan is reported, net, at the lower of (a) its amortized cost; (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 the loan is collateral dependent. Collateral dependency is determined using the practical expedient when: 1) the borrower is experiencing financial difficulty; and 2) repayment is expected to be provided substantially through the sale or operation of the collateral. 14 The Company has elected to not measure an ACL on accrued interest as it writes off accrued interest in a timely manner. Allowance for Credit Losses - Unfunded Commitments - The ACL on unfunded commitments is a liability for credit losses on commitments to originate or fund loans, and standby letters of credit. It is included in “Other liabilities” on the consolidated balance sheets. Expected credit losses are estimated over the contractual period in which the Company is exposed to credit risk via a commitment that cannot be unconditionally canceled, adjusted for projected prepayments when appropriate. In addition,the estimate of the liability considers the likelihood that funding will occur. The ACL on unfunded commitments is adjusted through provision for credit losses on consolidated statements of operations. Because the business processes and risks associated with unfunded commitments are essentially the same as loans, the Company uses the same process to estimate the liability. Loans Held for Sale — Loans held for sale are those loans the Company has the intent to sell in the foreseeable future. They are carried at the lower of aggregate cost or fair value. Gains and losses on sales of loans are recognized at settlement dates, and are determined by the difference between the sales proceeds and the carrying value of the loans after allocating costs to servicing rights retained. Such gains and losses are included as non-interest income in the consolidated statements of operations. All sales are made without recourse. Interest rate lock commitments on mortgage loans to be funded and sold are valued at fair value, and are included in other assets or liabilities, if material. Transfers of financial assets— Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the entity, (2) the transferee obtains the right, free of conditions that constrain it from taking advantage of that right, to pledge or exchange the transferred assets, and (3) the entity does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity. Mortgage Servicing Rights— Mortgage servicing rights (“MSR”) assets result as the Company sells loans to investors in the secondary market and retains the rights to service mortgage loans sold to others. MSR assets are initially measured at fair value; assessed for impairment at least annually; carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value. MSR assets are amortized in proportion to and over the period of estimated net servicing income, with the amortization recorded in non-interest expense in the consolidated statement of operations. The valuation of MSRs and related amortization, included in mortgage servicing rights expense in the consolidated statements of operations, thereon are based on numerous factors, assumptions and judgments, such as those for: changes in the mix of loans, interest rates, prepayment speeds, and default rates. Changes in these factors, assumptions and judgments may have a material effect on the valuation and amortization of MSRs. Although management believes that the assumptions used to evaluate the MSRs for impairment are reasonable, future adjustment may be necessary if future economic conditions differ substantially from the economic assumptions used to determine the value of MSRs. Servicing fee income, which is reported on the consolidated statements of operations in non-interest income as loan servicing income, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of outstanding principal; or a fixed amount per loan and are recorded as income when earned. Goodwill and other intangible assets— The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350, “Intangibles - Goodwill and Other.” The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, as goodwill. On a periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amounts of the intangible assets may be impaired. Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A reporting unit is defined as any distinct, separately identifiable component of the Company’s one operating segment for which complete, discrete financial information is available and reviewed regularly by the segment’s management. The Company has one reporting unit as of March 31, 2023, 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. The Company has monitored 15 events and conditions since December 31, 2022, and has determined that no triggering event has occurred that would require goodwill to be tested for impairment. Foreclosed and Repossessed Assets, net – Assets acquired through foreclosure or repossession are initially recorded at fair value, less estimated costs to sell, which establishes a new cost basis. If the fair value declines subsequent to foreclosure or repossession, a write-down is recorded through expense. Costs incurred after acquisition are expensed and are included in non-interest expense, other in the consolidated statements of operations. New Markets Tax Credits - As a part of its commitment to the communities it serves, in the first quarter of 2022, the Company made an investment in an LLC that is sponsoring a community development project that has been awarded a New Markets Tax Credit (NMTC) through the U.S. Department of the Treasury’s Community Development Financial Institutions Fund. This investment is Community Reinvestment Act eligible and is designed to generate a return primarily through the realization of the tax credit. This LLC is considered a Variable Interest Entity (VIE) as the Company represents the holder of the equity investment at risk, but does not have the ability to direct the activities that most significantly affect the performance of the LLC. As such, the Company is not the primary beneficiary of the VIE and the LLC has not been consolidated. With the adoption of ASU 2023-02 on January 1, 2023 discussed in Recent Accounting Pronouncements - Adopted below, the investment is accounted for using the proportional amortization method, which requires amortizing the investment in the period of and in proportion to the recognition of the related tax credit. Amortization of the investment is included in provision for income taxes and the utilization of the tax credit is recorded as a reduction in provision for income taxes. Prior to the adoption of ASU 2023-02 the investment was accounted for using the equity method of accounting and was amortized through non-interest expense As of March 31, 2022, the carrying amount of this investment, which is included in other assets in the consolidated balance sheets, was $ 3,334 . Prior to the adoption of ASU 2023-02, the carrying value of the investment as of December 31, 2022 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 March 31, 2023, there were no known instances of noncompliance associated with the investment. Leases - We determine if an arrangement is a lease at inception. All of our existing leases have been determined to be operating leases under ASC 842. Right-of-use (“ROU”) assets are included in other assets in our consolidated balance sheets. Operating lease liabilities are included in other liabilities in our consolidated balance sheets. Lease expense is included in non-interest expense, occupancy in the consolidated statements of operations. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date, based on the present value of lease payments over the lease term. As none of our existing leases provide an implicit rate, we use our incremental borrowing rate, based on information available at commencement date, in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease, when it is reasonably certain that we will exercise that option. Lease expense is recognized based on the total contractually required lease payments, over the term of the lease, on a straight-line basis. Debt and equity issuance costs— Debt issuance costs, which consist primarily of fees paid to note lenders, are deferred and included in other borrowings in the consolidated balance sheets. Debt issuance costs with a Company call option that originated prior to 2020 and senior note debt issuance costs, are amortized over the contractual term of the corresponding debt, as a component of interest expense on other borrowed funds in the consolidated statements of operations. Debt issuance costs that originated in 2020 and thereafter, are amortized through the first Company call option date of the corresponding debt, as a component of interest expense on other borrowed funds in the consolidated statements of operations. Specific costs associated with the issuance of shares of the Company’s common or preferred stock are netted against proceeds and recorded in stockholders’ equity, as additional paid in capital, on the consolidated balance sheets, in the period of the share issuance. Advertising, Marketing and Public Relations Expense— The Company expenses all advertising, marketing and public relations costs as they are incurred. Income Taxes – The Company accounts for income taxes in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes.” Under this guidance, deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. 16 The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. The Company regularly reviews the carrying amount of its net deferred tax assets to determine if the establishment of a valuation allowance is necessary. If based on the available evidence, it is more likely than not that all or a portion of the Company’s net deferred tax assets will not be realized in future periods, a deferred tax valuation allowance would be established. Consideration is given to various positive and negative factors that could affect the realization of the deferred tax assets. In evaluating this available evidence, management considers, among other things, historical performance, expectations of future earnings, the ability to carry back losses to recoup taxes previously paid, the length of statutory carry forward periods, any experience with utilization of operating loss and tax credit carry forwards not expiring, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. Accordingly, the Company’s evaluation is based on current tax laws as well as management’s expectations of future performance. Revenue Recognition - The Company’s primary source of revenue is interest income from interest earning assets, which is recognized on the accrual basis of accounting using the effective interest method. The recognition of revenues from interest earning assets is based upon formulas from underlying loan agreements, securities contracts or other similar contracts. The Company accounts for revenue from contracts with customers in accordance with ASC Topic 606, “Revenue from Contracts with Customers.” Topic 606 provides that revenue from contracts with customers be recognized when performance obligations under the terms of a contract are satisfied. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing service. The Company does not have any materially significant payment terms as payment is received shortly after the satisfaction of the performance obligation. The non-interest income line items recognized under the scope of Topic 606 are as follows: Service charges on deposit accounts - Service charges on accounts consist of monthly service fees, transaction-based fees, overdraft services and other deposit account related fees. The Company’s performance obligation for monthly services fees is generally satisfied over the period in which the service is provided. Revenue for these monthly fees is recognized during the service period. Other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied at the time the service is provided. Payment for service charges on deposit accounts are primarily received immediately or in the following month through a direct charge to a customer’s account. Interchange income - The Company earns interchange fees when cardholder debit card transaction are processed through card association networks. The interchange rates are generally set by the card association based upon purchase volumes and other factors. Interchange fees represent a percentage of the underlying transaction value. The Company has a continuous contract, based on customary business practices, with the card association networks to make funds available for settlement of card transactions. The Company’s performance obligation is satisfied over time as it makes funds available, and the related income is recognized when received. Gain (loss) on repossessed assets - The Company records a gain or loss from the sale of repossessed assets, when control of the property or asset transfers to the buyer, which generally occurs at the time of an executed deed or sales agreement. When the company finances the sale of repossessed assets to a buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the repossessed asset is derecognized and the gain or loss on sale is recorded 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. 17 Other Comprehensive Income — Accumulated and other comprehensive income or loss is comprised of the unrealized and realized gains and losses on securities available for sale, net of tax, and is shown on the accompanying consolidated statements of comprehensive income. Operating Segments— While our executive officers monitor the revenue streams of the various banking products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company’s banking operations are considered by management to be aggregated in one reportable operating segment. Reclassifications – Certain items previously reported were reclassified for consistency with the current presentation. Recent Accounting Pronouncements— The Financial Accounting Standards Board (FASB) issues Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification (ASC). This section provides a summary description of recent ASUs that have potentially significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on financial statements issued in the near future. Recent Accounting Pronouncements—Adopted ASU 2020-04 and ASU 2021-01, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting-- These ASUs provide optional and temporary relief, in the form of optional expedients and exceptions, for applying GAAP to modifications of contacts, hedging relationships and other transactions affected by reference rate (e.g. LIBOR) reforms. ASU 2020-04 and ASU 2021-01 are effective for the Company immediately and through December 31, 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. 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 was permitted; however, the Company elected not to adopt the ASU early. The Company formed a cross-functional team to implement ASU 2016-13. Key objectives of the team included selecting a loss estimation methodology, establishing processes and controls, data validation, creation of supporting analytics, documentation of policies and procedures, and developing disclosures. As previously disclosed, the Company is utilizing a third-party model to assist in loss estimation including pooling loans with similar risk characteristics and modeling methodologies. The Company adopted ASU 2016-13 using the modified retrospective approach effective January 1, 2023. Results for the periods beginning on and after January 1, 2023 are presented under ASU 2016-13 while prior period amounts are reported in accordance with previously applicable accounting standards. The company recorded a reduction to retained earnings of $ 4,432 upon the adoption of ASU 2016-13, primarily due to the requirement to estimated credit losses over the life of the loan and the duration of the Company’s portfolio. The Company also recorded an increase to the ACL of $ 4,706 . This increase was made up of two components, $ 4,576 for non-purchased credit deteriorated (“PCD”) loans and $ 130 for PCD loans. An ACL on unfunded commitments of $ 1,537 was also established. The Company elected not to record an allowance on HTM securities as the portfolio consists almost entirely of agency-backed securities that inherently have minimal nonpayment risk. The transition adjustment included corresponding increases in deferred tax assets. The Company adopted ASU 2016-13 using the prospective transition approach for financial assets considered PCD. These assets were previously classified as purchase credit impaired ("PCI") and accounted for under ASC 310-30 prior to January 1, 2023. In accordance with the standard, the Company did not reassess whether the PCI assets met the criteria of PCD assets as of the adoption date. The amortized cost of the PCD assets were adjusted to reflect the addition of $ 130 to the allowance for credit losses. This adjustment is included in the discussion of the transition adjustment above. The remaining noncredit discount, based on the adjusted amortized cost, will be accreted into interest income at the effective interest rate over the remaining life of the assets. 18 The following table illustrates the impact of ASU 2016-13 adoption in thousands Pre-ASU 2016-13 Adoption December 31, 2022 Impact of ASU 2016-13 Adoption As Reported under ASU 2016-13 January 1, 2023 Allowance for credit losses: Commercial/Agricultural Real Estate $ 14,085 $ 4,510 $ 18,595 C&I/Agricultural operating 2,318 ( 331 ) 1,987 Residential Mortgage 599 1,119 1,718 Consumer Installment 129 216 345 Unallocated 808 ( 808 ) — Total allowance for credit losses on loans 17,939 4,706 22,645 Allowance for credit losses on unfunded commitments — 1,537 1,537 Total allowance for credit losses $ 17,939 $ 6,243 $ 24,182 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. The company adopted ASU 2022-02 in conjunction with ASU 2016-13 on January 1, 2023 using the prospective approach. ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method - This ASU expands the use of the proportional amortization method in accounting for tax credit investments to all tax credit investments that meet certain criteria. The Company has determined that its New Markets Tax Credit investment qualifies for use of the proportional amortization method under this ASU and has elected to early adopt the update as of January 1, 2023 using the modified retrospective approach. The transition adjustment resulted in an increase to retained earnings of $ 130 . Amortization of the investment will now be recognized in the period of and proportional to recognition of the related tax credit and included in provision for income taxes in the consolidated statements of operations. Prior to adoption of this amendment, the amortization was included in other non-interest expense as a separate line item. The Company chose to adopt ASU 2023-02 because it felt that the proportional amortization method more accurately reflects the economic substance of its tax credit investment. Proportional amortization better matches the cost of the investment with the benefits received, and including the amortization of the investment in provision for income taxes better reflects the benefit the Company receives from the transaction. For the three months ended March 31, 2023, adopting ASU 2023-02 increased net income $ 32 . Recently Issued, But Not Yet Effective Accounting Pronouncements None 19 NOTE 2 – INVESTMENT SECURITIES The amortized cost, estimated fair value and related unrealized gains and losses on securities available for sale and held to maturity as of March 31, 2023 and December 31, 2022, respectively, were as follows: Available for sale securities Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value March 31, 2023 U.S. government agency obligations $ 25,213 $ 153 $ 184 $ 25,182 Mortgage-backed securities 96,020 — 17,061 78,959 Corporate debt securities 47,141 — 4,926 42,215 Corporate asset-based securities 27,933 11 877 27,067 Total available for sale securities $ 196,307 $ 164 $ 23,048 $ 173,423 December 31, 2022 U.S. government agency obligations $ 18,373 $ 173 $ 233 $ 18,313 Mortgage-backed securities 97,458 — 18,848 78,610 Corporate debt securities 44,636 — 4,385 40,251 Corporate asset-based securities 29,877 — 1,060 28,817 Total available for sale securities $ 190,344 $ 173 $ 24,526 $ 165,991 Held to maturity securities Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value March 31, 2023 Obligations of states and political subdivisions $ 600 $ — $ 45 $ 555 Mortgage-backed securities 94,701 9 18,082 76,628 Total held to maturity securities $ 95,301 $ 9 $ 18,127 $ 77,183 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 At March 31, 2023, the Bank has pledged mortgage-backed securities with a carrying value of $ 30,396 as collateral against a borrowing line of credit with the Federal Reserve Bank. However, as of March 31, 2023, there were no borrowings outstanding on this Federal Reserve Bank line of credit. As of March 31, 2023, the Bank has pledged U.S. Government Agency securities with a carrying value of $ 2,224 and mortgage-backed securities with a carrying value of $ 2,116 as collateral against specific municipal deposits. As of March 31, 2023, the Bank also has mortgage-backed securities with a carrying value of $ 122 pledged as collateral to the Federal Home Loan Bank of Des Moines. 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. For the three month periods ended March 31, 2023 and March 31, 2022, there were no sales of available for sale securities. 20 The estimated fair value of securities at March 31, 2023 and December 31, 2022, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities on mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Expected maturities may differ from contractual maturities on certain agency and municipal securities due to the call feature. March 31, 2023 December 31, 2022 Available for sale securities Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Due in one year or less $ — $ — $ — $ — Due after one year through five years 11,624 11,300 8,525 8,184 Due after five years through ten years 48,688 43,988 45,622 41,427 Due after ten years 39,975 39,176 38,739 37,770 Total securities with contractual maturities $ 100,287 $ 94,464 $ 92,886 $ 87,381 Mortgage-backed securities 96,020 78,959 97,458 78,610 Total available for sale securities $ 196,307 $ 173,423 $ 190,344 $ 165,991 March 31, 2023 December 31, 2022 Held to maturity securities Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Due in one year or less $ 100 $ 97 $ — $ — Due after one year through five years 500 458 450 415 Due after five years through ten years — — 150 131 Total securities with contractual maturities 600 555 600 546 Mortgage-backed securities 94,701 76,628 95,779 76,233 Total held to maturity securities $ 95,301 $ 77,183 $ 96,379 $ 76,779 21 Securities with unrealized losses at March 31, 2023 and December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows: Less than 12 Months 12 Months or More Total Available for sale securities Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss March 31, 2023 U.S. government agency obligations $ 5,015 $ 7 $ 2,923 $ 177 $ 7,938 $ 184 Mortgage-backed securities — — 78,934 17,061 78,934 17,061 Corporate debt securities 17,080 1,070 25,135 3,856 42,215 4,926 Corporate asset-based securities — — 25,801 877 25,801 877 Total $ 22,095 $ 1,077 $ 132,793 $ 21,971 $ 154,888 $ 23,048 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-based securities 7,955 221 20,862 839 28,817 1,060 Total $ 42,325 $ 2,943 $ 109,611 $ 21,583 $ 151,936 $ 24,526 Less than 12 Months 12 Months or More Total Held to maturity securities Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss March 31, 2023 Obligations of states and political subdivisions $ — $ — $ 555 $ 45 $ 555 $ 45 Mortgage-backed securities 365 9 76,035 18,073 76,400 18,082 Total $ 365 $ 9 $ 76,590 $ 18,118 $ 76,955 $ 18,127 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 The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. As part of such monitoring, the credit quality of individual securities and their issuer is assessed. Significant inputs used to measure the amount of other-than-temporary impairment related to credit loss include, but are not limited to; the Company’s intent and ability to sell the debt security prior to recovery, that it is more likely than not that the Company will not sell the security prior to recovery, default and delinquency rates of the underlying collateral, remaining credit support, and historical loss severities. Adjustments to market value of available for sale securities that are considered temporary are recorded as separate components of stockholders’ equity, net of tax. If the unrealized loss of a security is identified as other-than-temporary based on information available, such as the decline in the creditworthiness of the issuer, external market ratings, or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if credit loss exists. If there is a credit loss, it will be recorded in the Company’s consolidated statement of operations. Non-credit components of the unrealized losses on available for sale securities will continue to be recognized in other comprehensive income (loss), net of tax. Unrealized losses reflected in the preceding tables have not been included in results of operations because the unrealized loss was not deemed other-than-temporary. Management has determined that more likely than not, the Company neither intends to sell, nor will it be required to sell each debt security before its anticipated recovery, and therefore recovery of cost will occur. 22 NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES Portfolio Segments: Commercial and agricultural real estate loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and prudently expand its business. Management examines current and projected cash flows to determine the ability of the borrower to repay its obligations as agreed. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The level of owner-occupied property versus non-owner-occupied property are tracked and monitored on a regular basis. Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Loan-to-value ratios on loans secured by farmland generally do not exceed 75 %. Commercial and industrial (“C&I”) loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. These cash flows, however, may not be as expected and the value of collateral securing the loans may fluctuate. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. Agricultural operating loans are generally comprised of term loans to fund the purchase of equipment, livestock and seasonal operating lines. Operating lines are typically written for one year and secured by the crop and other farm assets or other business assets, as considered necessary. Agricultural loans carry significant credit risks as they may involve larger balances concentrated with single borrowers or groups of related borrowers. In addition, repayment of such loans depends on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. Farming operations may be affected by adverse weather conditions such as drought, hail or floods that can severely limit crop yields. 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. 23 Loans are stated at the principal amount outstanding net of unearned net deferred fees and costs and loans in process, unearned discounts on acquired loans, and allowance for credit losses (“ACL”). Unearned net deferred fees and costs includes deferred loan origination fees reduced by loan origination costs and is amortized to interest income over the life of the related loan using methods that approximated the effective interest rate method. Interest on substantially all loans is credited to income based on the principal amount outstanding. A summary of loans at March 31, 2023 follows: March 31, 2023 Amortized Cost % of Total Commercial/Agricultural real estate: Commercial real estate $ 724,685 51.0 % Agricultural real estate 90,706 6.4 % Multi-family real estate 207,686 14.6 % Construction and land development 114,288 8.0 % C&I/Agricultural operating: Commercial and industrial 130,417 9.2 % Agricultural operating 24,168 1.7 % Residential mortgage: Residential mortgage 109,759 7.7 % Purchased HELOC loans 3,206 0.2 % Consumer installment: Originated indirect paper 9,313 0.7 % Other consumer 6,727 0.5 % Total loans receivable $ 1,420,955 100 % Less Allowance for credit losses ( 22,679 ) Net loans receivable $ 1,398,276 24 Loans are stated at the unpaid principal balance outstanding at December 31, 2022. December 31, 2022 Loan Principal Balance % of Total Commercial/Agricultural real estate: Commercial real estate $ 725,971 51.5 % Agricultural real estate 87,908 6.2 % Multi-family real estate 208,908 14.8 % Construction and land development 102,492 7.3 % C&I/Agricultural operating: Commercial and industrial 136,013 9.6 % Agricultural operating 28,806 2.0 % Residential mortgage: Residential mortgage 105,389 7.5 % Purchased HELOC loans 3,262 0.2 % Consumer installment: Originated indirect paper 10,236 0.7 % Other consumer 7,150 0.5 % Gross Loans $ 1,416,135 100.3 % Less: Unearned net deferred fees and costs and loans in process ( 2,585 ) ( 0.2 ) % Unamortized discount on acquired loans ( 1,766 ) ( 0.1 ) % Total loans receivable $ 1,411,784 100.0 % Less Allowance for loan losses ( 17,939 ) Net loans $ 1,393,845 25 Credit Quality/Risk Ratings: Management utilizes a numeric risk rating system to identify and quantify the Bank’s risk of loss within its loan portfolio. Ratings are initially assigned prior to funding the loan, and may be changed at any time as circumstances warrant. Ratings range from the highest to lowest quality based on factors that include measurements of ability to pay, collateral type and value, borrower stability and management experience. The Bank’s loan portfolio ratings are presented below in accordance with the risk rating framework that has been commonly adopted by the federal banking agencies. The definitions of the various risk rating categories are as follows: 1 through 4 - Pass. A “Pass” loan means that the condition of the borrower and the performance of the loan is satisfactory or better. 5 - Watch. A “Watch” loan has clearly identifiable developing weaknesses that deserve additional attention from management. Weaknesses that are not corrected or mitigated, may jeopardize the ability of the borrower to repay the loan in the future. 6 - Special Mention. A “Special Mention” loan has one or more potential weakness that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position in the future. 7 - Substandard. A “Substandard” loan is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Assets classified as substandard must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. 8 - Doubtful. A “Doubtful” loan has all the weaknesses inherent in a Substandard loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. 9 - Loss. Loans classified as “Loss” are considered uncollectible, and their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, and a partial recovery may occur in the future. 26 Below is a summary of the amortized cost of loans summarized by class, credit quality risk rating and year of origination as of March 31, 2023 and gross charge-offs for the three months ended March 31, 2023: Amortized Cost Basis by Origination Year 2023 2022 2021 2020 2019 Prior Revolving Revolving to Term Total Commercial/Agricultural real estate: Commercial real estate Risk rating 1 to 5 $ 12,394 $ 138,884 $ 260,942 $ 94,027 $ 74,434 $ 123,651 $ 7,419 $ — $ 711,751 Risk rating 6 — — — 337 — 5,429 — — 5,766 Risk rating 7 — 190 534 4,630 284 1,517 13 — 7,168 Risk rating 8 — — — — — — — — — Risk rating 9 — — — — — — — — — Total $ 12,394 $ 139,074 $ 261,476 $ 98,994 $ 74,718 $ 130,597 $ 7,432 $ — $ 724,685 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Agricultural real estate Risk rating 1 to 5 $ 10,263 $ 24,209 $ 17,372 $ 8,216 $ 5,793 $ 19,651 $ 1,886 $ — $ 87,390 Risk rating 6 — — — — — 537 — — 537 Risk rating 7 — 405 808 3 102 1,461 — — 2,779 Risk rating 8 — — — — — — — — — Risk rating 9 — — — — — — — — — Total $ 10,263 $ 24,614 $ 18,180 $ 8,219 $ 5,895 $ 21,649 $ 1,886 $ — $ 90,706 Current period gross charge-offs $ — $ — $ — $ 32 $ — $ — $ — $ — $ 32 Multi-family real estate Risk rating 1 to 5 $ 1,263 $ 41,882 $ 88,727 $ 47,028 $ 8,832 $ 19,954 $ — $ — $ 207,686 Risk rating 6 — — — — — — — — — Risk rating 7 — — — — — — — — — Risk rating 8 — — — — — — — — — Risk rating 9 — — — — — — — — — Total $ 1,263 $ 41,882 $ 88,727 $ 47,028 $ 8,832 $ 19,954 $ — $ — $ 207,686 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Construction and land development Risk rating 1 to 5 $ 10,551 $ 39,920 $ 49,670 $ 9,022 $ 121 $ 951 $ 3,959 $ — $ 114,194 Risk rating 6 — — — — — — — — — Risk rating 7 — — — — — 94 — — 94 Risk rating 8 — — — — — — — — — Risk rating 9 — — — — — — — — — Total $ 10,551 $ 39,920 $ 49,670 $ 9,022 $ 121 $ 1,045 $ 3,959 $ — $ 114,288 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Commercial/Agricultural operating: Commercial and industrial Risk rating 1 to 5 $ 2,852 $ 34,888 $ 31,344 $ 14,152 $ 8,607 $ 5,567 $ 32,509 $ — $ 129,919 Risk rating 6 — — — — 1 — 20 — 21 Risk rating 7 — — 438 — 1 38 — — 477 Risk rating 8 — — — — — — — — — Risk rating 9 — — — — — — — — — Total $ 2,852 $ 34,888 $ 31,782 $ 14,152 $ 8,609 $ 5,605 $ 32,529 $ — $ 130,417 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Agricultural operating Risk rating 1 to 5 $ 435 $ 3,471 $ 1,555 $ 990 $ 714 $ 2,685 $ 12,124 $ — $ 21,974 Risk rating 6 — 30 — — — 132 149 — 311 Risk rating 7 — 521 1,185 — 36 141 — — 1,883 Risk rating 8 — — — — — — — — — Risk rating 9 — — — — — — — — — Total $ 435 $ 4,022 $ 2,740 $ 990 $ 750 $ 2,958 $ 12,273 $ — $ 24,168 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — 27 Continued Amortized Cost Basis by Origination Year 2023 2022 2021 2020 2019 Prior Revolving Revolving to Term Total Residential mortgage: Residential mortgage Risk rating 1 to 5 $ 6,982 $ 32,697 $ 9,458 $ 3,065 $ 2,531 $ 38,069 $ 14,087 $ — $ 106,889 Risk rating 6 — — — — — — — — — Risk rating 7 — — 23 — 14 2,721 57 55 2,870 Risk rating 8 — — — — — — — — — Risk rating 9 — — — — — — — — — Total $ 6,982 $ 32,697 $ 9,481 $ 3,065 $ 2,545 $ 40,790 $ 14,144 $ 55 $ 109,759 Current period gross charge-offs $ — $ — $ — $ — $ — $ 14 $ — $ — $ 14 Purchased HELOC loans Risk rating 1 to 5 $ — $ — $ — $ — $ — $ — $ 3,206 $ — $ 3,206 Risk rating 6 — — — — — — — — — Risk rating 7 — — — — — — — — — Risk rating 8 — — — — — — — — — Risk rating 9 — — — — — — — — — Total $ — $ — $ — $ — $ — $ — $ 3,206 $ — $ 3,206 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Consumer installment: Originated indirect paper Risk rating 1 to 5 $ — $ — $ — $ — $ — $ 9,277 $ — $ — $ 9,277 Risk rating 6 — — — — — — — — — Risk rating 7 — — — — — 36 — — 36 Risk rating 8 — — — — — — — — — Risk rating 9 — — — — — — — — — Total $ — $ — $ — $ — $ — $ 9,313 $ — $ — $ 9,313 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Other consumer Risk rating 1 to 5 $ 502 $ 2,229 $ 1,175 $ 884 $ 709 $ 676 $ 536 $ — $ 6,711 Risk rating 6 — — — — — — — — — Risk rating 7 8 — — — — 6 2 — 16 Risk rating 8 — — — — — — — — — Risk rating 9 — — — — — — — — — Total $ 510 $ 2,229 $ 1,175 $ 884 $ 709 $ 682 $ 538 $ — $ 6,727 Current period gross charge-offs $ — $ — $ — $ 10 $ 1 $ — $ — $ — $ 11 Total loans receivable $ 45,250 $ 319,326 $ 463,231 $ 182,354 $ 102,179 $ 232,593 $ 75,967 $ 55 $ 1,420,955 Total current period gross charge-offs $ — $ — $ — $ 42 $ 1 $ 14 $ — $ — $ 57 28 Below is a summary of the unpaid principal balance of loans summarized by class and credit quality risk rating as of December 31, 2022: 1 to 5 6 7 8 9 TOTAL 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 $ 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 Allowance for Credit Losses - On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial instruments and transitioned to the Current Expected Credit Loss (“CECL”) model to estimate losses based on the lifetime of the loan. Under the new methodology, the ACL is comprised of collectively evaluated and individually evaluated components. The allowance for credit losses (“ACL”) represents the Company’s best estimate of the reserve necessary to adequately account for probable losses expected over the remaining life of the assets. The provision for credit losses is the charge against current earnings that is determined by the Company as the amount needed to maintain an adequate allowance for credit losses. In determining the adequacy of the allowance for credit losses, and therefore the provision to be charged to current earnings, the Company relies predominantly on a disciplined credit review and approval process that extends to the full range of the Company’s credit exposure. The review process is directed by the overall lending policy and is intended to identify, at the earliest possible stage, the borrowers who might be facing financial difficulty. Factors considered by the Company in evaluating the overall adequacy of the allowance include historical net loan losses, the level and composition of nonaccrual, past due and modifications, trends in volumes and terms of loans, effects of changes in risk selection and underwriting standards or lending practices, lending staff changes, concentrations of credit, industry conditions and the current economic conditions in the region where the Company operates. The Company estimates the appropriate level of allowance for credit losses by evaluating loans collectively on a pooled basis when similar risk characteristics exist, and on an individual basis when management determines that a loan does not share similar risk characteristics with other loans. 29 The following table presents the balance and activity in the allowance for credit losses (“ACL”) - loans by portfolio segment as of March 31, 2023: Commercial/Agricultural Real Estate C&I/Agricultural operating Residential Mortgage Consumer Installment Unallocated Total Three months ended March 31, 2023 Allowance for Credit Losses - Loans: ACL - Loans, at beginning of period $ 14,085 $ 2,318 $ 599 $ 129 $ 808 $ 17,939 Cumulative effect of ASU 2016-13 adoption 4,510 ( 331 ) 1,119 216 ( 808 ) 4,706 Charge-offs ( 32 ) — ( 14 ) ( 11 ) — ( 57 ) Recoveries 3 15 4 12 — 34 Additions to ACL - Loans via provision for credit losses charged to operations ( 70 ) ( 154 ) 292 ( 11 ) — 57 ACL - Loans, at end of period $ 18,496 $ 1,848 $ 2,000 $ 335 $ — $ 22,679 Allowance for Credit Losses - Unfunded Commitments: In addition to the ACL - Loans, the Company has established an ACL - Unfunded Commitments of $ 1,530 at March 31, 2023 and $ 0 at December 31, 2022, classified in other liabilities on the consolidated balance sheets. March 31, 2023 and Three Months Ended December 31, 2022 and Three Months Ended ACL - Unfunded commitments - beginning of period $ — $ — Cumulative effect of ASU 2016-13 adoption 1,537 — Reductions to ACL - Unfunded commitments via provision for credit losses charged to operations ( 7 ) — ACL - Unfunded commitments - End of period $ 1,530 $ — Provision for credit losses - The provision for credit losses is determined by the Company as the amount to be added to the ACL loss accounts for various types of financial instruments (including loans and off-balance sheet credit exposures) after net charge-offs have been deducted to bring the ACL to a level that, in managements judgement, is necessary to absorb expected credit losses over the lives of the respective financial instruments. The following table presents the components of the provision for credit losses. March 31, 2023 and Three Months Ended Provision for credit losses on: Loans $ 57 Unfunded commitments ( 7 ) Total provision for credit losses $ 50 Allowance for Loan Losses - Prior to the adoption of ASU 2016-13, the Allowance for Loan Losses (“ALL”) represented management’s estimate of probable and inherent credit losses in the Bank’s loan portfolio. Estimating the amount of the ALL required 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 have been susceptible to significant change. There were many factors affecting the ALL; some were quantitative, while others required qualitative judgment. The process for determining the ALL (which management believed adequately considered potential factors which resulted in 30 probable credit losses), included subjective elements and, therefore, may have been susceptible to significant change. To the extent actual outcomes differed from management estimates, additional provision for loan losses could have been required that could have adversely affected the Company’s earnings or financial position in future periods. Allocations of the ALL may have been made for specific loans but the entire ALL was available for any loan that, in management’s judgment, should have been charged-off or for which an actual loss was realized. As an integral part of their examination process, various regulatory agencies also reviewed the Bank’s ALL. Such agencies may have required that changes in the ALL be recognized when such regulators’ credit evaluations differed from those of our management based on information available to the regulators at the time of their examinations. Changes in the ALL by loan type for the periods presented below were as follows: Commercial/Agricultural Real Estate C&I/Agricultural operating Residential Mortgage Consumer Installment Unallocated Total Three months ended March 31, 2022 Allowance for Loan Losses: Beginning balance, January 1, 2022 $ 12,354 $ 1,959 $ 518 $ 225 $ 774 $ 15,830 Charge-offs ( 35 ) ( 63 ) — ( 9 ) — ( 107 ) Recoveries 3 10 1 10 — 24 Provision 72 198 ( 59 ) ( 66 ) 8 153 Total allowance on originated loans $ 12,394 $ 2,104 $ 460 $ 160 $ 782 $ 15,900 Purchased credit impaired loans — — — — — — Other acquired loans Beginning balance, January 1, 2022 856 69 130 28 — 1,083 Charge-offs — — ( 12 ) — — ( 12 ) Recoveries — — — — — — Provision ( 67 ) ( 11 ) ( 56 ) ( 19 ) — ( 153 ) Total allowance on other acquired loans 789 58 62 9 — 918 Total allowance on acquired loans 789 58 62 9 — 918 Ending balance, March 31, 2022 $ 13,183 $ 2,162 $ 522 $ 169 $ 782 $ 16,818 Allowance for Loan Losses at March 31, 2022: Amount of allowance for loan losses arising from loans individually evaluated for impairment $ 1,280 $ 373 $ 69 $ — $ — $ 1,722 Amount of allowance for loan losses arising from loans collectively evaluated for impairment $ 11,903 $ 1,789 $ 453 $ 169 $ 782 $ 15,096 Loans Receivable as of March 31, 2022 Ending balance of originated loans $ 890,440 $ 134,513 $ 63,362 $ 22,350 $ — $ 1,110,665 Ending balance of purchased credit-impaired loans 8,672 1,023 1,024 — — 10,719 Ending balance of other acquired loans 133,745 16,314 23,874 349 — 174,282 Ending balance of loans $ 1,032,857 $ 151,850 $ 88,260 $ 22,699 $ — $ 1,295,666 Ending balance: individually evaluated for impairment $ 20,597 $ 6,605 $ 6,838 $ 210 $ — $ 34,250 Ending balance: collectively evaluated for impairment $ 1,012,260 $ 145,245 $ 81,422 $ 22,489 $ — $ 1,261,416 31 Commercial/Agricultural Real Estate C&I/Agricultural operating Residential Mortgage Consumer Installment Unallocated Total 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 32 An aging analysis of the Company’s commercial/agricultural real estate, C&I, agricultural operating, residential mortgage, consumer installment and purchased third party loans as of March 31, 2023 and December 31, 2022, respectively, was as follows: (Loan balances at amortized cost) 30-59 Days Past Due and Accruing 60-89 Days Past Due and Accruing Greater Than 89 Days Past Due and Accruing Total Past Due and Accruing Nonaccrual Loans Total Past Due Accruing and Nonaccrual Loans Current Total Loans March 31, 2023 Commercial/Agricultural real estate: Commercial real estate $ 684 $ — $ — $ 684 $ 5,514 $ 6,198 $ 718,487 $ 724,685 Agricultural real estate — — — — 2,496 2,496 88,210 90,706 Multi-family real estate — — — — — — 207,686 207,686 Construction and land development 94 — — 94 — 94 114,194 114,288 C&I/Agricultural operating: Commercial and industrial — — — — 452 452 129,965 130,417 Agricultural operating 15 — — 15 794 809 23,359 24,168 Residential mortgage: Residential mortgage 1,313 160 221 1,694 1,131 2,825 106,934 109,759 Purchased HELOC loans — — — — — — 3,206 3,206 Consumer installment: Originated indirect paper 24 — — 24 21 45 9,268 9,313 Other consumer 24 2 3 29 2 31 6,696 6,727 Total $ 2,154 $ 162 $ 224 $ 2,540 $ 10,410 $ 12,950 $ 1,408,005 $ 1,420,955 (Loan balances at unpaid principal balance) 30-59 Days Past Due and Accruing 60-89 Days Past Due and Accruing Greater Than 89 Days Past Due and Accruing Total Past Due and Accruing Nonaccrual Loans Total Past Due Accruing and Nonaccrual Loans Current Total Loans 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 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 33 Nonaccrual Loans - The following table presents the Company’s nonaccrual loans at March 31, 2023 with no allowance for credit losses and interest income that would have been recorded under the original terms of such nonaccrual loans: March 31, 2023 Total Nonaccrual Loans Nonaccrual with no Allowance for Credit Losses Interest Income Not Recorded for Nonaccrual loans Commercial/Agricultural real estate: Commercial real estate $ 5,514 $ 636 $ 20 Agricultural real estate 2,496 1,252 69 Multi-family real estate — — — Construction and land development — — — C&I/Agricultural operating: Commercial and industrial 452 15 8 Agricultural operating 794 358 55 Residential mortgage: Residential mortgage 1,131 825 12 Purchased HELOC loans — — — Consumer installment: Originated indirect paper 21 21 1 Other consumer 2 2 — Total $ 10,410 $ 3,109 $ 165 Collateral Dependent Loans - A loan is considered to be collateral dependent when, based upon management’assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. For collateral dependent loans, expected credit losses are based on the fair value of the collateral at the balance sheet date, with consideration for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The following table presents collateral dependent loans by portfolio segment and collateral type, including those loans with and without a related allowance allocation. Collateral Type March 31, 2023 Real Estate Other Assets Total Without an Allowance With an Allowance Allowance Allocation Commercial/Agricultural real estate: Commercial real estate $ 7,810 $ — $ 7,810 $ 2,864 $ 4,946 $ 31 Agricultural real estate 2,793 — 2,793 1,551 1,242 418 Multi-family real estate — — — — — — Construction and land development 94 — 94 94 — — C&I/Agricultural operating: Commercial and industrial — 478 478 38 440 220 Agricultural operating — 1,879 1,879 1,444 435 29 Residential mortgage: Residential mortgage 3,100 — 3,100 2,625 475 97 Purchased HELOC loans — — — — — — Consumer installment: Originated indirect paper — 36 36 — 36 — Other consumer — 16 16 16 — — Total $ 13,797 $ 2,409 $ 16,206 $ 8,632 $ 7,574 $ 795 34 There were no outstanding commitments to borrowers experiencing financial difficulty as of March 31, 2023. There were unused lines of credit totaling $ 71 on loans with borrowers experiencing financial difficulties as of March 31, 2023. 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, non-PCI loans. The $ 26,823 recorded investment of loans individually evaluated for impairment includes $ 5,171 of performing TDR loans. A loan is identified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Performing TDRs consist of loans that have been modified and are performing in accordance with the modified terms for a sufficient length of time, generally six months, or loans that were modified on a proactive basis. A summary of the Company’s loans individually evaluated for impairment as of December 31, 2022 and March 31, 2022 was as follows: Twelve Months Ended 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 4,740 248 Residential mortgage 5,937 5,998 48 6,602 341 Consumer installment 755 755 10 309 7 Total $ 26,823 $ 26,919 $ 826 $ 31,336 $ 1,418 35 Three Months Ended Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized March 31, 2022 With No Related Allowance Recorded: Commercial/Agricultural real estate $ 13,840 $ 14,116 $ — $ 16,626 $ 136 C&I/Agricultural operating 6,015 6,167 — 5,319 50 Residential mortgage 6,447 6,528 — 6,882 71 Consumer installment 210 210 — 258 2 Total $ 26,512 $ 27,021 $ — $ 29,085 $ 259 With An Allowance Recorded: Commercial/Agricultural real estate $ 6,481 $ 6,481 $ 1,280 $ 5,285 $ 11 C&I/Agricultural operating 438 438 373 415 10 Residential mortgage 310 310 69 600 1 Consumer installment — — — 1 — Total $ 7,229 $ 7,229 $ 1,722 $ 6,301 $ 22 March 31, 2022 Commercial/Agricultural real estate $ 20,321 $ 20,597 $ 1,280 $ 21,911 $ 147 C&I/Agricultural operating 6,453 6,605 373 5,734 60 Residential mortgage 6,757 6,838 69 7,482 72 Consumer installment 210 210 — 259 2 Total $ 33,741 $ 34,250 $ 1,722 $ 35,386 $ 281 36 Loan Modifications Made to Borrowers Experiencing Financial Difficulty: Term Extension Loan Class Amortized Cost Basis at March 31, 2023 % of Total Class of Financing Receivables Commercial real estate $ 5,359 0.74 % Commercial and industrial $ 25 0.02 % Residential mortgage $ 38 0.03 % Other-Than-Insignificant Payment Delay Loan Class Amortized Cost Basis at March 31, 2023 % of Total Class of Financing Receivables Other consumer $ 22 0.33 % The following tables describe the financial effect of the modifications made to borrowers experiencing financial difficulty: Term Extension Loan Class Financial Effect Commercial real estate A weighted average of 6 months was added to the term of the loans Commercial and industrial A weighted average of 5 months was added to the term of the loans Residential mortgage A weighted average of 17 months was added to the term of the loans Other-Than-Insignificant Payment Delay Loan Class Financial Effect Other consumer Payments were deferred a weighted average of 3 months The Company closely monitors the performance of loans that have been modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table shows the performance of such loans that have been modified during the three months ended March 31, 2023. No loan modified within the last three months has subsequently defaulted. Current 30-59 Days Past Due 60-89 Days Past Due Greater Than 89 Days Past Due Commercial real estate $ 5,359 $ — $ — $ — Commercial and industrial 25 — — — Residential mortgage 38 — — — Other consumer 22 — — — Total $ 5,444 $ — $ — $ — 37 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 loan greater than 60 days past due, with a recorded investment of $ 15 at December 31, 2022. Following is a summary of TDR loans by accrual status as of December 31, 2022. December 31, 2022 Troubled debt restructure loans: Accrual status $ 5,171 Non-accrual status 2,617 Total $ 7,788 There was one TDR commitment totaling $ 26 meeting our TDR criteria as of December 31, 2022. There were unused lines of credit totaling $ 484 meeting our TDR criteria as of December 31, 2022. The following provides detail, including specific reserve and reasons for modification, related to loans identified as TDRs during the three months ended March 31, 2022: Number of Contracts Maturity Extension Modified Payment Modified Under- writing Other Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific Reserve Three months ended March 31, 2022 TDRs: Commercial/Agricultural real estate 4 $ 1,241 $ — $ — $ — $ 1,241 $ 1,241 $ — C&I/Agricultural operating 1 — — 150 — 150 150 — Residential mortgage 4 31 — 507 — 538 538 — Consumer installment — — — — — — — — Totals 9 $ 1,272 $ — $ 657 $ — $ 1,929 $ 1,929 $ — There were no loans modified in a TDR during the previous twelve months which subsequently defaulted during the three months ended March 31, 2022. 38 NOTE 4 – MORTGAGE SERVICING RIGHTS Mortgage servicing rights-- Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid balances of these loans as of March 31, 2023 and December 31, 2022 were $ 513,781 and $ 523,736 , respectively, and consisted of one to four family residential real estate loans. These loans are serviced primarily for the Federal Home Loan Mortgage Corporation, Federal Home Loan Bank and the Federal National Mortgage Association. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in deposits were $ 4,552 and $ 2,649 at March 31, 2023 and December 31, 2022, respectively. Mortgage servicing rights activity for the three month periods ended March 31, 2023 and March 31, 2022 were as follows: As of and for the Three Months Ended As of and for the Three Months Ended March 31, 2023 March 31, 2022 Mortgage servicing rights: Mortgage servicing rights, beginning of period $ 4,262 $ 4,727 Increase in mortgage servicing rights resulting from transfers of financial assets 16 126 Amortization during the period ( 158 ) ( 239 ) Mortgage servicing rights, end of period 4,120 4,614 Valuation allowance: Valuation allowance, beginning of period — ( 566 ) Additions — — Recoveries — 566 Valuation allowance, end of period — — Mortgage servicing rights, net $ 4,120 $ 4,614 Fair value of mortgage servicing rights; end of period $ 5,482 $ 5,267 The current period change in valuation allowance, if applicable, is included in non-interest expense as mortgage servicing rights expense, net on the consolidated statement of operations. Servicing fees totaled $ 317 and $ 351 for the three months ended March 31, 2023 and March 31, 2022, respectively. Servicing fees are included in loan servicing income on the consolidated statement of operations. Late fees and ancillary fees related to loan servicing are not material. To estimate the fair value of the MSR asset, a valuation model is applied at the loan level to calculate the present value of the expected future cash flows. The valuation model incorporates various assumptions that would impact market participants’ estimations of future servicing income. Central to the valuation model is the discount rate. Fair value at both March 31, 2023 and March 31, 2022, 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. 39 NOTE 5 – 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 ranging from approximately 0.58 to 5.25 years. Some of the leases include an option to extend, the longest of with is for two 5 year terms. As of March 31, 2023, we have no lease commitments that have not yet commenced. The Company also leases a portion of some of its facilities and receives rental income from such lease agreements, all of which are considered operating leases. Three Months Ended March 31, 2023 March 31, 2022 The components of total lease cost were as follows: Operating lease cost $ 129 $ 139 Variable lease cost 13 10 Total lease cost $ 142 $ 149 The components of total lease income were as follows: Operating lease income $ 9 $ 9 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 $ 138 $ 139 March 31, 2023 December 31, 2022 Supplemental balance sheet information related to leases was as follows: Operating lease right-of-use assets $ 1,586 $ 1,700 Operating lease liabilities $ 1,823 $ 1,945 Weighted average remaining lease term in years; operating leases 4.69 4.89 Weighted average discount rate; operating leases 3.00 % 2.98 % Cash obligations and receipts under lease contracts are as follows: Fiscal years ending December 31, Payments Receipts 2023 $ 433 $ 24 2024 467 17 2025 452 2 2026 396 — 2027 401 — Thereafter 141 — Total 2,290 $ 43 Less: effects of discounting ( 467 ) Lease liability recognized $ 1,823 40 NOTE 6 – DEPOSITS The following is a summary of deposits by type at March 31, 2023 and December 31, 2022, respectively: March 31, 2023 December 31, 2022 Non-interest bearing demand deposits $ 247,735 $ 284,722 Interest bearing demand deposits 390,730 371,210 Savings accounts 214,537 220,019 Money market accounts 309,005 323,435 Certificate accounts 274,786 225,334 Total deposits $ 1,436,793 $ 1,424,720 At March 31, 2023, the scheduled maturities of time deposits were as follows for the year ended, except December 31, 2023, which is the nine months ended: December 31, 2023 $ 102,059 December 31, 2024 145,407 December 31, 2025 19,586 December 31, 2026 1,546 December 31, 2027 595 After December 31, 2027 5,593 Total $ 274,786 Time deposits of $250 or more were $ 87,549 and $ 66,827 at March 31, 2023 and December 31, 2022, respectively. Brokered deposits were $ 63,962 at March 31, 2023 and consisted of $ 53,962 of brokered certificates of deposit and $ 10,000 of brokered money market accounts. Brokered Deposits were $ 39,841 at December 31, 2022 and consisted of $ 39,839 of brokered certificates of deposit and $ 2 of brokered money market accounts. At March 31, 2023, the scheduled maturities of brokered certificates of deposit were as follows for the year ended, except December 31, 2023, which is the nine months ended: December 31, 2023 $ 39,839 December 31, 2025 (1) 8,634 December 31, 2028 (1) 5,489 Total $ 53,962 (1) The Company can call the brokered certificates of deposits maturing in the years ended December 31, 2025 and 2028, monthly beginning in March 2024. 41 NOTE 7 – FEDERAL HOME LOAN BANK AND FEDERAL RESERVE BANK ADVANCES AND OTHER BORROWINGS A summary of Federal Home Loan Bank advances and other borrowings at March 31, 2023 and December 31, 2022 is as follows: March 31, 2023 December 31, 2022 Stated Maturity Amount Range of Stated Rates Stated Maturity Amount Range of Stated Rates Federal Home Loan Bank advances (1), (2), (3) 2023 $ 157,000 1.43 % 4.92 % 2023 $ 117,000 1.43 % 4.31 % 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 % Federal Home Loan Bank advances $ 182,530 $ 142,530 Senior Notes (4) 2034 $ 18,083 6.75 % 7.25 % 2034 $ 23,250 3.00 % 6.75 % Subordinated Notes (5) 2030 $ 15,000 6.00 % 6.00 % 2030 $ 15,000 6.00 % 6.00 % 2032 35,000 4.75 % 4.75 % 2032 35,000 4.75 % 4.75 % $ 50,000 $ 50,000 Unamortized debt issuance costs ( 783 ) ( 841 ) Total other borrowings $ 67,300 $ 72,409 Totals $ 249,830 $ 214,939 (1) The FHLB advances bear fixed rates, require interest-only monthly payments, and are collateralized by a blanket lien on pre-qualifying first mortgages, home equity lines, multi-family loans and certain other loans which had a pledged balance of $ 1,017,535 and $ 984,878 at March 31, 2023 and December 31, 2022, respectively. At March 31, 2023, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $ 213,372 compared to $ 256,773 as of December 31, 2022. (2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $ 182,530 and $ 157,530 , during the three months ended March 31, 2023 and the twelve months ended December 31, 2022, respectively. (3) The weighted-average interest rate on FHLB borrowings maturing within twelve months as of March 31, 2023 and December 31, 2022 were 4.55 % and 4.09 %, respectively. (4) 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 and modified in February of 2023, requiring quarterly interest-only payments through March 2027, 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 August 1, 2023, that remains undrawn upon. (5) Subordinated notes resulted from the following: (a) 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. 42 (b) 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 $ 206,150 and $ 191,650 at March 31, 2023 and December 31, 2022, respectively. Federal Reserve Borrowings At March 31, 2023 and December 31, 2022, the Bank had the ability to borrow $ 19,869 and $ 4,118 from the Federal Reserve Bank of Minneapolis. The ability to borrow is based on mortgage-backed securities pledged with a carrying value of $ 30,396 and $ 5,421 as of March 31, 2023 and December 31, 2022, respectively. There were no Federal Reserve borrowings outstanding as of March 31, 2023 and December 31, 2022. In March of 2023, the Bank was approved to obtain funding from the Federal Reserve’s new Bank Term Funding Program (“BTFP”). As of March 31, 2023, the Bank has not borrowed from this facility and has not pledged any collateral to this facility. Federal Funds Purchased Lines of Credit As of March 31, 2023, the Bank maintains two unsecured federal funds purchased lines of credit with its banking partners which total $ 30,000 . As of December 31, 2022, the Bank maintained three unsecured federal funds purchased lines of credit with its banking partners which totaled $ 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 March 31, 2023 or December 31, 2022. 43 NOTE 8 - CAPITAL MATTERS Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Although these terms are not used to represent overall financial condition, if adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 2023, the Bank was categorized as “Well Capitalized”, under Prompt Corrective Action Provisions. The Bank’s Tier 1 (leverage) and risk-based capital ratios at March 31, 2023, and December 31, 2022, respectively, are presented below: Actual For Capital Adequacy Purposes To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio As of March 31, 2023 Total capital (to risk weighted assets) $ 226,873 14.6 % $ 124,595 > = 8.0 % $ 155,744 > = 10.0 % Tier 1 capital (to risk weighted assets) 207,474 13.3 % $ 93,446 > = 6.0 % 124,595 > = 8.0 % Common equity tier 1 capital (to risk weighted assets) 207,474 13.3 % $ 70,085 > = 4.5 % 101,234 > = 6.5 % Tier 1 leverage ratio (to adjusted total assets) 207,474 11.7 % 71,180 > = 4.0 % 88,974 > = 5.0 % 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 % 44 The Company’s Tier 1 (leverage) and risk-based capital ratios at March 31, 2023 and December 31, 2022, respectively, are presented below: Actual For Capital Adequacy Purposes Amount Ratio Amount Ratio As of March 31, 2023 Total capital (to risk weighted assets) $ 220,131 14.1 % 124,595 > = 8.0 % Tier 1 capital (to risk weighted assets) 150,732 9.7 % 93,446 > = 6.0 % Common equity tier 1 capital (to risk weighted assets) 150,732 9.7 % 70,085 > = 4.5 % Tier 1 leverage ratio (to adjusted total assets) 150,732 8.5 % 71,180 > = 4.0 % 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 % 45 NOTE 9 – STOCK-BASED COMPENSATION On March 27, 2018, the stockholders of Citizens Community Bancorp, Inc. approved the 2018 Equity Incentive Plan. The aggregate number of shares of common stock initially reserved and available for issuance under the 2018 Equity Incentive Plan was 350,000 shares. As of March 31, 2023, 290,187 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. The amount also includes 18,551 shares of performance based restricted stock granted in 2020 and issued in January 2023 upon achievement of the performance criteria and completion of the three year performance period beginning in January 2020 and ending December 31, 2022. 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 March 31, 2023, no stock options had been granted under this plan. In February 2008, the Company’s stockholders approved the Company’s 2008 Equity Incentive Plan for a term of 10 years. Due to the plan’s expiration, no new awards can be granted under this plan. As of March 31, 2023, there are no awarded unvested restricted shares and 57,000 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. Net compensation expense related to restricted stock awards from these plans was $ 216 for the three months ended March 31, 2023, compared to $ 195 for the three months ended March 31, 2022. Restricted Common Stock Award March 31, 2023 December 31, 2022 Number of Shares Weighted Average Grant Price Number of Shares Weighted Average Grant Price Restricted Shares Unvested and outstanding at beginning of year 75,626 $ 12.30 75,630 $ 11.20 Granted 50,606 12.36 43,465 13.99 Vested ( 28,690 ) 12.07 ( 40,843 ) 12.12 Forfeited ( 1,168 ) 10.78 ( 2,626 ) 11.04 Unvested and outstanding at end of period 96,374 $ 12.42 75,626 $ 12.30 The Company accounts for stock option-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 compensation cost recognized for stock option-based employee compensation related to the 2008 plan for the three month period ended March 31, 2023 was $ 0 as all options have vested. The compensation cost recognized for stock option-based employee compensation related to these plans for the three month period ended March 31, 2022 was $ 1 . 46 Common Stock Option Awards Option Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term in Years Aggregate Intrinsic Value March 31, 2023 Outstanding at beginning of year 58,000 $ 11.51 Exercised — — Forfeited or expired ( 1,000 ) 13.76 Outstanding at end of period 57,000 $ 11.47 3.55 $ 21 Exercisable at end of period 57,000 $ 11.47 3.55 $ 21 December 31, 2022 Outstanding at beginning of year 65,900 $ 11.20 Exercised ( 7,900 ) 8.95 Forfeited or expired — — Outstanding at end of year 58,000 $ 11.51 3.73 $ 65 Exercisable at end of year 58,000 $ 11.51 3.73 $ 65 Information related to the 2008 Equity Incentive Plan for the respective periods follows: Three months ended March 31, 2023 Twelve months ended December 31, 2022 Intrinsic value of options exercised $ — $ 38 Cash received from options exercised $ — $ 71 Tax benefit realized from options exercised $ — $ — 47 NOTE 10 – FAIR VALUE ACCOUNTING ASC Topic 820-10, “ Fair Value Measurements and Disclosures ” establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The topic describes three levels of inputs that may be used to measure fair value: Level 1- Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date. Level 2- Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3- Significant unobservable inputs that reflect the Company’s assumptions about the factors that market participants would use in pricing an asset or liability. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the fair value measurement. The fair value of securities available for sale is determined by obtaining market price quotes from independent third parties wherever such quotes are available (Level 1 inputs); or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Where such quotes are not available, we utilize independent third party valuation analysis to support our own estimates and judgments in determining fair value (Level 3 inputs). 48 Assets Measured on a Recurring Basis The following tables present the financial instruments measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022: Fair Value Quoted Prices in Active Markets for Identical Instruments (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) March 31, 2023 Investment securities: U.S. government agency obligations $ 25,182 $ — $ 25,182 $ — Mortgage-backed securities 78,959 — 78,959 — Corporate debt securities 42,215 — 42,215 — Corporate asset-backed securities 27,067 — 27,067 — Total investment securities 173,423 — 173,423 — Equity Investments: Equity Investments 380 380 — — Equity investments measured at NAV(1) 1,771 — — — Total equity investments 2,151 380 — — Total $ 175,574 $ 380 $ 173,423 $ — December 31, 2022 Investment securities: U.S. government agency obligations $ 18,313 $ — $ 18,313 $ — 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 $ — (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. 49 Assets Measured on Nonrecurring Basis The following tables present the financial instruments measured at fair value on a nonrecurring basis as of March 31, 2023 and December 31, 2022: Carrying Value Quoted Prices in Active Markets for Identical Instruments (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) March 31, 2023 Foreclosed and repossessed assets, net $ 1,113 $ — $ — $ 1,113 Collateral dependent loans with allowances 6,779 — — 6,779 Mortgage servicing rights 4,120 — — 5,482 Total $ 12,012 $ — $ — $ 13,374 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 The fair value of collateral dependent loans with allowances, and impaired loans prior to the adoption of ASU 2016-13 on January 1, 2023, referenced above, was determined by obtaining independent third party appraisals and/or internally developed collateral valuations to support the Company’s estimates and judgments in determining the fair value of the underlying collateral supporting impaired loans. The fair value of foreclosed and repossessed assets was determined by obtaining market price valuations from independent third parties wherever such quotes were available for other collateral owned. The Company utilized independent third party appraisals to support the Company’s estimates and judgments in determining fair value for other real estate owned. The fair value of mortgage servicing rights was estimated using discounted cash flows based on current market rates and other factors. 50 The following table represents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which we have utilized Level 3 inputs to determine their fair value at March 31, 2023. Fair Value Valuation Techniques (1) Significant Unobservable Inputs (2) Range March 31, 2023 Foreclosed and repossessed assets, net $ 1,113 Appraisal value Estimated costs to sell 10 % - 15 % Collateral dependent loans with allowances $ 6,779 Appraisal value Estimated costs to sell 10 % - 15 % Mortgage servicing rights $ 5,482 Discounted cash flows Discounted rates 9 % - 12 % 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 % (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 collateral depended loans, impaired loans prior to the adoption of ASU 2016-12, 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. 51 The table below represents what we would receive to sell an asset or what we would have to pay to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying amount and estimated fair value of the Company’s financial instruments as of the dates indicated below were as follows: March 31, 2023 December 31, 2022 Valuation Method Used Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Financial assets: Cash and cash equivalents (Level I) $ 65,050 $ 65,050 $ 35,363 $ 35,363 Other interest-bearing deposits (Level II) 249 249 249 250 Securities available for sale “AFS” (Level II) 173,423 173,423 165,991 165,991 Securities held to maturity “HTM” (Level II) 95,301 77,183 96,379 76,779 Equity investments (Level I) 380 380 338 338 Equity investments valued at NAV(1) N/A 1,771 1,771 1,456 1,456 Other investments (Level II) 17,428 17,428 15,834 15,834 Loans receivable, net (Level III) 1,398,276 1,348,570 1,393,845 1,342,838 Loans held for sale - Residential mortgage (Level I) 393 402 — — Loans held for sale - SBA (Level II) 368 408 — — Mortgage servicing rights (Level III) 4,120 5,482 4,262 5,665 Accrued interest receivable (Level I) 5,550 5,550 5,285 5,285 Financial liabilities: Deposits (Level III) $ 1,436,793 $ 1,434,459 $ 1,424,720 $ 1,420,871 FHLB advances (Level II) 182,530 181,379 142,530 141,060 Other borrowings (Level I) 67,300 67,300 72,409 72,409 Accrued interest payable (Level I) 573 573 968 968 (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. 52 NOTE 11— EARNINGS PER SHARE Earnings per share is based on the weighted average number of shares outstanding for the period. A reconciliation of the basic and diluted earnings per share is as follows: Three Months Ended (Share count in thousands) March 31, 2023 March 31, 2022 Basic Net income attributable to common stockholders $ 3,662 $ 4,706 Weighted average common shares outstanding 10,472 10,527 Basic earnings per share $ 0.35 $ 0.45 Diluted Net income attributable to common stockholders $ 3,662 $ 4,706 Weighted average common shares outstanding 10,472 10,527 Add: Dilutive stock options outstanding 6 14 Average shares and dilutive potential common shares 10,478 10,541 Diluted earnings per share $ 0.35 $ 0.45 Additional common stock option shares that have not been included due to their antidilutive effect 20 — 53 NOTE 12 – OTHER COMPREHENSIVE INCOME (LOSS) The following tables show the tax effects allocated to each component of other comprehensive income (loss) for the three months ended March 31, 2023 and 2022: Three months ended March 31, 2023 March 31, 2022 Before-Tax Amount Tax Benefit (Expense) Net-of-Tax Amount Before-Tax Amount Tax Benefit (Expense) Net-of-Tax Amount Unrealized gain (losses) on securities: Net unrealized gains (losses) arising during the period $ 1,469 $ ( 404 ) $ 1,065 $ ( 9,824 ) $ 2,701 $ ( 7,123 ) Other comprehensive income (loss) $ 1,469 $ ( 404 ) $ 1,065 $ ( 9,824 ) $ 2,701 $ ( 7,123 ) The changes in the accumulated balances for each component of other comprehensive income (loss), net of tax for the twelve months ended December 31, 2022 and the three months ended March 31, 2023 were as follows: Unrealized Gains (Losses) on AFS Securities Other Accumulated Comprehensive Income (Loss), net of tax Beginning Balance, January 1, 2022 $ 222 $ 161 Current year-to-date other comprehensive loss ( 24,575 ) ( 17,817 ) Ending balance, December 31, 2022 $ ( 24,353 ) $ ( 17,656 ) Current year-to-date other comprehensive income 1,469 1,065 Ending balance, March 31, 2023 $ ( 22,884 ) $ ( 16,591 ) Reclassifications out of accumulated other comprehensive income (loss) for the three month periods ended March 31, 2023 and March 31, 2022 were as follows: Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) Details about Accumulated Other Comprehensive Income (Loss) Components Three months ended March 31, 2023 Three months ended March 31, 2022 (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 stockholders 54