Citizens Community Bancorp Inc. [CZWI] Filings

10-Q 1 czwi-20240630.htm 10-Q czwi-20240630

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 June 30, 2024


☐			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 August 6, 2024 there were 10,297,341 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

CITIZENS COMMUNITY BANCORP, INC.

FORM 10-Q

June 30, 2024

INDEX


			Page Number
Part I – FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of June 30, 2024 (Unaudited) and December 31, 2023	5
		Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2024 and 2023	6
		Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and six months ended June 30, 2024 and 2023	7
		Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the six months ended June 30, 2024 and the year ended December 31, 2023	8
		Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2024 and 2023	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	86
	Item 6.	Exhibits	87
SIGNATURES			88

PART 1 – FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Balance Sheets

June 30, 2024 (unaudited) and December 31, 2023

(derived from audited financial statements)

(in thousands, except share and per share data)


	June 30, 2024		December 31, 2023
Assets
Cash and cash equivalents	$	36,886	$	37,138

Available for sale ("AFS") securities, at fair value (amortized cost of $170,494, net of allowance for credit losses of $0 at June 30, 2024 and amortized cost of $179,744, net of allowance for credit losses of $0 at December 31, 2023)	146,438		155,743
Held to maturity ("HTM") securities, at amortized cost (fair value of $69,027, net of allowance for credit losses of $0 at June 30, 2024 and fair value of $73,262, net of allowance for credit losses of $0 at December 31, 2023)	88,605		91,229
Equity investments	5,023		3,284
Other investments	13,878		15,725
Loans receivable	1,428,588		1,460,792
Allowance for credit losses	(21,178)		(22,908)
Loans receivable, net	1,407,410		1,437,884
Loans held for sale	275		5,773
Mortgage servicing rights, net	3,731		3,865
Office properties and equipment, net	17,774		18,373
Accrued interest receivable	6,289		5,409
Intangible assets	1,336		1,694
Goodwill	31,498		31,498
Foreclosed and repossessed assets, net	1,662		1,795
Bank owned life insurance ("BOLI")	25,708		25,647

Other assets	15,794		16,334
TOTAL ASSETS	$	1,802,307	$	1,851,391


Liabilities and Stockholders’ Equity
Liabilities:
Deposits	$	1,519,544	$	1,519,092
Federal Home Loan Bank (“FHLB”) advances	31,500		79,530
Other borrowings	61,498		67,465
Other liabilities	13,720		11,970
Total liabilities	1,626,262		1,678,057

Stockholders’ Equity:

Common stock—$0.01 par value, authorized 30,000,000; 10,297,341 and 10,440,591 shares issued and outstanding, respectively	103		104
Additional paid-in capital	117,838		119,441
Retained earnings	75,501		71,117

Accumulated other comprehensive loss	(17,397)		(17,328)
Total stockholders’ equity	176,045		173,334
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,802,307	$	1,851,391

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Operations (unaudited)

Three and Six Months Ended June 30, 2024 and 2023

(in thousands, except per share data)


	Three Months Ended				Six Months Ended
	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023
Interest and dividend income:
Interest and fees on loans	$	19,921	$	17,960	$	40,089	$	35,086
Interest on investments	2,542		2,817		5,053		5,364
Total interest and dividend income	22,463		20,777		45,142		40,450
Interest expense:
Interest on deposits	9,338		6,162		18,547		10,510
Interest on FHLB and FRB borrowed funds	576		1,892		1,088		3,385
Interest on other borrowed funds	973		1,037		2,026		2,074
Total interest expense	10,887		9,091		21,661		15,969
Net interest income before provision for credit losses	11,576		11,686		23,481		24,481
(Negative) provision for credit losses	(1,525)		450		(2,325)		500
Net interest income after provision for credit losses	13,101		11,236		25,806		23,981
Non-interest income:
Service charges on deposit accounts	490		488		961		973
Interchange income	579		591		1,120		1,142
Loan servicing income	526		499		1,108		1,068
Gain on sale of loans	226		904		1,246		1,202
Loan fees and service charges	309		88		539		168

Net realized gains on debt securities	—		12		—		12


Net losses (gains) on equity securities	(658)		(2)		(491)		54
Bank Owned Life Insurance (BOLI) death benefit	184		—		184		—
Other	257		333		510		586
Total non-interest income	1,913		2,913		5,177		5,205
Non-interest expense:
Compensation and related benefits	5,675		5,336		11,158		10,674
Occupancy	1,333		1,359		2,700		2,782

Data processing	1,525		1,444		3,122		2,904
Amortization of intangible assets	179		193		358		397
Mortgage servicing rights expense, net	116		148		264		306
Advertising, marketing and public relations	186		151		350		287
FDIC premium assessment	200		203		405		404
Professional services	347		306		913		811
Gains on repossessed assets, net	(18)		(9)		(18)		(38)

Other	756		715		1,824		1,440
Total non-interest expense	10,299		9,846		21,076		19,967
Income before provision for income taxes	4,715		4,303		9,907		9,219
Provision for income taxes	1,040		1,097		2,144		2,351
Net income attributable to common stockholders	$	3,675	$	3,206	$	7,763	$	6,868
Per share information:
Basic earnings	$	0.35	$	0.31	$	0.75	$	0.66
Diluted earnings	$	0.35	$	0.31	$	0.75	$	0.66
Cash dividends paid	$	—	$	—	$	0.32	$	0.29

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

Three and Six months ended June 30, 2024 and 2023

(in thousands)


	Three Months Ended				Six Months Ended
	June 30, 2024		June 30, 2023		June 30, 2024		June 30, 2023
Net income attributable to common stockholders	$	3,675	$	3,206	$	7,763	$	6,868
Other comprehensive income (loss), net of tax:
Securities available for sale
Net unrealized gains (losses) arising during period, net of tax	503		(2,277)		(199)		(1,212)
Reclassification adjustment for net gains included in net income, net of tax	—		(9)		—		(9)
Reclassification for net loss on exchanged security, included in net income, net of tax	130		—		130		—
Other comprehensive income (loss), net of tax	633		(2,286)		(69)		(1,221)



Comprehensive income	$	4,308	$	920	$	7,694	$	5,647

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statement of Changes in Stockholders’ Equity (unaudited)

Six Months Ended June 30, 2024

(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, December 31, 2023	10,440,591	$	104	$	119,441	$	71,117	$	(17,328)	$	173,334
Net income	—	—		—		4,088		—		4,088
Other comprehensive loss, net of tax	—	—		—		—		(702)		(702)

Surrender of restricted shares of common stock	(9,471)	—		(113)		—		—		(113)
Restricted common stock awarded under the equity incentive plan	16,955			—		—		—		—
Restricted common stock issued upon achievement of the 2021 performance criteria	8,805	—		—		—		—		—
Common stock repurchased	(50,000)	—		(570)		(28)		—		(598)




Amortization of restricted stock	—	—		158		—		—		158


Cash dividends ($0.32 per share)	—	—		—		(3,346)		—		(3,346)
Balance at March 31, 2024	10,406,880	104		118,916		71,831		(18,030)		172,821
Net income	—	—		—		3,675		—		3,675
Other comprehensive income, net of tax	—	—		—		—		633		633

Surrender of restricted shares of common stock	(539)	—		(6)		—		—		(6)


Common stock repurchased	(109,000)	(1)		(1,230)		(5)		—		(1,236)

Amortization of restricted stock	—	—		158		—		—		158

Balance at June 30, 2024	10,297,341	$	103	$	117,838	$	75,501	$	(17,397)	$	176,045

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, 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, December 31, 2022	10,425,119	$	104	$	119,240	$	65,400	$	(17,656)	$	167,088
Net income	—	—		—		3,662		—		3,662
Other comprehensive loss, 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 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
Net income	—	—		—		3,693		—		3,693
Other comprehensive loss, net of tax	—	—		—		—		4,411		4,411






Common stock repurchased	(27,500)	(1)		(303)		—		—		(304)




Amortization of restricted stock	—	—		132		—		—		132
Balance, December 31, 2023	10,440,591	$	104	$	119,441	$	71,117	$	(17,328)	$	173,334

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Cash Flows (unaudited)

Six Months Ended June 30, 2024 and 2023

(in thousands)


	Six Months Ended
	June 30, 2024		June 30, 2023
Cash flows from operating activities:
Net income attributable to common stockholders	$	7,763	$	6,868
Adjustments to reconcile net income to net cash provided by operating activities:
Net accretion on debt securities	(39)		(34)
Depreciation expense	1,113		1,203
(Negative provision) provision for credit losses	(2,325)		500
Net loss (gain) on equity securities	491		(54)
Net realized gain on sale of debt securities	—		(12)

Increase in mortgage servicing rights resulting from transfers of financial assets	(130)		(52)
Mortgage servicing rights amortization and impairment, net	264		306
Amortization of intangible assets	358		397
Amortization of restricted stock	316		382


Decrease in deferred income taxes	355		129
Increase in cash surrender value of life insurance	(560)		(336)
Net gain from disposals of foreclosed and repossessed assets	(18)		(38)


Gain on sale of loans held for sale, net	(1,246)		(1,202)
Proceeds from sale of loans held for sale	28,441		23,192
Originations of loans held for sale	(21,697)		(24,384)

Net change in:

Accrued interest receivable and other assets	(709)		(1,047)
Other liabilities	1,750		(1,466)
Total adjustments	6,364		(2,516)
Net cash provided by operating activities	14,127		4,352
Cash flows from investing activities:
Proceeds from Bank Owned Life Insurance (BOLI) death benefit	499		—
Net decrease in other interest bearing deposits	—		249
Purchase of available for sale securities	—		(11,007)
Proceeds from principal payments of available for sale securities	7,045		9,128
Proceeds from sales of available for sale securities	—		5,105

Proceeds from principal payments and maturities of held to maturity securities	2,618		2,571

Equity investment capital distribution	170		—
Purchase of equity investments	(150)		(450)
Net sales (purchases) of other investments	1,847		(513)
Proceeds from sales of foreclosed and repossessed assets	201		254
Proceeds from insurance claim on foreclosed and repossessed assets	27		—
Net decrease (increase) in loans	32,726		(13,199)
Net capital expenditures	(527)		(547)

Proceeds from disposal of office properties and equipment	13		10

Net cash provided by (used in) investing activities	44,469		(8,399)


Cash flows from financing activities:

Change in short term Federal Home Loan Bank advances, net	(27,500)		15,000

Federal Home Loan Bank advance repayment due to FHLB call	(10,000)		—

Federal Home Loan Bank advance long-term maturities	(10,530)		(35,000)
Amortization of debt issuance costs	116		115


Other borrowings principal reductions	(6,083)		(5,167)
Net increase in deposits	448		39,962
Restricted common stock awarded under the equity incentive plan	—		1

Repurchase shares of common stock	(1,834)		(117)
Surrender of restricted shares of common stock	(119)		(129)
Common stock options exercised	—		28
Cash dividends paid	(3,346)		(3,040)
Net cash (used in) provided by financing activities	(58,848)		11,653
Net (decrease) increase in cash and cash equivalents	(252)		7,606
Cash and cash equivalents at beginning of period	37,138		35,363
Cash and cash equivalents at end of period	$	36,886	$	42,969


Supplemental cash flow information:
Cash paid during the period for:
Interest on deposits	$	14,897	$	10,088
Interest on borrowings	$	3,044	$	5,363
Income taxes	$	1,487	$	2,505
Supplemental noncash disclosure:
Transfers from loans receivable to other real estate owned ("OREO")	$	73	$	144

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 (the “FRB”), and operates under the title of Citizens Community Bancorp, Inc. The Office of the Comptroller of the Currency (the “OCC”), is the primary federal regulator for the Bank.

The consolidated income of the Company is principally derived from the income of the Bank, the Company’s wholly owned subsidiary, serving customers primarily in Wisconsin and Minnesota through 22 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 balance sheet date of June 30, 2024, through the date on which the consolidated financial statements were available to be issued on August 6, 2024, 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, 2023, filed with the SEC on March 5, 2024; the matters described in “Risk Factors” in Item 1A of the quarterly reports on Form 10-Q for the quarter ended March 31, 2024, filed with the SEC on May 8, 2024; the matters described in “Risk Factors” in Item 1A of this Form 10-Q; and external market factors such as market interest rates and unemployment rates; changes to operating policies and procedures, and changes in applicable banking regulations. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period.

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

Investment Securities; Available for Sale and Held to Maturity – 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 – 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 through an allowance for credit losses is recognized in other comprehensive income.

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.

The Company has elected to not measure an ACL on accrued interest on available for sale and held to maturity securities, as it would write off accrued interest in a timely manner if the related security was determined to have a credit loss. The Company has no available for sale securities or held to maturity securities which it deems to have a credit loss at June 30, 2024.

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.

Included in equity investments are preferred shares of a community development financial institution, which are carried at their fair market value. As no ready market exists for this investment, the Company utilizes significant unobservable inputs (Level 3 inputs) to determine fair value.We record the unrealized gains and losses resulting from changes in the fair value of this investment as net gains or losses on investment securities in our consolidated statements 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 net 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 statements 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 $13,878 at June 30, 2024 consisted of $5,447 of FHLB stock, $5,707 of Federal Reserve Bank stock and $2,724 of Bankers’ Bank stock. Other investments totaling $15,725 at December 31, 2023 consisted of $7,302 of FHLB stock and $5,699 of Federal Reserve Bank stock and $2,724 of Bankers’ Bank stock.

Loans Receivable – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, accretable yield on acquired loans, and non-accretable 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. For commercial/agricultural real estate loans, 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. For commercial and industrial/agricultural operating, residential, and consumer loans, the loss rate is then combined with the loans balance and contractual maturity, to determine expected future losses.

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. 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 -