Citizens Community Bancorp Inc. - Quarter Report: 2023 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-33003

CITIZENS COMMUNITY BANCORP, INC.

(Exact name of registrant as specified in its charter)


Maryland						20-5120010
(State or other jurisdiction of incorporation or organization)						(IRS Employer Identification Number)

2174 EastRidge Center

Eau Claire, WI 54701

(Address and Zip Code of principal executive offices)

715-836-9994

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value per share	CZWI	NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

At November 3, 2023 there were 10,468,091 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

CITIZENS COMMUNITY BANCORP, INC.

FORM 10-Q

September 30, 2023

INDEX


			Page Number
Part I – FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of September 30, 2023 (Unaudited) and December 31, 2022	5
		Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2023 and 2022	6
		Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and nine months ended September 30, 2023 and 2022	7
		Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2023 and the year ended December 31, 2022	8
		Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2023 and 2022	10
		Condensed Notes to Consolidated Financial Statements (Unaudited)	12
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	59
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	83
	Item 4.	Controls and Procedures	84
Part II – OTHER INFORMATION			85
	Item 1.	Legal Proceedings	85
	Item 1A.	Risk Factors	86
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	86
	Item 3.	Defaults Upon Senior Securities	86
	Item 4.	Mine Safety Disclosures	86
	Item 5.	Other Information	87
	Item 6.	Exhibits	88
SIGNATURES			89

PART 1 – FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Balance Sheets

September 30, 2023 (unaudited) and December 31, 2022

(derived from audited financial statements)

(in thousands, except share and per share data)


	September 30, 2023		December 31, 2022
Assets
Cash and cash equivalents	$	32,532	$	35,363
Other interest bearing deposits	—		249
Available for sale ("AFS") securities, at fair value (amortized cost of $183,152, net of allowance for credit losses of $0 at September 30, 2023)	153,414		165,991
Held to maturity ("HTM") securities, at amortized cost, net of allowance for credit losses of $0 at September 30, 2023	92,336		96,379
Equity investments	2,433		1,794
Other investments	15,109		15,834
Loans receivable	1,447,529		1,411,784
Allowance for credit losses	(22,973)		(17,939)
Loans receivable, net	1,424,556		1,393,845
Loans held for sale	2,737		—
Mortgage servicing rights, net	3,944		4,262
Office properties and equipment, net	19,465		20,493
Accrued interest receivable	5,936		5,285
Intangible assets	1,873		2,449
Goodwill	31,498		31,498
Foreclosed and repossessed assets, net	1,046		1,271
Bank owned life insurance ("BOLI")	25,467		24,954

Other assets	18,741		16,719
TOTAL ASSETS	$	1,831,087	$	1,816,386


Liabilities and Stockholders’ Equity
Liabilities:
Deposits	$	1,473,235	$	1,424,720
Federal Home Loan Bank (“FHLB”)	114,530		142,530
Other borrowings	67,407		72,409
Other liabilities	10,513		9,639
Total liabilities	1,665,685		1,649,298

Stockholders’ Equity:

Common stock—$0.01 par value, authorized 30,000,000; 10,468,091 and 10,425,119 shares issued and outstanding, respectively	105		104
Additional paid-in capital	119,612		119,240
Retained earnings	67,424		65,400

Accumulated other comprehensive loss	(21,739)		(17,656)
Total stockholders’ equity	165,402		167,088
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,831,087	$	1,816,386

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Operations (unaudited)

Three and Nine Months Ended September 30, 2023 and 2022

(in thousands, except per share data)


	Three Months Ended				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Interest and dividend income:
Interest and fees on loans	$	19,083	$	15,937	$	54,169	$	44,597
Interest on investments	2,689		2,022		8,053		5,441
Total interest and dividend income	21,772		17,959		62,222		50,038
Interest expense:
Interest on deposits	7,388		1,681		17,898		3,734
Interest on FHLB and FRB borrowed funds	1,210		568		4,595		1,176
Interest on other borrowed funds	1,053		1,253		3,127		3,237
Total interest expense	9,651		3,502		25,620		8,147
Net interest income before provision for credit losses	12,121		14,457		36,602		41,891
Provision for credit losses	(325)		375		175		775
Net interest income after provision for credit losses	12,446		14,082		36,427		41,116
Non-interest income:
Service charges on deposit accounts	491		535		1,464		1,505
Interchange income	601		597		1,743		1,760
Loan servicing income	611		611		1,679		1,912
Gain on sale of loans	299		194		1,501		1,330
Loan fees and service charges	140		267		308		500

Net gains (losses) on investment securities	116		(55)		182		(167)



Other	307		323		893		717
Total non-interest income	2,565		2,472		7,770		7,557
Non-interest expense:
Compensation and related benefits	5,293		5,900		15,967		16,887
Occupancy	1,335		1,429		4,117		4,137

Data processing	1,536		1,382		4,440		4,098
Amortization of intangible assets	179		399		576		1,197
Mortgage servicing rights expense, net	150		197		456		65
Advertising, marketing and public relations	185		300		472		762
FDIC premium assessment	204		119		608		352
Professional services	342		382		1,153		1,152
(Losses) gains on repossessed assets, net	100		(8)		62		(17)
New market tax credit depletion	—		163		—		488
Other	645		1,014		2,085		2,286
Total non-interest expense	9,969		11,277		29,936		31,407
Income before provision for income taxes	5,042		5,277		14,261		17,266
Provision for income taxes	2,544		1,284		4,895		4,201
Net income attributable to common stockholders	$	2,498	$	3,993	$	9,366	$	13,065
Per share information:
Basic earnings	$	0.24	$	0.38	$	0.89	$	1.24
Diluted earnings	$	0.24	$	0.38	$	0.89	$	1.24
Cash dividends paid	$	—	$	—	$	0.29	$	0.26

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

Three and Nine months ended September 30, 2023 and 2022

(in thousands)


	Three Months Ended				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Net income attributable to common stockholders	$	2,498	$	3,993	$	9,366	$	13,065
Other comprehensive gain (loss), net of tax:
Securities available for sale
Net unrealized losses arising during period, net of tax	(2,862)		(4,980)		(4,074)		(17,418)
Reclassification adjustment for net gains included in net income, net of tax	—		—		(9)		—

Other comprehensive loss, net of tax	(2,862)		(4,980)		(4,083)		(17,418)



Comprehensive (loss) income	$	(364)	$	(987)	$	5,283	$	(4,353)

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statement of Changes in Stockholders’ Equity (unaudited)

Nine Months Ended September 30, 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
Net income	—	—		—		3,206		—		3,206
Other comprehensive loss, net of tax	—	—		—		—		(2,286)		(2,286)
Forfeiture of unvested shares	(1,500)	—		—		—		—		—


Common stock options exercised	3,000	—		28		—		—		28
Common stock repurchased	(14,146)	—		(117)		—		—		(117)

Amortization of restricted stock	—	—		166		—		—		166

Balance at June 30, 2023	10,470,175	105		119,404		64,926		(18,877)		165,558
Net income	—	—		—		2,498		—		2,498
Other comprehensive loss, net of tax	—	—		—		—		(2,862)		(2,862)
Forfeiture of unvested shares	(2,084)	—		—		—		—		—








Amortization of restricted stock	—	—		208		—		—		208



Balance, September 30, 2023	10,468,091	$	105	$	119,612	$	67,424	$	(21,739)	$	165,402

See accompanying condensed notes to unaudited consolidated financial statements.

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.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Cash Flows (unaudited)

Nine Months Ended September 30, 2023 and 2022

(in thousands)


	Nine Months Ended
	September 30, 2023		September 30, 2022
Cash flows from operating activities:
Net income attributable to common stockholders	$	9,366	$	13,065
Adjustments to reconcile net income to net cash provided by operating activities:
Investment securities net (discount accretion) premium amortization	(46)		59
Depreciation expense	1,787		1,773
Provision for credit losses	175		775
Net realized (gain) loss on equity securities	(170)		167
Net realized gain on debt securities	(12)		—
Deferred tax asset valuation allowance	1,828		—
Increase in mortgage servicing rights resulting from transfers of financial assets	(138)		(275)
Mortgage servicing rights amortization and impairment, net	456		65
Amortization of intangible assets	576		1,197
Amortization of restricted stock	590		647
Net stock based compensation expense	—		3
Loss on sale of office properties and equipment	—		271
Decrease in deferred income taxes	226		252
Increase in cash surrender value of life insurance	(513)		(472)
Net loss (gain) from disposals of foreclosed and repossessed assets	62		(17)


Gain on sale of loans held for sale, net	(1,501)		(1,330)
New market tax credit depletion expense	—		488
Net change in:
Loans held for sale	(1,236)		7,334
Accrued interest receivable and other assets	(1,615)		356
Other liabilities	(663)		(3,625)
Total adjustments	(194)		7,668
Net cash provided by operating activities	9,172		20,733
Cash flows from investing activities:

Net decrease in other interest bearing deposits	249		1,143
Purchase of available for sale securities	(11,007)		(10,543)
Proceeds from principal payments of available for sale securities	13,164		21,799
Proceeds from sales of available for sale securities	5,105		—
Purchase of held to maturity securities	—		(35,342)
Proceeds from principal payments and maturities of held to maturity securities	4,031		8,838

Equity investment capital distribution	132		—
Purchase of equity investments	(600)		(300)
Net sales (purchases) of other investments	725		(602)
Proceeds from sales of foreclosed and repossessed assets	307		56
Net increase in loans	(35,606)		(65,476)
Net capital expenditures	(771)		(2,446)

Proceeds from disposal of office properties and equipment	12		14
New market tax credit investment	—		(4,056)
Net cash used in investing activities	(24,259)		(86,915)


Cash flows from financing activities:

Federal Home Loan Bank advances	15,000		72,000
Amortization of fair value adjustments for acquired Federal Home Loan Bank advances	—		3
Federal Home Loan Bank advance call payments	—		(55,000)
Federal Home Loan Bank advance termination payments	—		(15,015)
Federal Home Loan Bank maturities	(43,000)		(11,000)
Amortization of debt issuance costs	165		340
Proceeds from other borrowings, net of origination costs	—		34,191

Other borrowings principal reductions	(5,167)		(20,606)
Net increase in deposits	48,515		46,833
Common stock restricted shares	1		—

Repurchase shares of common stock	(117)		(979)
Surrender of restricted shares of common stock	(129)		(143)
Common stock options exercised	28		20
Cash dividends paid	(3,040)		(2,742)
Net cash provided by financing activities	12,256		47,902
Net decrease in cash and cash equivalents	(2,831)		(18,280)
Cash and cash equivalents at beginning of period	35,363		47,691
Cash and cash equivalents at end of period	$	32,532	$	29,411


Supplemental cash flow information:
Cash paid during the period for:
Interest on deposits	$	16,602	$	3,784
Interest on borrowings	$	8,363	$	4,698
Income taxes	$	3,855	$	3,365
Supplemental noncash disclosure:
Transfers from loans receivable to other real estate owned ("OREO")	$	144	$	92


Transfers from office properties and equipment to foreclosed and repossessed assets	$	—	$	130

See accompanying condensed notes to unaudited consolidated financial statements.

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 23 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 September 30, 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 the quarterly reports on Form 10-Q for the quarters ended March 31, 2023 and June 30, 2023, filed with the SEC on May 4, 2023 and August 3, 2023, respectively; 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. 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.

Allowance for Credit Losses – Held to Maturity Securities -The Company measures expected credit losses on held to maturity debt securities on a collective basis by major security type. For agency mortgage-backed securities there are no expected credit losses as they are guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. For other securities, the estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

Allowance for Credit Losses – Available for Sale Securities - The Company measures the allowance for credit losses on available for sale debt securities by evaluating securities in an unrealized loss position using a two-step process. First, the Company assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost. If it is determined that the Company intends or will be required to sell the security, it is written down to its fair value as net gains or losses on investment securities in our consolidated statement of operations. For agency mortgage-backed and asset-backed securities that do not meet the criteria in step one, there are no expected credit losses as they are guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. For other debt securities that do not meet the criteria in step one, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and the allowance for credit losses on available for sale investments is recorded for the credit loss, limited by the amount that the fair value is less that the amortized cost basis. Any impairment that has not been recorded though an allowance for credit losses is recognized in other comprehensive income.

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 or losses on investment securities in our 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 investment 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 our consolidated statement of operations.

Also included in other investments is stock of our correspondent bank, Bankers’ Bank, without readily determinable fair value. This stock is carried at cost plus or minus changes resulting from observable price changes in orderly transactions for this stock, less other-than-temporary impairment charges, if any.

Management’s evaluation for impairment of these other investments, includes consideration of the financial condition and other available relevant information of the issuer. Based on management’s quarterly evaluation, no impairment has been recorded on these securities. Other investments totaling $15,109 at September 30, 2023 consisted of $6,909 of FHLB stock,

$5,692 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:

•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”) on loans 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.

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; and 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 as “mortgage servicing rights expense” 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 September 30, 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 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.

Bank Owned Life Insurance (BOLI)—The Bank invests in bank-owned life insurance (BOLI) as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by the Bank on a select group of employees. The Bank is the owner and beneficiary of the policies. Income from the increase in cash surrender value of the policies as well as the receipt of death benefits is included in non-interest income on the consolidated statements of operations.

New Markets Tax Credits - As a part of its commitment to the communities it serves, in the first quarter of 2022, the Company made an investment in an LLC that is sponsoring a community development project that has been awarded a New Markets Tax Credit (NMTC) through the U.S. Department of the Treasury’s Community Development Financial Institutions Fund. This investment is Community Reinvestment Act eligible and is designed to generate a return primarily through the realization of the tax credit. This LLC is considered a Variable Interest Entity (VIE) as the Company represents the holder of the equity investment at risk, 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 September 30, 2023, the carrying amount of this investment, which is included in other assets in the consolidated balance sheets, was $3,044. 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 September 30, 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. 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.

The Company’s effective tax rates were 50.5% and 34.3% for the three and nine months ended September 30, 2023, and 24.3% for both the three and nine months ended September 30, 2022. The Wisconsin state budget, signed July 5, 2023, effective January 1, 2023, made originated loans in Wisconsin for business purposes up to $5,000 non-taxable. This change lowers the Company’s income tax rates for the three and nine-month periods ended September 30, 2023. The current period income tax expense was lower due to the retroactive, i.e. nine-month effect of this change by $553. This reduction of income tax expense was offset by a one-time tax expense of $1,828 in the current period, as the impact of the resulting lower incremental tax rate decreased the estimated future realization of an existing deferred tax asset resulting in a valuation allowance.

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.

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 was effective immediately upon issuance and will remain in effect 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 estimate 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.

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 and nine months ended September 30, 2023, adopting ASU 2023-02 increased net income $33 and $98, respectively.

Recently Issued, But Not Yet Effective Accounting Pronouncements

None

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 September 30, 2023 and December 31, 2022, respectively, were as follows:


Available for sale securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
September 30, 2023
U.S. government agency obligations	$	17,452	$	89	$	223	$	17,318

Mortgage-backed securities	92,722		—		22,991		69,731

Corporate debt securities	47,153		20		6,284		40,889
Asset-backed securities	25,825		27		376		25,476

Total available for sale securities	$	183,152	$	136	$	29,874	$	153,414

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
Asset-backed 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
September 30, 2023

Obligations of states and political subdivisions	$	600	$	—	$	48	$	552
Mortgage-backed securities	91,736		3		23,539		68,200
Total held to maturity securities	$	92,336	$	3	$	23,587	$	68,752

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 September 30, 2023, the Bank has pledged mortgage-backed securities with a carrying value of $29,542 as collateral against a borrowing line of credit with the Federal Reserve Bank. As of September 30, 2023, there were no borrowings outstanding on this Federal Reserve Bank line of credit. As of September 30, 2023, the Bank has pledged U.S. Government Agency securities with a carrying value of $531 and mortgage-backed securities with a carrying value of $1,900 as collateral against specific municipal deposits. As of September 30, 2023, the Bank also has mortgage-backed securities with a carrying value of $688 pledged as collateral to the Federal Home Loan Bank of Des Moines.

At December 31, 2022, the Bank had 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 had 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 had mortgage-backed securities with a carrying value of $142 pledged as collateral to the Federal Home Loan Bank of Des Moines.

For the three and nine month periods ended September 30, 2023 gross sales of available securities were $0 and $5,105, respectively, gross gains on the sale of available for sale securities were $0 and $12, respectively, and gross losses on the sale of available for sale securities were $0 for both periods.

For the three and nine month periods ended September 30, 2022, there were no sales of available for sale securities.

The estimated fair value of securities at September 30, 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.


	September 30, 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	13,850		13,523		8,525		8,184
Due after five years through ten years	43,761		37,639		45,622		41,427
Due after ten years	32,819		32,521		38,739		37,770
Total securities with contractual maturities	90,430		83,683		92,886		87,381
Mortgage-backed securities	92,722		69,731		97,458		78,610

Total available for sale securities	$	183,152	$	153,414	$	190,344	$	165,991


	September 30, 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	$	99	$	—	$	—
Due after one year through five years	500		453		450		415
Due after five years through ten years	—		—		150		131

Total securities with contractual maturities	600		552		600		546
Mortgage-backed securities	91,736		68,200		95,779		76,233
Total held to maturity securities	$	92,336	$	68,752	$	96,379	$	76,779

Securities with unrealized losses at September 30, 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
September 30, 2023
U.S. government agency obligations	$	3,961	$	—	$	3,615	$	223	$	7,576	$	223

Mortgage-backed securities	6		—		69,725		22,991		69,731		22,991

Corporate debt securities	4,602		320		34,372		5,964		38,974		6,284
Asset-backed securities	—		—		20,789		376		20,789		376

Total	$	8,569	$	320	$	128,501	$	29,554	$	137,070	$	29,874
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
Asset-backed securities	7,955		221		20,862		839		28,817		1,060

Total	$	42,325	$	2,943	$	109,611	$	21,583	$	151,936	$	24,526


	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
September 30, 2023

Obligations of states and political subdivisions	$	—	$	—	$	552	$	48	$	552	$	48
Mortgage-backed securities	—		—		68,001		23,539		68,001		23,539
Total	$	—	$	—	$	68,553	$	23,587	$	68,553	$	23,587
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

At September 30, 2023 no ACL was established for available for sale or held to maturity securities. Substantially all the held to maturity portfolio is made up of agency backed mortgage securities. These securities are guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. Accordingly, the Company does not expect to incur credit losses on these securities. Unrealized losses on available-for-sale investment securities have not been recognized into income because the issuers’ bonds are agency backed securities or other securities that all principal and interest is expected to be received on a timely basis. Furthermore, the Company does not intend to sell, and it is likely that management will not be required to sell, the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The issuers continue to make timely principal and interest payments on their bonds.

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 underwritten 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.

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 September 30, 2023 follows:


	September 30, 2023
		Amortized Cost		% of Total
Commercial/Agricultural real estate:
Commercial real estate		$	748,118	51.7	%
Agricultural real estate		84,328		5.8	%
Multi-family real estate		219,095		15.1	%
Construction and land development		109,041		7.5	%
C&I/Agricultural operating:
Commercial and industrial		120,532		8.3	%
Agricultural operating		24,571		1.7	%
Residential mortgage:
Residential mortgage		125,348		8.7	%
Purchased HELOC loans		2,881		0.2	%
Consumer installment:
Originated indirect paper		7,175		0.5	%
Other consumer		6,440		0.5	%
Total loans receivable		$	1,447,529	100	%
Less Allowance for credit losses		(22,973)
Net loans receivable		$	1,424,556

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

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.

Below is a summary of the amortized cost of loans summarized by class, credit quality risk rating and year of origination as of September 30, 2023 and gross charge-offs for the nine months ended September 30, 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	$	51,379	$	141,529	$	245,661	$	92,071	$	72,159	$	113,138	$	11,866	$	—	$	727,803
Risk rating 6	—		—		9,303		—		—		—		—		—		9,303
Risk rating 7	—		188		—		4,551		187		6,086		—		—		11,012
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	51,379	$	141,717	$	254,964	$	96,622	$	72,346	$	119,224	$	11,866	$	—	$	748,118
Current period gross charge-offs	$	—	$	—	$	10	$	—	$	—	$	4	$	—	$	—	$	14
Agricultural real estate
Risk rating 1 to 5	$	16,044	$	19,876	$	11,362	$	7,838	$	5,374	$	15,786	$	1,004	$	—	$	77,284
Risk rating 6	—		172		5,460		—		297		646		—		—		6,575
Risk rating 7	—		370		—		—		99		—		—		—		469
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	16,044	$	20,418	$	16,822	$	7,838	$	5,770	$	16,432	$	1,004	$	—	$	84,328
Current period gross charge-offs	$	—	$	—	$	—	$	32	$	—	$	—	$	—	$	—	$	32
Multi-family real estate
Risk rating 1 to 5	$	3,492	$	48,439	$	89,513	$	46,238	$	8,663	$	22,715	$	35	$	—	$	219,095
Risk rating 6	—		—		—		—		—		—		—		—		—
Risk rating 7	—		—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	3,492	$	48,439	$	89,513	$	46,238	$	8,663	$	22,715	$	35	$	—	$	219,095
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Construction and land development
Risk rating 1 to 5	$	36,366	$	34,514	$	25,382	$	7,308	$	119	$	825	$	4,322	$	—	$	108,836
Risk rating 6	—		—		—		—		—		111		—		—		111
Risk rating 7	—		—		—		—		—		94		—		—		94
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	36,366	$	34,514	$	25,382	$	7,308	$	119	$	1,030	$	4,322	$	—	$	109,041
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial/Agricultural operating:
Commercial and industrial
Risk rating 1 to 5	$	13,658	$	32,774	$	28,294	$	12,179	$	5,276	$	2,537	$	22,844	$	—	$	117,562
Risk rating 6	—		—		—		—		—		—		2,950		—		2,950
Risk rating 7	—		—		—		—		—		3		—		17		20
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	13,658	$	32,774	$	28,294	$	12,179	$	5,276	$	2,540	$	25,794	$	17	$	120,532
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Agricultural operating
Risk rating 1 to 5	$	3,392	$	3,201	$	960	$	489	$	344	$	2,303	$	11,448	$	—	$	22,137
Risk rating 6	92		—		48		345		—		—		575		—		1,060
Risk rating 7	—		493		722		—		35		124		—		—		1,374
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	3,484	$	3,694	$	1,730	$	834	$	379	$	2,427	$	12,023	$	—	$	24,571
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


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	$	23,434	$	34,176	$	8,872	$	2,644	$	2,324	$	35,201	$	15,670	$	—	$	122,321
Risk rating 6	—		—		—		—		—		—		—		—		—
Risk rating 7	—		—		—		—		14		2,963		—		50		3,027
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	23,434	$	34,176	$	8,872	$	2,644	$	2,338	$	38,164	$	15,670	$	50	$	125,348
Current period gross charge-offs	$	—	$	—	$	10	$	—	$	—	$	68	$	—	$	—	$	78
Purchased HELOC loans
Risk rating 1 to 5	$	—	$	—	$	—	$	—	$	—	$	—	$	2,881	$	—	$	2,881
Risk rating 6	—		—		—		—		—		—		—		—		—
Risk rating 7	—		—		—		—		—		—		—		—		—
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—	$	—	$	2,881	$	—	$	2,881
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer installment:
Originated indirect paper
Risk rating 1 to 5	$	—	$	—	$	—	$	—	$	—	$	7,135	$	—	$	—	$	7,135
Risk rating 6	—		—		—		—		—		—		—		—		—
Risk rating 7	—		—		—		—		—		40		—		—		40
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—	$	7,175	$	—	$	—	$	7,175
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	13	$	—	$	—	$	13
Other consumer
Risk rating 1 to 5	$	1,763	$	1,743	$	872	$	665	$	470	$	342	$	557	$	—	$	6,412
Risk rating 6	—		—		—		—		—		—		—		—		—
Risk rating 7	7		—		—		—		18		2		1		—		28
Risk rating 8	—		—		—		—		—		—		—		—		—
Risk rating 9	—		—		—		—		—		—		—		—		—
Total	$	1,770	$	1,743	$	872	$	665	$	488	$	344	$	558	$	—	$	6,440
Current period gross charge-offs	$	—	$	—	$	1	$	11	$	2	$	3	$	—	$	—	$	17
Total loans receivable	$	149,627	$	317,475	$	426,449	$	174,328	$	95,379	$	210,051	$	74,153	$	67	$	1,447,529
Total current period gross charge-offs	$	—	$	—	$	21	$	43	$	2	$	88	$	—	$	—	$	154

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 - Loans- 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.

The following tables present the balance and activity in the allowance for credit losses (“ACL”) - loans by portfolio segment for the three and nine months ended September 30, 2023:


	Commercial/Agricultural Real Estate		C&I/Agricultural operating		Residential Mortgage		Consumer Installment		Unallocated		Total
Three months ended September 30, 2023
Allowance for Credit Losses - Loans:
ACL - Loans, at beginning of period	$	18,933	$	1,458	$	2,452	$	321	$	—	$	23,164

Charge-offs	—		—		(54)		(3)		—		(57)
Recoveries	206		10		—		2		—		218
(Reversals)/additions to ACL - Loans via provision for credit losses charged to operations	(284)		(279)		235		(24)		—		(352)
ACL - Loans, at end of period	$	18,855	$	1,189	$	2,633	$	296	$	—	$	22,973


	Commercial/Agricultural Real Estate		C&I/Agricultural operating		Residential Mortgage		Consumer Installment		Unallocated		Total
Nine months ended September 30, 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	(46)		—		(78)		(30)		—		(154)
Recoveries	236		41		40		24		—		341
Additions/(reversals) to ACL - Loans via provision for credit losses charged to operations	70		(839)		953		(43)		—		141
ACL - Loans, at end of period	$	18,855	$	1,189	$	2,633	$	296	$	—	$	22,973

Allowance for Credit Losses - Unfunded Commitments - In addition to the ACL - Loans, the Company has established an ACL - Unfunded Commitments of $1,571 at September 30, 2023 and $0 at December 31, 2022, classified in other liabilities on the consolidated balance sheets. The following table presents the balance and activity in the ACL - Unfunded Commitments for the three and nine months ended September 30, 2023.


	September 30, 2023 and Three Months Ended		September 30, 2023 and Nine Months Ended
ACL - Unfunded Commitments - beginning of period	$	1,544	$	—
Cumulative effect of ASU 2016-13 adoption	—		1,537
Additions to ACL - Unfunded Commitments via provision for credit losses charged to operations	27		34
ACL - Unfunded Commitments - End of period	$	1,571	$	1,571

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.


	September 30, 2023 and Three Months Ended		September 30, 2023 and Nine Months Ended
Provision for credit losses on:
Loans	$	(352)	$	141
Unfunded Commitments	27		34
Total provision for credit losses	$	(325)	$	175

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 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:



Three months ended September 30, 2022	Commercial/Agricultural Real Estate		C&I/Agricultural operating		Residential Mortgage		Consumer Installment		Unallocated		Total
Allowance for Loan Losses:
Beginning balance, July 1, 2022	$	12,702	$	1,910	$	472	$	143	$	826	$	16,053
Charge-offs	—		—		—		(9)		—		(9)
Recoveries	35		8		1		27		—		71
Provision	380		7		10		(38)		217		576

Total allowance on originated loans	13,117		1,925		483		123		1,043		16,691
Purchased credit impaired loans	—		—		—		—		—		—
Other acquired loans:
Beginning balance, July 1, 2022	664		51		48		9		—		772
Charge-offs	(48)		—		—		—		—		(48)
Recoveries	—		—		2		1		—		3
Provision	49		(2)		(21)		(1)		(226)		(201)

Total allowance on other acquired loans	665		49		29		9		(226)		526
Total allowance on acquired loans	665		49		29		9		(226)		526
Ending balance, September 30, 2022	$	13,782	$	1,974	$	512	$	132	$	817	$	17,217


	Commercial/Agricultural Real Estate		C&I/Agricultural operating		Residential Mortgage		Consumer Installment		Unallocated		Total
Nine months ended September 30, 2022
Allowance for Loan Losses:
Beginning balance, January 1, 2022	$	12,354	$	1,959	$	518	$	225	$	774	$	15,830
Charge-offs	(157)		(310)		(35)		(32)		—		(534)
Recoveries	41		27		2		48		—		118
Provision	879		249		(2)		(118)		269		1,277

Total allowance on originated loans	$	13,117	$	1,925	$	483	$	123	$	1,043	$	16,691
Purchased credit impaired loans	—		—		—		—		—		—
Other acquired loans
Beginning balance, January 1, 2022	856		69		130		28		—		1,083
Charge-offs	(48)		—		(33)		(2)		—		(83)
Recoveries	—		—		27		1		—		28
Provision	(143)		(20)		(95)		(18)		(226)		(502)

Total allowance on other acquired loans	665		49		29		9		(226)		526
Total allowance on acquired loans	665		49		29		9		(226)		526
Ending balance, September 30, 2022	$	13,782	$	1,974	$	512	$	132	$	817	$	17,217
Allowance for Loan Losses at September 30, 2022:
Amount of allowance for loan losses arising from loans individually evaluated for impairment	$	699	$	—	$	—	$	—	$	—	$	699
Amount of allowance for loan losses arising from loans collectively evaluated for impairment	$	13,083	$	1,974	$	512	$	132	$	817	$	16,518
Loans Receivable as of September 30, 2022
Ending balance of originated loans	$	982,555	$	145,197	$	80,664	$	18,250	$	—	$	1,226,666
Ending balance of purchased credit-impaired loans	5,785		578		908		—		—		7,271
Ending balance of other acquired loans	110,577		15,073		20,518		294		—		146,462
Ending balance of loans	$	1,098,917	$	160,848	$	102,090	$	18,544	$	—	$	1,380,399
Ending balance: individually evaluated for impairment	$	18,698	$	4,829	$	6,290	$	113	$	—	$	29,930
Ending balance: collectively evaluated for impairment	$	1,080,219	$	156,019	$	95,800	$	18,431	$	—	$	1,350,469


	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

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 September 30, 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
September 30, 2023
Commercial/Agricultural real estate:
Commercial real estate	$	523	$	—	$	—	$	523	$	10,570	$	11,093	$	737,025	$	748,118
Agricultural real estate	36		—		—		36		469		505		83,823		84,328
Multi-family real estate	—		—		—		—		—		—		219,095		219,095
Construction and land development	—		—		—		—		94		94		108,947		109,041
C&I/Agricultural operating:
Commercial and industrial	—		150		—		150		—		150		120,382		120,532

Agricultural operating	—		—		—		—		1,373		1,373		23,198		24,571
Residential mortgage:
Residential mortgage	1,049		221		952		2,222		923		3,145		122,203		125,348
Purchased HELOC loans	117		—		—		117		—		117		2,764		2,881
Consumer installment:
Originated indirect paper	70		—		—		70		26		96		7,079		7,175

Other consumer	36		4		19		59		1		60		6,380		6,440
Total	$	1,831	$	375	$	971	$	3,177	$	13,456	$	16,633	$	1,430,896	$	1,447,529


(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

Nonaccrual Loans - The following table presents the amortized cost basis of loans on nonaccrual status and of nonaccrual loans individually evaluated at September 30, 2023 with no allowance for credit losses and interest income that would have been recorded under the original terms of such nonaccrual loans:


September 30, 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	$	10,570	$	10,556	$	723
Agricultural real estate	469		469		70
Multi-family real estate	—		—		—
Construction and land development	94		94		1
C&I/Agricultural operating:
Commercial and industrial	—		—		—

Agricultural operating	1,373		1,373		108
Residential mortgage:
Residential mortgage	923		685		44
Purchased HELOC loans	—		—		—
Consumer installment:
Originated indirect paper	26		26		1

Other consumer	1		1		—
Total	$	13,456	$	13,204	$	947

The Company’s policy is to discontinue the accrual of interest income on all loans for which principal or interest is past due according to the following schedules:

•Commercial/agricultural real estate loans, past due 90 days or more;

•Commercial and industrial/agricultural operating loans past due 90 days or more;

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

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

The accrual of interest is discontinued earlier when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Once interest accruals are discontinued, accrued but uncollected interest is charged against current year income. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Interest on loans determined to be modified is recognized on an accrual basis in accordance with the restructured terms if the loan is in compliance with the modified terms. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.

The amount of interest income recognized by the Company for the three and nine months ended September 30, 2023, due to nonaccrual loan payoffs was $420 and $505, respectively.

Collateral Dependent Loans - A loan is considered to be collateral dependent when, based upon management’s 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 the amortized cost basis of collateral dependent loans by portfolio segment and collateral type that were individually evaluated to determine expected credit losses and the related allowance for credit losses as of September 30, 2023.


	Collateral Type
September 30, 2023	Real Estate		Other Assets		Total		Without an Allowance		With an Allowance		Allowance Allocation
Commercial/Agricultural real estate:
Commercial real estate	$	11,604	$	—	$	11,604	$	11,590	$	14	$	13
Agricultural real estate	6,900		—		6,900		6,900		—		—
Multi-family real estate	—		—		—		—		—		—
Construction and land development	206		—		206		206		—		—
C&I/Agricultural operating:
Commercial and industrial	—		2,970		2,970		2,970		—		—

Agricultural operating	—		1,373		1,373		1,373		—		—
Residential mortgage:
Residential mortgage	3,094		—		3,094		2,722		372		80
Purchased HELOC loans	—		—		—		—		—		—
Consumer installment:
Originated indirect paper	—		40		40		40		—		—

Other consumer	—		27		27		27		—		—
Total	$	21,804	$	4,410	$	26,214	$	25,828	$	386	$	93

There were no outstanding commitments to borrowers experiencing financial difficulty as of September 30, 2023. There were unused lines of credit totaling $37 on loans with borrowers experiencing financial difficulties as of September 30, 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 September 30, 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


							Three Months Ended				Nine Months Ended
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
September 30, 2022
With No Related Allowance Recorded:
Commercial/Agricultural real estate	$	12,002	$	12,038	$	—	$	12,646	$	105	$	14,636	$	410
C&I/Agricultural operating	4,710		4,829		—		4,478		57		4,898		139
Residential mortgage	6,229		6,290		—		5,957		85		6,419		218
Consumer installment	113		113		—		138		1		198		5
Total	$	23,054	$	23,270	$	—	$	23,219	$	248	$	26,151	$	772
With An Allowance Recorded:
Commercial/Agricultural real estate	$	6,660	$	6,660	$	699	$	6,232	$	81	$	5,758	$	95
C&I/Agricultural operating	—		—		—		—		—		207		10
Residential mortgage	—		—		—		101		—		350		2
Consumer installment	—		—		—		—		—		1		—
Total	$	6,660	$	6,660	$	699	$	6,333	$	81	$	6,316	$	107
September 30, 2022
Commercial/Agricultural real estate	$	18,662	$	18,698	$	699	$	18,878	$	186	$	20,394	$	505
C&I/Agricultural operating	4,710		4,829		—		4,478		57		5,105		149
Residential mortgage	6,229		6,290		—		6,058		85		6,769		220
Consumer installment	113		113		—		138		1		199		5
Total	$	29,714	$	29,930	$	699	$	29,552	$	329	$	32,467	$	879

The tables below detail Loan Modifications Made to Borrowers Experiencing Financial Difficulty during the three months ended September 30, 2023:


	Term Extension
Loan Class	Amortized Cost Basis at September 30, 2023		% of Total Class of Financing Receivables
Commercial real estate	$	4,826	0.65	%

The following tables describe the financial effect of the modifications made to borrowers experiencing financial difficulty during the three months ended September 30, 2023:


Term Extension
Loan Class						Financial Effect
Commercial real estate						A weighted average of 20 months was added to the term of the loans

The tables below detail Loan Modifications Made to Borrowers Experiencing Financial Difficulty during the nine months ended September 30, 2023:


	Term Extension
Loan Class	Amortized Cost Basis at September 30, 2023		% of Total Class of Financing Receivables
Commercial real estate	$	4,826	0.65	%

Agricultural operating	$	179	0.73	%
Residential mortgage	$	36	0.03	%

	Other-Than-Insignificant Payment Delay
Loan Class	Amortized Cost Basis at September 30, 2023		% of Total Class of Financing Receivables
Residential mortgage	$	69	0.06	%
Other consumer	$	20	0.31	%

The following tables describe the financial effect of the modifications made to borrowers experiencing financial difficulty during the nine months ended September 30, 2023:


Term Extension
Loan Class						Financial Effect
Commercial real estate						A weighted average of 20 months was added to the term of the loans

Agricultural operating						A weighted average of 3 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
Residential mortgage						Payments were deferred a weighted average of 6 months
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. No loan modified during the three and nine months ended September 30, 2023 has subsequently defaulted. The following table shows the performance of such loans that have been modified during the nine months ended September 30, 2023.


	Current		30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days Past Due
Commercial real estate	$	4,826	$	—	$	—	$	—

Agricultural operating	179
Residential mortgage	105		—		—		—
Other consumer	20		—		—		—
Total	$	5,130	$	—	$	—	$	—

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 and nine months ended September 30, 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 September 30, 2022
TDRs:
Commercial/Agricultural real estate	2	$	—	$	—	$	1,539	$	—	$	1,539	$	1,539	$	—
C&I/Agricultural operating	2	1,424		—		140		—		1,564		1,564		—
Residential mortgage	3	7		147		—		—		154		154		—
Consumer installment	—	—		—		—		—		—		—		—
Totals	7	$	1,431	$	147	$	1,679	$	—	$	3,257	$	3,257	$	—


	Number of Contracts	Maturity Extension		Modified Payment		Modified Under- writing		Other		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserve
Nine months ended September 30, 2022
TDRs:
Commercial/Agricultural real estate	7	$	1,241	$	—	$	1,964	$	—	$	3,205	$	3,205	$	—
C&I/Agricultural operating	5	1,424		—		736		—		2,160		2,160		—
Residential mortgage	9	70		147		507		—		724		724		—
Consumer installment	—	—		—		—		—		—		—		—
Totals	21	$	2,735	$	147	$	3,207	$	—	$	6,089	$	6,089	$	—

There were no loans modified in a TDR during the previous twelve months which subsequently defaulted during the three and nine months ended September 30, 2022.

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 September 30, 2023 and December 31, 2022 were $499,482 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 $6,526 and $2,649 at September 30, 2023 and December 31, 2022, respectively.

Mortgage servicing rights activity for the three and nine month periods ended September 30, 2023 and September 30, 2022 were as follows:


	As of and for the Three Months Ended		As of and for the Three Months Ended		As of and for the Nine Months Ended		As of and for the Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Mortgage servicing rights:
Mortgage servicing rights, beginning of period	$	4,008	$	4,520	$	4,262	$	4,727

Increase in mortgage servicing rights resulting from transfers of financial assets	86		48		138		275
Amortization during the period	(150)		(197)		(456)		(631)
Mortgage servicing rights, end of period	3,944		4,371		3,944		4,371
Valuation allowance:
Valuation allowance, beginning of period	—		—		—		(566)
Additions	—		—		—		—
Recoveries	—		—		—		566

Valuation allowance, end of period	—		—		—		—
Mortgage servicing rights, net	$	3,944	$	4,371	$	3,944	$	4,371
Fair value of mortgage servicing rights; end of period	$	5,701	$	5,795	$	5,701	$	5,795

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 $321 and $346 for the three months ended September 30, 2023 and September 30, 2022, respectively. Servicing fees totaled $976 and $1,049 for the nine months ended September 30, 2023 and September 30, 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 September 30, 2023, was determined using discount rates ranging from 10.125% to 13.125%. Fair value at September 30, 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.

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 0.92 to 4.75 years. Some of the leases include an option to extend, the longest of which is for two 5 year terms. As of September 30, 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.


	Nine Months Ended
	September 30, 2023			September 30, 2022
The components of total lease cost were as follows:
Operating lease cost	$	382		$	419
Variable lease cost	59			35
Total lease cost	$	441		$	454

The components of total lease income were as follows:
Operating lease income	$	29		$	26

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	$	409		$	419
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	225		$	215


	September 30, 2023			December 31, 2022
Supplemental balance sheet information related to leases was as follows:
Operating lease right-of-use assets	$	1,588		$	1,700
Operating lease liabilities	$	1,806		$	1,945

Weighted average remaining lease term in years; operating leases	4.17			4.89
Weighted average discount rate; operating leases	3.18		%	2.98		%

Cash obligations and receipts under lease contracts are as follows:


Fiscal years ending December 31,	Payments		Receipts
2023	$	136	$	11
2024	549		32
2025	534		15
2026	464		7
2027	401		—
Thereafter	141		—
Total	2,225		$	65
Less: effects of discounting	(419)
Lease liability recognized	$	1,806

NOTE 6 – DEPOSITS

The following is a summary of deposits by type at September 30, 2023 and December 31, 2022, respectively:


	September 30, 2023		December 31, 2022
Non-interest bearing demand deposits	$	275,790	$	284,722
Interest bearing demand deposits	336,962		371,210
Savings accounts	183,702		220,019
Money market accounts	312,689		323,435
Certificate accounts	364,092		225,334
Total deposits	$	1,473,235	$	1,424,720

At September 30, 2023, the scheduled maturities of certificate accounts were as follows for the year ended, except December 31, 2023, which is the three months ended:


December 31, 2023	$	80,547
December 31, 2024	255,639
December 31, 2025	19,146
December 31, 2026	2,371
December 31, 2027	677
After December 31, 2027	5,712
Total	$	364,092

Certificate accounts of $250 or more were $128,414 and $66,827 at September 30, 2023 and December 31, 2022, respectively.

Brokered deposits were $85,173 at September 30, 2023 and consisted of $84,163 of brokered certificate accounts and $1,010 of brokered money market accounts. Brokered Deposits were $39,841 at December 31, 2022 and consisted of $39,839 of brokered certificate accounts and $2 of brokered money market accounts.

At September 30, 2023, the scheduled maturities of brokered certificate accounts were as follows for the year ended, except December 31, 2023, which is the three months ended:


December 31, 2023	$	25,706
December 31, 2024	44,334
December 31, 2025 (1)	8,634


December 31, 2028 (1)	5,489
Total	$	84,163

(1) The Company can call the brokered certificate accounts maturing in the years ended December 31, 2025 and 2028, monthly beginning in March 2024.

NOTE 7 – FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

A summary of Federal Home Loan Bank advances and other borrowings at September 30, 2023 and December 31, 2022 is as follows:


	September 30, 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) (4)	2023	$	74,000	1.43	%	5.46	%	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	%
	2028	15,000		3.57	%	3.59	%






Federal Home Loan Bank advances		$	114,530						$	142,530

Senior Notes (5)	2034	$	18,083	6.75	%	7.75	%	2034	$	23,250	3.00	%	6.75	%

Subordinated Notes (6)	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		(676)							(841)
Total other borrowings		$	67,407						$	72,409

Totals		$	181,937						$	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 $1,065,913 and $984,878 at September 30, 2023 and December 31, 2022, respectively. At September 30, 2023, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $314,521 compared to $256,773 as of December 31, 2022.

(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $217,530 and $157,530, during the nine months ended September 30, 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 September 30, 2023 and December 31, 2022 were 4.58% and 4.09%, respectively.

(4) FHLB term notes totaling $15,000, with 2028 maturity dates, are callable once by the FHLB in December of 2023.

(5) Senior notes, entered into by the Company in June 2019 consist of the following:

(a) A term note, which was subsequently refinanced in March 2022 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, 2024, that remains undrawn upon.

(6) 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.

(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. The letters of credit balances were $469,530 and $191,650 at September 30, 2023 and December 31, 2022, respectively.

Federal Reserve Borrowings

At September 30, 2023 and December 31, 2022, the Bank had the ability to borrow $22,059 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 $23,210 and $5,421 as of September 30, 2023 and December 31, 2022, respectively. There were no Federal Reserve borrowings outstanding as of September 30, 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 September 30, 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 September 30, 2023, the Bank maintains two unsecured federal funds purchased lines of credit with its banking partners which total $70,000. 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 September 30, 2023 or December 31, 2022.

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 September 30, 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 September 30, 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 September 30, 2023
Total capital (to risk weighted assets)	$	229,007	14.6	%	$	125,736	> =	8.0	%	$	157,170	> =	10.0	%
Tier 1 capital (to risk weighted assets)	209,302		13.3	%	94,302		> =	6.0	%	125,736		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	209,302		13.3	%	70,727		> =	4.5	%	102,161		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	209,302		11.6	%	72,145		> =	4.0	%	90,181		> =	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	%

The Company’s Tier 1 (leverage) and risk-based capital ratios at September 30, 2023 and December 31, 2022, respectively, are presented below:


	Actual				For Capital Adequacy Purposes
	Amount		Ratio		Amount			Ratio
As of September 30, 2023
Total capital (to risk weighted assets)	$	226,800	14.4	%	$	125,736	> =	8.0	%
Tier 1 capital (to risk weighted assets)	157,095		10.0	%	94,302		> =	6.0	%
Common equity tier 1 capital (to risk weighted assets)	157,095		10.0	%	70,727		> =	4.5	%
Tier 1 leverage ratio (to adjusted total assets)	157,095		8.7	%	72,145		> =	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	%

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 September 30, 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 September 30, 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 September 30, 2023, there are no awarded unvested restricted shares and 54,000 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 $208 and $590 for the three and nine months ended September 30, 2023, compared to $255 and $647 for the three and nine months ended September 30, 2022.

Restricted Common Stock Award


	September 30, 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	(31,803)	12.19		(40,843)	12.12
Forfeited	(4,752)	11.78		(2,626)	11.04
Unvested and outstanding at end of period	89,677	$	12.40	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 and nine month periods ended September 30, 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 and nine month period ended September 30, 2022 was $1 and $3, respectively.

Common Stock Option Awards


	Option Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
September 30, 2023
Outstanding at beginning of year	58,000	$	11.51

Exercised	(3,000)	9.21
Forfeited or expired	(1,000)	13.76
Outstanding at end of period	54,000	$	11.59	3.09	$	2
Exercisable at end of period	54,000	$	11.59	3.09	$	2

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:


	Nine months ended September 30, 2023		Twelve months ended December 31, 2022
Intrinsic value of options exercised	$	2	$	38
Cash received from options exercised	$	28	$	71
Tax benefit realized from options exercised	$	—	$	—

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).

Assets Measured on a Recurring Basis

The following tables present the financial instruments measured at fair value on a recurring basis as of September 30, 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)
September 30, 2023
Investment securities:
U.S. government agency obligations	$	17,318	$	—	$	17,318	$	—

Mortgage-backed securities	69,731		—		69,731		—

Corporate debt securities	40,889		—		40,889		—
Corporate asset-backed securities	25,476		—		25,476		—

Total investment securities	153,414		—		153,414		—
Equity Investments:
Equity Investments	450		450		—		—
Equity investments measured at NAV(1)	1,983		—		—		—
Total equity investments	2,433		450		—		—
Total	$	155,847	$	450	$	153,414	$	—

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.

Assets Measured on Nonrecurring Basis

The following tables present the financial instruments measured at fair value on a nonrecurring basis as of September 30, 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)
September 30, 2023
Foreclosed and repossessed assets, net	$	1,046	$	—	$	—	$	1,046
Collateral dependent loans with allowances	293		—		—		293
Mortgage servicing rights	3,944		—		—		5,701
Total	$	5,283	$	—	$	—	$	7,040
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.

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

September 30, 2023.


	Fair Value		Valuation Techniques (1)	Significant Unobservable Inputs (2)	Range
September 30, 2023
Foreclosed and repossessed assets, net	$	1,046	Appraisal value	Estimated costs to sell	10% - 15%
Collateral dependent loans with allowances	$	293	Appraisal value	Estimated costs to sell	10% - 15%
Mortgage servicing rights	$	5,701	Discounted cash flows	Discounted rates	10.125% - 13.125%
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.

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:


		September 30, 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)	$	32,532	$	32,532	$	35,363	$	35,363
Other interest-bearing deposits	(Level II)	—		—		249		250
Securities available for sale “AFS”	(Level II)	153,414		153,414		165,991		165,991
Securities held to maturity “HTM”	(Level II)	92,336		68,752		96,379		76,779
Equity investments	(Level I)	450		450		338		338
Equity investments valued at NAV(1)	N/A	1,983		1,983		1,456		1,456
Other investments	(Level II)	15,109		15,109		15,834		15,834
Loans receivable, net	(Level III)	1,424,556		1,357,089		1,393,845		1,342,838
Loans held for sale - Residential mortgage	(Level I)	904		914		—		—
Loans held for sale - SBA /FSA	(Level II)	1,833		1,833		—		—
Mortgage servicing rights	(Level III)	3,944		5,701		4,262		5,665
Accrued interest receivable	(Level I)	5,936		5,936		5,285		5,285
Financial liabilities:
Deposits	(Level III)	$	1,473,235	$	1,470,098	$	1,424,720	$	1,420,871
FHLB advances	(Level II)	114,530		113,571		142,530		141,060
Other borrowings	(Level II)	67,407		59,450		72,409		72,409
Accrued interest payable	(Level I)	1,623		1,623		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.

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				Nine Months Ended
(Share count in thousands)	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022

Basic
Net income attributable to common stockholders	$	2,498	$	3,993	$	9,366	$	13,065
Weighted average common shares outstanding	10,470		10,510		10,473		10,522
Basic earnings per share	$	0.24	$	0.38	$	0.89	$	1.24
Diluted
Net income attributable to common stockholders	$	2,498	$	3,993	$	9,366	$	13,065
Weighted average common shares outstanding	10,470		10,510		10,473		10,522

Add: Dilutive stock options outstanding	—		9		2		11
Average shares and dilutive potential common shares	10,470		10,519		10,475		10,533
Diluted earnings per share	$	0.24	$	0.38	$	0.89	$	1.24
Additional common stock option shares that have not been included due to their antidilutive effect	40		21		40		—

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 and nine months ended September 30, 2023 and 2022:


	Three Months Ended
	September 30, 2023						September 30, 2022
	Before-Tax Amount		Tax Benefit (Expense)		Net-of-Tax Amount		Before-Tax Amount		Tax Benefit (Expense)		Net-of-Tax Amount
Unrealized (losses) gains on securities:
Net unrealized losses arising during the period	$	(3,701)	$	839	$	(2,862)	$	(6,868)	$	1,888	$	(4,980)





Other comprehensive loss	$	(3,701)	$	839	$	(2,862)	$	(6,868)	$	1,888	$	(4,980)


	Nine Months Ended
	September 30, 2023						September 30, 2022
	Before-Tax Amount		Tax Benefit (Expense)		Net-of-Tax Amount		Before-Tax Amount		Tax Benefit (Expense)		Net-of-Tax Amount
Unrealized (losses) gains on securities:
Net unrealized losses arising during the period	$	(5,373)	$	1,299	$	(4,074)	$	(24,024)	$	6,606	$	(17,418)
Reclassification adjustment for gains included in net income	(12)		3		(9)		—		—		—




Other comprehensive loss	$	(5,385)	$	1,302	$	(4,083)	$	(24,024)	$	6,606	$	(17,418)

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 nine months ended September 30, 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 loss	(5,385)		(4,083)
Ending balance, September 30, 2023	$	(29,738)	$	(21,739)

Reclassifications out of accumulated other comprehensive income (loss) for the three and nine month periods ended September 30, 2023 and September 30, 2022 were as follows:


	Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
Details about Accumulated Other Comprehensive Income (Loss) Components	Three months ended September 30, 2023		Nine months ended September 30, 2023		(1)	Affected Line Item on the Statement of Operations
Unrealized gains and losses
Sale of securities	$	—	$	12		Net gains (losses) on investment securities
Tax effect	—		(3)			Provision for income taxes
Total reclassifications for the period	$	—	$	9		Net income attributable to common stockholders


	Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
Details about Accumulated Other Comprehensive Income (Loss) Components	Three months ended September 30, 2022		Nine months ended September 30, 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

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain matters discussed in this report contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and the Company intends that these forward-looking statements be covered by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as “anticipate,” “believe,” “could,” “expect,” “estimates,” “intend,” “may,” “preliminary,” “planned,” “potential,” “should,” “will,” “would,” or the negative of those terms or other words of similar meaning. Similarly, statements that describe the Company’s future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are inherently subject to many uncertainties in the Company’s operations and business environment.

Factors that could affect actual results or outcomes include the matters described under the caption “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 7, 2023 (“2022 10-K”), the matters described in “Risk Factors” in Item 1A for the quarters ended March 31, 2023 and June 30, 2023 and in Item 1A of this Form 10-Q, and the following:

•conditions in the financial markets and economic conditions generally;

•reputational risk, new legislation, regulations, or policy changes as a result of recent volatility in the banking sector;

•adverse impacts to the Company or Bank arising from the COVID-19 pandemic;

•acts of terrorism and political or military actions by the United States or other governments;

•the possibility of a deterioration in the residential real estate markets;

•interest rate risk;

•lending risk;

•higher lending risks associated with our commercial and agricultural banking activities;

•the sufficiency of the allowance for credit losses;

•changes in the fair value or ratings downgrades of our securities;

•competitive pressures among depository and other financial institutions;

•disintermediation risk;

•our ability to maintain our reputation;

•our ability to maintain or increase our market share;

•our ability to realize the benefits of net deferred tax assets;

•our inability to obtain needed liquidity;

•our ability to raise capital needed to fund growth or meet regulatory requirements;

•our ability to attract and retain key personnel;

•our ability to keep pace with technological change;

•prevalence of fraud and other financial crimes;

•cybersecurity risks;

•the possibility that our internal controls and procedures could fail or be circumvented;

•our ability to successfully execute our acquisition growth strategy;

•risks posed by acquisitions and other expansion opportunities, including difficulties and delays in integrating the acquired business operations or fully realizing the cost savings and other benefits;

•restrictions on our ability to pay dividends;

•the potential volatility of our stock price;

•accounting standards for credit losses;

•legislative or regulatory changes or actions, or significant litigation, adversely affecting the Company or Bank;

•public company reporting obligations;

•changes in federal or state tax laws; and

•changes in accounting principles, policies or guidelines and their impact on financial performance.

Stockholders, potential investors, and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this filing and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances occurring after the date of this report.

GENERAL

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of September 30, 2023, and our consolidated results of operations for the three and nine months ended September 30, 2023, compared to the same periods in the prior fiscal year for the three and nine months ended September 30, 2022. This discussion should be read in conjunction with the interim consolidated financial statements and the condensed notes thereto included with this report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes related thereto included in our 2022 10-K. Unless otherwise stated, all monetary amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than share, per share and capital ratio amounts, are stated in thousands.

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amount of assets, liabilities, revenue, expenses, and their related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors that our management believes to be relevant at the time our consolidated financial statements are prepared. Some of these estimates are more critical than others. In addition to the policies included in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included as an exhibit in our annual report on our 2022 10-K, our critical accounting estimates are as follows:

Allowance for Credit Losses

We adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), “Measurement of Credit Losses on Financial Instruments” through a cumulative-effect adjustment on January 1, 2023. We have selected a loss estimation methodology, utilizing a third-party model. See also Notes 1 and 3 to the unaudited consolidated financial statements for further discussion of our adoption of ASU 2016-13.

Allowance for Credit Losses – Held-to-Maturity Securities. Currently, all of the Company’s held-to-maturity securities are backed by governments or government agencies, for which the risk of credit loss is minimal. Accordingly, the Company does not record an allowance for credit losses on held-to-maturity securities.

Allowance for Credit Losses - Loans - We maintain an allowance for credit losses to absorb probable and inherent losses in our loan portfolio. The allowance is based on ongoing, quarterly assessments of the estimated lifetime losses in our loan portfolio. In evaluating the level of the allowance for credit losses, we consider the types of loans and the amount of loans in our loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, prevailing economic conditions and other relevant factors determined by management. We follow all applicable regulatory guidance, including the “Interagency Policy Statement on Allowances for Credit losses,” issued by the Office of the Comptroller of the Currency, Department of the Treasury, Federal Deposit Insurance Corporation, and National Credit Union Administration. We believe that the Bank’s Allowance for Credit Losses Policy conforms to all applicable regulatory requirements. However, based on periodic examinations by regulators, the amount of the allowance for credit losses recorded during a particular period may be adjusted.

Our determination of the allowance for credit losses - loans is based on (1) an individual allowance for specifically identified and evaluated loans that management has determined have unique risk characteristics. For these loans, the estimated loss is based on likelihood of default, payment history, and net realizable value of underlying collateral. Specific allocations for collateral dependent loans are based on the fair value of the underlying collateral relative to the amortized cost of the loans. For loans that are not collateral dependent, the specific allocation is based on the present value of expected future cash flows discounted at the loan’s original effective interest rate through the repayment period; and (2) a collective allowance for loans not specifically identified in (1) above. The allowance for these loans is estimated by pooling loans with a similar risk profile and calculating a collective loss rate using the pool’s risk drivers, historical loss experience, and reasonable and supportable future economic forecasts to project lifetime losses. This collectively estimated loss is adjusted for qualitative factors.

Assessing the allowance for credit losses - loans is inherently subjective as it requires making material estimates, including the amount, and timing of future cash flows expected to be received on impaired loans, any of which estimates may be susceptible to significant change. In our opinion, the allowance, when taken as a whole, reflects estimated probable loan losses in our loan portfolio.

Allowance for Credit Losses – Unfunded Commitments. The Company estimates expected credit losses over the contractual period for which the Company is exposed to credit risk, via a contractual obligation to extend credit, unless the

obligation is unconditionally cancellable by the Company. The allowance for credit losses - unfunded commitments on off-balance sheet exposures is included in other liabilities on the consolidated balance sheet.

Goodwill.

We account for goodwill and other intangible assets in accordance with ASC Topic 350, “Intangibles - Goodwill and Other.” The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, as goodwill. The Company amortizes acquired intangible assets with definite useful economic lives over their useful economic lives utilizing the straight-line method. On a periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amounts of the intangible assets may be impaired. The Company does not amortize goodwill, but reviews goodwill for impairment at a reporting unit level on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired. 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 September 30, 2023, which is related to its banking activities. The Company performed the required goodwill impairment test and determined that goodwill was not impaired as of December 31, 2022. The Company has monitored 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.

Fair Value Measurements and Valuation Methodologies.

We apply various valuation methodologies to assets and liabilities which often involve a significant degree of judgment, particularly when liquid markets do not exist for the particular items being valued. Quoted market prices are referred to when estimating fair values for certain assets, such as most investment securities. However, for those items for which an observable liquid market does not exist, management utilizes significant estimates and assumptions to value such items. Examples of these items include loans, deposits, borrowings, goodwill, core deposit intangible assets, other assets and liabilities obtained or assumed in business combinations, and certain other financial instruments. These valuations require the use of various assumptions, including, among others, discount rates, rates of return on assets, repayment rates, cash flows, default rates, and liquidation values. The use of different assumptions could produce significantly different results, which could have material positive or negative effects on the Company’s results of operations, financial condition, or disclosures of fair value information.

In addition to valuation, the Company must assess whether there are any declines in value below the carrying value of assets that should be considered other than temporary or otherwise require an adjustment in carrying value and recognition of a loss in the consolidated statement of operations. Examples include but are not limited to: loans, investment securities, goodwill, core deposit intangible assets and deferred tax assets, among others. Specific assumptions, estimates and judgments utilized by management are discussed in detail herein in management’s discussion and analysis of the Company’s balance sheet and statement of operations and in notes 1, 2, 3, 4 and 10 of Condensed Notes to Consolidated Financial Statements.

Income Taxes.

Amounts provided for income tax expenses are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. The amounts provided for income taxes are also impacted by the Company’s investment in a New Markets Tax Credit. With the adoption of ASU 2023-02 on January 1, 2023, 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. Deferred income tax assets and liabilities, which arise principally from temporary differences between the amounts reported in the financial statements and the tax basis of certain assets and liabilities, are included in the amounts provided for income taxes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and tax planning strategies which will create taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and if necessary, tax planning strategies in making this assessment.

The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and application of specific provisions of federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be material to our consolidated results of operations and reported earnings. We believe that the deferred tax assets and liabilities are adequate and properly recorded in the accompanying consolidated financial statements. The Wisconsin state budget, signed July 5, 2023, and effective January 1, 2023, made originated loans in Wisconsin for business purposes up to $5 million non-taxable. This change resulted in the Company reducing its estimated future effective tax rate at which it will likely recognize its deferred tax asset arising from

unrealized losses on AFS securities. As a result, the Company recorded a $1.8 million valuation allowance against this deferred tax asset in the quarter ended September 30, 2023.

STATEMENT OF OPERATIONS ANALYSIS

Net Interest Income. Net interest income represents the difference between the dollar amount of interest earned on interest-bearing assets and the dollar amount of interest paid on interest-bearing liabilities. The interest income and expense of financial institutions (including those of the Bank) are significantly affected by general economic conditions, competition, policies of regulatory authorities and other factors.

Interest rate spread and net interest margin are used to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest earning assets and the rate paid for interest-bearing liabilities that fund those assets. Net interest margin is expressed as the percentage of net interest income to average interest earning assets. Net interest margin currently exceeds interest rate spread because non-interest-bearing sources of funds (“net free funds”), principally demand deposits and stockholders’ equity, also support interest earning assets. The narrative below discusses net interest income, interest rate spread, and net interest margin for the three and nine-month periods ended September 30, 2023, and September 30, 2022, respectively.

Net interest income was $12.1 million and $36.6 million for the three and nine months ended September 30, 2023, respectively, compared to $14.5 million and $41.9 million for the three and nine months ended September 30, 2022, respectively. Net interest income for the three months ended September 30, 2023, decreased from the same period one year ago due to: 1) higher deposit and borrowing balances and costs and 2) a $0.3 million reduction in the accretion on purchased loans. This was partially offset by: 1) positive loan volume variance due to growth in loans outstanding and 2) increases in loan and investment yields due to both contractual repricing and higher coupons on new loans and investments in excess of portfolio yield and 3) the realization of $0.4 million of interest income due to a nonaccrual loan payoff.

The net interest margin for the three-month period ended September 30, 2023, was 2.79%, compared to 3.43% for the three-month period ended September 30, 2022. The net interest margin decrease was due to: 1) higher deposit costs due to strategic increases in deposit rates to maintain a strong deposit base and customers moving from lower cost savings and money market accounts to higher yielding certificate accounts, 2) the impact of higher short-term interest rates which increased FHLB advance and other borrowing costs, and 3) a six-basis point decrease in accretion on purchased loans. This was partially offset by: 1) increases in loan and investment yields due to contractual repricing, 2) rates on new loans and investments exceeding the portfolio as a whole, and 3) a ten-basis point increase in yield due to income realized on the payoff of a nonaccrual loan.

Net interest income for the nine months ended September 30, 2023, decreased from the same period one year ago due to: 1) higher deposit and borrowing balances and related costs, 2) $1.0 million reduction in the accretion on purchased loans, and 3) $0.3 million of lower SBA PPP accretion, as the last SBA PPP loan was repaid in second quarter 2022. This was partially offset by: 1) positive loan volume variance due to growth in loans outstanding and 2) increases in loan and investment yields due to both contractual repricing and higher coupons on new loans and investments in excess of portfolio yield.

The net interest margin for the nine-month period ended September 30, 2023, was 2.85%, compared to 3.38% for the nine-month period ended September 30, 2022. The net interest margin decrease was due to: 1) higher deposit and FHLB borrowing costs, 2) a seven-basis point decrease in accretion on purchased loans, 3) a two-basis point decrease on SBA PPP accretion, and 4) the impact of additional interest expense of the subordinated debt issued in March 2022. These decreases were partially offset by increases in loan and investment yields, due to both contractual repricing and higher coupons on new loans and investments in excess of portfolio yield.

Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following net interest income analysis table presents interest income from average interest earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates on a tax equivalent basis. Shown below is the weighted average tax equivalent yield on interest earning assets, rates paid on interest-bearing liabilities and the resultant spread at or during the three-month and nine-month periods ended September 30, 2023 and September 30, 2022. Non-accruing loans have been included in the table as loans carrying a zero yield.

NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS

(Dollar amounts in thousands)

Three months ended September 30, 2023 compared to the three months ended September 30, 2022:


	Three months ended September 30, 2023						Three months ended September 30, 2022
	Average Balance		Interest Income/ Expense		Average Yield/ Rate (1)		Average Balance		Interest Income/ Expense		Average Yield/ Rate (1)
Average interest earning assets:
Cash and cash equivalents	$	21,298	$	302	5.63	%	$	11,043	$	60	2.16	%
Loans	1,435,284		19,083		5.27	%	1,370,897		15,937		4.61	%
Interest-bearing deposits	—		—		—	%	1,079		7		2.57	%
Investment securities (1)	252,226		2,119		3.33	%	274,868		1,768		2.57	%
Other investments	15,511		268		6.85	%	14,910		187		4.98	%
Total interest earning assets (1)	$	1,724,319	$	21,772	5.01	%	$	1,672,797	$	17,959	4.26	%
Average interest-bearing liabilities:
Savings accounts	$	199,279	$	328	0.65	%	$	238,095	$	211	0.35	%
Demand deposits	354,073		1,863		2.09	%	413,033		575		0.55	%
Money market	298,098		1,889		2.51	%	331,469		519		0.62	%
CD’s	358,238		3,308		3.66	%	160,960		376		0.93	%

Total deposits	$	1,209,688	$	7,388	2.42	%	$	1,143,557	$	1,681	0.58	%
FHLB Advances and other borrowings	182,967		2,263		4.91	%	192,338		1,821		3.76	%
Total interest-bearing liabilities	$	1,392,655	$	9,651	2.75	%	$	1,335,895	$	3,502	1.04	%
Net interest income			$	12,121					$	14,457
Interest rate spread					2.26	%					3.22	%
Net interest margin (1)					2.79	%					3.43	%
Average interest earning assets to average interest-bearing liabilities					1.24						1.25

(1) Fully taxable equivalent (FTE). The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the quarters ended September 30, 2023, and September 30, 2022. The FTE adjustment to net interest income included in the rate calculations totaled $0 and $0 thousand for the three months ended September 30, 2023, and September 30, 2022, respectively.

NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS

(Dollar amounts in thousands)

Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022:


	Nine months ended September 30, 2023						Nine months ended September 30, 2022
	Average Balance		Interest Income/ Expense		Average Yield/ Rate (1)		Average Balance		Interest Income/ Expense		Average Yield/ Rate (1)
Average interest earning assets:
Cash and cash equivalents	$	19,066	$	768	5.39	%	$	23,727	$	116	0.65	%
Loans	1,420,423		54,169		5.10	%	1,334,811		44,597		4.47	%
Interest-bearing deposits	84		1		1.59	%	1,365		22		2.15	%
Investment securities (1)	261,507		6,505		3.33	%	282,771		4,777		3.38	%
Other investments	16,447		779		6.33	%	15,044		526		4.67	%
Total interest earning assets (1)	$	1,717,527	$	62,222	4.84	%	$	1,657,718	$	50,038	4.04	%
Average interest bearing liabilities:
Savings accounts	$	208,446	$	1,103	0.71	%	$	237,677	$	442	0.25	%
Demand deposits	370,235		5,047		1.82	%	411,471		1,045		0.34	%
Money market	298,957		4,759		2.13	%	318,246		1,011		0.42	%
CD’s	300,279		6,989		3.11	%	169,804		1,236		0.97	%

Total deposits	$	1,177,917	$	17,898	2.03	%	$	1,137,198	$	3,734	0.44	%
FHLB Advances and other borrowings	214,034		7,722		4.82	%	181,598		4,413		3.25	%
Total interest bearing liabilities	$	1,391,951	$	25,620	2.46	%	$	1,318,796	$	8,147	0.83	%
Net interest income			$	36,602					$	41,891
Interest rate spread					2.38	%					3.21	%
Net interest margin (1)					2.85	%					3.38	%
Average interest earning assets to average interest bearing liabilities					1.23						1.26

(1) Fully taxable equivalent (FTE). The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the nine months ended September 30, 2023 and September 30, 2022. The FTE adjustment to net interest income included in the rate calculations totaled $0 and $1 thousand for the nine-month periods ended September 30, 2023 and September 30, 2022, respectively.

Rate/Volume Analysis. The following tables present the dollar amount of changes in interest income and interest expense for the components of interest earning assets and interest-bearing liabilities that are presented in the preceding table. For each category of interest earning assets and interest-bearing liabilities, information is provided on changes attributable to: 1) changes in volume, which are changes in the average outstanding balances multiplied by the prior period rate (i.e., holding the initial rate constant) and 2) changes in rate, which are changes in average interest rates multiplied by the prior period volume (i.e., holding the initial balance constant). Rate changes have been discussed previously in the net interest income section above. For the three and nine months ended September 30, 2023, compared to the same period in 2022, the loan volume increased due to strong organic growth. The increase in certificate volumes is due to CD growth, with some of this growth moving from non-maturity deposits and to a lesser extent, brokered CD growth. Investment securities volume decreases for the three and nine months ended September 30, 2023, compared to the three and nine months ended September 30, 2022, are primarily due to: 1) principal repayments and sales, net of purchases and 2) unrealized losses in the available for sale securities portfolio, partially offset by modest floating-rate purchases in the first quarter of 2023.

RATE / VOLUME ANALYSIS

(Dollar amounts in thousands)

Three months ended September 30, 2023 compared to the three months ended September 30, 2022.


	Increase (decrease) due to
	Volume		Rate		Net
Interest income:
Cash and cash equivalents	$	76	$	166	$	242
Loans	774		2,372		3,146
Interest-bearing deposits	(7)		—		(7)
Investment securities	(157)		508		351
Other investments	8		73		81
Total interest earning assets	694		3,119		3,813
Interest expense:
Savings accounts	(40)		157		117
Demand deposits	(95)		1,383		1,288
Money market accounts	(58)		1,428		1,370
CD’s	675		2,257		2,932

Total deposits	482		5,225		5,707
FHLB Advances and other borrowings	(93)		535		442
Total interest bearing liabilities	389		5,760		6,149
Net interest income	$	305	$	(2,641)	$	(2,336)

Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.


	Increase (decrease) due to
	Volume		Rate		Net
Interest income:
Cash and cash equivalents	$	(28)	$	680	$	652
Loans	2,981		6,591		9,572
Interest-bearing deposits	(15)		(6)		(21)
Investment securities	(530)		2,258		1,728
Other investments	52		201		253
Total interest earning assets	2,460		9,724		12,184
Interest expense:
Savings accounts	(61)		722		661
Demand deposits	(116)		4,118		4,002
Money market accounts	(65)		3,813		3,748
CD’s	1,294		4,459		5,753

Total deposits	1,052		13,112		14,164
FHLB Advances and other borrowings	879		2,430		3,309
Total interest bearing liabilities	1,931		15,542		17,473
Net interest income	$	529	$	(5,818)	$	(5,289)

Provision for Credit Losses. We determine our provision for credit losses (“provision”) based on our desire to provide an adequate Allowance for Credit Losses (“ACL”) - Loans to reflect estimated lifetime losses in our loan portfolio and ACL - Unfunded Commitments to reflect estimated losses on our unfunded commitments to lend. We use a third-party model to collectively evaluate and estimate the ACL on loans and unfunded commitments on a pooled basis. The model pools loans and commitments with similar characteristics and calculates an estimated loss rate for the pool based on identified risk drivers. These risk drivers vary with loan type. Projections about future economic conditions and the effect they could have on future losses are inherent in the model. Loans with uniquely identified circumstances and risks are individually evaluated. Lifetime losses on these loans are estimated based on the loans’ individual characteristics.

Total benefit, i.e. negative provision, for credit losses for the three months ended September 30, 2023, was $0.325 million, compared to provision of $0.375 million for the three months ended September 30, 2022. The decrease in provision for credit losses was primarily due to net recoveries from the payoff of a nonaccrual agricultural loan and the impact of the payoff of two larger loans. The total provision for credit losses for the nine-month period ending September 30, 2023 was $0.175 million, compared to $0.775 million for the same period in the prior year. The current year’s provision is primarily the result of growth in the loan portfolio, which partially offset the combined positive impact of net recoveries of $0.187 million, reductions in reserves on individually evaluated loans and third quarter loan payoffs.

Continued improving economic conditions in our markets, as evidenced by unemployment rates below the national average in our two largest population centers, have resulted in improving overall economic trends for businesses, with the impact of higher interest rates and the impact of an inverted yield forecast in our third-party model of economic conditions to result in economic slowdown.

Note that in discussing ACL allocations, the entire ACL balance is available for any loan that, in management’s judgment, should be charged off.

Management believes that the provision recorded for the current year’s three and nine-month periods is adequate in view of the present condition of our loan portfolio and the sufficiency of collateral supporting our non-performing loans. We continually monitor non-performing loan relationships and will adjust our provision, as necessary, if changing facts and circumstances require a change in the ACL. In addition, a decline in the quality of our loan portfolio as a result of general economic conditions, factors affecting particular borrowers or our market areas, or otherwise, could all affect the adequacy of our ACL. If there are significant charge-offs against the ACL, or we otherwise determine that the ACL is inadequate, we will need to record an additional provision in the future.

Non-interest Income. The following table reflects the various components of non-interest income for the three and nine- month periods ended September 30, 2023 and 2022, respectively.


	Three months ended September 30,						Nine months ended September 30,
	2023		2022		% Change		2023		2022		% Change
Non-interest Income:
Service charges on deposit accounts	$	491	$	535	(8.22)	%	$	1,464	$	1,505	(2.72)	%
Interchange income	601		597		0.67	%	1,743		1,760		(0.97)	%
Loan servicing income	611		611		—	%	1,679		1,912		(12.19)	%
Gain on sale of loans	299		194		54.12	%	1,501		1,330		12.86	%
Loan fees and service charges	140		267		(47.57)	%	308		500		(38.40)	%

Net gains (losses) on investment securities	116		(55)		N/M		182		(167)		N/M



Other	307		323		(4.95)	%	893		717		24.55	%
Total non-interest income	$	2,565	$	2,472	3.76	%	$	7,770	$	7,557	2.82	%

Loan servicing income decreased due to reduced capitalization of mortgage servicing rights resulting from lower mortgage loan origination volume for the nine-month period ended September 30, 2023, compared to the same prior year period, along with lower mortgage servicing income due to servicing a smaller portfolio. For the three-month period ended September 30, 2023, compared to the same prior year period, lower loan servicing income was offset by higher capitalization of mortgage servicing rights.

Gain on sale of loans increased in the current three-month period ended September 30, 2023, compared to the three months ended September 30, 2022, due to modestly higher SBA gains and higher mortgage gains. For the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, increased SBA gains more than offset lower mortgage gains.

Loan fees and services charges are lower for the three and nine-month periods ended September 30, 2023, compared to the same periods in 2022 due to lower customer activity.

The change in net gains (losses) on investment securities between the three and nine months ended September 30, 2023, and the three and nine months ended September 30, 2022, is primarily due to the change in valuations of equity securities and a small gain on the sale of available for sale securities in the second quarter of 2023.

Non-interest Expense. The following table reflects the various components of non-interest expense for the three and nine-month periods ended September 30, 2023 and 2022, respectively.


	Three months ended September 30,								Nine months ended September 30,
	2023			2022			% Change		2023			2022			% Change
Non-interest Expense:
Compensation and related benefits	$	5,293		$	5,900		(10.29)	%	$	15,967		$	16,887		(5.45)	%
Occupancy	1,335			1,429			(6.58)	%	4,117			4,137			(0.48)	%

Data processing	1,536			1,382			11.14	%	4,440			4,098			8.35	%
Amortization of intangible assets	179			399			(55.14)	%	576			1,197			(51.88)	%
Mortgage servicing rights expense, net	150			197			(23.86)	%	456			65			601.54	%
Advertising, marketing and public relations	185			300			(38.33)	%	472			762			(38.06)	%
FDIC premium assessment	204			119			71.43	%	608			352			72.73	%
Professional services	342			382			(10.47)	%	1,153			1,152			0.09	%
Gains on repossessed assets, net	100			(8)			1350.00	%	62			(17)			464.71	%
New market tax credit depletion	—			163			N/M		—			488			N/M
Other	645			1,014			(36.39)	%	2,085			2,286			(8.79)	%
Total non-interest expense	$	9,969		$	11,277		(11.60)	%	$	29,936		$	31,407		(4.68)	%

Non-interest expense (annualized) / Average assets	2.15		%	2.51		%	(14.34)	%	2.18		%	2.38		%	(8.40)	%

Compensation expense for the three and nine months ended September 30, 2023, decrease from the prior year period is largely due to lower incentive compensation due to lower production volumes and lower net income.

Amortization of intangible assets for three and nine months ended September 30, 2023, decreased from the same prior year periods, as intangible assets related to certain acquisitions have been fully amortized.

Mortgage servicing rights expense, net decreased for the three months ended September 30, 2023, compared to the comparable prior year period due to lower forecasted prepayments and the impact of a lower balance of loans serviced for others. Amortization expense increased for the nine-month period ended September 30, 2023, due to the impact of a $566 thousand impairment reversal recorded in the comparable prior year period, partially offset by lower amortization due to lower forecasted prepayments and the impact of a lower balance of loans serviced for others.

Advertising, marketing and public relations expense decreased for the three and nine months ended September 30, 2023, compared to the prior year periods, due to management’s intentional decision to limit expenditures.

The FDIC insurance premium increased for the three and nine-month periods ended September 30, 2023, from the comparable prior year periods due to an increase in the FDIC assessment rate. This was partially offset by the favorable impact of increased bank capital ratios, largely due to both a $15 million capital injection following the Company’s subordinated debt issuance in March of 2022, and the impact of growth in the Bank’s retained earnings.

In the first quarter of 2022, the Bank invested $4.1 million in a New Market Tax Credit. Based on the applicable accounting guidance at the time of investment, the related non-tax-deductible asset depletion would have occurred over a 5-year period in lockstep with the recognition of the tax credit. In March of 2023, FASB issued ASU 2023-02, which allows for proportional amortization of tax credit investments that meet certain criteria. We determined that our New Market Tax Credit investment met the criteria of ASU 2023-02 and chose to early adopt using the modified retrospective approach as of January 1, 2023. Under ASU 2023-02, the amortization of the investment is now included in income tax expense.

The decrease in other expenses during the three and nine months ended September 30, 2023, from the comparable prior year periods is largely related to branch closure costs incurred in the third quarter of 2022.

Income Taxes.. Income tax expenses were $2.544 million and $4.895 million for the three and nine months ended September 30, 2023, respectively, compared to $1.284 million and $4.201 million for the three and nine months ended September 30, 2022. The effective tax rate was 50.5% and 34.3% for the three and nine-month periods ended September 30, 2023, compared to 24.3% for both of the comparable prior year periods. The Wisconsin state budget, signed by Governor Evers on July 5, 2023, provides financial institutions a tax exemption on income earned on Wisconsin commercial and agricultural loans up to $5 million retroactive to January 1, 2023. This change reduces the Company’s 2023 Wisconsin state income tax rate and thus, its overall effective tax rate. The third quarter ended September 30, 2023, reflects three quarters of the related 2023 tax benefit, retroactive to January 1, 2023, as a reduction of income tax expense. This positive impact was more than offset by a one-time tax expense of $1.8 million reflecting the impact of the lower 2023 Wisconsin state tax rate on the future realization of existing net deferred tax assets. In addition, the impact of the New Market Tax Credit investment depletion, now being included in income tax expense, increased the income tax rate, while lower pre-tax income reduced current period income tax expense.

BALANCE SHEET ANALYSIS

Cash and Cash Equivalents. Our cash balances decreased $2.9 million to $32.5 million compared to $35.4 million at December 31, 2022, as we increased our interest-bearing cash deposits at the Federal Reserve by $6.8 million and cash items in process decreased $9.7 million from December 31, 2022, to September 30, 2023.

Investment Securities. We manage our securities portfolio to provide liquidity and enhance income. Our investment portfolio is comprised of securities available for sale and securities held to maturity.

Securities available for sale, which represent the majority of our investment portfolio, were $153.4 million at September 30, 2023, compared with $166.0 million at December 31, 2022. The decrease in the available for sale portfolio is primarily due to the sale of $5.1 million of floating-rate SBA backed pass-through securities, principal repayments, and an increase in the unrealized loss of $5.3 million arising during the period, partially offset by the purchases of $11.0 million of primarily floating rate SBA backed pass-through securities.

Securities held to maturity decreased to $92.3 million at September 30, 2023, compared to $96.4 million at December 31, 2022. This decrease was due to principal repayments. The unrealized loss on the held to maturity portfolio increased by $4.0 million in the first three quarters of 2023, to $23.6 million.

The amortized cost and market values of our available for sale securities by asset categories as of the dates indicated below were as follows:


Available for sale securities	Amortized Cost		Fair Value
September 30, 2023
U.S. government agency obligations	$	17,452	$	17,318

Mortgage-backed securities	92,722		69,731
Corporate debt securities	47,153		40,889
Corporate asset-backed securities	25,825		25,476

Totals	$	183,152	$	153,414
December 31, 2022
U.S. government agency obligations	$	18,373	$	18,313

Mortgage-backed securities	97,458		78,610
Corporate debt securities	44,636		40,251
Corporate asset-backed securities	29,877		28,817

Totals	$	190,344	$	165,991

The amortized cost and fair value of our held to maturity securities by asset categories as of the dates noted below were as follows:


Held to maturity securities	Amortized Cost		Fair Value
September 30, 2023

Obligations of states and political subdivisions	$	600	$	552
Mortgage-backed securities	91,736		68,200
Totals	$	92,336	$	68,752
December 31, 2022
Obligations of states and political subdivisions	$	600	$	546
Mortgage-backed securities	95,779		76,233
Totals	$	96,379	$	76,779

The composition of our available for sale portfolios by credit rating as of the dates indicated below was as follows:


	September 30, 2023				December 31, 2022
Available for sale securities	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. government agency	$	101,098	$	78,071	$	112,477	$	93,669
AAA	10,112		9,892		8,640		8,334
AA	24,790		24,563		24,591		23,737
A	8,200		7,379		5,700		5,133
BBB	38,952		33,509		38,936		35,118

Non-rated	—		—		—		—
Total available for sale securities	$	183,152	$	153,414	$	190,344	$	165,991

The composition of our held to maturity portfolio by credit rating as of the dates indicated was as follows:


	September 30, 2023				December 31, 2022
Held to maturity securities	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. government agency	$	91,736	$	68,200	$	95,779	$	76,233
AAA	—		—		—		—
AA	—		—		—		—
A	600		552		600		546



Total	$	92,336	$	68,752	$	96,379	$	76,779

At September 30, 2023, the Bank has pledged mortgage-backed securities with a carrying value of $29.5 million as collateral against a borrowing line of credit with the Federal Reserve Bank with no borrowings outstanding on this line of credit. As of September 30, 2023, the Bank has pledged U.S. Government Agency securities with a carrying value of $0.5 million and mortgage-backed securities with a carrying value of $1.9 million as collateral against specific municipal deposits. As of September 30, 2023, the Bank also has mortgage-backed securities with a carrying value of $0.7 million pledged as collateral to the Federal Home Loan Bank of Des Moines.

At December 31, 2022, the Bank had pledged certain of its mortgage-backed securities with a carrying value of $5.4 million as collateral to secure a line of credit with the Federal Reserve Bank with no borrowings outstanding on this line of credit. As of December 31, 2022, the Bank had pledged certain of its U.S. Government Agency securities with a carrying value of $2.6 million and mortgage-backed securities with a carrying value of $2.2 million as collateral against specific municipal deposits. As of December 31, 2022, the Bank also had mortgage-backed securities with a carrying value of $0.1 million pledged as collateral to the Federal Home Loan Bank of Des Moines.

Loans.Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, increased by $35.7 million, to $1.45 billion as of September 30, 2023, from $1.41 billion at December 31, 2022. The following table reflects the composition, of our loan portfolio at September 30, 2023, and December 31, 2022:


	September 30, 2023				December 31, 2022
	Amount		Percent		Amount		Percent
Real estate loans:
Commercial/Agricultural real estate
Commercial real estate	$	750,282	51.8	%	$	725,971	51.5	%
Agricultural real estate	84,558		5.8	%	87,908		6.2	%
Multi-family real estate	219,193		15.1	%	208,908		14.8	%
Construction and land development	109,799		7.6	%	102,492		7.3	%
Residential mortgage
Residential mortgage	125,939		8.7	%	105,389		7.5	%
Purchased HELOC loans	2,881		0.2	%	3,262		0.2	%
Total real estate loans	1,292,652		89.3	%	1,233,930		87.5	%
C&I/Agricultural operating and Consumer Installment Loans:
C&I/Agricultural operating
Commercial and industrial (“C&I”)	121,033		8.4	%	136,013		9.6	%
Agricultural operating	24,552		1.7	%	28,806		2.0	%
Consumer installment
Originated indirect paper	7,175		0.5	%	10,236		0.7	%
Other consumer	6,440		0.4	%	7,150		0.5	%
Total C&I/Agricultural operating and Consumer installment Loans	159,200		11.0	%	182,205		12.8	%


Gross loans	$	1,451,852	100.3	%	$	1,416,135	100.3	%
Unearned net deferred fees and costs and loans in process	(3,048)		(0.2)	%	(2,585)		(0.2)	%
Unamortized discount on acquired loans	(1,275)		(0.1)	%	(1,766)		(0.1)	%
Total loans (net of unearned income and deferred expense)	1,447,529		100.0	%	1,411,784		100.0	%
Allowance for credit losses	(22,973)				(17,939)
Total loans receivable, net	$	1,424,556			$	1,393,845

Allowance for Credit Losses - Loans.

The Allowance for Credit Losses - Loans (“ACL”) is a valuation allowance for expected future credit losses in the Company’s loan portfolio as of the balance sheet date. 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 qualitative and quantitative relevant 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 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 loan’s 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.

In addition, various regulatory agencies periodically review the ACL. These agencies may require the Company to make additions to the ACL or may require that certain loan balances be charged off or downgraded into classified loan categories when the agencies’ evaluation differs from management’s evaluation based on their judgments of collectability from the information available to them at the time of examination.

The Allowance for Credit Losses - Unfunded Commitments is a liability for expected future credit losses on the Company’s commitments to lend. The Company estimates expected credit losses over the contractual period for which the Company is exposed to credit risk, via a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Company. The Allowance for Credit Losses - Unfunded Commitments on off-balance sheet exposures is included in other liabilities on the consolidated balance sheet.

On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments using the modified retrospective method. This adoption resulted in a $4.7 million increase in the ACL on loans (“ACL - Loans”) and established a $1.5 million ACL on unfunded commitments (“ACL - Unfunded Commitments”). The increase in transition ACL is primarily due to the interaction of change from an incurred loss model to a lifetime loss model and the duration of our portfolio. Since transition, the ACL- Loans modestly increased $0.3 million to $23.0 million at September 30, 2023, representing 1.59% of loans receivable. The allowance for loan losses, prior to the ASU 2016-13 transition, was $17.9 million at December 31, 2022, representing 1.27% of loans receivable. The increase in the ACL - Loans, was due to a provision of $0.2 million and net recoveries. The ACL - Unfunded Commitments, established under ASU 2016-13, was $1.6 million at September 30, 2023. During the nine months ended September 30, 2023, the ACL - Unfunded Commitments increased $0.03 million due to an increase in projected loss rates.

Allowance for Credit Losses - Loans Roll Forward

(in thousands, except ratios)


	Three Months Ended						Nine Months Ended
	September 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
Allowance for Credit Losses (“ACL”)
ACL - Loans, at beginning of period	$	23,164		$	16,825		$	17,939		$	16,913
Cumulative effect of ASU 2016-13 adoption	—			—			4,706			—
Loans charged off:
Commercial/Agricultural real estate	—			(48)			(46)			(205)
C&I/Agricultural operating	—			—			—			(310)
Residential mortgage	(54)			—			(78)			(68)
Consumer installment	(3)			(9)			(30)			(34)
Total loans charged off	(57)			(57)			(154)			(617)
Recoveries of loans previously charged off:
Commercial/Agricultural real estate	206			35			236			41
C&I/Agricultural operating	10			8			41			27
Residential mortgage	—			3			40			29
Consumer installment	2			28			24			49
Total recoveries of loans previously charged off:	218			74			341			146
Net loan recoveries/(charge-offs) (“NCOs”)	161			17			187			(471)
(Reversals)/additions to ACL - Loans via provision for credit losses charged to operations	(352)			375			141			775
ACL - Loans, at end of period	$	22,973		$	17,217		$	22,973		$	17,217





Average outstanding loan balance	$	1,435,284		$	1,370,897		$	1,420,423		$	1,334,811
Ratios:
NCOs (annualized) to average loans	(0.04)		%	—		%	(0.02)		%	0.05		%

Allowance for Credit Losses - Loans Activity by Segment

(in thousands, except ratios)


	Commercial/Agricultural Real Estate		C&I/Agricultural operating		Residential Mortgage		Consumer Installment		Unallocated		Total
Three months ended Septemeber 30, 2023
Allowance for Credit Losses - Loans:
ACL - Loans, at beginning of period	$	18,933	$	1,458	$	2,452	$	321	$	—	$	23,164

Charge-offs	—		—		(54)		(3)		—		(57)
Recoveries	206		10		—		2		—		218
(Reversals)/additions to ACL - Loans via provision for credit losses charged to operations	(284)		(279)		235		(24)		—		(352)
ACL - Loans, at end of period	$	18,855	$	1,189	$	2,633	$	296	$	—	$	22,973


	Commercial/Agricultural Real Estate		C&I/Agricultural operating		Residential Mortgage		Consumer Installment		Unallocated		Total
Nine months ended September 30, 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	(46)		—		(78)		(30)		—		(154)
Recoveries	236		41		40		24		—		341
Additions/(reversals) to ACL - Loans via provision for credit losses charged to operations	70		(839)		953		(43)		—		141
ACL - Loans, at end of period	$	18,855	$	1,189	$	2,633	$	296	$	—	$	22,973

Allowance for Credit Losses - Loans to Percentage

(in thousands, except ratios)


	September 30, 2023			December 31, 2022
Loans, end of period	$	1,447,529		$	1,411,784
ACL - Loans	$	22,973		$	17,939
ACL - Loans to loans, end of period	1.59		%	1.27		%

Allowance for Credit Losses - Unfunded Commitments:

(in thousands)

In addition to the ACL - Loans, the Company has established an ACL - Unfunded Commitments of $1.571 million at September 30, 2023 and $0 at December 31, 2022, classified in other liabilities on the consolidated balance sheets.


	September 30, 2023 and Three Months Ended		September 30, 2023 and Nine Months Ended
ACL - Unfunded Commitments - beginning of period	$	1,544	$	—
Cumulative effect of ASU 2016-13 adoption	—		1,537
Increases to ACL - Unfunded Commitments via provision for credit losses charged to operations	27		34
ACL - Unfunded Commitments - end of period	$	1,571	$	1,571

Nonperforming Loans, Potential Problem Loans and Foreclosed Properties. We practice early identification of nonaccrual and problem loans in order to minimize the Bank’s risk of loss. Nonperforming loans are defined as nonaccrual loans and restructured loans that were 90 days or more past due at the time of their restructure, or when management determines that such classification is warranted. The accrual of interest income is discontinued on our loans according to the following schedule:

•Commercial/agricultural real estate loans, past due 90 days or more;

•C&I/Agricultural operating loans, past due 90 days or more;

•Closed ended 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.

When interest accruals are discontinued, interest credited to income is reversed. If collection is in doubt, cash receipts on non-accrual loans are used to reduce principal rather than being recorded as interest income. The Company adopted ASU 2022-02 on January 1, 2023, which eliminated special accounting rules for TDRs. Prior to the elimination of the special accounting rules, TDR loans were accounted for under ASC 310-40. A TDR is typically involved granting some concession to the borrower involving a loan modification, such as modifying the payment schedule or making interest rate changes. TDR loans may have involved loans that had a charge-off taken against the loan to reduce the carrying amount of the loan to fair market value as determined pursuant to ASC 310-10.

The following table identifies the various components of nonperforming assets and other balance sheet information as of the dates indicated below and changes in the ACL for the periods then ended:


	September 30, 2023 and Nine Months Then Ended (1)			December 31, 2022 and Twelve Months Then Ended (2)
Nonperforming assets:
Nonaccrual loans
Commercial real estate	$	10,570		$	5,736
Agricultural real estate	469			2,742
Construction and land development	94			—
Commercial and industrial	—			552
Agricultural operating	1,373			890
Residential mortgage	923			1,253
Consumer installment	27			31
Total nonaccrual loans	$	13,456		$	11,204
Accruing loans past due 90 days or more	971			246
Total nonperforming loans (“NPLs”)	14,427			11,450
Other real estate owned	1,046			1,265
Other collateral owned	—			6
Total nonperforming assets (“NPAs”)	$	15,473		$	12,721



Average outstanding loan balance	$	1,420,423		$	1,351,052
Loans, end of period	$	1,447,529		$	1,411,784
Total assets, end of period	$	1,831,087		$	1,816,386
ACL - Loans, at beginning of period	$	17,939		$	16,913
Cumulative effect of ASU 2016-13 adoption	4,706			—
Loans charged off:
Commercial/Agricultural real estate	(46)			(205)
C&I/Agricultural operating	—			(346)
Residential mortgage	(78)			(68)
Consumer installment	(30)			(48)
Total loans charged off	(154)			(667)
Recoveries of loans previously charged off:
Commercial/Agricultural real estate	236			102
C&I/Agricultural operating	41			36
Residential mortgage	40			29
Consumer installment	24			51
Total recoveries of loans previously charged off:	341			218
Net loan recoveries/(charge-offs) (“NCOs”)	187			(449)
Additions to ACL - loans via provision for credit losses charged to operations	141			1,475
ACL - Loans, at end of period	$	22,973		$	17,939
Ratios:
ACL-Loans to NCOs (annualized)	(9,188.53)		%	3,995.32		%
NCOs (annualized) to average loans	0.02		%	0.03		%
ACL-Loans to total loans	1.59		%	1.27		%
ACL-Loans to nonaccrual loans	170.73		%	160.11		%
Nonaccrual loans to total loans	0.93		%	0.79		%
NPLs to total loans	1.00		%	0.81		%
NPAs to total assets	0.85		%	0.70		%

(1) Loan balances are stated at amortized cost.

(2) Loan balances are stated at the unpaid principal balance of the loan.

Nonaccrual Loans Roll Forward:


	Quarter Ended
	September 30, 2023		June 30, 2023		March 31, 2023		December 31, 2022		September 30, 2022
Balance, beginning of period	$	15,663	$	10,410	$	11,204	$	10,772	$	10,434
Additions	33		7,826		154		1,039		257

Charge offs	—		(23)		(49)		(37)		(4)
Transfers to OREO	(53)		(110)		(25)		—		(27)
Return to accrual status	(190)		—		(252)		—		(117)
Repurchases of government guaranteed loans	—		—		—		—		517
Payments received	(1,994)		(2,429)		(527)		(561)		(288)
Other, net	(3)		(11)		(95)		(9)		—
Balance, end of period	$	13,456	$	15,663	$	10,410	$	11,204	$	10,772

Nonaccrual loans increased by $2.3 million at September 30, 2023, from $11.2 million at December 31, 2022, largely due to adding a $5.4 million hotel loan from special mention to substandard in the second quarter of 2023, partially offset by payments received, including a third quarter $1.2 million loan payoff. Nonperforming assets increased to $15.5 million or 0.85% of total assets at September 30, 2023, compared to $12.7 million, or 0.70% of total assets at December 31, 2022, due to increases in nonaccrual loans.

Refer to the “Allowance for Credit Losses - Loans” and “Nonperforming Loans, Potential Problem Loans and Foreclosed Properties” sections above for more information related to nonperforming loans.

Below is a summary of loan modifications made to borrowers experiencing financial difficulty during the nine months ended September 30, 2023.


	Term Extension
Loan Class	Amortized Cost Basis at September 30, 2023		% of Total Class of Financing Receivables
Commercial real estate	$	4,826	0.65	%


Residential mortgage	$	36	0.03	%

	Other-Than-Insignificant Payment Delay
Loan Class	Amortized Cost Basis at September 30, 2023		% of Total Class of Financing Receivables
Residential mortgage	$	69	0.06	%
Other consumer	$	20	0.31	%

Included in the nonaccrual loans roll forward table above, for periods prior to the January 1, 2023 adoption of ASU 2022-02 are nonaccrual TDR loans. Nonaccrual TDR loans were $2.6 million at December 31, 2022.


	December 31, 2022
		Number of Modifications	Recorded Investment
Troubled debt restructurings: Accrual Status
Commercial/Agricultural real estate		10	$	1,336
C&I/Agricultural operating		5	960
Residential mortgage		36	2,875
Consumer installment		—	—
Total loans		51	$	5,171

The table below shows a summary of criticized loans, split by special mention and substandard for the past five quarters. Since September 30, 2022, a large special mention credit paid off and a $5 million relationship moved to substandard with two relationships, each totaling $9 million added in the second quarter. Substandard changes largely reflect payoffs, partially offset with the addition of a $5 million relationship in the second quarter moving from special mention.

In addition to our discussion of criticized, special mention, and substandard loans above, the following information provides further insights about our loans to certain industries. As of September 30, 2023, hotel loans totaled $94 million with a weighted average LTV of 60% and average balance of $3.9 million. Restaurant loans totaled $52 million, at September 30, 2023. The weighted-average LTV percentage on these restaurant loans was 49% and the average loan balance was $721 thousand. Approximately $39 million of restaurant loans are to franchise quick-service restaurants. At September 30, 2023, we have $41 million of office loans with a weighted average LTV of 64% and average loan balance of $552 thousand. A large percentage of the related office properties are located outside of large cities.


	(in thousands)
(Loan balance at unpaid principal balance)	September 30, 2023		June 30, 2023		March 31, 2023		December 31, 2022		September 30, 2022
Special mention loan balances	$	20,043	$	20,507	$	6,636	$	12,170	$	20,178
Substandard loan balances	16,171		19,203		15,439		17,319		20,227
Criticized loans, end of period	$	36,214	$	39,710	$	22,075	$	29,489	$	40,405

Mortgage Servicing Rights. Mortgage servicing rights (“MSR”) assets are initially measured at fair value; assessed at least quarterly for impairment; carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value. MSR assets are amortized in proportion to and over the period of estimated net servicing income, with the amortization recorded in non-interest expense in the consolidated statement of operations. The valuation of MSRs and related amortization 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.

The fair market value of the Company’s MSR asset was $5.7 million at both September 30, 2023, and December 31, 2022, as a higher fair value percentage offset the lower balance of loans serviced. At September 30, 2023, and December 31, 2022, the Company did not have an MSR impairment, or related valuation allowance.

The unpaid balances of one-to-four family residential real estate loans serviced for others as of September 30, 2023, and December 31, 2022, were $449.5 million and $523.7 million, respectively. The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at September 30, 2023, and December 31, 2022, was 1.14% and 1.08%, respectively.

Deposits. From a quarter-end perspective, deposits have grown each quarter since December 31, 2022. From March 7, 2023 to March 31, 2023, a period closely monitored for unusual withdrawal activity, balances remained stable. Total deposits increased $8.6 million during the quarter ended September 30, 2023, to $1.47 billion. During the current quarter: 1) commercial deposits grew $28.3 million, largely due to growth in non-interest-bearing checking; 2) retail deposits grew $4.6 million; 3)

brokered deposits decreased $12.2 million, primarily due to CD maturities not replaced due to organic deposit growth; and 4) public deposits declined $12.1 million from the previous quarter, due to seasonal outflows. Deposit composition changed during the third quarter, as both business and retail depositors sought higher yields on deposit accounts.

Consumer, commercial and government deposits have been stable since January 31, 2023, and since the two large coastal bank failures in early March. There are no material customer or industry deposit concentrations. A decrease in deposits during January occurred as commercial customers decreased their cash balances to support the needs of their businesses.


	September 30, 2023		June 30, 2023		March 31, 2023		December 31, 2022
Consumer deposits	$	794,970	$	790,404	$	786,614	$	805,598
Commercial deposits	429,358		401,079		391,534		405,733
Public deposits	163,734		175,869		194,683		173,548
Brokered deposits	85,173		97,330		63,962		39,841
Total deposits	$	1,473,235	$	1,464,682	$	1,436,793	$	1,424,720

At September 30, 2023 our deposit portfolio composition was 54% consumer, 29% commercial, 11% public and 6% brokered deposits. At December 31, 2022 our deposit portfolio composition was 57% consumer, 28% commercial, 12% public and 3% brokered deposits.


	September 30, 2023		June 30, 2023		March 31, 2023		December 31, 2022
Non-interest bearing demand deposits	$	275,790	$	261,876	$	247,735	$	284,722
Interest bearing demand deposits	336,962		358,226		390,730		371,210
Savings accounts	183,702		206,380		214,537		220,019
Money market accounts	312,689		288,934		309,005		323,435
Certificate accounts	364,092		349,266		274,786		225,334
Total deposits	$	1,473,235	$	1,464,682	$	1,436,793	$	1,424,720

Uninsured and uncollateralized deposits were $277.9 million, or 19% of total deposits at September 30, 2023, and $298.8 million, or 21% of total deposits, at December 31, 2022. Uninsured deposits at September 30, 2023, were $412.9 million, or 28% of total deposits, and $441.2 million, or 31% of total deposits at December 31, 2022, with the difference from the above sentence being fully secured government deposits.

On-balance sheet liquidity, collateralized new borrowing capacity and uncommitted federal funds borrowing availability totaled $604.9 million, or 218% of uninsured and uncollateralized deposits at September 30, 2023. At December 31, 2022 on-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability totaled $570.0 million, or 191% of uninsured and uncollateralized deposits.

Federal Home Loan Bank (FHLB) advances and Other Borrowings. A summary of Federal Home Loan Bank (FHLB) advances and other borrowings at September 30, 2023 and December 31, 2022 is as follows:


	September 30, 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) (4)	2023	$	74,000	1.43	%	5.46	%	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	%
	2028	15,000		3.57	%	3.59	%






Federal Home Loan Bank advances		$	114,530						$	142,530

Senior Notes (5)	2034	$	18,083	6.75	%	7.75	%	2034	$	23,250	3.00	%	6.75	%

Subordinated Notes (6)	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		(676)							(841)
Total other borrowings		$	67,407						$	72,409

Totals		$	181,937						$	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 $1,065.9 million and $984.9 million at September 30, 2023 and December 31, 2022, respectively. At September 30, 2023, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $314.5 million compared to $256.8 million as of December 31, 2022.

(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $217.5 million and $157.5 million, during the nine months ended September 30, 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 September 30, 2023 and December 31, 2022 were 4.58% and 4.09%, respectively.

(4) FHLB term notes totaling $15.0 million, with 2028 maturity dates, are callable once by the FHLB in December of 2023.

(5) Senior notes, entered into by the Company in June 2019 consist of the following:

(b) A $5.0 million line of credit, maturing August 1, 2023, that remains undrawn upon. This line was renewed effective August 1, 2023 and will mature August 1, 2024.

(6) Subordinated notes resulted from the following:

FHLB advances decreased $28.0 million to $114.5 million as of September 30, 2023, compared to $142.5 million as of December 31, 2022. The decrease is a result of decreased funding needs due to increases in deposits partially offset by loan growth, as well as the Bank’s desire to manage its liquidity and increase cash on hand in response to recent events. At September 30, 2023, short-term FHLB advances consisted of $54 million maturing in October 2023. 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. The Bank’s current unused borrowing capacity, supported by loan collateral as of September 30, 2023, is approximately $314.5 million.

At September 30, 2023, and December 31, 2022, the Bank had the ability to borrow $22.1 million and $4.1 million from the Federal Reserve Bank of Minneapolis. The ability to borrow is based on mortgage-backed securities pledged with a carrying value of $23.2 million and $5.4 million as of September 30, 2023, and December 31, 2022, respectively. There were no related Federal Reserve borrowings outstanding as of September 30, 2023, or December 31, 2022. In addition, The Bank has been approved to obtain funding from the Federal Reserve’s new Bank Term Funding Program (“BTFP”). As of September 30, 2023, the Bank has not borrowed from this facility and has not pledged any collateral to this facility.

The Bank maintains two unsecured federal funds purchased lines of credit with banking partners which total $70 million. These lines bear interest at the lender banks 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 September 30, 2023, or December 31, 2022. Additionally, we have a $5.0 million revolving line of credit which is available as needed for general liquidity purposes.

See Note 7, “Federal Home Loan Bank Advances and Other Borrowings” for more information.

At September 30, 2023, the Bank has pledged $1.066 billion of loans to secure the current FHLB outstanding advances and letters of credit and to provide the unused borrowing capacity, compared to $0.98 billion of loans pledged at December 31, 2022.

Stockholders’ Equity. Total stockholders’ equity was $165.4 million at September 30, 2023, compared to $167.1 million at December 31, 2022. The decrease in stockholder’s equity was attributable to: 1) the $4.4 million cumulative effect adjustment from the adoption of ASU 2016-13; 2) the payment of the annual cash dividend paid in February to common stockholders of $0.29 per share, or $3.0 million; and 3) an increase in the unrealized loss due to interest rates on available for sale securities of $4.1 million, net of tax. These reductions to equity were partially offset by 1) net income of $9.4 million; and 2) the $0.1 million cumulative effect adjustment from the adoption of ASU 2023-02.

On July 23, 2021, the Board of Directors adopted a share repurchase program. There were 14 thousand shares repurchased in the second quarter of 2023 and no shares repurchased during the first and third quarters of 2023. As of September 30, 2023, an additional 229 thousand shares remain available for repurchase.

Liquidity and Asset / Liability Management. Liquidity management refers to our ability to ensure cash is available in a timely manner to meet loan demand, depositors’ needs, and meet other financial obligations as they become due without undue cost, risk, or disruption to normal operating activities. We manage and monitor our short-term and long-term liquidity positions and needs through a regular review of maturity profiles, funding sources, and loan and deposit forecasts to minimize funding risk. A key metric we monitor is our liquidity ratio, calculated as cash and unpledged securities portfolio divided by total assets. At September 30, 2023, our on-balance sheet liquidity ratio decreased to 11.4% percent from 13.0% at December 31, 2022. This was largely due reductions in the AFS and HTM investment portfolios.

There are no material customers or industry deposit concentrations. A decrease in deposits during January occurred as commercial customers decreased their cash balances to support the needs of their businesses. At September 30, 2023, our deposit portfolio composition was 54% consumer, 29% commercial, 11% public and 6% brokered deposits. At December 31, 2022, our deposit portfolio composition was 57% consumer, 28% commercial, 12% public and 3% brokered deposits.

Uninsured and uncollateralized deposits were $277.9 million, or 19% of total deposits, at September 30, 2023, and $298.8 million, or 21% of total deposits, at December 31, 2022. Uninsured deposits alone at September 30, 2023, were $412.9 million, or 28% of total deposits, and $441.2 million, or 31% of total deposits at December 31, 2022, with the difference being fully secured government deposits.

On-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability was $604.9 million, or 218% of uninsured and uncollateralized deposits at September 30, 2023. At December 31, 2022, on-balance sheet liquidity, collateralized borrowing and uncommitted federal funds availability was $570.0 million, or 191% of uninsured and uncollateralized deposits.

Our primary sources of funds are deposits, amortization, prepayments and maturities on the investment and loan portfolios and funds provided from operations. We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, and to fund loan commitments. While scheduled payments from the amortization of loans and maturing short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. Although $307.2 million of our $364.1 million (84%) CD portfolio will mature within the next 12 months, we have historically retained a majority of our maturing CD’s. However, due to strategic pricing decisions regarding rate matching and branch closures, our retention rate decreased in 2021 and early 2022. Since June of 2022, we strategically increased deposit pricing, which resulted in modest growth in certificates. Retail non-maturity interest-bearing accounts have increased at approximately the same rate as the certificate accounts, as our customers have moved to higher-yielding certificates and spent money. Through new deposit product offerings to our branch and commercial customers, we are currently attempting to strengthen customer relationships to attract additional non-rate sensitive deposits. However, this is challenging in the current competitive environment.

We maintain access to additional sources of funds including FHLB borrowings and lines of credit with the Federal Reserve Bank, and our correspondent banks. We utilize FHLB borrowings to leverage our capital base, to provide funds for our lending and investment activities, and to manage our interest rate risk. Our borrowing arrangement with the FHLB calls for pledging certain qualified real estate, commercial and industrial loans, and borrowing up to 75% of the value of those loans, not to exceed 35% of the Bank’s total assets. Currently, we have approximately $314.5 million available to borrow under this arrangement, supported by loan collateral as of September 30, 2023. We also had borrowing capacity of $22.1 million at the Federal Reserve Bank and have been approved to access the Bank Term Funding Program (“BTFP”) if the need should arise. The bank maintains $70 million of uncommitted federal funds purchased lines with correspondent banks as part of our contingency funding plan. In addition, the Company has a $5.0 million revolving line of credit which is available as needed for general liquidity purposes. While the Bank does not have formal brokered certificate lines of credit with counter parties at September 30, 2023, we believe that the Bank could access this market, which provides an additional potential source of liquidity, as evidenced by access to this market during the past four quarters. See Note 7, “Federal Home Loan Bank and Other Borrowings” of “Notes to Consolidated Financial Statements” which are included in Part I, Item 1, “Financial Statements and Supplementary Data” of this Form 10-Q, for further detail.

In reviewing the adequacy of our liquidity, we review and evaluate historical financial information, including information regarding general economic conditions, current ratios, management goals and the resources available to meet our anticipated liquidity needs. Management believes that our liquidity is adequate, and to management’s knowledge, there are no known events or uncertainties that will result or are likely to reasonably result in a material increase or decrease in our liquidity.

Off-Balance Sheet Liabilities. In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments, issued to meet customer financial needs. Such financial instruments are recorded in the financial statements when they become payable. These instruments include unused commitments for lines of credit, overdraft protection lines of credit and home equity lines of credit, as well as commitments to extend credit. As of September 30, 2023, the Company had approximately $260.7 million in unused loan commitments, compared to approximately $243.0 million in unused commitments as of December 31, 2022. In addition, there are $4.1 million of commitments for contributions of capital to an SBIC and an investment company at September 30, 2023. These commitments totaled $4.7 million at December 31, 2022.

Capital Resources. As of September 30, 2023, and December 31, 2022, as shown in the table below, the Bank’s Tier 1 and Risk-based capital levels exceeded levels necessary to be considered “Well Capitalized” under Prompt Corrective Action provisions.

Below are the amounts and ratios for our capital levels as of the dates noted below for the Bank:


	Actual				For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio
As of September 30, 2023 (Unaudited)
Total capital (to risk weighted assets)	$	229,007	14.6	%	$	125,736	> =	8.0	%	$	157,170	> =	10.0	%
Tier 1 capital (to risk weighted assets)	209,302		13.3	%	94,302		> =	6.0	%	125,736		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	209,302		13.3	%	70,727		> =	4.5	%	102,161		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	209,302		11.6	%	72,145		> =	4.0	%	90,181		> =	5.0	%
As of December 31, 2022 (Audited)
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	%

At September 30, 2023, and December 31, 2022, the Bank was categorized as “Well Capitalized” under Prompt Corrective Action Provisions, as determined by the OCC, our primary regulator.

Below are the amounts and ratios for our capital levels as of the dates noted below for the Company:


	Actual				For Capital Adequacy Purposes
	Amount		Ratio		Amount			Ratio
As of September 30, 2023 (Unaudited)
Total capital (to risk weighted assets)	$	226,800	14.4	%	$	125,736	> =	8.0	%
Tier 1 capital (to risk weighted assets)	157,095		10.0	%	94,302		> =	6.0	%
Common equity tier 1 capital (to risk weighted assets)	157,095		10.0	%	70,727		> =	4.5	%
Tier 1 leverage ratio (to adjusted total assets)	157,095		8.7	%	72,145		> =	4.0	%
As of December 31, 2022 (Audited)
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	%

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time and are not predictable or controllable. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. Like other financial institutions, our interest income and interest expense are affected by general economic conditions and policies of regulatory authorities, including the monetary policies of the Federal Reserve. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.

How We Measure Our Risk of Interest Rate Changes. As part of our attempt to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor our interest rate risk through several means including through the use of third-party reporting software. In monitoring interest rate risk, we continually analyze and manage assets and liabilities based on their payment streams and interest rates, the timing of their maturities, and their sensitivity to actual or potential changes in market interest rates.

In order to manage the potential for adverse effects of material and prolonged increases in interest rates on our results of operations, we adopted asset and liability management policies to better align the maturities and re-pricing terms of our interest earning assets and interest-bearing liabilities. These policies are implemented by our Asset and Liability Management Committee (ALCO). The ALCO is comprised of members of the Bank’s senior management and Board of Directors. The ALCO establishes guidelines for and monitors the volume and mix of our assets and funding sources, taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The Committee’s objectives are to manage assets and funding sources to produce results that are consistent with liquidity, cash flow, capital adequacy, growth, risk, and profitability goals for the Bank. The ALCO meets on a regularly scheduled basis to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate risk exposure limits versus current projections pursuant to net present value of portfolio equity analysis. At each meeting, the Committee recommends strategy changes, as appropriate, based on this review. The Committee is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the Bank’s Board of Directors on a regularly scheduled basis.

In managing our assets and liabilities to achieve desired levels of interest rate risk, we have focused our strategies on:

•originating shorter-term secured commercial, agricultural and consumer loan maturities;

•originating variable rate commercial and agricultural loans;

•the sale of a vast majority of longer-term fixed-rate residential loans in the secondary market with retained servicing;

•managing our funding needs growing core deposits;

•utilize brokered certificate of deposits and borrowings as appropriate, which may have fixed rates with varying maturities;

•purchasing investment securities to modify our interest rate risk profile.

At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the ALCO may determine to increase the Bank’s interest rate risk position somewhat in order to maintain or improve its net interest margin.

The following table sets forth, at September 30, 2023 and December 31, 2022 an analysis of our interest rate risk as measured by the estimated changes in Economic Value of Equity (“EVE”) resulting from an immediate and permanent shift in the yield curve (up 300 basis points and down 200 basis points).


	Percent Change in Economic Value of Equity (EVE)
Change in Interest Rates in Basis Points (“bp”) Rate Shock in Rates (1)	At September 30, 2023		At December 31, 2022

+300 bp	(2)	%	0	%
+200 bp	(1)	%	0	%
+100 bp	0	%	0	%
-100 bp	0	%	(1)	%
-200 bp	(2)	%	(4)	%

(1)Assumes an immediate and parallel shift in the yield curve at all maturities.

Our overall interest rate sensitivity is demonstrated by net interest income shock analysis, which measures the change in net interest income in the event of hypothetical changes in interest rates. This analysis assesses the risk of change in our net interest income over the next 12 months in the event of an immediate and parallel shift in the yield curve (up 300 basis points and down 200 basis points). The table below presents our projected change in net interest income for the various rate shock levels at September 30, 2023, and December 31, 2022.


	Percent Change in Net Interest Income Over One Year Horizon
Change in Interest Rates in Basis Points (“bp”) Rate Shock in Rates (1)	At September 30, 2023		At December 31, 2022

+300 bp	(11)	%	(3)	%
+200 bp	(7)	%	(2)	%
+100 bp	(3)	%	(1)	%
-100 bp	3	%	1	%
-200 bp	5	%	2	%

(1)Assumes an immediate and parallel shift in the yield curve at all maturities.

Note: The table above may not be indicative of future results.

The projected changes in net interest income in the rate shock scenarios is largely due to the impact of growth in short-term certificates of deposits, which reprice faster and at a higher rate than other deposit products. The assumptions used to measure and assess interest rate risk include interest rates, loan prepayment rates, deposit decay (runoff) rates, and the market values of certain assets under differing interest rate scenarios. Actual values may differ from those projections set forth above should market conditions vary from the assumptions used in preparing the analysis. Further, the computations do not contemplate any actions we may undertake in response to changes in interest rates.

ITEM 4.CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that the information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have designed our disclosure controls and procedures to reach a level of reasonable assurance of achieving the

desired control objectives. We carried out an evaluation as of September 30, 2023, under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2023, at reaching a level of reasonable assurance.

There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.LEGAL PROCEEDINGS

In the normal course of business, the Company and/or the Bank occasionally become involved in other various legal proceedings. In our opinion, any liability from such proceedings would not have a material adverse effect on the business or financial condition of the Company.

Item 1A.RISK FACTORS

The information in this Form 10-Q should be read in conjunction with the risk factors described in “Risk Factors” in Item 1A of our 2022 10-K and the information under “Forward-Looking Statements” in this Form 10-Q and in our 2022 10-K.

There have been no material changes from the risk factors as previously disclosed in “Risk Factors” in Item 1A of our 2022 10-K, except as described below:

Recent volatility in the banking sector may result in reputational risk, new legislation, regulations or policy changes that could subject the Company to increased government regulation and supervision.

The recent failures of Silicon Valley Bank, Signature Bank, and First Republic Bank caused general uncertainty and concern regarding the banking sector, including the adequacy of liquidity. Uncertainty may be compounded by the reach and depth of media attention and its ability to disseminate concerns about these types of events. This public uncertainty and concern could potentially affect the Bank despite its relatively high percentage of deposits (81% as of September 30, 2023) that are either insured or collateralized and its on balance sheet liquidity and collateralized borrowing capacity being well in excess of the uninsured deposit balances.

These recent bank failures also prompted responses by the FDIC, the Federal Reserve and the U.S. Treasury Secretary to protect the depositors of these institutions. Congress and the federal banking agencies have begun to evaluate the events leading to the failures and have put forth varying theories, such as inadequate regulation and supervision, and a failure by the institutions to effectively manage interest rate and liquidity risks. Continued evaluation of these recent developments, or the occurrence of new bank failures, may lead to governmental initiatives intended to prevent future bank failures. The federal banking agencies may also re-evaluate applicable liquidity risk management standards. Although we cannot predict with certainty which initiatives may be pursued by legislators and regulatory agencies, or the terms and scope of any such initiatives, any of the potential changes referenced above could, among other things, subject us to additional costs, limit the types of financial services and products that the Bank may offer, and limit the future growth of the Company, any of which could materially and adversely affect the business, results of operations or financial condition of the Company.

Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)Not applicable.

(b)Not applicable.

(c)Issuer Purchases of Equity Securities.

On July 23, 2021, the Board of Directors adopted a share repurchase program, pursuant to which Citizens Community Bancorp, Inc. is authorized to repurchase 532,962 shares of its common stock, or approximately 5% of the outstanding shares on that date. As of the beginning of the quarter ended September 30, 2023, 229,659 shares were available for purchase under the share repurchase program. During the quarter ended September 30, 2023 no shares were repurchased under the program. As of September 30, 2023, an additional 229,659 shares remain available for repurchase under the program.


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2023 - July 31, 2023	—	$	—	—	229,659
August 1, 2023 - August 31, 2023	—	$	—	—	229,659
September 1, 2023 - September 30, 2023	—	$	—	—	229,659
Total	—	$	—	—

Item 3.DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4.MINE SAFETY DISCLOSURES

Not applicable.

Item 5.OTHER INFORMATION

Not applicable.

Item 6.EXHIBITS

(a) Exhibits


10.1						Business Note Renewal, Dated August 1, 2023, issued by Citizens Community Bancorp, Inc. to Chippewa Valley Bank (filed herewith).
31.1						Rule 13a-14(a) Certification of the Company’s Chief Executive Officer
31.2						Rule 13a-14(a) Certification of the Company’s Chief Financial Officer
32.1*						Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
101						The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags.
104						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)


*			This certification is not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CITIZENS COMMUNITY BANCORP, INC.

Date: November 3, 2023

By:

/s/ Stephen M. Bianchi

Stephen M. Bianchi

Chief Executive Officer

Date: November 3, 2023

By:

/s/ James S. Broucek

James S. Broucek

Chief Financial Officer