UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended ~~June~~September 30, ~~2018~~2019



¨	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~~

2174 EastRidge CenterEau Claire, WI54701(Address of principal executive offices)(Zip Code)

715-836-9994

(Registrant’s telephone number, including area code)

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 x No ¨

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). Yes x No ¨

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

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 x

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 SM

APPLICABLE ONLY TO CORPORATE ISSUERS

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

At ~~August 10, 2018~~November 7, 2019 there were ~~5,914,379~~11,269,726 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

CITIZENS COMMUNITY BANCORP, INC.

FORM 10-Q

~~June~~September 30, ~~2018~~2019

INDEX



			Page Number
Part I – FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of ~~June~~September 30, ~~2018~~2019 (Unaudited) and ~~September 30, 2017~~December 31, 2018	45
		Consolidated Statements of Operations (Unaudited) for the three and nine months ended ~~June~~September 30, ~~2018~~2019 and ~~2017~~2018	56
		Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended ~~June~~September 30, ~~2018~~2019 and ~~2017~~2018	67
		Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the nine months ended ~~June~~September 30, ~~2018~~2019	78
		Consolidated Statements of Cash Flows (Unaudited) for the nine months ended ~~June~~September 30, ~~2018~~2019 and ~~2017~~2018	810
		Condensed Notes to Consolidated Financial Statements (Unaudited)	1012
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4449
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6470
	Item 4.	Controls and Procedures	6672
Part II – OTHER INFORMATION			6672
	Item 1.	Legal Proceedings	6672
	Item 1A.	Risk Factors	6873
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6973
	Item 3.	Defaults Upon Senior Securities	7073
	Item 4.	Mine Safety Disclosures	7073
	Item 5.	Other Information	7073
	Item 6.	Exhibits	7074
SIGNATURES			7175

PART 1 – FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Balance Sheets

~~June~~September 30, ~~2018~~2019 (unaudited) and ~~September 30, 2017~~December 31, 2018

(derived from audited financial statements)

(in thousands, except share and per share data)


	June 30, 2018			September 30, 2017			September 30, 2019			December 31, 2018
Assets
Cash and cash equivalents	$	27,731		$	41,677		$	52,276		$	45,778
Other interest-bearing deposits	8,160			8,148			5,245			7,460
Securities available for sale	119,702			95,883
Securities held to maturity	4,809			5,453
Non-marketable equity securities, at cost	6,862			7,292
Securities available for sale "AFS"							182,956			146,725
Securities held to maturity "HTM"							3,665			4,850
Other investments							12,863			11,261
Loans receivable	761,087			732,995			1,124,378			992,556
Allowance for loan losses	(6,458		)	(5,942		)	(9,177		)	(7,604		)
Loans receivable, net	754,629			727,053			1,115,201			984,952
Loans held for sale	1,778			2,334			3,262			1,927
Mortgage servicing rights	1,841			1,886			4,245			4,486
Office properties and equipment, net	9,947			9,645			20,938			13,513
Accrued interest receivable	3,306			3,291			4,993			4,307
Intangible assets	4,966			5,449			7,999			7,501
Goodwill	10,444			10,444			31,841			31,474
Foreclosed and repossessed assets, net	5,392			6,017			1,373			2,570
Bank owned life insurance ("BOLI")	11,581			11,343			22,895			17,792
Other assets	3,922			4,749			5,612			3,328
TOTAL ASSETS	$	975,070		$	940,664		$	1,475,364		$	1,287,924


Liabilities and Stockholders’ Equity
Liabilities:
Deposits	$	744,536		$	742,504		$	1,161,750		$	1,007,512
Federal Home Loan Bank advances	58,000			90,000			113,466			109,813
Other borrowings	29,059			30,319			44,545			24,647
Other liabilities	8,264			4,358			7,574			7,765
Total liabilities	839,859			867,181			1,327,335			1,149,737

Stockholders’ equity:
Preferred stock - $0.01 par value, $130.00 per share liquidation, 1,000,000 shares authorized, 500,000 shares issued and outstanding	61,289			—
Common stock— $0.01 par value, authorized 30,000,000; 5,914,379; and 5,888,816 shares issued and outstanding, respectively	59			59
Stockholders’ Equity:
Common stock— $0.01 par value, authorized 30,000,000; 11,270,710 and 10,953,512 shares issued and outstanding, respectively							113			109
Additional paid-in capital	63,850			63,383			128,926			125,512
Retained earnings	12,904			10,764			19,348			15,264
Unearned deferred compensation	(716		)	(456		)	(630		)	(857		)
Accumulated other comprehensive loss	(2,175		)	(267		)	272			(1,841		)
Total stockholders’ equity	135,211			73,483			148,029			138,187
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	975,070		$	940,664		$	1,475,364		$	1,287,924

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Operations (unaudited)

Three and Nine Months Ended ~~June~~September 30, ~~2018~~2019 and ~~2017~~2018

(in thousands, except per share data)


	Three Months Ended					Nine Months Ended						Three Months Ended					Nine Months Ended
	June 30, 2018		June 30, 2017			June 30, 2018			June 30, 2017			September 30, 2019			September 30, 2018		September 30, 2019			September 30, 2018
Interest and dividend income:
Interest and fees on loans	$	8,865	$	6,030		$	26,125		$	18,632		$	14,646		$	9,414	$	40,036		$	26,818
Interest on investments	905		591			2,409			1,476			1,577			948		4,241			2,666
Total interest and dividend income	9,770		6,621			28,534			20,108			16,223			10,362		44,277			29,484
Interest expense:
Interest on deposits	1,432		1,035			3,884			3,204			3,371			1,659		8,890			4,341
Interest on FHLB borrowed funds	412		164			987			500			639			323		2,213			1,049
Interest on other borrowed funds	446		107			1,300			308			620			440		1,436			1,318
Total interest expense	2,290		1,306			6,171			4,012			4,630			2,422		12,539			6,708
Net interest income before provision for loan losses	7,480		5,315			22,363			16,096			11,593			7,940		31,738			22,776
Provision for loan losses	650		—			850			—			575			450		2,125			1,200
Net interest income after provision for loan losses	6,830		5,315			21,513			16,096			11,018			7,490		29,613			21,576
Non-interest income:
Service charges on deposit accounts	413		325			1,303			1,065			625			489		1,756			1,332
Interchange income	338		203			946			575			476			338		1,267			978
Loan servicing income	337		62			1,011			205			714			368		1,902			1,051
Gain on sale of mortgage loans	226		206			709			490
Gain on sale of loans												679			234		1,560			649
Loan fees and service charges	116		96			357			418			471			164		860			367
Insurance commission income	187		—			540			—			197			180		573			554
Settlement proceeds	—		—			—			283
Gains (losses) on available for sale securities	4		—			(17		)	29
Gains (losses) on investment securities												96			—		151			(17		)
Gain on sale of branch												—			—		2,295			—
Other	146		99			532			295			363			216		827			517
Total non-interest income	1,767		991			5,381			3,360			3,621			1,989		11,191			5,431
Non-interest expense:
Compensation and related benefits	3,840		2,395			11,201			7,629			5,295			3,778		14,605			11,424
Occupancy	733		565			2,199			2,196			905			776		2,725			2,270
Office	417		304			1,281			897			599			468		1,649			1,311
Data processing	720		476			2,157			1,402			1,092			771		2,953			2,224
Amortization of intangible assets	161		38			484			119			412			161		1,085			483
Amortization of mortgage servicing rights	84		—			250			—			325			85		822			245
Advertising, marketing and public relations	185		75			480			243			315			265		974			596
FDIC premium assessment	94		79			351			231			78			121		318			330
Professional services	735		382			1,746			1,218			561			577		1,961			1,635
Loss (gain) on repossessed assets, net	450		(11		)	464			(16		)	(16		)	71		(143		)	521
Other	455		316			1,507			1,050			3,409			571		5,309			1,582
Total non-interest expense	7,874		4,619			22,120			14,969			12,975			7,644		32,258			22,621
Income before provision for income taxes	723		1,687			4,774			4,487
Income before provision for income tax												1,664			1,835		8,546			4,386
Provision for income taxes	220		604			1,590			1,530			430			736		2,252			1,443
Net income attributable to common stockholders	$	503	$	1,083		$	3,184		$	2,957		$	1,234		$	1,099	$	6,294		$	2,943
Per share information:
Basic earnings	$	0.09	$	0.21		$	0.54		$	0.56		$	0.11		$	0.18	$	0.57		$	0.49
Diluted earnings	$	0.08	$	0.20		$	0.52		$	0.56		$	0.11		$	0.10	$	0.57		$	0.38
Cash dividends paid	$	—	$	—		$	0.20		$	0.16		$	—		$	—	$	0.20		$	0.20

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Comprehensive Income (unaudited)

Three and Nine months ended ~~June~~September 30, ~~2018~~2019 and ~~2017~~2018

(in thousands)


	Three Months Ended					Nine Months Ended						Three Months Ended					Nine Months Ended
	June 30, 2018			June 30, 2017		June 30, 2018			June 30, 2017			September 30, 2019		September 30, 2018			September 30, 2019		September 30, 2018
Net income attributable to common stockholders	$	503		$	1,083	$	3,184		$	2,957		$	1,234	$	1,099		$	6,294	$	2,943
Other comprehensive income (loss), net of tax:
Securities available for sale
Net unrealized losses arising during period	(164		)	514		(1,755		)	(770		)
Reclassification adjustment for (losses) gains included in net income	—			—		(16		)	17
Other comprehensive loss	(164		)	514		(1,771		)	(753		)
Net unrealized gains (losses) arising during period												250		(531		)	2,049		(1,753		)
Reclassification adjustment for net gains (losses) included in net income												69		—			109		(13		)
Other comprehensive income (loss)												319		(531		)	2,158		(1,766		)
Comprehensive income	$	339		$	1,597	$	1,413		$	2,204		$	1,553	$	568		$	8,452	$	1,177

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statement of Changes in Stockholders’ Equity (unaudited)

Nine Months Ended ~~June~~September 30, ~~2018~~2019

(in thousands, except shares and per share data)


							Additional Paid-In Capital				Retained Earnings				Unearned Deferred Compensation				Accumulated Other Comprehensive Income (Loss)				Total Stockholders' Equity									Additional Paid-In Capital				Retained Earnings				Unearned Deferred Compensation				Accumulated Other Comprehensive Income (Loss)				Total Stockholders’ Equity
	Common Stock				Preferred Stock									Common Stock
	Shares		Amount		Amount									Shares								Amount
Balance, October 1, 2017	5,888,816		$	59	$	—				$	63,383			$				10,764				$				(456	)	$	(267	)		$	73,483
Balance, January 1, 2019																										10,953,512		$	109			$	125,512			$	15,264			$	(857	)		$	(1,841	)		$	138,187
Net income														3,184												3,184		—			—				—				953				—				—				953
Preferred stock issued net of costs					61,289																					61,289
Reclassification of certain deferred tax effects (1)											137								(137		)		—
Other comprehensive loss, net of tax																			(1,771		)		(1,771		)
Other comprehensive income, net of tax																										—		—				—				—				—				1,164				1,164
Forfeiture of unvested shares	(11,847	)					(124		)						124								—			(958	)	—				(13		)		—				13				—				—
Surrender of restricted shares of common stock	(1,809	)					(25		)														(25		)	(798	)	—				(9		)		—				—				—				(9		)
Restricted Common stock awarded under the equity incentive plan	33,230						561								(561		)						—
Common stock repurchased	(53	)					(1		)														(1		)
Common stock awarded under the equity incentive plan																										10,847		—				252				—				(252		)		—				—
Common stock options exercised	6,042						50																50			27,430		1				194				—				—				—				195
Stock option expense							6																6			—		—				4				—				—				—				4
Amortization of restricted stock															177								177			—		—				—				—				140				—				140
Adoption of ASU 2016-01; Equity securities																										—		—				—				45				—				(45		)		—
Adoption of ASU 2016-02; Leases																										—		—				—				(56		)		—				—				(56		)
Cash dividends ($0.20 per share)											(1,181		)										(1,181		)	—		—				—				(2,198		)		—				—				(2,198		)
Balance, June 30, 2018	5,914,379		$	59	$	61,289	$	63,850			$	12,904			$	(716	)		$	(2,175	)		$	135,211
Balance at March 31, 2019																										10,990,033		110				125,940				14,008				(956		)		(722		)		138,380
Net income																										—		—				—				4,107				—				—				4,107
Other comprehensive income, net of tax																										—		—				—				—				—				675				675
Forfeiture of unvested shares																										(7,958	)	—				(118		)		—				118				—				—
Surrender of restricted shares of common stock																										(3,067	)	—				(35		)		—				—				—				(35		)
Common stock awarded under the equity incentive plan																										2,000		—				22				—				(22		)		—				—
Common stock options exercised																										1,000		—				8				—				—				—				8
Stock option expense																										—		—				5				—				—				—				5
Amortization of restricted stock																										—		—				—				—				103				—				103
Adoption of ASU 2016-02; Leases																										—		—				—				(1		)		—				—				(1		)
Balance at June 30, 2019																										10,982,008		110				125,822				18,114				(757		)		(47		)		143,242
Net income																										—		—				—				1,234				—				—				1,234
Other comprehensive income, net of tax																										—		—				—				—				—				319				319
Surrender of restricted shares of common stock																										(297	)	—				(3		)		—				—				—				(3		)
Common stock issued to F&M shareholders																										288,999		3				3,102				—				—				—				3,105
Stock option expense																										—		—				5				—				—				—				5
Amortization of restricted stock																										—		—				—				—				127				—				127
Balance, September 30, 2019																										11,270,710		$	113			$	128,926			$	19,348			$	(630	)		$	272			$	148,029

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, 2018

(in thousands, except shares and per share data)



								Additional Paid-In Capital			Retained Earnings			Unearned Deferred Compensation			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Common Stock				Preferred Stock
	Shares		Amount		Amount
Balance, January 1, 2018	5,883,603		$	59	$	—		$	63,348		$	12,104		$	(391	)	$	(666	)	$	74,454
Net income	—		—		—			—			1,341			—			—			1,341
Reclassification of certain deferred tax effects (1)	—		—		—			—			137			—			(137		)	—
Other comprehensive loss, net of tax	—		—		—			—			—			—			(1,208		)	(1,208		)
Forfeiture of unvested shares	(1,437	)	—		—			(20		)	—			20			—			—
Common stock awarded under the equity incentive plan	15,523		—		—			211			—			(211		)	—			—
Common stock options exercised	4,792		—		—			41			—			—			—			41
Stock option expense	—		—		—			(5		)	—			—			—			(5		)
Amortization of restricted stock	—		—		—			—			—			67			—			67
Cash dividends ($0.20 per share)	—		—		—			—			(1,181		)	—			—			(1,181		)
Balance at March 31, 2018	5,902,481		59		—			63,575			12,401			(515		)	(2,011		)	73,509
Net income	—		—		—			—			503			—			—			503
Preferred stock issued (net of issuance costs)	—		—		61,289			—			—			—			—			61,289
Other comprehensive loss, net of tax	—		—		—			—			—			—			(164		)	(164		)
Surrender of restricted shares of common stock	(1,809	)	—		—			(25		)	—			—			—			(25		)
Common stock awarded under the equity incentive plan	13,707		—		—			295			—			(295		)	—			—
Stock option expense	—		—		—			5			—			—			—			5
Amortization of restricted stock	—		—		—			—			—			94			—			94
Balance at June 30, 2018	5,914,379		59		61,289			63,850			12,904			(716		)	(2,175		)	135,211
Net income	—		—		—			—			1,099			—			—			1,099
Preferred stock issued net of issuance costs	—		—		(24		)	—			—			—			—			(24		)
Preferred stock converted to common stock	5,000,000		50		(61,265		)	61,215			—			—			—			—
Other comprehensive loss, net of tax	—		—		—			—			—			—			(531		)	(531		)
Surrender of restricted shares of common stock	(526	)	—		—			(8		)	—			—			—			(8		)
Stock option expense	—		—		—			6			—			—			—			6
Amortization of restricted stock	—		—		—			—			—			94			—			94
Balance, September 30, 2018	10,913,853		$	109	$	—		$	125,063		$	14,003		$	(622	)	$	(2,706	)	$	135,847

(1) Amounts reclassified to retained earnings due to early adoption of ASU 2018-02. ~~For further information, refer to Note 1.~~

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Cash Flows (unaudited)

Nine Months Ended ~~June~~September 30, ~~2018~~2019 and ~~2017~~2018

(in thousands)

Nine Months Ended
June 30, 2018 June 30, 2017
Cash flows from operating activities:
Net income attributable to common stockholders $ 3,184
$ 2,957
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premium/discount on securities 736
575
Depreciation 749
674
Provision for loan losses 850
—
Net realized loss (gain) on sale of securities 17
(29 )
Amortization of intangible assets 484
119
Amortization of restricted stock 177
48
Net stock based compensation expense 6
23
(Gain) loss on sale of office properties and equipment (4 ) 2
Provision for deferred income taxes 137
456
Net loss (gain) from disposals of foreclosed properties 489
(16 )
Provision for valuation allowance on foreclosed properties —
—
Gain on sale of loans held for sale, net (709 ) (490 )
Proceeds from sale of loans held for sale 37,989
19,530
Origination of loans held for sale (29,689 ) (19,857 )
Decrease (increase) in accrued interest receivable and other assets 1,952
319
Decrease in other liabilities 3,906
(1,755 )
Total adjustments 17,090
(401 )
Net cash provided by operating activities 20,274
2,556
Cash flows from investing activities:
Purchase of investment securities (34,123 ) (16,239 )
Purchase of bank owned life insurance —
(3,500 )
Net increase in interest-bearing deposits (12 ) (250 )
Proceeds from sale of securities available for sale 31
10,644
Principal payments on investment securities 7,609
6,458
Proceeds from sale of non-marketable equity securities 8,114
953
Purchase of non-marketable equity securities (7,684 ) (417 )
Proceeds from sale of foreclosed properties 2,171
713
Net (increase) decrease in loans (36,741 ) 53,888
Net capital expenditures (2,562 ) (366 )
Net cash received from sale of office properties 73
7
Net cash (used in) provided by investing activities (63,124 ) 51,891
Cash flows from financing activities:
Net (decrease) increase in Federal Home Loan Bank advances (32,000 ) 8,609
Decrease in other borrowings (1,260 ) —
Net increase (decrease) in deposits 2,032
(38,544 )
Proceeds from sale of preferred stock, net of costs 61,289
—
Surrender of restricted shares of common stock (25 ) (17 )
Exercise of common stock options 50
67
Repurchase shares of common stock (1 ) (16 )
Cash dividends paid (1,181 ) (843 )
Net cash provided by (used in) financing activities 28,904
(30,744 )
Net (decrease) increase in cash and cash equivalents (13,946 ) 23,703
Cash and cash equivalents at beginning of period 41,677
10,046
Cash and cash equivalents at end of period $ 27,731
$ 33,749



	Nine Months Ended
	September 30, 2019			September 30, 2018
Cash flows from operating activities:
Net income attributable to common stockholders	$	6,294		$	2,943
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premium/accretion discount on investment securities	762			843
Provision for depreciation	1,110			819
Provision for loan losses	2,125			1,200
Net realized (gain) loss on sale of securities	(151		)	17
Increase in MSR assets resulting from transfers of financial assets	(581		)	(289		)
Amortization of MSR assets	822			335
Amortization of intangible assets	1,085			483
Amortization of restricted stock	370			255
Net stock based compensation expense	14			6
Gain on sale of office properties and equipment	(32		)	(3		)
Benefit for deferred income taxes	—			(194		)
Increase in cash surrender value of life insurance	(384		)	(318		)
Net (gain) loss from disposals of foreclosed and repossessed assets	(143		)	522
Gain on sale of loans held for sale, net	(1,560		)	(943		)
Net change in loans held for sale	225			1,360
Decrease in accrued interest receivable and other assets	3,009			433
(Decrease) increase in other liabilities	(6,482		)	620
Total adjustments	189			5,146
Net cash provided by operating activities	6,483			8,089
Cash flows from investing activities:
Purchase of investment securities	(23,457		)	(33,622		)
Net decrease (increase) in interest-bearing deposits	3,207			(25		)
Proceeds from sale of investment securities	7,976			26
Principal payments on investment securities	19,579			8,776
Net sales of other investments	1,084			933
Proceeds from sale of foreclosed and repossessed assets	2,238			4,805
Net increase in loans	(6,710		)	(28,644		)
Net capital expenditures	(6,149		)	(2,405		)
Net cash acquired in business combinations	(8,137		)	—
Proceeds from disposal of office properties and equipment	300			74
Net cash used in investing activities	(10,069		)	(50,082		)
Cash flows from financing activities:
Net decrease in Federal Home Loan Bank advances	(16,469		)	(31,000		)
Proceeds from other borrowings, net of debt issuance costs	—			9,911
Proceeds from other borrowings to fund business combination, net of origination costs	29,889			—
Principal payment reduction to other borrowings	(10,000		)	(15,191		)
Net increase in deposits	5,601			5,460
Proceeds from private placement stock offering, net of issuance costs	—			61,265
Common stock issued in F&M acquisition less capitalized equity costs	3,105			—
Surrender of restricted shares of common stock	(47		)	(33		)
Exercise of common stock options	203			41
Cash dividends paid	(2,198		)	(1,181		)
Net cash provided by financing activities	10,084			29,272
Net increase (decrease) in cash and cash equivalents	6,498			(12,721		)
Cash and cash equivalents at beginning of period	45,778			47,215
Cash and cash equivalents at end of period	$	52,276		$	34,494

810


Supplemental cash flow information:
Cash paid during the period for:
Interest on deposits	$	3,907	$	3,172	$	8,775	$	4,285
Interest on borrowings	$	2,119	$	584	$	3,966	$	2,366
Income taxes	$	920	$	979	$	3,847	$	1,160
Supplemental noncash disclosure:
Transfers from loans receivable to foreclosed and repossessed assets	$	591	$	543	$	898	$	1,064
Fair value of assets acquired, net of cash and cash equivalents					$	177,494	$	—
Fair value of liabilities assumed, net of cash and cash equivalents					$	169,724	$	—

See accompanying condensed notes to unaudited consolidated financial statements.

911

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 accompanying consolidated financial statements include the accounts of Citizens Community Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Citizens Community Federal N.A. (the ~~"Bank"~~“Bank”), and have been prepared 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"~~“FRB”), and operates under the title of Citizens Community Bancorp, Inc. 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."). The~~ U.S. Office of the Comptroller of the Currency (the ~~"OCC"~~“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 ~~and Michigan~~ through 2228 branch ~~locations.~~locations, including two branch locations acquired in the F. & M. Bancorp. of Tomah, Inc. merger on July 1, 2019. Its primary markets include the Chippewa Valley Region in Wisconsin, the Twin Cities and Mankato markets in Minnesota, and various rural communities around these areas. The Bank offers traditional community banking services to businesses, ~~agricultural~~Agricultural operators and consumers, including ~~one to four~~one-to-four family residential ~~mortgages.~~mortgages, as well as expanded services through Wells Insurance Agency, Inc.

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 as of ~~June~~September 30, ~~2018~~2019 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.

On ~~August 18, 2017,~~May 17, 2019, the Company completed ~~its merger~~the sale of the Rochester Hills, MI branch for a deposit premium of 7 percent, or approximately $2.3 million, net of selling costs. The branch sale included approximately $34 million in deposits and $300,000 in fixed assets. The Bank retained all loans associated with ~~Wells Financial Corporation ("WFC"), pursuant to~~ the ~~merger agreement, dated March 17, 2017. At that time, the separate corporate existence of WFC ceased, and~~branch.

On July 1, 2019, the Company ~~survived~~closed on the merger. In connection with the merger, the Company caused Wells Federal Bank to merge with and into the Bank, with the Bank surviving the merger. The merger expands the Bank's market share in Mankato and southern Minnesota, and added seven branch locations along with expanded services through Wells Insurance Agency,acquisition of F. & M. Bancorp. of Tomah, Inc. and ~~loan servicing.~~completed the related data systems conversion on July 14, 2019. See Note 2, “Acquisitions” for additional information.

On ~~June 20, 2018,~~October 25, 2019, the ~~Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with United Bancorporation (“Parent”) and its wholly-owned subsidiary,~~Department of the Treasury released regulations which clarified the tax status of acquired life insurance policies, resulting in policies acquired from United Bank and F&M retaining their tax-free status. As a ~~Wisconsin chartered bank (“United Bank”), pursuant to which~~result, the Company will ~~subject to~~be reducing its related deferred tax liabilities by $350 thousand (F&M), and $300 thousand (United Bank) and F&M’s initial goodwill will be reduced by $350 thousand on the ~~terms and conditions set forth therein, acquire 100% of the common stock of United Bank (the “Acquisition”) for approximately $50.7 million in cash, subject to adjustment~~December 31, 2019 consolidated balance sheet. $300 thousand will be recorded as ~~provided in the Stock Purchase Agreement. At the closing of the Acquisition, United Bank will become~~ a ~~wholly-owned subsidiary of the Company. Immediately following the closing of the Acquisition, the Company intends to merge United Bank with and into the Bank.~~

On June 20, 2018, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with each of a limited number of institutional and other accredited investors, including certain officers and directors of the Company (collectively the “Purchasers”), pursuant to which the Company sold an aggregate of 500,000 shares ofdiscrete tax credit reduction on the Company’s 8.00% Series A Mandatorily Convertible Non-Cumulative Non-Voting Perpetual Preferred Stock, par value $0.01 per share, (the “Series A Preferred Stock”), in a private placement (the “Private Placement”) at $130.00 per share,statement of operations for ~~aggregate gross proceeds of $65 million. The Securities Purchase Agreement contains customary representations, warranties,~~the three and ~~covenants of the Company and the Purchasers.~~

Each share of Series A Preferred Stock will be mandatorily convertible into ten shares of common stock following receipt of stockholder approval of the issuance of the shares of common stock into which the Series A Preferred Stock is expected to be converted. The Company has scheduled a special meeting of stockholders on September 25, 2018twelve-months ended December 31, 2019. See Note 12, “Subsequent Event” for ~~purposes of a stockholder vote regarding approval of issuance of the shares of common stock into which the Series A Preferred Stock is expected to be converted.~~

additional information.

The accompanying consolidated interim financial statements are unaudited. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Unless otherwise stated herein, and except for shares and per share amounts, all amounts are in thousands.

Principles of Consolidation – The accompanying consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates – Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, fair value of financial instruments, the allowance for loan losses, mortgage servicing rights, foreclosed and repossessed assets, valuation of acquired intangible assets, useful lives for depreciation and amortization,

indefinite-lived intangible assets, stock-based compensation and long-lived assets, 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"~~“Risk Factors” in Item 1A ~~of the annual~~in our transition report on Form 10-K for the ~~year ended September 30, 2017,~~transition period from October 1, 2018 to December 31, 2018, filed with the SEC on ~~December 13, 2017,~~March 8, 2019, 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 ~~deemed other than temporarily impaired due to non-credit issues~~ being reported in other comprehensive income (loss), net of tax. Unrealized losses deemed other-than-temporary due to credit issues are reported in the Company’s net income in the period in which the losses arise. 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 ~~underlying~~ securities.

The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. As part of such monitoring, the credit quality of individual securities and their issuer is assessed. Significant inputs used to measure the amount of other-than-temporary impairment related to credit loss include, but are not limited to; the ~~Company's~~Company’s intent and ability to sell the debt security prior to recovery, that it is more likely than not that the Company will not sell the security prior to recovery, default and delinquency rates of the underlying collateral, remaining credit support, and historical loss severities. Adjustments to market value of available for sale securities that are considered temporary are recorded in other comprehensive income or loss as separate components of ~~stockholders'~~stockholders’ equity, net of tax. If the unrealized loss of a security is identified as other-than-temporary based on information available, such as the decline in the creditworthiness of the issuer, external market ratings, or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if credit loss exists. If there is a credit loss, it will be recorded in the ~~Company's~~Company’s consolidated statement of operations. Non-credit components of the unrealized losses on available for sale securities will continue to be recognized in other comprehensive income (loss), net of tax.

Other Investments - Other investments includes equity securities with readily determinable fair values, “restricted” equity securities, and private company securities. Other investments includes $241 of equity securities with readily determinable fair values. Equity investment securities are carried at their fair market value, based on an “exit price” notion. Changes in the fair value of equity investment securities are recognized as Gains (losses) on investment securities in the consolidated Statement of Operations.

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 income.

Also included in other investments is stock in a private company that does not have a quoted market price. 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.

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 unearned interest, and net of deferred loan fees and ~~costs.~~costs, and non-accretable discount on purchased of credit impaired loans. Interest income is accrued on the unpaid principal balance of these loans. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the interest method without anticipating prepayments. ~~Delinquency~~Late charge fees are recognized into income when ~~chargeable, assuming collection is reasonably assured.~~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/agricultural non-real estate loans past due 90 days or more;

•Closed end consumer non-real estate loans past due 120 days or more; and

•Residential real estate loans and open ended consumer non-real estate 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 ~~and is generally applied against principal,~~ 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 6six month payment history has been established. Interest on impaired loans considered troubled debt restructurings (“TDRs”) or substandard, less than 90 days delinquent, is recognized as income as it accrues based on the revised terms of the loan over an established period of continued payment. Substandard loans, as defined by the OCC, our primary banking regulator, are loans that are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Residential real estate loans and open ended consumer non-real estate 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 ~~end~~ended consumer non-real estate 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 loans, including~~ Commercial/agricultural real estate and ~~C&I~~non-real estate 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 ~~180~~90 days or ~~more for open ended loans or loans secured by real estate collateral, or the loan becomes 120 days past due or more for loans secured by non-real estate collateral.~~

The Company defines Acquired Loans as all loans acquired in a business combination accounted for under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 805, "~~Business Combinations". These loans include, but are not limited to loans accounted for under FASB ASC 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality"~~ ~~as discussed below. All other loans are defined as Originated Loans.~~more.

Allowance for Loan Losses –The allowance for loan losses (“ALL”) is a valuation allowance for probable and inherent credit losses in our loan portfolio. Loan losses are charged against the ALL when management believes that the collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the ALL. Management estimates the required ALL balance taking into account the following factors: past loan loss experience; the nature, volume and composition of our loan portfolio; known and inherent risks in our ~~loan~~ portfolio; information about specific borrowers’ ability to repay; estimated collateral values; current economic conditions; and other relevant factors determined by management. The ALL consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for certain qualitative factors. The entire ALL balance is available for any loan that, in ~~our~~ management’s judgment, should be charged off.

A loan is impaired when full payment under the loan terms is not expected. Impaired loans consist of all TDRs, as well as individual ~~substandard~~ loans not considered a TDR, ~~when full payment under~~that are either (1) rated substandard or worse, (2) on nonaccrual status or (3) PCI loans which are impaired at the ~~loan terms is not expected.~~time of acquisition. All TDRs are individually evaluated for impairment. See Note 3,4, “Loans, Allowance for Loan Losses and Impaired Loans” for more information on what we consider to be a TDR. ~~If a TDR~~For TDR’s or substandard ~~loan is~~loans deemed to be impaired, a specific ALL allocation may be established so that the loan is reported, net, at the lower of (a) its outstanding principal ~~balance,~~balance; (b) the present value of the loan’s estimated future cash flows using the loan’s existing rate; or (c) at the fair value of any loan collateral, less estimated disposal costs, if repayment is expected solely from the underlying collateral of the loan. For TDRs less than 9090+ days past due, and certain substandard loans that are less than 9090+ days delinquent, the likelihood of the loan migrating to over 90 days past due is also taken into account when determining the specific ALL allocation for these particular loans. Large groups of smaller balance homogeneous loans, such as non-TDR commercial, consumer and residential real estate loans, ~~as well as non-TDR commercial loans,~~ are collectively evaluated for ~~impairment,~~ALL purposes, and accordingly, are not separately identified for ~~impairment~~ALL disclosures.

~~Mortgage Servicing Rights-~~ Mortgage servicing rights ("MSR") assets initially arose as a result of the WFC merger. WFC had retained the right to service certain loans sold in the secondary market. The Company continues to sell loans to investors in the secondary market and generally retains the rights to service mortgage loans sold to others. MSR assets are initially measured at fair value; assessed at least annually 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.

Acquired ~~Loans -~~Loans— Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value with no carryover of related allowance for credit losses. Any allowance for loan loss on these pools reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received). Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition-date fair value including the remaining life of the acquired loans, delinquency status, estimated prepayments, payment options and other loan features, internal risk grade, estimated value of the underlying collateral and interest rate environment.

Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if we can reasonably estimate the timing and amount of the expected cash flows on such loans and if we expect to fully collect the new carrying value of the loans. As such,

we may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable yield.

Loans acquired with deteriorated credit quality are accounted for in accordance with Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC 310-30) if, at acquisition, the loans have evidence of credit quality deterioration since origination and it is probable that all contractually required payments will not be collected. At acquisition, the Company considers several factors as indicators that an acquired loan has evidence of deterioration in credit quality. These factors ~~include~~include; loans 90 days or more past due, loans with an internal risk grade of substandard or below, loans classified as non-accrual by the acquired institution, and loans that have been previously modified in a troubled debt restructuring.

Under the ASC 310-30 model, the excess of cash flows expected to be collected at acquisition over recorded fair value is referred to as the accretable yield and is the interest component of expected cash flow. The accretable yield is recognized into income over the remaining life of the loan if the timing and/or amount of cash flows expected to be collected can be reasonably estimated (the accretion method). If the timing or amount of cash flows expected to be collected cannot be reasonably estimated, the cost recovery method of income recognition is used. The difference between the loan’s total scheduled principal and interest payments over all cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the non-accretable difference. The non-accretable difference represents contractually required principal and interest payments which the Company does not expect to collect.

Over the life of the loan, management continues to estimate cash flows expected to be collected. Decreases in expected cash flows are recognized as impairments through a charge to the provision for loan losses resulting in an increase in the allowance for loan losses. Subsequent improvements in cash flows result in first, reversal of existing valuation allowances recognized subsequent to acquisition, if any, and next, an increase in the amount of accretable yield to be subsequently recognized in interest income on a prospective basis over the loan’s remaining life.

Acquired loans that were not individually determined to be purchased with deteriorated credit quality are accounted for in accordance with ASC 310-20, Nonrefundable Fees and Other Costs (ASC 310-20), whereby the premium or discount derived from the fair market value adjustment, on a loan-by-loan or pooled basis, is recognized into interest income on a level yield basis over the remaining expected life of the loan or pool.

For all acquired loans, the outstanding loan balances less any related accretable yield and/or non-accretable difference is referred to as the loans’ carrying amount.

Loans ~~Acquired through Business Combination with Deteriorated Credit Quality -~~Held for Sale — ~~ASC Topic 310-30,~~ "~~Loan~~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 ~~Debt Securities Acquired with Deteriorated Credit Quality", applies to loans acquired in a business combination that have evidence~~losses on sales of deterioration of credit quality since origination and for which it is probable, at acquisition, that we will be unable to collect all contractually required payments receivable. In accordance with this guidance, these loans are ~~initially recorded~~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. All sales are made without recourse. Interest rate lock commitments on mortgage loans to be funded and sold are valued at fair value, ~~(as determined by~~and are included in other assets or liabilities, if material.

Mortgage Servicing Rights- Mortgage servicing rights (“MSR”) assets result as the ~~present~~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 at least annually 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, additional future adjustment may be necessary if future economic conditions differ substantially from the economic assumptions used to determine the value of expected future cash flows) with no valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield”, is recognized as interest income over the life of the loans using a method that approximates the level-yield method. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference”, are not recognized as a yield adjustment, a loss accrual, or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized as impairments. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition.MSRs.

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 ~~valuation allowance~~write-down is recorded through expense. Costs incurred after acquisition are expensed and are included in non-interest expense, other ~~on our~~in the Consolidated Statements of Operations.

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.

Goodwill and other intangible assets-The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350, ~~"Intangibles~~“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 and any acquired intangible asset with an indefinite useful economic life, but reviews them 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, 2017~~December 31, 2018 which is related to its banking activities. The Company has performed the required goodwill impairment test and has determined that goodwill was not impaired as of ~~September 30, 2017.~~December 31, 2018.

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.

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.

Income Taxes – The Company accounts for income taxes in accordance with the ~~FASB ASC~~Financial Accounting Standards Board (FASB) Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes.” Under this guidance, deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.

The Tax Cuts and Jobs Act of 2017 ("(“the Tax ~~Act"~~Act”), enacted on December 22, 2017, reduces corporate Federal income tax rates for the Company from 34% to 24.5% for 2018, and 21% for 2019. GAAP requires the impact of the provisions of the Tax Act be accounted for in the period of enactment. At December 31, 2017, we had not completed our accounting for the tax effects of enactment of the Tax Act; however, in certain cases, as described below, we made a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. The Company revalued its net deferred tax assets to account for the future impact of lower corporate taxes. For the items for which we were able to determine a reasonable estimate, we recorded an increased provisional amount of income tax expense of $275 in December 2017, related to the revaluation of the deferred tax assets to both the revaluation of timing differences and the unrealized loss on securities. In the ~~second and third~~fourth quarter of fiscal 2018, ~~we reviewed~~based on updated information obtained in connection with the filing of our tax return and analysis ~~from first quarter and determined there were no material changes warranting any further adjustment.~~

~~Provisional amounts.~~ ~~Deferred tax assets and liabilities: We remeasured certain~~of our net deferred tax ~~assets~~asset both from the return and ~~liabilities based on~~2018 tax provisions, we finalized the ~~rates at which they are expected to reverse~~tax analysis and recorded an additional $63 of expense, or a net increase in our tax provision for the ~~future, which is generally 21%. However, we are still analyzing certain aspects~~year of the Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amounts recorded in December 2017$338 related to the ~~re-measurement of our deferred tax balance was $275.~~Tax Act.

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 ~~carryforward~~carry forward periods, any experience with utilization of operating loss and tax credit ~~carryforwards~~carry forwards not expiring, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. Accordingly, the Company’s evaluation is based on current tax laws as well as management’s expectations of future performance.

Revenue Recognition - The Company recognizes revenue in the consolidated statements of operations as ~~it is earned~~performance obligations are met and when collectability is reasonably assured. The 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. Non-interest income is recognized on the accrual basis of accounting as ~~services~~performance obligations are ~~provided~~met or as transactions occur. Non-interest income includes fees from brokerage and advisory service, ~~insurance commission,~~ deposit accounts, merchant services, ATM and debit card fees, mortgage banking activities, and other miscellaneous services and transactions. Commission revenue is recognized as of the effective date of the insurance policy or the date the customer is billed, whichever is later. The

Company also receives contingent commissions from insurance companies which are based on the overall profitability of their relationship based primarily on the loss experience of the insurance placed by the Company. Contingent commissions from insurance companies are recognized when determinable. Commission revenue is included in other non-interest ~~insurance commission~~ income in the consolidated statement of operations.

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~~Company’s stock price on the reporting date and the Series A Preferred Stock which is mandatorily convertible into ten shares of common stock following receipt of stockholder approval of the issuance of the shares of common stock into which the Series A Preferred Stock is expected to be converted. .date.

Operating Segments—While our ~~chief decision makers~~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.

Recognition of a prior period error—In April 2019 the Company determined that certain state franchise returns had not ever been filed. The franchise liability calculation is primarily based on the Company’s equity. The initial franchise return should have been filed in 2006 when the Company went public. Additionally, with the Company’s 2018 capital raise, an additional franchise liability should have been recorded in fiscal 2018. The Company should have recorded a $140 pre-tax charge related to 2006 initial public offering in fiscal year ended September 30, 2006 and a $160 pre-tax charge related to 2018 capital raise in fiscal year ended September 30, 2018. The correction of these prior period errors to record both the 2006 and 2018 franchise liability totaling $300, was recorded during the three months ended March 31, 2019. The impact on results of operations for the three months ended March 31, 2019 and the six months ended June 30, 2019, were as follows: pre-tax income was understated by $300, tax expense was overstated by $81 and net income was understated by $219 or $0.02 per share. For the fiscal year ended September 30, 2018, pre-tax income was overstated by $160, tax expense was understated by $44 and net income was overstated by $116 or $0.02 per share. Management of the Company evaluated these prior period errors under the accounting guidance FASB ASC 250, Accounting Changes and Error Corrections and concluded that the effect of these errors will be immaterial to the Company’s estimated annual results and consolidated financial statements for the year ending December 31, 2019 and were also immaterial to the fiscal year ended September 30, 2018 consolidated financial statements.

Reclassifications – Certain items previously reported were reclassified for consistency with the current presentation.

Recent Accounting ~~Pronouncements -~~ Pronouncements—The Financial Accounting Standards Board (FASB) issues Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification (ASC). This section provides a summary description of recent ASUs that have significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on financial statements issued in the near future.

Recent Accounting Pronouncements—Adopted

ASU 2016-01; Recognition and Measurement of Financial Assets and Liabilities—The guidance requires certain equity investments to be measured at fair value, with changes in fair value recognized in net income. The Company’s adoption of ASU 2016-01 as of January 1, 2019, constitutes a change in accounting principle. The Company recorded a cumulative effect adjustment to retained earnings of $45 as of January 1, 2019, as a result of implementing this new accounting standard.

ASU 2016-02; Leases (Topic 842)—The ASU changed current GAAP by requiring that lease assets and liabilities arising from operating leases be recognized on the balance sheet. In ~~February~~July 2018, the FASB issued ~~Accounting Standards Update ("ASU") 2018-02, "Income Statement--Reporting Comprehensive Income (Topic 220): Reclassification~~ASU 2018-10 and ASU 2018-11, Codification Improvements to Topic 842, Leases, amending various aspects of ~~Certain Income Tax Effects~~Topic 842. Topic 842 does not significantly change the recognition, measurement and presentation of expenses and cash flows arising from ~~Accumulated Other Comprehensive Income." ASU 2018-02 allows~~ a ~~reclassification~~lease by a lessee from ~~accumulated other comprehensive income ("AOCI")~~current U.S. GAAP. For leases with a term of 12 months or less, a lessee would be permitted to ~~retained earnings for certain stranded tax effects resulting from the Tax Cuts~~make an accounting policy election, by class of underlying asset, not to recognize lease assets and ~~Jobs Act. For public entities, ASU 2018-02 is~~liabilities. Topic 842 became effective for ~~fiscal years beginning after December 15, 2018, including~~the Company for annual and interim periods ~~within those fiscal years. Early adoption is permitted. The Company adoption of ASU 2018-02~~beginning in the ~~current period resulted in a reclassification of $137 from AOCI to retained earnings and had no material effect on the Company's consolidated results of operations, financial position or cash flows.~~first quarter 2019.

In May 2017, the FASB issued Accounting Standards Update ("ASU") 2017-09, "Compensation--Stock Compensation (Topic 718): Scope of Modification Accounting." ASU 2017-09 provides specific guidance as to which changes to terms and conditions of share-based payment awards require an entity to apply modification accounting in Topic 718. For public entities, ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company expects the adoption of ASU 2017-09 will have no material effect on the Company's consolidated results of operations, financial position or cash flows.

In March 2017, the FASB issued ASU 2017-08, "Receivables--Nonrefundable fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities." ASU 2017-08 amends the amortization period for certain purchased callable debt securities held at a premium. For public entities, ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company expects the adoption of ASU 2017-08 will have no material effect on the Company's consolidated results of operations, financial position or cash flows.

In February 2017, the FASB issued ASU 2017-05, "Other Income--Gains and Losses from the Derecognition of Non-financial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Non-financial Assets." ASU 2017-05 clarifies previously issued ASU 2014-09, primarily with respect to (a) derecognition of an in substance non-financial asset, and (b) partial sales of non-financial assets. For public entities, ASU 2017-05 is effective at the same time of adoption of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is for annual reporting periods beginning after December 15, 2017 and related interim periods. Early adoption is not permitted. The Company expects the adoption of ASU 2017-05 will have no material effect on the Company's consolidated results of operations, financial position or cash flows.

In January, 2017, the FASB issued ASU 2017-04, "Intangibles--Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." ASU 2017-04 intends to simplify how an entity is required to test goodwill impairment. For public entities, ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, and any related interim annual goodwill impairment tests thereon. The Company expects the adoption of ASU 2017-04 will have no material effect on the Company's consolidated results of operations, financial position or cash flows.

In January, 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business." ASU 2017-01 narrows the definition of a "business" with respect to accounting for business combinations. For public entities, ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company expects the adoption of ASU 2017-01 will have no material effect on the Company's consolidated results of operations, financial position or cash flows.

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In June, 2016 the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 is intended to provide financial statement users with more decision-useful information about the excepted credit losses on financial instruments and other commitments to extend credit. For public entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company ~~has~~leased (1) 9 branch locations, (2) its corporate offices (3) 1 production office and (4) office equipment under operating leases that resulted in the recognition of right-of-use assets and corresponding lease liabilities of approximately $5,000 on the consolidated balance sheet under Topic 842. Adoption of Topic 842 did not ~~yet evaluated the potential effects of adopting ASU 2016-13~~have a material impact on the Company’s consolidated ~~results~~statement of ~~operations, financial position or cash flows. The Company has not yet evaluated~~operations. Management adopted the ~~potential effects of adopting ASU 2016-13~~guidance on ~~the Company's consolidated results of operations, financial position or cash flows.~~

~~In May 2016,~~January 1, 2019, and elected certain practical expedients offered by the FASB, ~~issued~~ including foregoing the restatement of comparative periods upon adoption. Management also excluded short-term leases from the recognition of right-of-use asset and lease liabilities. Additionally, the Company elected the transition relief allowed by FASB in foregoing reassessment of the following: whether any existing contracts were or contained leases, the classification of existing leases, and the determination of initial direct costs for existing leases. As of September 30, 2019, the Company leases (1) 6 branch locations, (2) its corporate offices (3) 1 production office and (4) office equipment under operating leases. See Note 6 for additional detail.

ASU ~~2016-12, “Revenue~~2014-09; Revenue from Contracts with Customers (Topic 606)~~; Narrow-Scope Improvements~~—Under the ASU, as modified by subsequent ASUs, revenue is recognized when a customer obtains control of promised services in an amount that reflects the consideration the entity expects to receive in exchange for those services. In addition, the standard requires disclosure of the nature, amount, timing, and ~~Practical Expedients.”~~uncertainty of revenue and cash flows arising from contracts with customers. The Company applied the five-step method outlined in the ASU ~~2016-12 is intended~~ to ~~address certain specific issues identified~~all revenue streams scoped-in by the ~~FASB-IASB Joint Transition Resource Group for Revenue Recognition with respect to~~ ASU ~~2014-09, “Revenue from Contracts with Customers (Topic 606).” For public entities, ASU 2016-12~~ and ~~ASU 2014-09 are effective on a~~elected the modified retrospective basis for the annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is not permitted. Based on our evaluation under the current guidance, we estimate that substantiallyimplementation method. Substantially all of ~~our~~the Company’s interest income and ~~non-interest~~certain noninterest income ~~will~~were not be impacted by the adoption of ~~these standards,~~this ASU because ~~either~~ the revenue from those contracts with customers is covered by other guidance in U.S. ~~GAAP, or~~GAAP. The Company’s largest sources of noninterest revenue which are subject to the ~~anticipated~~guidance include fees and service charges on loan and deposit accounts and interchange revenue from debit card transactions. ASU 2014-08, as amended, became effective for the Company’s annual and interim periods beginning in the first quarter 2019. Adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements as the change in the timing and pattern of the Company’s revenue recognition ~~outcomes~~related to scoped-in noninterest income recognized under the newly issued ASU is consistent with the ~~adoption~~current applicable accounting guidance. The Company has made all required additional disclosures related to non-interest income in the consolidated financial statements, primarily in Note 1-Nature of ~~these standards will likely be similar to our current revenue recognition practices.~~ Business and Summary of Significant Accounting Policies.

Recently Issued, But Not Yet Effective Accounting Pronouncements

ASU 2017-04; Intangibles--Goodwill and Other (Topic 350)--The ~~company evaluated certain non-interest revenue streams, including deposit related fees, service charges and interchange fees,~~ASU simplifies the accounting for goodwill impairment. This guidance, among other things, removes step two of the goodwill impairment test thus eliminating the need to determine the ~~potential impact~~fair value of individual assets and liabilities of the ~~guidance~~reporting unit. Upon adoption of this ASU, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This may result in either greater or less impairment being recognized than under current guidance. This Update will become effective for the Company’s annual goodwill impairment tests beginning in the first quarter 2020. The Company does not expect adoption of this ASU to have a material impact on its consolidated financial statements.

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. On July 17, 2019, the FASB proposed delaying the effective date for ASU 2016-13 for smaller reporting companies. This proposal was approved on October 18, 2019, resulting in ASU 2016-13 becoming effective in the first quarter of 2023 for the Company. Earlier adoption is permitted; however, the Company does not currently plan to adopt the ASU early. Management is assessing alternative loss estimation methodologies and the Company’s data and system needs in order to evaluate the impact that adoption of this standard will have on the ~~Company's consolidated~~Company’s financial ~~statements.~~condition and results of operations. The Company ~~is expected to use~~anticipates recording the ~~modified retrospective method for transition,~~effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which the ~~cumulative effect~~ASU is effective, which will be recognized at the date of adoption with no restatement of comparative periods presented. The Company expects additional financial statement disclosures of non-interest income revenue streams and associated internal controls to be implemented along with the adoption of these standards. In addition, we are reviewing our business processes, systems and controls to support recognition and disclosures under the new standard. The Company expects that the adoption of ASUs 2016-12 and 2014-09 will have no material effect on the Company's consolidated results of operations, financial position or cash flows.

In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 is intended to simplify certain areas of share-based payment transaction accounting, including the income tax consequences, equity or liability classification of certain share awards, and classification on the statement of cash flows. ASU 2016-09 is effective for the annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. The Company adoption of ASU 2016-09 had no material effect on the Company's results of operations, financial position or cash flows.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)". ASU 2016-02 is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for the annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. The Company has not yet evaluated the impact of ASU 2016-02 on the Company's results of operations, financial position or cash flows.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. ASU 2016-01 is intended to address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. For public entities, ASU 2016-01 is effective for the annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is not permitted, except for certain provisions of ASU 2016-01, which are not applicable to the Company. The Company expects the adoption of ASU 2016-01 to have no material effect on the Company's consolidated results of operations, financial position or cash flows.1, 2023.

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NOTE 2 – ACQUISITION

F. & M. Bancorp. of Tomah, Inc.

On July 1, 2019 the Company completed its previously announced acquisition of F. & M. Bancorp. of Tomah, Inc. (“F&M”) pursuant to the merger agreement. In connection with the acquisition, the Company merged Farmers & Merchants Bank with and into the Bank, with the Bank surviving the merger.

Under the terms of the merger agreement, each issued and outstanding share of F&M common stock, $0.25 par value, other than F&M common stock held by dissenting shareholders, or shares of F&M common stock held by F&M as treasury stock or owned by the Company, was converted into the right to receive, without interest (i) $94.92 in cash, (ii) 1.3350 shares of Citizens common stock, and (iii) cash in lieu of fractional shares. The value of the aggregate consideration paid to F&M shareholders was approximately $24 million.

The merger added $192.3 million in assets, gross loans of $130.3 million and $148.5 million in deposits. Based on preliminary estimates, $367 of goodwill and $1.6 million of a core deposit intangible asset was created at September 30, 2019. We expect our analysis to be final at December 31, 2019. The goodwill is not deductible for tax purposes, as the acquisition is accounted for as a tax-free exchange for tax purposes.

In connection with the F&M acquisition, we incurred expenses related to (1) accounting, legal and other professional services, (2) contract termination costs, and (3) other costs of integrating and conforming acquired operations with and into the Company. These merger-related expenses, that were expensed as incurred, amounted to $2,575 for the three months ended September 30, 2019 and $3,086 for the nine months ended September 30, 2019, and were included in non-interest expense on the consolidated statement of operations.

The acquisition of the net assets of F&M constitutes a business combination as defined by FASB ASC Topic 805, “Business Combinations.” Accordingly, the assets acquired and liabilities assumed are presented at their fair values at acquisition date. Fair values were determined based on the requirements of FASB ASC Topic 820, “Fair Value Measurements.” In many cases, the determination of these fair values required management to make estimates regarding discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change for a period up to 12 months after the acquisition date. Management engaged third-party valuation specialists to assist in determining such values. The preliminary results of the fair value evaluation generated goodwill and intangible assets as noted above.

The following pro forma financial information for the periods presented reflects our estimated consolidated pro forma results of operations as if the F&M acquisition occurred on January 1, 2019, not considering potential cost savings and other business synergies we expect to receive as a result of the acquisition:



Nine Months Ended September 30, 2019	(1) Citizens Community Bancorp, Inc.		(2) F&M		(3) Pro Forma Adjustments			Pro Forma Combined
Revenue (net interest income and non-interest income)	$	42,929	$	4,918	$	(299	)	$	47,548
Net income attributable to common stockholders	$	6,294	$	1,007	$	(321	)	$	6,980
Earnings per share--basic	$	0.57						$	0.63
Earnings per share-diluted	$	0.57						$	0.63

(1) Revenue and net income attributable to common stockholders for Citizens Community Bancorp, Inc. are for the consolidated entity through September 30, 2019 which includes the results of operations of F&M for the time period July 1, 2019 through September 30, 2019.

(2) Revenue and net income attributable to common stockholders for F&M includes the results of operations of F&M for the time period January 1, 2019 through June 30, 2019.

(3) Pro-forma adjustments are for the time period January 1, 2019 through June 30, 2019 and include:

•Six month adjustment to record accretion of loan discount ($814) on a straight line basis over approximately six years

•Six month adjustment to record amortization of the deposit premium on a straight line basis over the estimated lives of the underlying deposits ranging from seven months to approximately twenty months

•Six month adjustment to record amortization of the FHLB borrowings premium on a straight line basis over the estimated lives of the underlying advances ranging from four months up to approximately thirty-three months

•Six month adjustment to record interest expense on funds borrowed to fund the acquisition of Tomah.

These pro forma adjustments reflect (1) additional depreciation and amortization expense related to, and associated tax effects of, the purchase accounting adjustments made to record various items at fair value and (2) elimination of acquisition related costs incurred.

The revenue and earnings of F&M since the acquisition date of July 1, 2019 are presented below:



Three Months Ended September 30, 2019	F&M
Revenue (net interest income and non-interest income)	$	1,433
Net income attributable to common stockholders	$	402

The following table summarizes the preliminary amounts recorded on the consolidated balance sheet as of the acquisition date in conjunction with the acquisition discussed above:



	F&M

Fair value of consideration paid	$	23,894

Fair value of identifiable assets acquired:
Cash and cash equivalents	15,757
Other interest bearing deposits	992
Securities available for sale “AFS”	37,069
Other investments	2,413
Loans receivable, net	126,562
Office properties and equipment, net	2,654
Core deposit intangible	1,582
Cash value of life insurance	4,719
Other assets	1,503
Total identifiable assets acquired	$	193,251

Fair value of liabilities assumed:
Deposits	$	148,637
Other borrowings	20,122
Other liabilities	965
Total liabilities assumed	169,724
Fair value of net identifiable assets acquired	23,527
Goodwill recognized	$	367

NOTE 23 – 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 ~~June~~September 30, ~~2018~~2019 and ~~September 30, 2017~~December 31, 2018, respectively, were as follows:


Available for sale securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
June 30, 2018
September 30, 2019
U.S. government agency obligations	$	37,067	$	7	$	1,088	$	35,986	$	53,405	$	184	$	211	$	53,378
Obligations of states and political subdivisions	35,518		18		558		34,978		27,648		301		12		27,937
Mortgage-backed securities	44,653		24		1,214		43,463		54,979		741		62		55,658
Agency securities	104		119		—		223
Corporate debt securities	5,360		—		308		5,052		18,793		131		90		18,834
Corporate asset based securities									27,756		—		607		27,149
Total available for sale securities	$	122,702	$	168	$	3,168	$	119,702	$	182,581	$	1,357	$	982	$	182,956

September 30, 2017
December 31, 2018
U.S. government agency obligations	$	18,454	$	35	$	448	$	18,041	$	46,215	$	13	$	930	$	45,298
Obligations of states and political subdivisions	35,656		270		131		35,795		35,162		22		456		34,728
Mortgage-backed securities	36,661		124		311		36,474		42,279		10		939		41,350
Agency Securities	147		83		—		230		104		49		5		148
Corporate debt securities	5,410		—		67		5,343		6,577		—		272		6,305
Corporate asset based securities									18,928		8		40		18,896
Total available for sale securities	$	96,328	$	512	$	957	$	95,883	$	149,265	$	102	$	2,642	$	146,725


Held to maturity securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
June 30, 2018
September 30, 2019
Obligations of states and political subdivisions	$	1,308	$	—	$	1	$	1,307	$	980	$	2	$	—	$	982
Mortgage-backed securities	3,501		44		25		3,520		2,685		103		—		2,788
Total held to maturity securities	$	4,809	$	44	$	26	$	4,827	$	3,665	$	105	$	—	$	3,770

September 30, 2017
December 31, 2018
Obligations of states and political subdivisions	$	1,311	$	17	$	—	$	1,328	$	1,701	$	—	$	3	$	1,698
Mortgage-backed securities	4,142		136		1		4,277		3,149		42		17		3,174
Total held to maturity securities	$	5,453	$	153	$	1	$	5,605	$	4,850	$	42	$	20	$	4,872

As of ~~June~~September 30, ~~2018,~~2019, the Bank has pledged U.S. Government Agency securities with a market value of ~~$2,191~~$5,974 and mortgage-backed securities with a market value of $13,710 as collateral against specific municipal deposits. At September 30, 2019, the Bank has pledged U.S. Government Agency securities with a market value of $1,703 as collateral against a borrowing line of credit with the Federal Reserve Bank. However, as of ~~June~~September 30, ~~2018~~,2019, there were no borrowings outstanding on this Federal Reserve Bank line of credit. As of ~~June~~September 30, ~~2018,~~2019, the Bank also has ~~pledged U.S. Government Agency~~mortgage backed securities ~~with a market value of $5,490, mortgage-backed securities with a market value of $22,779 and interest bearing investment CD's~~ with a carrying value of ~~$746~~$760 pledged as collateral ~~against specific municipal deposits.~~to the Federal Home Loan Bank of Des Moines.

1721

The estimated fair value of securities at ~~June 30, 2018 and~~ September 30, ~~2017,~~2019 and December 31, 2018, 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.


	June 30, 2018				September 30, 2017				September 30, 2019				December 31, 2018
Available for sale securities	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	1,663	$	1,657	$	160	$	160	$	3,984	$	3,986	$	2,177	$	2,172
Due after one year through five years	17,493		17,331		15,008		15,056		19,572		19,806		22,296		22,043
Due after five years through ten years	41,136		39,826		30,586		30,330		40,350		40,437		43,014		42,081
Due after ten years	17,653		17,202		13,766		13,633		63,696		63,069		39,395		38,931
	$	77,945	$	76,016	$	59,520	$	59,179
Total securities with contractual maturities									$	127,602	$	127,298	$	106,882	$	105,227
Mortgage backed securities	44,653		43,463		36,661		36,474		54,979		55,658		42,279		41,350
Securities without contractual maturities	104		223		147		230		—		—		104		148
Total available for sale securities	$	122,702	$	119,702	$	96,328	$	95,883	$	182,581	$	182,956	$	149,265	$	146,725


	June 30, 2018				September 30, 2017				September 30, 2019				December 31, 2018
Held to maturity securities	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less									$	680	$	680	$	680	$	679
Due after one year through five years	$	1,308	$	1,307	$	1,311	$	1,328	300		302		1,021		1,020
Total securities with contractual maturities									$	980	$	982	$	1,701	$	1,699
Mortgage backed securities	3,501		3,520		4,142		4,277		2,685		2,788		3,149		3,173
Total held to maturity securities	$	4,809	$	4,827	$	5,453	$	5,605	$	3,665	$	3,770	$	4,850	$	4,872

Securities with unrealized losses at ~~June 30, 2018 and~~ September 30, ~~2017,~~2019 and December 31, 2018, 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
June 30, 2018
U.S. government agency obligations $ 25,149
$ 358
$ 10,281
$ 730
$ 35,430
$ 1,088
Obligations of states and political subdivisions 26,592
390
3,666
168
30,258
558
Mortgage backed securities 30,404
753
8,885
461
39,289
1,214
Corporate debt securities 5,052
308
—
—
5,052
308
Total $ 87,197
$ 1,809
$ 22,832
$ 1,359
$ 110,029
$ 3,168
September 30, 2017
U.S. government agency obligations $ 8,296
$ 186
$ 6,932
$ 262
$ 15,228
$ 448
Obligations of states and political subdivisions 8,170
62
3,701
69
11,871
131
Mortgage backed securities 14,167
96
9,753
215
23,920
311
Corporate debt securities 5,343
67
—
—
5,343
67
Total $ 35,976
$ 411
$ 20,386
$ 546
$ 56,362
$ 957

1822

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
June 30, 2018
Obligations of states and political subdivisions $ 1,132
$ 1
$ —
$ —
$ 1,132
$ 1
Mortgage-backed securities 2,409
25
—
—
2,409
25
Total $ 3,541
$ 26
$ —
$ —
$ 3,541
$ 26
September 30, 2017
Obligations of states and political subdivisions $ —
$ —
$ —
$ —
$ —
$ —
Mortgage-backed securities 406
1
—
—
406
1
Total $ 406
$ 1
$ —
$ —
$ 406
$ 1



	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, 2019
U.S. government agency obligations	$	10,815	$	51	$	10,694	$	160	$	21,509	$	211
Obligations of states and political subdivisions	4,118		4		737		8		4,855		12
Mortgage backed securities	2,380		4		6,216		57		8,596		61
Corporate debt securities	1,993		7		1,417		84		3,410		91
Corporate asset based securities	17,372		357		9,777		250		27,149		607
Total	$	36,678	$	423	$	28,841	$	559	$	65,519	$	982
December 31, 2018
U.S. government agency obligations	$	25,061	$	165	$	19,755	$	765	$	44,816	$	930
Obligations of states and political subdivisions	5,807		28		24,124		428		29,931		456
Mortgage backed securities	3,518		9		31,040		930		34,558		939
Agency securities	28		5		—		—		28		5
Corporate debt securities	1,233		17		5,071		255		6,304		272
Corporate asset based securities	10,142		40		—		—		10,142		40
Total	$	45,789	$	264	$	79,990	$	2,378	$	125,779	$	2,642



	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, 2019
Obligations of states and political subdivisions	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities	—		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—	$	—
December 31, 2018
Obligations of states and political subdivisions	$	1,290	$	1	$	409	$	2	$	1,699	$	3
Mortgage-backed securities	1,238		3		1,319		14		2,557		17
Total	$	2,528	$	4	$	1,728	$	16	$	4,256	$	20

NOTE 34 – LOANS, ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS

Portfolio Segments:

Residential real estate loans are collateralized by primary and secondary positions on real estate and are underwritten primarily based on ~~borrower's~~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~~home’s appraised value less the balance owed on the existing first mortgage. Credit risk is minimized within the residential real estate portfolio as relatively small loan amounts are 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.

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%.

Consumer non-real estate loans are comprised of originated indirect paper loans secured primarily by boats and recreational vehicles, purchased indirect paper loans secured primarily by household goods and other consumer loans secured primarily by automobiles and other personal assets. The Bank ceased new originations of these types of loans in early fiscal 2017. Consumer loans underwriting terms often depend on the collateral type, debt to income ratio and the ~~borrower's~~borrower’s creditworthiness as evidenced by their credit score. Collateral value alone may not provide an adequate source of repayment of the outstanding loan balance in the event of a consumer non-real estate default. This shortage is a result of the greater likelihood of damage, loss and depreciation for consumer based collateral.

Commercial non-real estate loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. These cash flows, however, may not be as expected and the value of collateral securing the loans may fluctuate. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. Agricultural non-real estate 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 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.

2024

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 is 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"~~“Pass” loan means that the condition of the borrower and the performance of the loan is satisfactory or better.

5 - Watch. A ~~"Watch"~~“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"~~“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"~~“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"~~“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"~~“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.

2125

Below is a summary of originated and acquired loans by type and risk rating as of ~~June~~September 30, ~~2018:~~2019:


	1 to 5		6		7		8		9		TOTAL			1 to 5		6		7		8		9		TOTAL
Originated Loans:
Residential real estate:
One to four family	$	119,680	$	—	$	2,348	$	—	$	—	$	122,028		$	110,440	$	53	$	4,014	$	—	$	—	$	114,507
Purchased HELOC loans	15,237		—		—		—		—		15,237			10,120		—		—		—		—		10,120
Commercial/Agricultural real estate:
Commercial real estate	156,560		200		—		—		—		156,760			243,656		—		1,153		—		—		244,809
Agricultural real estate	22,709		530		500		—		—		23,739			32,278		112		2,137		—		—		34,527
Multi-family real estate	42,230		—		130		—		—		42,360			69,556		—		—		—		—		69,556
Construction and land development	11,212		—		—		—		—		11,212			48,841		—		3,478		—		—		52,319
Consumer non-real estate:
Originated indirect paper	66,649		—		142		—		—		66,791			42,623		—		271		—		—		42,894
Purchased indirect paper	19,801		—		—		—		—		19,801			—		—		—		—		—		—
Other Consumer	15,444		—		105		—		—		15,549			15,657		—		61		—		—		15,718
Commercial/Agricultural non-real estate:
Commercial non-real estate	58,620		—		17		—		—		58,637			76,555		866		3,520		—		—		80,941
Agricultural non-real estate	15,360		960		472		—		—		16,792			20,740		507		810		—		—		22,057
Total originated loans	$	543,502	$	1,690	$	3,714	$	—	$	—	$	548,906		$	670,466	$	1,538	$	15,444	$	—	$	—	$	687,448
Acquired Loans:
Residential real estate:
One to four family	$	78,392	$	—	$	1,936	$	—	$	—	$	80,328		$	70,584	$	450	$	2,529	$	—	$	—	$	73,563
Commercial/Agricultural real estate:
Commercial real estate	46,926		2,046		2,794		—		—		51,766			204,056		6,729		9,452		—		—		220,237
Agricultural real estate	42,921		903		3,318		—		—		47,142			46,308		3,010		5,596		—		—		54,914
Multi-family real estate	3,158		—		189		—		—		3,347			16,427		—		1,775		—		—		18,202
Construction and land development	3,548		—		498		—		—		4,046			12,434		—		797		—		—		13,231
Consumer non-real estate:
Other Consumer	3,485		—		29		—		—		3,514			3,038		—		14		—		—		3,052
Commercial/Agricultural non-real estate:
Commercial non-real estate	14,547		253		1,326		—		—		16,126			43,492		1,101		1,698		—		—		46,291
Agricultural non-real estate	9,192		182		200		—		—		9,574			16,417		131		1,222		—		—		17,770
Total acquired loans	$	202,169	$	3,384	$	10,290	$	—	$	—	$	215,843		$	412,756	$	11,421	$	23,083	$	—	$	—	$	447,260
Total Loans:
Residential real estate:
One to four family	$	198,072	$	—	$	4,284	$	—	$	—	$	202,356		$	181,024	$	503	$	6,543	$	—	$	—	$	188,070
Purchased HELOC loans	15,237		—		—		—		—		15,237			10,120		—		—		—		—		10,120
Commercial/Agricultural real estate:
Commercial real estate	203,486		2,246		2,794		—		—		208,526			447,712		6,729		10,605		—		—		465,046
Agricultural real estate	65,630		1,433		3,817		—		—		70,881			78,586		3,122		7,733		—		—		89,441
Multi-family real estate	45,388		—		319		—		—		45,707			85,983		—		1,775		—		—		87,758
Construction and land development	14,760		—		498		—		—		15,258			61,275		—		4,275		—		—		65,550
Consumer non-real estate:
Originated indirect paper	66,649		—		142		—		—		66,791			42,623		—		271		—		—		42,894
Purchased indirect paper	19,801		—		—		—		—		19,801			—		—		—		—		—		—
Other Consumer	18,929		—		134		—		—		19,063			18,695		—		75		—		—		18,770
Commercial/Agricultural non-real estate:
Commercial non-real estate	73,167		253		1,342		—		—		74,763			120,047		1,967		5,218		—		—		127,232
Agricultural non-real estate	24,552		1,142		672		—		—		26,366			37,157		638		2,032		—		—		39,827
Gross loans	$	745,671	$	5,074	$	14,004	$	—	$	—	$	764,749		$	1,083,222	$	12,959	$	38,527	$	—	$	—	$	1,134,708
Less:
Unearned net deferred fees and costs and loans in process											693													(158		)
Unamortized discount on acquired loans											(4,355		)											(10,172		)
Allowance for loan losses											(6,458		)											(9,177		)
Loans receivable, net											$	754,629												$	1,115,201

2226

Below is a summary of originated loans by type and risk rating as of ~~September 30, 2017:~~December 31, 2018:


	1 to 5		6		7		8		9		TOTAL			1 to 5		6		7		8		9		TOTAL
Originated Loans:
Residential real estate:
One to four family	$	130,837	$	—	$	1,543	$	—	$	—	$	132,380		$	118,461	$	165	$	2,427	$	—	$	—	$	121,053
Purchased HELOC loans	18,071		—		—		—		—		18,071			12,883		—		—		—		—		12,883
Commercial/Agricultural real estate:
Commercial real estate	96,953		49		153		—		—		97,155			200,226		197		452		—		—		200,875
Agricultural real estate	10,051		497		80		—		—		10,628			27,581		987		1,021		—		—		29,589
Multi-family real estate	24,338		—		148		—		—		24,486			61,574		—		—		—		—		61,574
Construction and land development	12,399		—		—		—		—		12,399			15,812		—		—		—		—		15,812
Consumer non-real estate:
Originated indirect paper	85,330		8		394		—		—		85,732			56,371		—		214		—		—		56,585
Purchased indirect paper	29,555		—		—		—		—		29,555			15,006		—		—		—		—		15,006
Other Consumer	14,361		—		135		—		—		14,496			15,515		—		38		—		—		15,553
Commercial/Agricultural non-real estate:
Commercial non-real estate	35,102		—		96		—		—		35,198			73,412		106		—		—		—		73,518
Agricultural non-real estate	10,798		708		987		—		—		12,493			16,494		205		642		—		—		17,341
Total originated loans	$	467,795	$	1,262	$	3,536	$	—	$	—	$	472,593		$	613,335	$	1,660	$	4,794	$	—	$	—	$	619,789
Acquired Loans:
Residential real estate:
One to four family	$	94,932	$	873	$	1,378	$	—	$	—	$	97,183		$	84,281	$	2,657	$	1,935	$	—	$	—	$	88,873
Commercial/Agricultural real estate:											—
Commercial real estate	57,795		1,814		3,198		—		—		62,807			145,674		5,808		5,602		—		—		157,084
Agricultural real estate	51,516		266		5,592		—		—		57,374			50,215		—		6,211		—		—		56,426
Multi-family real estate	1,519		—		223		—		—		1,742			7,661		—		165		—		—		7,826
Construction and land development	6,739		—		570		—		—		7,309			6,288		183		408		—		—		6,879
Consumer non-real estate:											—
Other Consumer	6,130		—		42		—		—		6,172			4,639		—		22		—		—		4,661
Commercial/Agricultural non-real estate:											—
Commercial non-real estate	18,257		372		1,424		—		—		20,053			35,221		1,338		2,350		—		—		38,909
Agricultural non-real estate	11,259		28		93		—		—		11,380			16,644		50		2,292		—		—		18,986
Total acquired loans	$	248,147	$	3,353	$	12,520	$	—	$	—	$	264,020		$	350,623	$	10,036	$	18,985	$	—	$	—	$	379,644
Total Loans:
Residential real estate:
One to four family	$	225,769	$	873	$	2,921	$	—	$	—	$	229,563		$	202,742	$	2,822	$	4,362	$	—	$	—	$	209,926
Purchased HELOC loans	18,071		—		—		—		—		18,071			12,883		—		—		—		—		12,883
Commercial/Agricultural real estate:							—		—											—		—
Commercial real estate	154,748		1,863		3,351		—		—		159,962			345,900		6,005		6,054		—		—		357,959
Agricultural real estate	61,567		763		5,672		—		—		68,002			77,796		987		7,232		—		—		86,015
Multi-family real estate	25,857		—		371		—		—		26,228			69,235		—		165		—		—		69,400
Construction and land development	19,138		—		570		—		—		19,708			22,100		183		408		—		—		22,691
Consumer non-real estate:							—		—											—		—
Originated indirect paper	85,330		8		394		—		—		85,732			56,371		—		214		—		—		56,585
Purchased indirect paper	29,555		—		—		—		—		29,555			15,006		—		—		—		—		15,006
Other Consumer	20,491		—		177		—		—		20,668			20,154		—		60		—		—		20,214
Commercial/Agricultural non-real estate:							—		—											—		—
Commercial non-real estate	53,359		372		1,520		—		—		55,251			108,633		1,444		2,350		—		—		112,427
Agricultural non-real estate	22,057		736		1,080		—		—		23,873			33,138		255		2,934		—		—		36,327
Gross loans	$	715,942	$	4,615	$	16,056	$	—	$	—	$	736,613		$	963,958	$	11,696	$	23,779	$	—	$	—	$	999,433
Less:
Unearned net deferred fees and costs and loans in process											1,471													409
Unamortized discount on acquired loans											(5,089		)											(7,286		)
Allowance for loan losses											(5,942		)											(7,604		)
Loans receivable, net											$	727,053												$	984,952

2327

Allowance for Loan Losses - The ALL represents management’s estimate of probable and inherent credit losses in the Bank’s loan portfolio. Estimating the amount of the ALL requires the exercise of significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of other qualitative factors such as current economic trends and conditions, all of which may be susceptible to significant change.

There are many factors affecting the ALL; some are quantitative, while others require qualitative judgment. The process for determining the ALL (which management believes adequately considers potential factors which result in probable credit losses), includes subjective elements and, therefore, may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for loan losses could be required that could adversely affect the Company’s earnings or financial position in future periods. Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.

As an integral part of their examination process, various regulatory agencies also review the Bank’s ALL. Such agencies may require that changes in the ALL be recognized when such regulators’ credit evaluations differ from those of our management based on information available to the regulators at the time of their examinations.

2428

Changes in the ALL by loan type for the periods presented below were as follows:


	Residential Real Estate			Commercial/Agriculture Real Estate			Consumer Non-real Estate			Commercial/Agricultural Non-real Estate			Unallocated		Total			Residential Real Estate			Commercial/Agriculture Real Estate			Consumer Non-real Estate			Commercial/Agricultural Non-real Estate		Unallocated			Total
Nine Months Ended June 30, 2018:
Nine months ended September 30, 2019
Allowance for Loan Losses:
Beginning balance, October 1, 2017	$	1,458		$	2,523		$	936		$	897		$	128	$	5,942
Beginning balance, January 1, 2019																		$	1,048		$	4,019		$	641		$	1,258	$	214		$	7,180
Charge-offs	(78		)	(1		)	(265		)	(5		)	—		(349		)	(119		)	(225		)	(142		)	—		—			(486		)
Recoveries	46			—			93			12			—		151			—			—			53			—		—			53
Provision	—			455			35			130			—		620			115			1,516			20			315		—			1,966
Allowance allocation adjustment	(351		)	54			(112		)	(22		)	151		(280		)	(39		)	(19		)	(75		)	27		87			(19		)
Total allowance on originated loans	1,075			3,031			687			1,012			279		6,084			1,005			5,291			497			1,600		301			8,694
Purchased credit impaired loans	—			—			—			—			—		—			—			—			—			—		—			—
Other acquired loans:	—			—			—			—			—		—
Beginning balance, October 1, 2017	—			—			—			—			—		—
Beginning balance, January 1, 2019																		205			183			65			32		(61		)	424
Charge-offs	(42		)	(73		)	(30		)	—			—		(145		)	(105		)	—			(29		)	—		—			(134		)
Recoveries	6			—			3			—			—		9			2			3			10			—		—			15
Provision	70			120			25			15			—		230			94			30			35			—		—			159
Allowance allocation adjustment	114			83			65			18			—		280			(26		)	(45		)	(26		)	55		61			19
Total allowance on other acquired loans	148			130			63			33			—		374			170			171			55			87		—			483
Total Allowance on acquired loans	148			130			63			33			—		374			170			171			55			87		—			483
Ending balance, June 30, 2018	$	1,223		$	3,161		$	750		$	1,045		$	279	$	6,458
Allowance for Loan Losses at June 30, 2018:
Ending balance, September 30, 2019																		$	1,175		$	5,462		$	552		$	1,687	$	301		$	9,177
Allowance for Loan Losses at September 30, 2019:
Amount of allowance for loan losses arising from loans individually evaluated for impairment	$	191		$	—		$	25		$	25		$	—	$	241		$	191		$	205		$	15		$	252	$	—		$	663
Amount of allowance for loan losses arising from loans collectively evaluated for impairment	$	1,032		$	3,161		$	725		$	1,020		$	279	$	6,217		$	984		$	5,257		$	537		$	1,435	$	301		$	8,514
Loans Receivable as of June 30, 2018:															—
Loans Receivable as of September 30, 2019:																																—
Ending balance of originated loans	$	137,265		$	234,071		$	102,141		$	75,429		$	—	$	548,906		$	124,627		$	401,211		$	58,612		$	102,998	$	—		$	687,448
Ending balance of purchased credit-impaired loans	456			7,558			—			1,612			—		9,626			2,273			33,840			—			5,320		—			41,433
Ending balance of other acquired loans	79,872			98,743			3,514			24,088			—		206,217			71,290			272,744			3,052			58,741		—			405,827
Ending balance of loans	$	217,593		$	340,372		$	105,655		$	101,129		$	—	$	764,749		$	198,190		$	707,795		$	61,664		$	167,059	$	—		$	1,134,708
Ending balance: individually evaluated for impairment	$	7,668		$	8,228		$	397		$	2,472		$	—	$	18,765		$	8,626		$	16,458		$	419		$	7,215	$	—		$	32,718
Ending balance: collectively evaluated for impairment	$	209,925		$	332,144		$	105,258		$	98,657		$	—	$	745,984		$	189,564		$	691,337		$	61,245		$	159,844	$	—		$	1,101,990

2529


	Residential Real Estate			Commercial/Agriculture Real Estate		Consumer Non-real Estate			Commercial/Agricultural Non-real Estate			Unallocated		Total			Residential Real Estate			Commercial/Agriculture Real Estate			Consumer Non-real Estate			Commercial/Agricultural Non-real Estate			Unallocated		Total
Nine months ended June 30, 2017:
Nine months ended September 30, 2018
Allowance for Loan Losses:
Beginning balance, October 1, 2016	$	2,039		$	1,883	$	1,466		$	652		$	28	$	6,068
Beginning balance, January 1, 2018																	$	1,439		$	2,604		$	910		$	880		$	26	$	5,859
Charge-offs	(159		)	—		(294		)	(9		)	—		(462		)	(72		)	—			(116		)	(52		)	—		(240		)
Recoveries	8			—		141			1			—		150			32			—			95			12			—		139
Provision	—			—		—			—			—		—			—			680			60			230			—		970
Allowance allocation adjustment	(427		)	461		(234		)	88			112		—			(364		)	(8		)	(285		)	(30		)	256		(431		)
Total Allowance on originated loans	$	1,461		$	2,344	$	1,079		$	732		$	140	$	5,756		$	1,035		$	3,276		$	664		$	1,040		$	282	$	6,297
Purchased credit impaired loans	—			—		—			—			—		—			—			—			—			—			—		—
Other acquired loans	—			—		—			—			—		—
Beginning balance, January 1, 2018																	—			—			—			—			—		—
Charge-offs																	(106		)	(73		)	(70		)	—			—		(249		)
Recoveries																	34			—			5			—			—		39
Provision																	70			120			25			15			—		230
Allowance allocation adjustment																	171			121			125			14			—		431
Total Allowance on other acquired loans																	169			168			85			29			—		451
Total Allowance on acquired loans	—			—		—			—			—		—			169			168			85			29			—		451
Ending balance, June 30, 2017	$	1,461		$	2,344	$	1,079		$	732		$	140	$	5,756
Allowance for Loan Losses at June 30, 2017:
Ending balance, September 30, 2018																	1,204			3,444			749			1,069			282		6,748
Allowance for Loan Losses at September 30, 2018:
Amount of allowance for loan losses arising from loans individually evaluated for impairment	$	203		$	—	$	32		$	6		$	—	$	241		$	97		$	23		$	39		$	43		$	—	$	202
Amount of allowance for loan losses arising from loans collectively evaluated for impairment	$	1,258		$	2,344	$	1,047		$	726		$	140	$	5,515		$	1,107		$	3,421		$	710		$	1,026		$	282	$	6,546
Loans Receivable as of June 30, 2017:
Loans Receivable as of September 30, 2018:
Ending balance of originated loans	$	136,527		$	123,183	$	141,984		$	34,521		$	—	$	436,215		$	136,526		$	254,751		$	94,236		$	79,710		$	—	$	565,223
Ending balance of purchased credit-impaired loans	247			1,813		4			905			—		2,969			450			7,173			645			739			—		9,007
Ending balance of other acquired loans	19,961			46,310		411			13,537			—		80,219			72,805			91,096			2,208			22,354			—		188,463
Ending balance of loans	$	156,735		$	171,306	$	142,399		$	48,963		$	—	$	519,403		$	209,781		$	353,020		$	97,089		$	102,803		$	—	$	762,693
Ending balance: individually evaluated for impairment	$	4,170		$	266	$	551		$	659		$	—	$	5,646		$	8,198		$	10,894		$	393		$	2,894		$	—	$	22,379
Ending balance: collectively evaluated for impairment	$	152,565		$	171,040	$	141,848		$	48,304		$	—	$	513,757		$	201,583		$	342,126		$	96,696		$	99,909		$	—	$	740,314

~~The Bank has originated substantially all loans currently recorded on the Company’s accompanying Consolidated Balance Sheet, except as noted below.~~

In February 2016, the Bank selectively purchased loans from Central Bank in Rice Lake and Barron, Wisconsin in the amount of $16,363. In May 2016, the Bank acquired loans from Community Bank of Northern Wisconsin ("CBN"), headquartered in Rice Lake, Wisconsin totaling $111,740. In August 2017, the Bank acquired loans from Wells Federal, headquartered in Wells, Minnesota totaling $189,077.

During October 2012, the Bank entered into an agreement to purchase short term consumer loans from a third party on an ongoing basis. As part of the servicer agreement entered into in connection with this purchase agreement, the third party seller agreed to purchase or substitute performing consumer loans for all contracts that become 120 days past due. Pursuant to the ongoing loan purchase agreement, a restricted reserve account was established at 3% of the outstanding consumer loan balances purchased up to a maximum of $1,000, with such percentage amount of the loans being deposited into a segregated reserve account. The funds in the reserve account are to be released to compensate the Bank for any purchased loans that are not purchased back by the seller or substituted with performing loans and are ultimately charged off by the Bank. During the first quarter of fiscal 2015, the Board of Directors increased the limit of these purchased consumer loans to a maximum of $50,000. As of September 30, 2017, new purchases from this third party were terminated. As of ~~June 30, 2018, the balance of these purchased consumer loans was $19,801~~ ~~compared to $29,555 as of September 30, 2017. The balance in the cash reserve account at June 30, 2018 was~~ ~~$622, which is included in Deposits on the accompanying Consolidated Balance Sheet. To date, the Company has not charged off or experienced losses related to the purchased loans.~~

~~The weighted average rate earned on these purchased consumer loans was 4.20% as of June 30, 2018.~~

2630

Loans receivable by loan type as of the end of the periods shown below were as follows:


	Residential Real Estate				Commercial/Agriculture Real Estate Loans				Consumer non-Real Estate				Commercial/Agriculture non-Real Estate				Totals				Residential Real Estate				Commercial/Agriculture Real Estate Loans				Consumer non-Real Estate				Commercial/Agriculture non-Real Estate				Totals
	June 30, 2018		September 30, 2017		June 30, 2018		September 30, 2017		June 30, 2018		September 30, 2017		June 30, 2018		September 30, 2017		June 30, 2018		September 30, 2017		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Performing loans
Performing TDR loans	$	3,481	$	3,085	$	1,663	$	1,890	$	122	$	167	$	496	$	88	$	5,762	$	5,230	$	2,876	$	3,319	$	3,574	$	2,209	$	74	$	99	$	452	$	428	$	6,976	$	6,055
Performing loans other	211,871		242,198		335,972		268,619		105,305		131,695		98,502		77,213		751,650		719,725		191,990		216,636		691,706		531,030		61,369		91,373		162,546		146,249		1,107,611		985,288
Total performing loans	215,352		245,283		337,635		270,509		105,427		131,862		98,998		77,301		757,412		724,955		194,866		219,955		695,280		533,239		61,443		91,472		162,998		146,677		1,114,587		991,343

Nonperforming loans (1)
Nonperforming TDR loans	508		593		540		—		17		28		1,383		—		2,448		621		562		785		2,343		577		—		—		1,914		1,305		4,819		2,667
Nonperforming loans other	1,733		1,758		2,197		3,391		211		447		748		1,823		4,889		7,419		2,762		2,069		10,172		2,249		221		334		2,147		771		15,302		5,423
Total nonperforming loans	2,241		2,351		2,737		3,391		228		475		2,131		1,823		7,337		8,040		3,324		2,854		12,515		2,826		221		334		4,061		2,076		20,121		8,090
Total loans	$	217,593	$	247,634	$	340,372	$	273,900	$	105,655	$	132,337	$	101,129	$	79,124	$	764,749	$	732,995	$	198,190	$	222,809	$	707,795	$	536,065	$	61,664	$	91,806	$	167,059	$	148,753	$	1,134,708	$	999,433


(1)	Nonperforming loans are either 90+ days past due or nonaccrual.

2731

An aging analysis of the Company’s residential real estate, commercial/agriculture real estate, consumer and other loans and purchased third party loans as of ~~June~~September 30, ~~2018~~2019 and ~~September 30, 2017~~December 31, 2018, respectively, was as follows:


	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days		Total Past Due		Current		Total Loans		Nonaccrual Loans		Recorded Investment > 89 Days and Accruing		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
June 30, 2018
September 30, 2019
Residential real estate:
One to four family	$	2,966	$	906	$	1,352	$	5,224	$	197,132	$	202,356	$	1,681	$	560	$	3,608	$	1,016	$	1,069	$	5,693	$	2,255	$	7,948	$	180,122	$	188,070
Purchased HELOC loans	404		—		—		404		14,833		15,237		—		—		466		338		—		804		—		804		9,316		10,120
Commercial/Agricultural real estate:
Commercial real estate	865		—		197		1,062		207,464		208,526		400		—		389		68		—		457		4,808		5,265		459,781		465,046
Agricultural real estate	975		949		2,210		4,134		66,747		70,881		2,210		—		1,853		81		—		1,934		6,191		8,125		81,316		89,441
Multi-family real estate	—		—		130		130		45,577		45,707		130		—		—		—		—		—		1,471		1,471		86,287		87,758
Construction and land development	220		—		85		305		14,953		15,258		123		—		—		—		—		—		45		45		65,505		65,550
Consumer non-real estate:
Originated indirect paper	169		20		27		216		66,575		66,791		45		5		250		25		16		291		165		456		42,438		42,894
Purchased indirect paper	410		205		136		751		19,050		19,801		—		135		—		—		—		—		—		—		—		—
Other Consumer	198		28		18		244		18,819		19,063		33		10		75		44		14		133		26		159		18,611		18,770
Commercial/Agricultural non-real estate:
Commercial non-real estate	1,061		165		181		1,407		73,356		74,763		1,257		—		957		80		—		1,037		2,072		3,109		124,123		127,232
Agricultural non-real estate	785		155		581		1,521		24,845		26,366		748		—		1,656		141		—		1,797		1,989		3,786		36,041		39,827
Total	$	8,053	$	2,428	$	4,917	$	15,398	$	749,351	$	764,749	$	6,627	$	710	$	9,254	$	1,793	$	1,099	$	12,146	$	19,022	$	31,168	$	1,103,540	$	1,134,708
September 30, 2017
December 31, 2018
Residential real estate:
One to four family	$	2,811	$	393	$	1,228	$	4,432	$	225,131	$	229,563	$	2,200	$	151	$	2,784	$	861	$	471	$	4,116	$	2,331	$	6,447	$	203,479	$	209,926
Purchased HELOC loans	$	250	—		—		250		17,821		18,071		—		—		820		572		51		1,443		—		1,443		11,440		12,883
Commercial/Agricultural real estate:
Commercial real estate	332		70		282		684		159,278		159,962		572		—		1,060		872		—		1,932		745		2,677		355,282		357,959
Agricultural real estate	57		—		2,405		2,462		65,540		68,002		2,723		96		1,360		—		—		1,360		2,019		3,379		82,636		86,015
Multi-family real estate	—		—		—		—		26,228		26,228		—		—		—		—		—		—		—		—		69,400		69,400
Construction and land development	—		—		—		—		19,708		19,708		—		—		526		175		—		701		63		764		21,927		22,691
Consumer non-real estate:
Originated indirect paper	426		112		123		661		85,071		85,732		74		80		272		167		45		484		106		590		55,995		56,585
Purchased indirect paper	601		305		221		1,127		28,428		29,555		—		221		340		200		157		697		—		697		14,309		15,006
Other Consumer	120		79		57		256		20,412		20,668		76		25		179		98		12		289		14		303		19,911		20,214
Commercial/Agricultural non-real estate:
Commercial non-real estate	75		23		156		254		54,997		55,251		1,618		—		399		70		—		469		1,314		1,783		110,644		112,427
Agricultural non-real estate	757		—		120		877		22,996		23,873		189		16		428		40		—		468		762		1,230		35,097		36,327
Total	$	5,429	$	982	$	4,592	$	11,003	$	725,610	$	736,613	$	7,452	$	589	$	8,168	$	3,055	$	736	$	11,959	$	7,354	$	19,313	$	980,120	$	999,433

2832

At ~~June~~September 30, 2019, the Company has identified impaired loans of $67,414, consisting of $11,795 TDR loans, the carrying amount of purchased credit impaired loans of $34,696 and $20,924 of substandard non-TDR loans. The $67,414 total of impaired loans includes $6,976 of performing TDR loans. At December 31, 2018, the Company has identified impaired loans of ~~$23,233,~~$47,334, consisting of ~~$8,210~~$8,722 TDR loans, the carrying amount of ~~which $5,762 are performing TDR loans, $9,626~~ purchased credit impaired loans of $24,816 and ~~$5,397~~$13,796 of substandard non-TDR ~~loans, which includes $2,908~~loans. The $47,334 total of ~~non-PCI acquired loans. At September 30, 2017, the Company identified~~ impaired loans includes $6,055 of ~~$24,359, consisting of $5,851~~ ~~TDR loan, of which $5,230 are~~ performing TDR ~~loans, $12,035 purchased credit impaired loans, and $6,473 substandard non-TDR loans, which includes $2,387 of non-PCI acquired~~ 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 impaired loans as of ~~June 30, 2018~~ ~~and~~ September 30, ~~2017~~2019 and December 31, 2018 was as follows:


	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
June 30, 2018
September 30, 2019
With No Related Allowance Recorded:
Residential real estate	$	6,220	$	6,220	$	—	$	5,117	$	242	$	9,016	$	9,016	$	—	$	8,945	$	141
Commercial/agriculture real estate	11,866		11,866		—		12,246		312		43,907		43,907		—		36,379		721
Consumer non-real estate	315		315		—		374		28		358		358		—		292		7
Commercial/agricultural non-real estate	2,967		2,967		—		4,381		84		10,298		10,298		—		8,599		166
Total	$	21,368	$	21,368	$	—	$	22,118	$	666	$	63,579	$	63,579	$	—	$	54,214	$	1,035
With An Allowance Recorded:
Residential real estate	$	1,685	$	1,685	$	192	$	1,442	$	38	$	1,598	$	1,598	$	191	$	1,465	$	24
Commercial/agriculture real estate	—		—		—		—		—		1,634		1,634		205		1,307		—
Consumer non-real estate	81		81		25		175		—		62		62		15		104.5		—
Commercial/agricultural non-real estate	99		99		25		61		—		541		541		252		284		—
Total	$	1,865	$	1,865	$	242	$	1,678	$	38	$	3,835	$	3,835	$	663	$	3,160	$	24
June 30, 2018 Totals:
September 30, 2019 Totals:
Residential real estate	$	7,905	$	7,905	$	192	$	6,559	$	280	$	10,614	$	10,614	$	191	$	10,410	$	165
Commercial/agriculture real estate	11,866		11,866		—		12,246		312		45,541		45,541		205		37,685		721
Consumer non-real estate	396		396		25		549		28		420		420		15		397		7
Commercial/agricultural non-real estate	3,066		3,066		25		4,442		84		10,839		10,839		252		8,883		166
Total	$	23,233	$	23,233	$	242	$	23,796	$	704	$	67,414	$	67,414	$	663	$	57,374	$	1,059

2933


	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
September 30, 2017
December 31, 2018
With No Related Allowance Recorded:
Residential real estate	$	4,015	$	4,015	$	—	$	3,440	$	9	$	8,873	$	8,873	$	—	$	7,915	$	88
Commercial/agriculture real estate	12,626		12,626		—		4,460		2		28,850		28,850		—		19,673		304
Consumer non-real estate	433		433		—		340		16		226		226		—		226		4
Commercial/agricultural non-real estate	5,795		5,795		—		2,628		11		6,900		6,900		—		4,522		105
Total	$	22,869	$	22,869	$	—	$	10,868	$	38	$	44,849	$	44,849	$	—	$	32,336	$	501
With An Allowance Recorded:
Residential real estate	$	1,198	$	1,198	$	214	$	1,545	$	2	$	1,332	$	1,332	$	156	$	1,280	$	17
Commercial/agriculture real estate	—		—		—		—		—		979		979		25		820		—
Consumer non-real estate	269		269		65		306		—		147		147		37		154		1
Commercial/agricultural non-real estate	23		23		23		101		—		27		27		9		73		1
Total	$	1,490	$	1,490	$	302	$	1,952	$	2	$	2,485	$	2,485	$	227	$	2,327	$	19
September 30, 2017 Totals:
December 31, 2018 Totals:
Residential real estate	$	5,213	$	5,213	$	214	$	4,985	$	11	$	10,205	$	10,205	$	156	$	9,195	$	105
Commercial/agriculture real estate	12,626		12,626		—		4,460		2		29,829		29,829		25		20,493		304
Consumer non-real estate	702		702		65		646		16		373		373		37		380		5
Commercial/agricultural non-real estate	5,818		5,818		23		2,729		11		6,927		6,927		9		4,595		106
Total	$	24,359	$	24,359	$	302	$	12,820	$	40	$	47,334	$	47,334	$	227	$	34,663	$	520

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 include ~~but are not limited to,~~ an extension of loan terms, renewals of existing balloon loans, reductions in interest rates and consolidating existing Bank loans at modified terms. A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability. If a TDR is placed on nonaccrual status, it remains there until a sufficient period of performance under the restructured terms has occurred at which time it is returned to accrual status. There were 714 delinquent TDRs greater than 60 days past due with a recorded investment of ~~$1,117~~$3,293 at ~~June~~September 30, ~~2018,~~2019, compared to 37 such loans with a recorded investment of ~~$504~~$1,211 at ~~September 30, 2017.~~December 31, 2018.

Following is a summary of TDR loans by accrual status as of ~~June 30, 2018 and~~ September 30, ~~2017.~~2019 and December 31, 2018.


	June 30, 2018		September 30, 2017		September 30, 2019		December 31, 2018
Troubled debt restructure loans:
Accrual status	$	5,860	$	5,230	$	7,194	$	6,055
Non-accrual status	2,350		621		4,601		2,667
Total	$	8,210	$	5,851	$	11,795	$	8,722

We committed to refinance two loans totaling $33 meeting our TDR criteria at September 30, 2019. There were ~~no TDR commitments or~~ unused lines of credit totaling $17 meeting our TDR criteria as of ~~June~~September 30, ~~2018.~~2019.

3034

The following provides detail, including specific reserve and reasons for modification, related to loans identified as TDRs during the nine months ended ~~June 30, 2018 and the year ended~~ September 30, ~~2017:~~2019 and three months ended December 31, 2018:


	Number of Contracts	Modified Rate		Modified Payment		Modified Under- writing		Other		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserve		Number of Contracts	Modified Rate		Modified Payment		Modified Under- writing		Other		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserve
Nine months ended June 30, 2018
Nine months ended September 30, 2019
TDRs:
Residential real estate	8	$	—	$	—	$	710	$	49	$	759	$	759	$	—	9	$	431	$	—	$	171	$	—	$	602	$	602	$	—
Commercial/Agricultural real estate	9	—		410		759		568		1,737		1,737		—		14	2,005		78		1,215		—		3,298		3,298		—
Consumer non-real estate	1	—		—		3		—		3		3		—		1	2		—		—		—		2		2		—
Commercial/Agricultural non-real estate	8	—		84		486		1,300		1,870		1,870		—		7	165		364		469		—		998		998		—
Totals	26	$	—	$	494	$	1,958	$	1,917	$	4,369	$	4,369	$	—	31	$	2,603	$	442	$	1,855	$	—	$	4,900	$	4,900	$	—


	Number of Contracts	Modified Rate		Modified Payment		Modified Under- writing		Other		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserve		Number of Contracts	Modified Rate		Modified Payment		Modified Under- writing		Other		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserve
Year ended September 30, 2017
Three months ended December 31, 2018
TDRs:
Residential real estate	9	$	—	$	—	$	679	$	236	$	915	$	915	$	24	4	$	240	$	—	$	—	$	—	$	240	$	240	$	—
Commercial/Agricultural real estate	8	—		—		1,822		68		1,890		1,890		—		2	—		581		—		21		602		602		—
Consumer non-real estate	4	—		—		4		28		32		32		—		—	—		—		—		—		—		—		—
Commercial/Agricultural non-real estate	2	—		—		—		93		93		93		—		1	24		—		—		—		24		24		—
Totals	23	$	—	$	—	$	2,505	$	425	$	2,930	$	2,930	$	24	7	$	264	$	581	$	—	$	21	$	866	$	866	$	—

A summary of loans by loan segment modified in a troubled debt restructuring as of ~~June 30, 2018 and~~ September 30, ~~2017,~~2019 and December 31, 2018, was as follows:


	June 30, 2018			September 30, 2017			September 30, 2019			December 31, 2018
	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Troubled debt restructurings:
Residential real estate	35	$	3,989	32	$	3,678	42	$	3,438	41	$	4,103
Commercial/Agricultural real estate	16	2,203		8	1,890		27	5,917		19	2,787
Consumer non-real estate	18	139		20	195		8	74		13	99
Commercial/Agricultural non-real estate	9	1,879		2	88		16	2,366		10	1,733
Total troubled debt restructurings	78	$	8,210	62	$	5,851	93	$	11,795	83	$	8,722

3135

The following table provides information related to restructured loans that were considered in default as of ~~June 30, 2018 and~~ September 30, ~~2017:~~2019 and December 31, 2018:


	June 30, 2018			September 30, 2017			September 30, 2019			December 31, 2018
	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Troubled debt restructurings:
Residential real estate	3	$	409	4	$	593	3	$	344	7	$	785
Commercial/Agricultural real estate	3	665		—	—		9	2,343		4	577
Consumer non-real estate	3	17		3	28		—	—		—	—
Commercial/Agricultural non-real estate	5	1,258		—	—		12	1,914		8	1,305
Total troubled debt restructurings	14	$	2,349	7	$	621	24	$	4,601	19	$	2,667

Included above are ~~two~~ten TDR loans that became in default during the three months ended ~~June~~September 30, ~~2018.~~2019.

All acquired loans were initially recorded at fair value at the acquisition date. The outstanding balance and the carrying amount of acquired loans included in the consolidated balance sheet are as follows:


	June 30, 2018		September 30, 2019
Accountable for under ASC 310-30 (Purchased Credit Impaired "PCI" loans)
Accountable for under ASC 310-30 (Purchased Credit Impaired “PCI” loans)
Outstanding balance	$	9,626	$	41,433
Carrying amount	$	7,738	$	34,696
Accountable for under ASC 310-20 (non-PCI loans)
Outstanding balance	$	206,217	$	405,827
Carrying amount	$	203,750	$	402,392
Total acquired loans
Outstanding balance	$	215,843	$	447,260
Carrying amount	$	211,488	$	437,088

The following table provides changes in accretable yield for all acquired loans accounted for under ASC 310-20:


	June 30, 2018			September 30, 2019
Balance at beginning of period	$	2,893
Balance at beginning of period, January 1, 2019				$	3,163
Acquisitions	—			814
Reduction due to unexpected early payoffs	—			—
Reclass from non-accretable difference	—			80
Disposals/transfers	—			—
Accretion	(426		)	(622		)
Balance at end of period	$	2,467
Balance at end of period, September 30, 2019				$	3,435

The following table reflects amounts for all acquired credit impaired and acquired performing loans acquired from F&M at acquisition:



	Acquired Credit Impaired Loans			Acquired Performing Loans			Total Acquired Loans
Contractually required cash flows at acquisition	$	18,355		$	111,919		$	130,274
Non-accretable difference (expected losses and foregone interest)	(2,898		)	—			(2,898		)
Cash flows expected to be collected at acquisition	15,457			111,919			127,376
Accretable yield	—			(814		)	(814		)
Fair value of acquired loans at acquisition	$	15,457		111,105			$	126,562

Our analysis of the acquired impaired and non-impaired F&M loan portfolio is ongoing and will be finalized at December31, 2019.

NOTE 45 – 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 ~~June 30, 2018 and~~ September 30, ~~2017~~2019 and December 31, 2018 were ~~$281,076~~$522,482 and ~~$282,392,~~$518,476, 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. The current period valuation allowance is included as amortization of mortgage servicing rights in non-interest expense on the consolidated statement of operations.

Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in deposits were ~~$2,610~~$6,353 and ~~$3,208,~~$3,182, at ~~June 30, 2018 and~~ September 30, ~~2017,~~2019 and December 31, 2018, respectively. Mortgage servicing rights activity for the nine ~~months ended June 30, 2018 and year~~month period ended September 30, ~~2017~~2019 and three months ended December 31, 2018 were as follows:


	Nine Months Ended			Twelve Months Ended			As of and for the Nine Months Ended			As of and for the Three Months Ended
	June 30, 2018			September 30, 2017			September 30, 2019			December 31, 2018
Balance at beginning of period	$	1,886		$	—		$	4,486		$	1,840
MSR asset acquired	—			1,909			—			2,721
MSRs capitalized	206			13
Increase in MSR assets resulting from transfers of financial assets							581			100
Amortization during the period	(251		)	(36		)	(612		)	(175		)
Valuation allowance at end of period	—			—			(210		)	—
Net book value at end of period	$	1,841		$	1,886		$	4,245		$	4,486
Fair value of MSR asset at end of period	$	2,269		$	1,951		$	4,299		$	5,214
Residential mortgage loans serviced for others	$	281,076		$	282,392		$	522,482		$	518,476
Net book value of MSR asset to loans serviced for others	0.65		%	0.67		%	0.81		%	0.87		%

3337

NOTE 6 – LEASES

We have operating leases for our corporate offices (1), bank branch offices (6), other production offices (1) and certain office equipment. In May 2019, the bank acquired the previously leased Mankato, MN branch office and in August 2019, the bank acquired the previously leased Rice Lake, WI and Lake Hallie, WI branch offices, which are now included in Office properties and equipment on the consolidated balance sheet. Our leases have remaining lease terms of 1 to 8.75 years, some of which include options to extend the leases for up to 5 years. As of September 30, 2019, we have no additional lease commitments that have not yet commenced.



	As of and for the nine months ended September 30, 2019
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	$	665
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	158

Supplemental balance sheet information related to leases was as follows:
Operating lease right-of-use assets	$	2,939
Operating lease liabilities	$	2,994

Weighted average remaining lease term in years; operating leases	6.95
Weighted average discount rate; operating leases	3.07		%

Cash obligations under lease contracts are as follows:



Fiscal years ending December 31,
2019	$	150
2020	566
2021	423
2022	378
2023	327
Thereafter	1,150
Total	$	2,994

NOTE 57 – FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

A summary of Federal Home Loan Bank advances and other borrowings at ~~June~~September 30, ~~2018~~2019 and ~~September 30, 2017~~December 31, 2018 is as follows:


	6/30/2018			9/30/2017			September 30, 2019			December 31, 2018
Advances from FHLB:
Fixed rates	$	29,000		$	90,000		$	71,530		$	43,000
Overnight borrowings	29,000			—			42,000			67,000
Total FHLB advances	58,000			90,000			113,530			110,000
Less: unamortized discount on acquired borrowings							$	(64	)	(187		)
Net FHLB advances							113,466			$	109,813

Other borrowings:
Senior notes:
Variable rate due in May 2021	9,778			10,694
Variable rate due in August 2022	4,625			5,000
	14,403			15,694
Variable rate due in June 2031							$	29,856		10,000
Subordinated notes:
6.75% due August 2027, variable rate commencing August 2022	5,000			5,000			15,000			15,000
6.75% due August 2027, variable rate commencing August 2022	10,000			10,000
	15,000			15,000
Less: unamortized debt issuance costs	(344		)	(375		)	(311		)	(353		)
Total other borrowings	29,059			30,319			$	44,545		$	24,647

TOTALS	$	87,059		$	120,319
Totals							$	158,011		$	134,460

Federal Home Loan Bank Advances and Irrevocable Standby Letters of Credit

The ~~Bank~~bank had an outstanding balance of ~~$29,000~~$42,000 with a rate of ~~2.12%~~2.04% on the FHLB ~~variable rate~~ overnight borrowings at ~~June~~September 30, ~~2018. All~~2019. Short-term fixed rate advances ~~from the FHLB~~of $8,500 mature on various dates through ~~July 2018.~~September 30, 2020. These five short-term FHLB advances were acquired as a result of the F&M acquisition, at a weighted average rate 2.21% and a weighted average maturity of 5 months.

The Bank acquired six additional FHLB notes totaling $9,530 as a result of the F&M acquisition that mature on various dates through 2024 with a weighted average rate of 2.02% and weighted average maturity of 30 months. The Bank acquired one $11,000 long-term FHLB note as a result of the United Bank acquisition, with a 2.45% rate and February 1, 2022 maturity date.

During the three months ended June 30, 2019, the Bank entered into a $10,000 FHLB note with a 10-year maturity, callable quarterly, at a fixed interest rate of 1.05%. During the three months ended September 30, 2019, the Bank entered into five additional FHLB notes totaling $32,500 with a 10-year maturity, callable quarterly, at a fixed weighted average interest rate of 1.04%. Each Federal Home Loan Bank advance is payable at the maturity date, with a prepayment penalty for fixed rate advances. The FHLB variable rate open line of credit and fixed rate advances are secured by ~~$311,179~~$670,863 of real estate and commercial and industrial loans.

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"~~(“LOC”) is supported by loan collateral as an alternative to directly pledging investment securities on behalf of a municipal customer as collateral for their interest bearing deposit balances. These balances were ~~$45,005~~$145,464 and ~~$30,233~~$87,359 at ~~June 30, 2018 and~~ September 30, ~~2017,~~2019 and December 31, 2018, respectively.

At ~~June~~September 30, ~~2018,~~2019, the Bank’s available and unused portion of this borrowing arrangement was approximately ~~$208,160,~~$153,949 compared to ~~$92,959~~$178,620 as of ~~September 30, 2017.~~December 31, 2018.

Maximum month-end amounts outstanding under this borrowing agreement were ~~$109,500~~$150,839 and ~~$90,000~~$109,813 during the nine months ended ~~June 30, 2018 and year ended~~ September 30, ~~2017,~~2019 and the three months ended December 31, 2018, respectively.

Senior Notes and Revolving Line of Credit

On ~~May 16, 2016,~~August 1, 2018, the Company entered into a ~~Loan Agreement evidencing an $11,000~~credit agreement, consisting of a $10,000 term loan maturing on May 15, 2021, payable in sixteen consecutive quarterly principal installments beginning on August 15, 2017. Installment nos. 1 to 15, inclusive, being in the amount of approximately $306 each,note and ~~installment no. 16,~~ a ~~balloon payment, being for the entire then-unpaid principal balance, due and payable on May 15, 2021, if not paid sooner. The proceeds from the Loan were used by~~$7,500 revolving note. On June 26, 2019, the Company ~~for the sole purpose~~entered into a credit agreement consisting of ~~financing the acquisition, by merger, of CBN.~~

~~On May 30, 2017, the Company extended~~a $29,856 term note and a $5,000 term loan facility for the sole purpose of financing the acquisition, by merger, of Wells Financial Corporation. On August 17, 2017, this term loan was funded and matures on August 15, 2022 with a ten year amortization.

3439

revolving note. This term note included the refinancing of $10,074 in existing debt and matures on June 26, 2031. This revolving note became effective on August 1, 2019, at which time it replaced the Company’s existing revolving loan arrangement, and it matures on August 1, 2020. These credit agreements bear interest at variable interest rates based on the U.S. Prime Rate, and are payable in accordance with the terms of the credit agreement. The ~~weighted average~~ contractual interest ~~rates payable were 5.07%~~rate for the term note ranged from 4.25% to 4.75% during the three and ~~4.01% at June 30, 2018 and~~nine months ended September 30, ~~2017, respectively.~~

2019. At September 30, 2019, there were no borrowings outstanding on the revolving note.

Subordinated Notes

On August 10, 2017, the Company issued $15,000 of subordinated notes maturing on August 10, 2027. ~~The proceeds of the notes were used by the Company for the sole purpose of financing the acquisition, by merger, of Wells Financial Corporation.~~

The subordinated notes are unsecured and are subordinate to the claims of other creditors of the Company. The subordinated notes mature in August 2027, ~~and convert to variable interest rate notes in August 2022. These notes provide for an annual~~with fixed interest rate for ~~the first~~ five years of 6.75%~~. After the fixed interest period~~, and ~~through maturity, the interest~~in August 2022, convert to a three-month LIBOR plus 4.90% variable rate, and will be reset quarterly ~~to equal the three-month LIBOR rate, plus 4.90%.~~thereafter. Interest on the Notes will be payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year through the maturity date.

Debt Issuance Costs

Debt issuance costs, consisting primarily of investment banking and loan origination fees, of $380 were incurred in conjunction with the senior and the issuance of subordinated notes for the year ended September 30, 2017. The unamortized amount of debt issuance costs was $311 and $353 at ~~June 30, 2018 and~~ September 30, ~~2017 was $344~~2019 and ~~$375.~~December 31, 2018, respectively. These debt issuance costs are included in other borrowings on the consolidated balance sheet.

Maturities of FHLB advances and other borrowings are as follows:


Fiscal years ending September 30,
2018	$	58,000
Fiscal years ending December 31,
2019	—		$	46,000
2020	—		5,500
2021	9,778		4,000
2022	4,594		14,936
2023			—
Thereafter	14,687		87,575
	$	87,059	$	158,011

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, 2019, the Bank and Company were categorized as “Well Capitalized”, under Prompt Corrective Action Provisions.

The Bank’s Tier 1 (leverage) and risk-based capital ratios at September 30, 2019 and December 31, 2018, 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, 2019
Total capital (to risk weighted assets)	$	157,069,000	13.5	%	$	92,966,000	> =	8.0	%	$	116,208,000	> =	10.0	%
Tier 1 capital (to risk weighted assets)	147,892,000		12.7	%	69,725,000		> =	6.0	%	92,966,000		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	147,892,000		12.7	%	52,293,000		> =	4.5	%	75,535,000		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	147,892,000		10.2	%	57,777,000		> =	4.0	%	72,221,000		> =	5.0	%
As of December 31, 2018
Total capital (to risk weighted assets)	$	126,440,000	12.7	%	$	79,651,000	> =	8.0	%	$	99,563,000	> =	10.0	%
Tier 1 capital (to risk weighted assets)	118,836,000		11.9	%	59,738,000		> =	6.0	%	79,651,000		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	118,836,000		11.9	%	44,804,000		> =	4.5	%	64,716,000		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	118,836,000		9.7	%	48,976,000		> =	4.0	%	61,220,000		> =	5.0	%

The Company’s Tier 1 (leverage) and risk-based capital ratios at September 30, 2019 and December 31, 2018, 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, 2019
Total capital (to risk weighted assets)	$	132,094,000	11.4	%	$	92,966,000	> =	8.0	%	$	116,208,000	> =	10.0	%
Tier 1 capital (to risk weighted assets)	107,917,000		9.3	%	69,725,000		> =	6.0	%	92,966,000		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	107,917,000		9.3	%	52,293,000		> =	4.5	%	75,535,000		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	107,917,000		7.5	%	57,777,000		> =	4.0	%	72,221,000		> =	5.0	%
As of December 31, 2018
Total capital (to risk weighted assets)	$	123,657,000	12.4	%	$	79,651,000	> =	8.0	%	$	99,563,000	> =	10.0	%
Tier 1 capital (to risk weighted assets)	101,053,000		10.2	%	59,738,000		> =	6.0	%	79,651,000		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	101,053,000		10.2	%	44,804,000		> =	4.5	%	64,716,000		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	101,053,000		8.3	%	48,976,000		> =	4.0	%	61,220,000		> =	5.0	%

NOTE 69 – STOCK-BASED COMPENSATION

In February 2005, the Company’s stockholders approved the Company’s 2004 Recognition and Retention Plan. This plan provides for the grant of up to 113,910 shares of the Company’s common stock to eligible participants under this plan. As of ~~June~~September 30, ~~2018~~2019, 113,910 restricted shares under this plan were granted. In February 2005, the Company’s stockholders also approved the Company’s 2004 Stock Option and Incentive Plan. This plan provides for the grant of nonqualified and incentive stock options and stock appreciation rights to eligible participants under the plan. The plan provides for the grant of awards for up to 284,778 shares of the Company’s common stock. At ~~June~~September 30, ~~2018~~2019, 284,778 options had been granted under this plan to eligible participants. This plan was terminated on January 18, 2018.

In February 2008, the Company’s stockholders approved the Company’s 2008 Equity Incentive Plan. The aggregate number of shares of common stock reserved and available for issuance under the 2008 Equity Incentive Plan is 597,605 shares. Under this Plan, the Compensation Committee may grant stock options and stock appreciation rights that, upon exercise, result in the issuance of 426,860 shares of the Company’s common stock. The Committee may also grant shares of restricted stock and restricted stock units for an aggregate of 170,745 shares of Company common stock under this plan. As of ~~June~~September 30, ~~2018~~2019, 89,183 restricted shares under this plan were granted. As of ~~June~~September 30, ~~2018~~2019, 181,000 options had been granted to eligible participants. As of January 18, 2018, no new awards will be granted under the 2008 Equity Incentive Plan.

Restricted shares granted to date under the 2004 Recognition and Retention Plan and the 2008 Equity Incentive Plan were awarded at no cost to the employee and vest pro rata over a two to five-year period from the grant date, as determined by the Board of Directors at issuance. Options granted to date under these plans vest pro rata over a five-year period from the grant date. Unexercised, nonqualified stock options expire within 15 years of the grant date and unexercised incentive stock options expire within 10 years of the grant date.

On March 27, 2018, the stockholders of Citizens Community Bancorp, Inc. approved the 2018 Equity Incentive ~~Plan at the 2018 Annual Meeting of Stockholders.~~Plan. The aggregate number of shares of common stock reserved and available for issuance under the 2018 Equity Incentive Plan is 350,000 shares. As of ~~June~~September 30, ~~2018, 13,707~~2019, 54,068 restricted shares had been granted under this plan. As of ~~June~~September 30, ~~2018,~~2019, no stock options had been granted under this plan.

Compensation expense related to restricted stock awards from these plans was ~~$94~~$127 and ~~$177~~$370 for the three and nine months ended ~~June~~September 30, ~~2018,~~2019, compared to ~~$15~~$94 and ~~$31~~$255 for the three and nine months ended ~~June~~September 30, ~~2017.~~2018.

Restricted Common Stock Award
	June 30, 2018				September 30, 2017				September 30, 2019				December 31, 2018
	Number of Shares		Weighted Average Grant Price		Number of Shares		Weighted Average Grant Price		Number of Shares		Weighted Average Grant Price		Number of Shares		Weighted Average Grant Price
Restricted Shares
Unvested and outstanding at beginning of fiscal year	42,378		$	12.07	23,159		$	9.59
Unvested and outstanding at beginning of year									75,407		$	13.24	52,172		$	13.29
Granted	33,230		13.77		25,569		13.53		12,847		11.50		27,514		13.15
Vested	(6,579	)	12.73		(6,350	)	8.88		(14,979	)	12.69		(4,279	)	13.30
Forfeited	(11,847	)	10.45		—		—		(8,916	)	13.41		—		—
Unvested and outstanding fiscal to date	57,182		$	13.32	42,378		$	12.07
Unvested and outstanding at end of year									64,359		$	12.85	75,407		$	13.24

The Company accounts for stock-based employee compensation related to the Company’s 2004 Stock Option and Incentive Plan and the 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-based employee compensation related to ~~both~~these plans for the three and nine month periods ended ~~June~~September 30, ~~2018~~2019 was $5 and ~~$6, respectively.~~$14. The compensation cost recognized for stock-based employee compensation related to ~~both~~these plans for the three and nine month periods ended ~~June~~September 30, ~~2017,~~2018, was $8$6 and ~~$15, respectively.~~$6.

Common Stock Option Awards	Common Stock Option Awards								Common Stock Option Awards

		Option Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value			Option Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
2018
Outstanding at September 30, 2017		146,606		$	9.45
September 30, 2019
Outstanding at beginning of year										108,930		$	10.15
Granted		8,000		13.60						—		—
Exercised		(6,042	)	8.11						(28,430	)	7.12
Forfeited or expired		(26,894	)	—						(1,000	)	13.76
Outstanding at June 30, 2018		121,670		$	9.82	5.78
Exercisable at June 30, 2018		56,770		$	8.04	3.38	$	387
Outstanding at end of year										79,500		$	11.19	6.81
Exercisable at end of year										43,100		$	10.62	6.5	$	19
Fully vested and expected to vest		121,670		$	9.82	5.78	$	526		79,500		$	11.19	6.81	$	(9	)
2017
Outstanding at September 30, 2016		140,706		$	8.67
December 31, 2018
Outstanding at beginning of year										121,670		$	9.82
Granted		23,000		13.75						—		—
Exercised		(14,100	)	8.27						(12,740	)	7.04
Forfeited or expired		(3,000	)	11.00						—		—
Outstanding at September 30, 2017		146,606		$	9.45	6.68
Exercisable at September 30, 2017		57,712		$	7.70	3.89	$	361
Outstanding at end of year										108,930		$	10.15	5.82
Exercisable at end of year										56,230		$	8.83	4.01	$	116
Fully vested and expected to vest		146,606		$	9.45	6.68	$	659		108,930		$	10.15	5.82	$	82

Information related to the 2004 Stock Option and Incentive Plan and 2008 Equity Incentive Plan ~~during each year~~for the respective periods follows:



	Nine months ended September 30, 2019		Three months ended December 31, 2018
Intrinsic value of options exercised	$	130	$	81
Cash received from options exercised	$	203	$	90
Tax benefit realized from options exercised	$	—	$	—

2018 2017
Intrinsic value of options exercised $ 33
$ 69
Cash received from options exercised $ 50
$ 114
Tax benefit realized from options exercised $ —
$ —

~~Set forth below is a table showing relevant assumptions used in calculating stock option expense related to the Company’s 2004 Stock Option and Incentive Plan and 2008 Equity Incentive Plan:~~

2018 2017
Dividend yield 1.18 % 1.16 %
Risk-free interest rate 2.4 % 2.2 %
Weighted average expected life (years) 10
10
Expected volatility 2.3 % 2.4 %

~~NOTE 7 – PREFERRED STOCK~~

On June 20, 2018, the Company entered into a Securities Purchase Agreement with each of a limited number of institutional and other accredited investors, including certain officers and directors of the Company, pursuant to which the Company sold an aggregate of 500,000 shares of the Company’s 8.00% Series A Mandatorily Convertible Non-Cumulative Non-Voting Perpetual Preferred Stock, par value $0.01 per share, in a private placement at $130.00 per share, for aggregate gross proceeds of $65 million. The Securities Purchase Agreement contains customary representations, warranties, and covenants of the Company and the Purchasers.

The 500,000 shares of the Company's 8.00% Series A Preferred Stock, totaling $61,289, net of issuance costs, is included in total stockholder's equity on the consolidated balance sheets. These issuance costs totaled $3,711 and consisted of legal, accounting and placement fees.

Each share of Series A Preferred Stock will be mandatorily convertible into ten shares of common stock following receipt of stockholder approval of the issuance of the shares of common stock into which the Series A Preferred Stock is expected to be converted. The Company has scheduled a special meeting of stockholders on September 25, 2018 for purposes of a stockholder vote regarding approval of issuance of the shares of common stock into which the Series A Preferred Stock is expected to be converted.

NOTE 810 – 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 statement 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, the Company utilizes independent third party valuation analysis to support the Company’s 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 ~~June~~September 30, ~~2018~~2019 and ~~September 30, 2017~~December 31, 2018:


	Fair Value		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2018
September 30, 2019
Investment securities:
U.S. government agency obligations	$	35,986	$	—	$	35,986	$	—	$	53,378	$	—	$	53,378	$	—
Obligations of states and political subdivisions	34,978		—		34,978		—		27,937		—		27,937		—
Mortgage-backed securities	43,463		—		43,463		—		55,658		—		55,658		—
Agency Securities	223		—		223		—		—		—		—		—
Corporate debt securities	5,052		—		5,052		—		18,834		—		18,834		—
Corporate asset based securities									27,149		—		27,149		—
Total	$	119,702	$	—	$	119,702	$	—	$	182,956	$	—	$	182,956	$	—
September 30, 2017
December 31, 2018
Investment securities:
U.S. government agency obligations	$	18,041	$	—	$	18,041	$	—	$	45,298	$	—	$	45,298	$	—
Obligations of states and political subdivisions	35,795		—		35,795		—		34,728		—		34,728		—
Mortgage-backed securities	36,474		—		36,474		—		41,350		—		41,350		—
Agency securities	230		—		230		—		148		—		148		—
Corporate debt securities	5,343		—		5,343		—		6,305		—		6,305		—
Total	$	95,883	$	—	$	95,883	$	—	$	146,725	$	—	$	146,725	$	—

Assets Measured on Nonrecurring Basis

The following tables present the financial instruments measured at fair value on a nonrecurring basis as of ~~June~~September 30, ~~2018~~2019 and ~~September 30, 2017~~December 31, 2018:


	Fair Value		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2018
September 30, 2019
Foreclosed and repossessed assets, net	$	5,392	$	—	$	—	$	5,392	$	1,373	$	—	$	—	$	1,373
Impaired loans with allocated allowances	1,865		—		—		1,865		3,835		—		—		3,835
Mortgage servicing rights	2,269		—		—		2,269		4,299		—		—		4,299
Total	$	9,526	$	—	$	—	$	9,526	$	9,507	$	—	$	—	$	9,507
September 30, 2017
December 31, 2018
Foreclosed and repossessed assets, net	$	6,017	$	—	$	—	$	6,017	$	2,570	$	—	$	—	$	2,570
Impaired loans with allocated allowances	1,490		—		—		1,490		2,485		—		—		2,485
Mortgage servicing rights	1,951		—		—		1,951		5,214		—		—		5,214
Total	$	9,458	$	—	$	—	$	9,458	$	10,269	$	—	$	—	$	10,269

The fair value of impaired loans referenced above was determined by obtaining independent third party appraisals and/or internally developed collateral valuations to support the Company’s estimates and judgments in determining the fair value of the underlying collateral supporting impaired loans.

The fair value of foreclosed and repossessed assets was determined by obtaining market price valuations from independent third parties wherever such quotes were available for other collateral owned. The Company utilized independent third party appraisals to support the Company’s estimates and judgments in determining fair value for other real estate owned.

The 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

~~June~~September 30, ~~2018.~~2019.


	Fair Value		Valuation Techniques (1)	Significant Unobservable Inputs (2)	Range	Fair Value		Valuation Techniques (1)	Significant Unobservable Inputs (2)	Range
June 30, 2018
September 30, 2019
Foreclosed and repossessed assets, net	$	5,392	Appraisal value	Estimated costs to sell	10 - 15%	$	1,373	Appraisal value	Estimated costs to sell	10 - 15%
Impaired loans with allocated allowances	$	1,865	Appraisal value	Estimated costs to sell	10 - 15%	$	3,835	Appraisal value	Estimated costs to sell	10 - 15%
Mortgage servicing rights	$	2,269	Discounted cash flows	Discounted rates	9.5% - 12.5%	$	4,299	Discounted cash flows	Discounted rates	9.5% - 12.5%
September 30, 2017
December 31, 2018
Foreclosed and repossessed assets, net	$	6,017	Appraisal value	Estimated costs to sell	10 - 15%	$	2,570	Appraisal value	Estimated costs to sell	10 - 15%
Impaired loans with allocated allowances	$	1,490	Appraisal value	Estimated costs to sell	10 - 15%	$	2,485	Appraisal value	Estimated costs to sell	10 - 15%
Mortgage servicing rights	$	1,951	Discounted cash flows	Discounted rates	9.5% - 12.5%	$	5,214	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 impaired loans and real estate owned may be adjusted to reflect management

estimates of disposal costs including, but not limited to, real estate brokerage commissions, legal fees,

and delinquent property taxes.

Fair Values of Financial Instruments

ASC 825-10 and ASC 270-10, Interim Disclosures about Fair Value Financial Instruments, require disclosures about fair value financial instruments and significant assumptions used to estimate fair value. The estimated fair values of financial instruments not previously disclosed are determined as follows:

Cash and Cash Equivalents

Due to their short-term nature, the carrying amounts of cash and cash equivalents are considered to be a reasonable estimate of fair value and represents a level 1 measurement.

Other Interest-Bearing Deposits

Fair value of interest bearing deposits is estimated using a discounted cash flow analysis based on current interest rates being offered by instruments with similar terms and represents a level 2 measurement.

~~Non-marketable Equity Securities, at cost~~Other Investments

~~Non-marketable equity securities are comprised~~The carrying amount of ~~Federal Home Loan Bank stock and~~ Federal Reserve Bank, ~~stock carried at cost, which are their redeemable fair values since the market for each category of this~~Bankers Bank, Federal Agricultural Mortgage Corporation, and FHLB stock is a reasonably accepted fair value estimate given their restricted ~~and represents~~nature. Fair value is the redeemable (carrying) value based on the redemption provisions of the instruments which is considered a level 12 measurement.

Loans Receivable, net

Fair value is estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as real estate, C&I and consumer. The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity date using market discount rates reflecting the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Bank’s repayment schedules for each loan classification. The fair value of variable rate loans

approximates carrying value. The net carrying value of the loans acquired through the CBN, WFC, United Bank and ~~WFC acquisition~~F&M acquisitions approximates the fair value of the loans at ~~June~~September 30, ~~2018.~~2019. The fair value of loans is considered to be a level 3 measurement.

Loans Held for Sale

Fair values are based on quoted market prices of similar loans sold on the secondary market.

Mortgage Servicing Rights

Fair values are estimated using discounted cash flows based on current market rates and conditions.

Impaired Loans (carried at fair value)

Impaired loans are loans in which the Company has measured impairment, generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Foreclosed Assets (carried at fair value)

Foreclosed assets are the only non-financial assets valued on a non-recurring basis which are held by the Company at fair value, less cost to sell. At foreclosure or repossession, if the fair value, less estimated costs to sell, of the collateral acquired (real estate, vehicles, equipment) is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses. Additionally, valuations are periodically performed by management and any subsequent reduction in value is recognized by a charge to income. The fair value of foreclosed assets held-for-sale is estimated using Level 3 inputs based on observable market data.

Accrued Interest Receivable and Payable

Due to their short-term nature, the carrying amounts of accrued interest receivable and payable are considered to be a reasonable estimate of fair value and represents a level 1 measurement.

Deposits

The fair value of deposits with no stated maturity, such as demand deposits, savings accounts, and money market accounts, is the amount payable on demand at the reporting date and represents a level 1 measurement. The fair value of fixed rate certificate accounts is calculated by using discounted cash flows applying interest rates currently being offered on similar certificates and represents a level 3 measurement. The net carrying value of acquired fixed rate certificate accounts ~~acquired through the CBN acquisition~~ approximates the fair value of the certificates at ~~June~~September 30, ~~2018~~2019 and represents a level 3 measurement.

Federal Home Loan Bank ~~("FHLB"~~(“FHLB”) Advances

The fair value of long-term borrowed funds is estimated using discounted cash flows based on the Bank’s current incremental borrowing rates for similar borrowing arrangements. The carrying value of short-term borrowed funds approximates their fair value and represents a level 2 measurement.

Off-Balance Sheet Instruments

The fair value of off-balance sheet commitments would be estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the customers. Since this amount is immaterial to the Company’s consolidated financial statements, no amount for fair value is presented. 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~~Company’s financial instruments as of the dates indicated below were as follows:

4046


		June 30, 2018				September 30, 2017					September 30, 2019				December 31, 2018
	Valuation Method Used	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value		Valuation Method Used	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	(Level I)	$	27,731	$	27,731	$	41,677	$	41,677	(Level I)	$	52,276	$	52,276	$	45,778	$	45,778
Other interest-bearing deposits	(Level II)	8,160		8,048		8,148		8,143		(Level II)	5,245		5,290		7,460		6,704
Securities available for sale "AFS"	See above	119,702		119,702		95,883		95,883
Securities held to maturity "HTM"	(Level II)	4,809		4,827		5,453		5,605
Non-marketable equity securities, at cost	(Level I)	6,862		6,862		7,292		7,292
Securities available for sale “AFS”										See above	182,956		182,956		146,725		146,725
Securities held to maturity “HTM”										(Level II)	3,665		3,770		4,850		4,872
Other investments										(Level II)	12,863		12,863		11,261		11,261
Loans receivable, net	(Level III)	754,629		749,079		727,053		737,119		(Level III)	1,115,201		1,112,305		984,952		988,072
Loans held for sale	(Level II)	1,778		1,778		2,334		2,334		(Level II)	3,262		3,262		1,927		1,927
Mortgage servicing rights	(Level III)	1,841		2,269		1,886		1,951		(Level III)	4,245		4,299		4,486		5,214
Accrued interest receivable	(Level 1)	3,306		3,306		3,291		3,291		(Level 1)	4,993		4,993		4,307		4,307
Financial liabilities:
Deposits	(Level III)	$	744,536	$	748,555	$	742,504	$	746,025	(Level III)	$	1,161,750	$	1,158,415	$	1,007,512	$	1,005,488
FHLB advances	(Level II)	58,000		57,999		90,000		89,998		(Level II)	113,466		114,226		109,813		109,665
Other borrowings	(Level I)	29,059		29,059		30,319		30,319		(Level I)	44,545		44,545		24,647		24,647
Other liabilities										(Level I)	7,112		7,112		7,359		7,359
Accrued interest payable	(Level I)	336		336		227		227		(Level II)	462		462		406		406

4147

NOTE 911 – OTHER COMPREHENSIVE INCOME (LOSS)

The following table shows the tax effects allocated to each component of other comprehensive income for the nine months ended ~~June~~September 30, ~~2018~~2019 and ~~2017:~~2018:

2018 2017

Before-Tax
Amount

Tax
Expense

Net-of-Tax
Amount

Before-Tax
Amount

Tax
Expense

Net-of-Tax
Amount
Unrealized gains (losses) on securities:
Net unrealized (losses) gains arising during the period $ (2,397 ) $ 642
$ (1,755 ) $ (2,140 ) $ 856
$ (1,284 )
Less: reclassification adjustment for (losses) gains included in net income (21 ) 5
(16 ) 29
(12 ) 17
Less: reclassification of certain deferred tax effects (1) (137 ) —
(137 ) —
—
—
Other comprehensive loss $ (2,555 ) $ 647
$ (1,908 ) $ (2,111 ) $ 844
$ (1,267 )



	2019									2018
	Before-Tax Amount			Tax Expense			Net-of-Tax Amount			Before-Tax Amount			Tax Expense		Net-of-Tax Amount
Unrealized gains (losses) on securities:
Net unrealized gains (losses) arising during the period	$	2,826		$	(777	)	$	2,049		$	(2,479	)	$	726	$	(1,753	)
Reclassification adjustment for gains (losses) included in net income	151			(42		)	109			(17		)	4		(13		)
Reclassification of certain deferred tax effects (1)	—			—			—			(137		)	—		(137		)
Adoption of ASU 2016-01; Equity securities	(62		)	17			(45		)	—			—		—
Other comprehensive income (loss)	$	2,915		$	(802	)	$	2,113		$	(2,633	)	$	730	$	(1,903	)

(1) Amounts reclassified to retained earnings due to early adoption of ASU 2018-02. For further information, refer to Note 1.

The changes in the accumulated balances for each component of other comprehensive income (loss) for the ~~twelve~~three months ended ~~September 30, 2017~~December 31, 2018 and the nine months ended ~~June~~September 30, ~~2018~~2019 were as follows:

Unrealized
Gains (Losses)
on
Securities

Defined
Benefit
Plans

Other Accumulated
Comprehensive
Income (Loss)
Balance, October 1, 2016 $ 614
$ —
$ 614
Current year-to-date other comprehensive loss, net of tax (881 ) —
(881 )
Ending balance, September 30, 2017 $ (267 ) $ —
$ (267 )
Current year-to-date other comprehensive loss, net of tax (1,908 ) —
(1,908 )
Ending balance, June 30, 2018 $ (2,175 ) $ —
$ (2,175 )



	Unrealized Gains (Losses) on Securities			Other Accumulated Comprehensive Income (Loss)
Ending Balance, October 1, 2018	$	(2,706	)	$	(2,706	)
Current year-to-date other comprehensive loss, net of tax	865			865
Ending balance, three months ended December 31, 2018	$	(1,841	)	$	(1,841	)
Current year-to-date other comprehensive loss, net of tax	2,113			2,113
Ending balance, September 30, 2019	$	272		$	272

Reclassifications out of accumulated other comprehensive income (loss) for the nine months ended ~~June~~September 30, ~~2018~~2019 were as follows:


Details about Accumulated Other Comprehensive Income Components	Amounts Reclassified from Accumulated Other Comprehensive Income			(1)	Affected Line Item on the Statement of Operations	Amounts Reclassified from Accumulated Other Comprehensive Income			(1)	Affected Line Item on the Statement of Operations
Unrealized gains and losses
Sale of securities	$	—			Net gain on sale of available for sale securities
Realized losses on securities available					Total fair value adjustments and other-than-
for sale for OTTI write-down	(21		)		temporary impairment
	(21		)
Gain on equity securities						$	151			Gain on investment securities
Tax Effect	5				Provision for income taxes	(42		)		Provision for income taxes
Total reclassifications for the period	$	(16	)		Net income attributable to common shareholders	$	109			Net income attributable to common shareholders

(1) Amounts in parentheses indicate decreases to income/loss.

4248

Reclassifications out of accumulated other comprehensive income for the nine months ended ~~June~~September 30, ~~2017~~2018 were as follows:


Details about Accumulated Other Comprehensive Income Components	Amounts Reclassified from Accumulated Other Comprehensive Income			(1)	Affected Line Item on the Statement of Operations	Amounts Reclassified from Accumulated Other Comprehensive Income			(1)	Affected Line Item on the Statement of Operations
Unrealized gains and losses
Sale of securities	$	29			Net gain on sale of available for sale securities	$	(17	)		Net loss on investment securities
Tax Effect	(12		)		Provision for income taxes	4				Benefit for income taxes
Total reclassifications for the period	$	17			Net income attributable to common shareholders	$	(13	)		Net loss attributable to common shareholders

(1) Amounts in parentheses indicate decreases to profit/loss.

NOTE 12 – SUBSEQUENT EVENT

The Tax Cuts and Jobs Act of 2017 (“TCJA”), modified the tax-free treatment of certain acquired life insurance policies. Under the TCJA, death benefits on life insurance policies acquired through a “reportable policy sale”, are no longer tax-free. At the time TCJA was enacted, it was uncertain whether insurance policies acquired in conjunction with a business combination were intended to be considered “reportable policy sales”.

After the TCJA was enacted, the Company acquired certain bank-owned life insurance (“BOLI”) policies in conjunction with the United Bank and F&M acquisitions, to which the TCJA changes applied. In each instance, the Company established a deferred tax liability for the anticipated taxable portion of the affected BOLI policies, based on the applicable provisions of the TCJA.

On October 25, 2019, the Department of the Treasury released revised guidance which clarified that ordinary course of business transactions, including mergers and acquisitions involving entities owning life insurance contracts, were not intended to meet the definition of a “reportable policy sale”. As such, the BOLI policies acquired from United Bank and F&M retained their tax-free status.

This regulation change will have an impact on the Company’s consolidated financial position and results of operations for both the three and twelve-month periods ended December 31, 2019 as follows. The elimination of the deferred tax liability associated with certain acquired BOLI contracts of F&M will result in a reduction of deferred tax liability, and a corresponding reduction to initially recorded goodwill of $350, respectively. Eliminating the deferred tax liability of $300 related to United Bank acquired BOLI contracts will result in a corresponding discrete tax credit reduction in the Company’s statement of operations.

4349


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 transition report on Form 10-K for the ~~fiscal year ended September 30, 2017, which was~~transition period from October 1, 2018 to December 31, 2018, filed with the SEC on ~~December 13, 2017,~~March 8, 2019 and the following:

conditions in the financial markets and economic conditions generally;

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

interest rate risk;

lending risk;

the sufficiency of loan allowances;

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

competitive pressures among depository and other financial institutions;

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

our ability to maintain or increase our market share;

~~the risk that the acquisition of United Bank may be more difficult, costly or time consuming or that the expected benefits are not realized;~~

~~failure to obtain applicable regulatory approvals and meet other closing conditions to the acquisition of United Bank on the expected terms and schedule;~~

~~the risk that if the acquisition of United Bank were not completed it could negatively impact the stock price and the future business and financial results of the Company;~~

~~difficulties and delays in integrating the acquired business operations or fully realizing the cost savings and other benefits;~~

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

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

increases in FDIC insurance premiums or special assessments by the FDIC;

disintermediation risk;

our inability to obtain needed liquidity;

risks related to the integration of F&M into the Company’s operations;

the risk that the combined company may be unable to retain the Company and/or F&M personnel successfully after the F&M Merger is completed;

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;

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

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

our ability to attract and retain key personnel;

our ability to keep pace with technological change;

cybersecurity risks;

~~risks posed by acquisitions and other expansion opportunities;~~

changes in federal or state tax laws;

~~litigation risk;~~

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

restrictions on our ability to pay dividends; and

the potential volatility of our stock price.

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.

4450

GENERAL

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of ~~June~~September 30, ~~2018~~2019, and our consolidated results of operations for the three and nine months ended ~~June~~September 30, ~~2018~~2019, compared to the same period in the prior fiscal year for the three and nine months ended ~~June~~September 30, ~~2017.~~2018. 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 the Company’s ~~annual~~transition report on Form 10-K for the transition period from October 1, 2018 to December 31, 2018 filed with the Securities and Exchange Commission on ~~December 13, 2017.~~March 8, 2019. 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.

~~PERFORMANCE SUMMARY~~

~~The following table sets forth our results of operations and related summary information for the three and~~ ~~nine~~ ~~month periods ended~~ ~~June 30, 2018~~ ~~and~~ ~~2017, respectively:~~

Three Months Ended June 30, Nine Months Ended June 30,
2018 2017 2018 2017
Net income as reported $ 503
$ 1,083
$ 3,184
$ 2,957
EPS - basic, as reported $ 0.09
$ 0.21
$ 0.54
$ 0.56
EPS - diluted, as reported $ 0.08
$ 0.20
$ 0.52
$ 0.56
Cash dividends paid $ —
$ —
$ 0.20
$ 0.16
Return on average assets (annualized) 0.21 % 0.65 % 0.45 % 0.58 %
Return on average equity (annualized) 2.51 % 6.66 % 5.60 % 6.06 %
Efficiency ratio, as reported (1) 85.15 % 73.71 % 79.73 % 77.24 %


~~(1)~~	~~The efficiency ratio is calculated as non-interest expense divided by the sum of net interest income plus non-interest income. A lower ratio indicates greater efficiency.~~

~~Key factors behind these results were:~~

Net income totaled $503 in Q3 fiscal 2018, compared to $1,083 a year ago. In addition to the impact of higher expenses due to the Wells Financial Corporation ("WFC") acquisition, expenses increased during the current quarter due to higher provision for loan losses related to strong organic commercial loan growth, valuation reductions to OREO branch offices that are scheduled for sale, acquisition related expenses, expenses related to resolved litigation, along with expenses to support asset growth.

Net interest margin (NIM) was at 3.40% for the current quarter, compared to 3.41% a year earlier. The increase in funding costs were offset by higher asset yields, primarily from loans, and additionally, the higher levels of equity due to the mandatorily convertible preferred stock offer.

Loan loss provision was $650 in Q3 fiscal 2018 compared to $0 the previous year as the Community Banking loan portfolio, consisting of commercial banking business and consumer lending, showed strong growth. The allowance for loan and lease losses (“ALLL”) was 0.85% of total loans at June 30, 2018, compared to 0.81% at September 30, 2017. Loans acquired, which are reported at fair market value at acquisition, are included in total loans. Nonperforming assets (“NPA”) declined as sales of OREO properties exceeded modest new non-performing loans. NPA’s were $12,729, or 1.31% of total assets at June 30, 2018, compared to $14,058, or 1.49% of total assets at September 30, 2017. The decrease was primarily the result of sales of foreclosed and repossessed assets during the quarter. Foreclosed and repossessed assets declined to $5,392 at June 30, 2018 from $6,017 million at September 30, 2017.

Total non-interest expense for Q3 fiscal 2018 of $7,874 was higher compared to Q2 fiscal 2018 at $7,103. The increase was largely related to increased professional fees related to the proposed acquisition totaling $228,000 and litigation costs totaling $198,000, as well as OREO branch office write-downs totaling $449,000. The Bank has accepted offers to sell all of the closed branch facilities carried as OREO.

Net loans increased to $754,629 at June 30, 2018, compared to $727,053 at September 30, 2017, reflecting growth in commercial, multi-family and agricultural loans. As a result of this loan growth, assets increased to $975,070 at June 30, 2018 compared to $940,664 at September 30, 2017.

The Tax Cuts and Jobs Act of 2017 ("the Tax Act"), enacted on December 22, 2017, reduced the corporate Federal income tax rates for the Company from 34% to 24.5% for 2018, and 21% for 2019. GAAP requires the impact of the provisions of the Tax Act be accounted for in the period of enactment. At December 31, 2017, we had not completed our accounting for the tax effects of enactment of the Tax Act; however, in certain cases, as described below, we made a reasonable estimates and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. The Company revalued its net deferred tax assets to account for the future impact of lower corporate taxes. For the items for which we were able to determine a reasonable estimate, we recorded an increased provisional amount of income tax expense of $275 in December 2017, related to the revaluation of the deferred tax assets to both the revaluation of timing differences and the unrealized loss on securities. In the second and third quarters of fiscal 2018, we reviewed our analysis from our first quarter and determined there were no material changes warranting any further adjustment.

~~Provisional amounts.~~ Deferred tax assets and liabilities: We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amounts recorded related to the re-measurement of our deferred tax balance was $275.

Provision for income taxes was $220 for the quarter ended June 30, 2018. The effective tax rate for the current quarter ended June 30, 2018 was 30.4%. The higher effective tax rate for the current quarter was partially the result of non-deductible expenses related to the United Bank acquisition.

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 toin our transition report on Form 10-K ~~annual report~~ for the ~~fiscal year ending September 30, 2017,~~transition period from October 1, 2018 to December 31, 2018, our critical accounting estimates are as follows:

Allowance for Loan Losses.

We maintain an allowance for loan losses to absorb probable and inherent losses in our loan portfolio. The allowance is based on ongoing, quarterly assessments of the estimated probable incurred losses in our loan portfolio. In evaluating the level of the allowance for loan loss, 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 the Allowance for Loan and Lease Losses,” issued by the Federal Financial Institutions Examination Council (FFIEC). We believe that the Bank’s Allowance for Loan Losses Policy conforms to all applicable regulatory requirements. However, based on periodic examinations by regulators, the amount of the allowance for loan losses recorded during a particular period may be adjusted.

Our determination of the allowance for loan losses is based on (1) specific allowances for specifically identified and evaluated impaired loans and their corresponding estimated loss based on likelihood of default, payment history, and net realizable value of underlying collateral. Specific allocations for collateral dependent loans are based on fair value of the underlying collateral relative to the unpaid principal balance of individually impaired 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 general allowance on loans not specifically identified in (1) above, based on historical loss ratios, which are adjusted for qualitative and general economic factors. We continue to refine our allowance for loan losses methodology, with an increased emphasis on historical performance adjusted for applicable economic and qualitative factors.

Assessing the allowance for loan losses 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.

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 and any acquired intangible asset with an indefinite useful economic life, but reviews them 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 ~~June~~September 30, ~~2018~~2019 which is related to its banking activities. The Company performed the required goodwill impairment test and determined that goodwill was not impaired as of ~~September 30, 2017.~~December 31, 2018.

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 income. 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 financial condition and results of operations and in notes 1, 2, 3, 4, 5 and 69 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. Deferred income ~~taxes,~~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 our operations and reported earnings. We believe that the deferred tax assets and liabilities are adequate and properly recorded in the accompanying consolidated financial statements. As of ~~June~~September 30, ~~2018,~~2019, management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary.

STATEMENT OF OPERATIONS ANALYSIS

The following table sets forth our results of operations and related summary information for the three and nine month periods ended September 30, 2019 and 2018, respectively:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income as reported	$	1,234		$	1,099		$	6,294		$	2,943
EPS - basic, as reported	$	0.11		$	0.37		$	0.57		$	0.49
EPS - diluted, as reported	$	0.11		$	0.37		$	0.57		$	0.38
Cash dividends paid	$	—		$	—		$	0.20		$	0.20
Return on average assets (annualized)	0.34		%	0.44		%	0.61		%	0.46		%
Return on average equity (annualized)	3.35		%	3.21		%	5.94		%	4.00		%

The Company had earnings of $1.2 million, or $0.11 per diluted share, for the quarter ended September 30, 2019, compared to $4.1 million, or $0.37 per diluted share, for the previous quarter ended June 30, 2019. Both the current quarter and previous quarter, had large notable items which impacted the quarter and are discussed below. In the September 2019 quarter, the Company benefited from (1) the full quarter impact of the F. & M. Bancorp. of Tomah, Inc. (“F&M”) acquisition, net of merger charge considerations, (2) strong loan fee income driven by commercial customer activity, (3) an annual incentive related to increased debit card activity and (4) reduced FDIC insurance assessments. These items were partially offset by (1) increased loan servicing amortization resulting from higher prepayments, primarily due to the low interest rate environment and (2) modestly higher than normal marketing expenses as CCFBank continues to execute on its plan of brand awareness with recent acquisitions.

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~~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 ~~June~~September 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

Net interest income was ~~$7,480 and $22,363~~$11.6 million for the three ~~and~~ ~~nine~~months ended ~~June~~September 30, ~~2018~~,2019, compared to ~~$5,315 and $16,096~~$7.9 million for the three ~~and nine~~ months ended ~~June~~September 30, ~~2017, respectively.~~2018. The net interest margin for the three-month period ended September 30, 2019 was 3.34%, compared to 3.45% for the three-month period ended September 30, 2018 .The net interest margin was 3.35% for the nine months ended September 30, 2019 and 3.42% for the nine months ended September 30, 2018 The net interest margin reduction for both the three and nine month periods ended ~~June~~September 30, 2019 from 2018 ~~was 3.40% and 3.41%, compared to 3.41% and 3.36% for the three and~~ ~~nine~~ ~~month periods ended~~ ~~June 30, 2017~~.

~~As shown in the rate/volume analysis in the following pages, volume changes resulted in an increase of $2,312 and $6,221 in net interest income for the three and~~ ~~nine~~ ~~month periods ended~~ ~~June 30, 2018, compared to the comparable prior year period primarily~~ is largely due to the ~~acquisition of WFC, which resulted in larger average balances of loans,~~competitive market for deposits and ~~borrowings. The changes in~~ the ~~composition of interest earning assets resulted in an increase of $2,775 and $7,384~~replacement funding for the ~~three and~~ Michigan branch sale being replaced with higher cost wholesale funding.

~~nine~~ ~~month periods~~For the quarter ended ~~June~~September 30, ~~2018~~,2019, the Company’s net interest margin benefited from $50 thousand of purchased loan accretion, or two basis points compared to ~~the same periods~~$54 thousand, or two basis points in the prior ~~year, primarily due to the acquisition of WFC. Rate changes on interest earning assets increased net interest income by $374~~quarter and ~~$1,042~~$15 thousand for the ~~three~~first quarter of 2019 or one basis point. There was no such income recognized in 2018. Scheduled accretion for acquired loans, was $234 thousand, $194 thousand and ~~nine~~ ~~month periods~~$194 thousand for the quarters ended September 30, 2019, June 30, 2019 and March 31, 2019, respectively. For 2018,~~, compared to~~ the ~~same periods in~~scheduled accretion was $142 thousand for the ~~prior year. Rate changes on interest-bearing liabilities increased interest expense by $521~~quarter ended September 30, 2018 and ~~$996 over~~$426 thousand for the same periods in the prior year, resulting in a net decrease of $147 and a net increase of $46 in net interest income as a result of changes in interest rates due to competitive pricing during the three and nine ~~month periods~~ months ended ~~June~~September 30, ~~2018. Rate changes on investment securities are reflective of growth of and changes in the composition of the investment portfolio.~~2018.

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

and nine month periods ended ~~June~~September 30, ~~2018~~,2019, and for the comparable prior year three and nine month periods. Non-accruing loans have been included in the table as loans carrying a zero yield.

~~Average interest earning assets were $889,884 and $883,379 for the three and~~ ~~nine~~ ~~month periods ended~~ ~~June 30, 2018, and $634,048 and $649,134 for the three and nine month periods ended June 30, 2017, respectively. Interest income on interest earning assets was $9,770 and $28,534 for the three and~~ ~~nine~~ ~~month periods ended~~ ~~June 30, 2018~~, compared to $6,621 and $20,108 for the three and nine month periods ended June 30, 2017, respectively. Interest income is comprised primarily of interest income on loans and interest income on investment securities adjusted for the tax benefit of tax-exempt securities. Interest income on loans was $8,865 and $26,125 for the three and ~~nine~~ ~~month periods ended~~ ~~June 30, 2018, compared to $6,030 and $18,632 for the nine month periods ended June 30, 2017, respectively.~~ The increase in loan interest income in the current year ~~three and nine month periods~~three-month period was primarily due to an increase in loans resulting from the United Bank and F&M acquisitions and to a lesser extent, strong organic growth and the positive impact of rising short-term interest rates. The increase in deposit interest expense was due to the ~~WFC acquisition. Interest income on investment securities was $701~~United Bank and ~~$1,834 for the three and~~ ~~nine~~ ~~month periods ended~~ ~~June 30, 2018~~ ~~compared to $512 and $1,249 for the three and nine month periods ended June 30, 2017, respectively.~~

~~Average interest-bearing liabilities were $779,731 and $781,104 for the three and~~ ~~nine~~ ~~month periods ended~~ ~~June 30, 2018, compared to $548,099 and $562,958 for the three and nine month periods ended June 30, 2017, respectively. Interest expense on interest-bearing liabilities was $2,290 and $6,171 for the three and~~ ~~nine~~ ~~month periods ended~~ ~~June 30, 2018, compared to $1,306 and $4,012 for the three and nine month periods ended June 30, 2017, respectively. Interest expense increased during the current three and~~ ~~nine~~ ~~month periods compared to the comparable prior year periods, primarily due to increases in rates on FHLB advances and other borrowings.~~

~~For the three and~~ ~~nine~~ ~~months ended~~ ~~June 30, 2018, interest expense on interest-bearing deposits increased $280 and $678, from volume and mix changes and increased $116 and $2 from~~F&M acquisition, the impact of ~~the~~a rising short-term interest rate environment ~~resulting in an aggregate increase of $396~~ and ~~$680 in interest expense~~impact on ~~interest-bearing deposits relative to June 30, 2017. Interest expense on FHLB advances~~deposit costs and ~~other borrowings increased $183 and $485 from volume and mix changes and increased $405 and $994 from the impact of the rate environment during the three and~~ ~~nine~~ ~~month periods ended June 30, 2018 for an aggregate increase of $588 and $1,479 relative to the three and~~ ~~nine~~ ~~month periods ended June 30, 2017.~~

organic deposit growth.

NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS

(Dollar amounts in thousands)

Three months ended ~~June~~September 30, ~~2018~~2019 compared to the three months ended ~~June~~September 30, ~~2017:~~2018:


	Three months ended June 30, 2018						Three months ended June 30, 2017						Three months ended September 30, 2019						Three months ended September 30, 2018
	Average Balance		Interest Income/ Expense		Average Yield/ Rate (1)		Average Balance		Interest Income/ Expense		Average Yield/ Rate (1)		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	$	19,203	$	61	1.27	%	$	17,246	$	27	0.66	%	$	32,376	$	203	2.49	%	$	24,468	$	117	1.90	%
Loans	729,390		8,865		4.87	%	526,661		6,030		4.57	%	1,143,252		14,646		5.08	%	754,442		9,414		4.95	%
Interest-bearing deposits	8,418		44		2.10	%	808		4		2.18	%	5,577		34		2.42	%	7,971		42		2.09	%
Investment securities (1)	124,715		701		2.44	%	84,845		512		2.11	%	185,921		1,174		2.56	%	124,991		674		2.30	%
Non-marketable equity securities, at cost	8,158		99		4.87	%	4,488		48		4.58	%
Other investments													13,072		166		5.04	%	7,581		115		6.02	%
Total interest earning assets (1)	$	889,884	$	9,770	4.43	%	$	634,048	$	6,621	4.13	%	$	1,380,198	$	16,223	4.67	%	$	919,453	$	10,362	4.49	%
Average interest-bearing liabilities:
Savings accounts	$	94,741	$	53	0.22	%	$	47,184	$	13	0.14	%	$	158,967	$	155	0.39	%	$	93,551	$	59	0.25	%
Demand deposits	150,666		129		0.34	%	50,617		59		0.47	%	219,955		550		0.99	%	146,372		142		0.38	%
Money market	115,625		196		0.68	%	122,709		126		0.41	%	200,647		593		1.17	%	116,597		213		0.72	%
CD’s	271,311		959		1.42	%	226,189		767		1.33	%	381,331		1,870		1.95	%	277,125		1,145		1.64	%
IRA’s	32,890		94		1.15	%	26,852		70		1.10	%	44,184		203		1.82	%	33,029		100		1.20	%
Total deposits	665,233		1,431		0.86	%	473,551		1,035		0.88	%	1,005,084		3,371		1.33	%	666,674		1,659		0.99	%
FHLB Advances and other borrowings	114,498		859		3.01	%	74,548		271		1.34	%	169,908		1,259		2.94	%	96,448		763		3.14	%
Total interest-bearing liabilities	$	779,731	$	2,290	1.18	%	$	548,099	$	1,306	0.94	%	$	1,174,992	$	4,630	1.56	%	$	763,122	$	2,422	1.26	%
Net interest income			$	7,480					$	5,315					$	11,593					$	7,940
Interest rate spread					3.25	%					3.27	%					3.11	%					3.23	%
Net interest margin (1)					3.40	%					3.41	%					3.34	%					3.45	%
Average interest earning assets to average interest-bearing liabilities					1.14						1.16						1.17						1.20

(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 quarter ended September 30, 2019 and 24.5% for the quarter ended ~~June~~September 30, ~~2018 and 34% for the quarter ended June 30, 2017.~~2018. The FTE adjustment to net interest income included in the rate calculations totaled ~~$55~~$27 thousand and ~~$70~~$51 thousand for the three months ended ~~June~~September 30, ~~2018~~2019 and ~~June~~September 30, ~~2017,~~2018, respectively.

4954

NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS

(Dollar amounts in thousands)

Nine months ended ~~June~~September 30, ~~2018~~2019 compared to the nine months ended ~~June~~September 30, ~~2017:~~2018:


	Nine months ended June 30, 2018						Nine months ended June 30, 2017						Nine months ended September 30, 2019						Nine months ended September 30, 2018
	Average Balance		Interest Income/ Expense		Average Yield/ Rate (1)		Average Balance		Interest Income/ Expense		Average Yield/ Rate (1)		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	$	24,840	$	191	1.03	%	$	15,007	$	68	0.61	%	$	29,489	$	542	2.46	%	$	23,814	$	240	1.35	%
Loans	729,253		26,125		4.79	%	542,600		18,632		4.59	%	1,054,492		40,036		5.08	%	736,478		26,818		4.87	%
Interest-bearing deposits	7,837		107		1.83	%	770		11		1.91	%	6,153		107		2.33	%	7,890		117		1.98	%
Investment securities (1)	113,662		1,834		2.34	%	85,910		1,249		2.28	%	167,023		3,119		2.58	%	121,216		1,996		2.38	%
Non-marketable equity securities, at cost	7,787		277		4.76	%	4,847		148		4.08	%
Other investments													11,853		473		5.34	%	7,915		313		5.29	%
Total interest earning assets (1)	$	883,379	$	28,534	4.34	%	$	649,134	$	20,108	4.19	%	$	1,269,010	$	44,277	4.68	%	$	897,313	$	29,484	4.42	%
Average interest-bearing liabilities:
Savings accounts	$	95,293	$	103	0.14	%	$	45,342	$	46	0.14	%	$	156,851	$	479	0.41	%	$	94,263	$	140	0.20	%
Demand deposits	150,262		333		0.30	%	50,439		194		0.51	%	200,387		1,288		0.86	%	150,023		385		0.34	%
Money market	118,779		524		0.59	%	126,061		387		0.41	%	172,671		1,423		1.10	%	116,948		570		0.65	%
CD’s	267,264		2,662		1.33	%	235,341		2,352		1.34	%	348,139		5,163		1.98	%	271,352		2,968		1.46	%
IRA’s	33,883		262		1.03	%	27,861		225		1.08	%	41,576		537		1.73	%	33,202		278		1.12	%
Total deposits	665,481		3,884		0.78	%	485,044		3,204		0.88	%	919,624		8,890		1.29	%	665,788		4,341		0.87	%
FHLB Advances and other borrowings	115,623		2,287		2.64	%	77,914		808		1.39	%	153,960		3,649		3.17	%	109,628		2,367		2.89	%
Total interest-bearing liabilities	$	781,104	$	6,171	1.06	%	$	562,958	$	4,012	0.95	%	$	1,073,584	$	12,539	1.56	%	$	775,416	$	6,708	1.16	%
Net interest income			$	22,363					$	16,096					$	31,738					$	22,776
Interest rate spread					3.29	%					3.24	%					3.12	%					3.26	%
Net interest margin (1)					3.41	%					3.36	%					3.35	%					3.42	%
Average interest earning assets to average interest-bearing liabilities					1.13						1.15						1.18						1.16

(1) Fully taxable equivalent (FTE). The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of ~~24.5% and 34%~~21.0% for the nine months ended ~~June~~September 30, ~~2018~~2019 and ~~June~~24.5% for the nine months ended September 30, ~~2017.~~2018. The FTE adjustment to net interest income included in the rate calculations totaled ~~$159~~$103 thousand and ~~$214~~$158 thousand for the nine months ended ~~June~~September 30, ~~2018~~2019 and ~~June~~September 30, ~~2017,~~2018, respectively.

Rate/Volume Analysis. The following table presents 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). ~~Changes~~Volume changes are largely due to ~~both rate~~the United Bank acquisition for the three and ~~volume which cannot be segregated have been allocated in proportion~~nine months of 2019 compared to 2018 and to a lesser extent, the F&M acquisition for the three months ended September 30, 2019 compared to the ~~relationship of the dollar amounts of the change~~same period in ~~each category.~~2018.

5055

RATE / VOLUME ANALYSIS

(Dollar amounts in thousands)

Three months ended ~~June~~September 30, ~~2018~~2019 compared to the three months ended ~~June~~September 30, ~~2017.~~2018.


	Increase (decrease) due to								Increase (decrease) due to
	Volume			Rate			Net		Volume			Rate			Net
Interest income:
Cash and cash equivalents	$	3		$	31		$	34	$	43		$	43		$	86
Loans	2,438			397			2,835		4,972			260			5,232
Interest-bearing deposits	40			—			40		(14		)	6			(8		)
Investment securities	251			(62		)	189		383			117			500
Non-marketable equity securities, at cost	43			8			51
Other investments									74			(23		)	51
Total interest earning assets	2,775			374			3,149		5,458			403			5,861
Interest expense:
Savings accounts	18			22			40		51			45			96
Demand deposits	95			(25		)	70		91			317			408
Money market accounts	(8		)	78			70		192			188			380
CD’s	158			34			192		478			247			725
IRA’s	17			7			24		40			63			103
Total deposits	280			116			396		852			860			1,712
FHLB Advances and other borrowings	183			405			588		549			(54		)	495
Total interest bearing liabilities	463			521			984		1,401			806			2,207
Net interest income	$	2,312		$	(147	)	$	2,165	$	4,057		$	(403	)	$	3,654

Nine months ended ~~June~~September 30, ~~2018~~2019 compared to the nine months ended ~~June~~September 30, ~~2017.~~2018.


	Increase (decrease) due to								Increase (decrease) due to
	Volume			Rate			Net		Volume			Rate			Net
Interest income:
Cash and cash equivalents	$	56		$	67		$	123	$	66		$	236		$	302
Loans	6,646			847			7,493		12,013			1,205			13,218
Interest-bearing deposits	97			(1		)	96		(29		)	19			(10		)
Investment securities	485			100			585		867			256			1,123
Non-marketable equity securities, at cost	100			29			129
Other investments									157			3			160
Total interest earning assets	7,384			1,042			$	8,426	13,074			1,719			$	14,793
Interest expense:
Savings accounts	54			3			57		120			219			339
Demand deposits	283			(144		)	139		157			746			903
Money market accounts	(24		)	161			137		331			522			853
CD’s	318			(8		)	310		954			1,241			2,195
IRA’s	47			(10		)	37		80			179			259
Total deposits	678			2			680		1,642			2,907			4,549
FHLB Advances and other borrowings	485			994			1,479		1,027			255			1,282
Total interest bearing liabilities	1,163			996			2,159		2,669			3,162			5,831
Net interest income	$	6,221		$	46		$	6,267	$	10,405		$	(1,443	)	$	8,962

Provision for Loan Losses. We determine our provision for loan losses (“provision”) based on our desire to provide an adequate allowance for loan losses (“ALL”) to reflect probable and inherent credit losses in our loan portfolio. ~~Within the last year, net charge-offs as a percent of loans, have decreased. However, we~~We continue to monitor adverse general economic conditions that could affect our commercial and agricultural portfolios in the future.

~~Net loan charge-offs for the~~ ~~nine~~ ~~month period ended~~ ~~June 30, 2018~~ ~~were~~ ~~$334, compared to $312, for the comparable prior year period. Annualized net charge-offs to average loans were~~ ~~0.06%~~ ~~for the~~ ~~nine~~ ~~month ended~~ ~~June 30, 2018, compared~~

5156

~~to 0.08%~~Provision expense for the ~~comparable period~~quarter ended September 30, 2019 of $575 thousand was due to newly originated loan growth, net legacy charge-offs and increases in specific reserves of approximately $150 thousand, primarily on certain specific residential loans.

Provision expense for the nine months ended September 30, 2019, was $2.1 million, resulting from (1) provision expense for newly originated organic loan growth of approximately $1.15 million, (2) approximately $300 thousand related to current year net charge offs on credits with no previous specific reserves and (3) $650 thousand attributed to increases in specific reserves on certain specific impaired credits. The largest specific reserve was established on a single agricultural credit for dairy farming operations of approximately $350 thousand, which was downgraded to nonaccrual status during the quarter ended March 31, 2019. $225 thousand of this credit was subsequently charged-off in the ~~prior year. Non-accrual loans were $6,627 at June 30, 2018, compared to $7,452 at September 30, 2017. Refer to~~second quarter of 2019. While this sector is generally experiencing difficult operating conditions, the ~~“Allowance for Loan Losses” and “Nonperforming Loans, Potential Problem Loans and Foreclosed Properties” sections below for more information~~issues related to ~~non-performing loans.~~this specific credit relationship were isolated. Management believes its agricultural lending processes remain prudent and there is no evidence to suggest systemic problems. The Bank has initiated foreclosure and has also filed a civil complaint in Eau Claire County Circuit Court regarding borrower representations in the loan application and approval process. The remaining $300 thousand increase in specific reserves relates to various, relatively smaller credits, approximately half of which relate to certain residential loans discussed above.

WeThe Bank recorded a ~~loan loss~~ provision of ~~$850~~$450 thousand and ~~$0 for the~~ ~~nine~~ ~~month periods ended~~ ~~June 30, 2018~~ ~~and June 30, 2017, respectively. Loan loss provision was $650~~$1.2 million for the three and nine months ended ~~June~~September 30, 2018, ~~due to strong~~respectively, reflecting primarily organic loan growth ~~in the Community Banking loan portfolio consisting of commercial banking business~~ and ~~consumer lending.~~ to a lesser extent, net charge-offs.

Management believes that the provision taken for the current year ~~nine~~ ~~month~~nine-month period 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 ~~make adjustments to~~adjust our provision, as necessary, if changing facts and circumstances require a change in the ALL. 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 ALL. If there are significant charge-offs against the ALL, or we otherwise determine that the ALL is inadequate, we will need to record an additional provision in the future. See the section below captioned “Allowance for Loan Losses” in this discussion for further analysis of our provision for loan losses.

Non-interest Income (Loss). The following table reflects the various components of non-interest income for the three and nine month periods ended ~~June~~September 30, ~~2018~~2019 and ~~2017,~~2018, respectively.


	Three months ended June 30,						Nine months ended June 30,							Three months ended September 30,						Nine months ended September 30,
	2018		2017		% Change		2018			2017		% Change		2019		2018		% Change		2019		2018			% Change
Non-interest Income:
Service charges on deposit accounts	$	413	$	325	27.08	%	$	1,303		$	1,065	22.35	%	$	625	$	489	27.81	%	$	1,756	$	1,332		31.83	%
Interchange income	338		203		66.50	%	946			575		64.52	%	476		338		40.83	%	1,267		978			29.55	%
Loan servicing income	337		62		443.55	%	1,011			205		393.17	%	714		368		94.02	%	1,902		1,051			80.97	%
Gain on sale of mortgage loans	226		206		9.71	%	709			490		44.69	%
Gain on sale of loans														679		234		190.17	%	1,560		649			140.37	%
Loan fees and service charges	116		96		20.83	%	357			418		(14.59	)%	471		164		187.20	%	860		367			134.33	%
Insurance commission income	187		—		N/M		540			—		N/M		197		180		9.44	%	573		554			3.43	%
Settlement proceeds	—		—		N/M		—			283		(100.00	)%
Gains (losses) on available for sale securities	4		—		N/M		(17		)	29		(158.62	)%
Gains (losses) on investment securities														96		—		N/M		151		(17		)	988.24	%
Gain on sale of branch														—		—		N/M		2,295		—			N/M
Other	146		99		47.47	%	532			295		80.34	%	363		216		68.06	%	827		517			59.96	%
Total non-interest income	$	1,767	$	991	78.30	%	$	5,381		$	3,360	60.15	%	$	3,621	$	1,989	82.05	%	$	11,191	$	5,431		106.06	%

N/M means not meaningful

The growth in most line items, year over year, includes the impact of the United Bank acquisition in October of 2018 and in the third quarter of 2019, the F&M acquisition.

The increase in gains on the sale of ~~$88 and $238 in service charges on deposit accounts~~loans for the three and nine ~~month periods~~moths ended ~~June~~September 30, ~~2018~~2019 reflects increased mortgage activity from the lower interest rate environment.

The increase in loan fees for the quarter ended September 30, 2019 compared to the same ~~periods~~three month period in the previous year, was primarily due to an increase in checking account related service charges associated with the addition of accounts acquired in the WFC acquisition. Interchange income increased $135 and $371 during the three and nine month periods ended June 30, 2018 ~~compared to the three and nine month periods ended June 30, 2017,~~is largely due to higher ~~volume and activity, also related to~~commercial loan customer activity.

The company sold the ~~addition of accounts acquired~~Rochester Hills, MI branch in the ~~WFC acquisition. Loan servicing income and~~second quarter of 2019 for a $2.3 million gain, recorded in gain on sale of ~~mortgage loans increased during~~branch for the ~~three and~~ nine ~~month periods~~months ended ~~June~~September 30, ~~2018 , mainly due to an increase~~2019.

Included in secondary market fee income generated from customer mortgage activity and servicing income related to the WFC acquisition. Total non-interest income increased $776 and $2,021 during the current three and nine month periods ended June 30, 2018 over the comparable prior year periods. Growth inother non-interest income, is ~~being driven by~~an annual debit card volume incentive totaling $94 thousand and $89 thousand for the ~~impact of the WFC acquisition which has resulted in higher deposit charges~~quarters ended September 30, 2019 and ~~increased loan fees and service charges, as well as insurance commission income generated through Wells Insurance Agency.~~2018, respectively.

Non-interest Expense. The following table reflects the various components of non-interest expense for the three and nine month periods ended ~~June~~September 30, ~~2018~~2019 and ~~2017,~~2018, respectively.



	Three months ended September 30,								Nine months ended September 30,
	2019			2018			% Change		2019			2018			% Change
Non-interest Expense:
Compensation and benefits	$	5,295		$	3,778		40.15	%	$	14,605		$	11,424		27.84	%
Occupancy - net	905			776			16.62	%	2,725			2,270			20.04	%
Office	599			468			27.99	%	1,649			1,311			25.78	%
Data processing	1,092			771			41.63	%	2,953			2,224			32.78	%
Amortization of intangible assets	412			161			155.90	%	1,085			483			124.64	%
Amortization of mortgage servicing rights	325			85			282.35	%	822			245			235.51	%
Advertising, marketing and public relations	315			265			18.87	%	974			596			63.42	%
FDIC premium assessment	78			121			(35.54	)%	318			330			(3.64	)%
Professional services	561			577			(2.77	)%	1,961			1,635			19.94	%
Gains (losses) on repossessed assets, net	(16		)	71			(122.54	)%	(143		)	521			(127.45	)%
Other	3,409			571			497.02	%	5,309			1,582			235.59	%
Total non-interest expense	$	12,975		$	7,644		69.74	%	$	32,258		$	22,621		42.60	%

Non-interest expense (annualized) / Average assets	3.54		%	3.09		%	14.51	%	3.15		%	3.21		%	(10.12	)%

N/M means not meaningful

The growth in most line items, year over year, includes the impact of the United Bank acquisition in October of 2018 and the F&M acquisition July1, 2019. The F&M acquisition added approximately $0.9 million in ongoing operational expenses and $2.6 million in one-time merger charges for the quarter ending September 30, 2019.

Amortization of mortgage servicing rights increased during the quarter ended September 30, 2019 to $325 thousand compared to $85 thousand during the quarter ended September 30, 2018, due to (1) a larger servicing portfolio primarily from the United Bank acquisition during the quarter ended December 31, 2018 and (2) increased prepayments in the Company’s servicing portfolio resulting from the current lower interest rate rate environment, which led to impairment of $100 thousand.

Advertising, marketing and public relations expenses increased $50 thousand in the quarter ended September 30, 2019 compared to the same period in 2018 to $315 thousand. For the nine months ending September 30, 2019, advertising, marketing and public relations expenses increased $378 thousand to $974 thousand. The Company incurred increased costs associated with Company branding of merged banking operations. With two bank conversions in less than six months, we anticipate approximately the same level of costs in the fourth quarter and then a decrease to approximately $250 thousand on a quarterly basis in 2020.

The third quarter ended September 30, 2019 was favorably impacted by the FDIC application of the Small

Bank Assessment Credits to our current quarter deposit insurance invoice totaling $150 thousand.

5258

Professional fees for the quarter ended September 30, 2019 was approximately equal to the quarter ended September 30, 2018. Professional fees for the nine months ended September 30, 2019 were $326 thousand higher than the same period in 2018 largely due to the costs related to changing the Companies fiscal year-end in 2019.

Three months ended June 30, Nine months ended June 30,
2018 2017 % Change 2018 2017 % Change
Non-interest Expense:
Compensation and benefits $ 3,840
$ 2,395
60.33 % $ 11,201
$ 7,629
46.82 %
Occupancy - net 733
565
29.73 % 2,199
2,196
0.14 %
Office 417
304
37.17 % 1,281
897
42.81 %
Data processing 720
476
51.26 % 2,157
1,402
53.85 %
Amortization of intangible assets 161
38
323.68 % 484
119
306.72 %
Amortization of mortgage servicing rights 84
—
N/M
250
—
N/M
Advertising, marketing and public relations 185
75
146.67 % 480
243
97.53 %
FDIC premium assessment 94
79
18.99 % 351
231
51.95 %
Professional services 735
382
92.41 % 1,746
1,218
43.35 %
Loss (gain) on repossessed assets, net 450
(11 ) 41.91 % 464
(16 ) 30.00 %
Other 455
316
43.99 % 1,507
1,050
43.52 %
Total non-interest expense $ 7,874
$ 4,619
70.47 % $ 22,120
$ 14,969
47.77 %

Non-interest expense (annualized) / Average assets 3.34 % 2.84 % 17.61 % 3.15 % 2.99 % 5.35 %

~~N/M means not meaningful~~

~~During~~Merger related expenses included in the consolidated statement of operations totaled $2.91 million and $3.78 million for the three and nine months ended ~~June~~September 30, ~~2018, most expense categories increased due to additional costs associated with~~2019. For the ~~prior acquisition~~three months ended September 30, 2019, merger expenses consisted of ~~WFC completed on August 18, 2017~~the following: (1) $200 thousand recorded in professional services and ~~higher staffing levels to support growth, along with~~(2) $2.71 million recorded in other non-interest expense. Merger related expenses incurred in the ~~third quarter items noted below. Compensation~~nine months ended September 30, 2019, consisted of the following: (1) $530 thousand recorded in professional services, (2) $70 thousand recorded in compensation and benefits ~~costs increased $1,445~~ and ~~$3,572 relative to~~(3) $3.2 million recorded in other non-interest expense. Merger related expenses incurred in the ~~comparable prior year period, largely due to~~consolidated statement of operation totaled $131 thousand and $369 thousand during the expanded workforce, with average full time equivalent employees increasing from 167 to 216, year over year. The current quarter operations reflect higher professional fees largely associated with the proposed United Bank acquisition totaling $228 and resolved litigation costs totaling $198, as well as OREO branch office write-downs totaling $449, included in loss on repossessed assets. Data processing costs, which are primarily volume based, rose $755 between the nine month periods predominantly attributable to the WFC acquisition and higher debit card processing costs and transaction volume. Advertising expense increased $110 and $237 over the comparable prior year period largely due to expanded branding efforts influencing additional marketing, promotions and media. Amortization of intangible assets expense increased for the current three and nine ~~month periods~~months ended ~~June~~September 30, 2018 compared to the same periods in the prior year due to higher amortization resulting from premiums paid to acquire WFC's core deposits and Wells Insurance Agency customer relationships. Professional fees increased duringrespectively. For the nine ~~month period~~months ended ~~June~~September 30, 2018, ~~due to one time special project costs~~merger expenses consisted of the following: (1) $356 thousand recorded in ~~fiscal 2018, partially offset by lower audit costs. Total~~professional services and (2) $13 thousand recorded in other non-interest ~~expense increased $3,255 for the nine month period ended June 30, 2018, compared to the same period in the prior year.~~expense.

Income Taxes. Income tax expense was ~~$220~~$430 thousand and ~~$1,590~~$2.3 million for the three and nine months ended ~~June~~September 30, ~~2018,~~2019, compared to ~~$604~~$736 thousand and ~~$1,530~~$1.4 million for the three and nine months ended ~~June~~September 30, ~~2017,~~2018, respectively. The effective tax rate ~~decreased from 34.1% to 33.3%~~decrease in 2019 for both the three and nine month periods ~~ended June 30, 2017 and June 30, 2018, respectively.~~

The Tax Cuts and Jobs Act of 2017 ("the Tax Act"), enacted on December 22, 2017, reduces corporate Federal income tax rates for the Company from 34% to 24.5% for 2018, and 21% for 2019. GAAP requires the impact of the provisions of the Tax Act be accounted for in the period of enactment. At June 30, 2018, we have not completed our accounting for the tax effects of enactment of the Tax Act; however, in certain cases, as described below, we have made a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. The Company revalued its net deferred tax assets to account for the future impact of lower corporate taxes. For the items for which we were able to determine a reasonable estimate, we recorded an increased provisional amount of income tax expense of $275 in December 2017, related to the revaluation of the deferred tax assets to both the revaluation of timing differences and the unrealized loss on securities. The increase was partially offset by an approximately $135 reduction in income tax expenseyear over year, due to a lower ~~corporate~~federal income tax ~~rate.~~rate, partially offset by higher non-deductible merger costs and an overall smaller tax-exempt investment security and loan portfolio as a percent of total interest earning assets.

5359

BALANCE SHEET ANALYSIS

Loans. Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, increased by ~~$28,092,~~$131.8 million, or ~~3.83%~~13.28%, to ~~$761,087~~$1.124 billion as of ~~June 30, 2018 from $732,995 at~~ September 30, ~~2017.~~2019 from $992.6 million at December 31, 2018. This increase was largely due to the F&M acquisition, which added approximately $126 million in net loans. Additionally, in the quarter ended September 30, 2019, the Bank sold the remaining unsecured purchased indirect portfolio with an approximate yield to the Bank of 4.25% at par. Due to the contractual repurchase arrangement with the servicer, who originated the loans, the Bank has no associated allowance for loan losses on this portfolio. The following table reflects the composition, or mix of our loan portfolio at ~~June 30, 2018 and~~ September 30, ~~2017:~~2019 and December 31, 2018:


	June 30, 2018			September 30, 2017			September 30, 2019			December 31, 2018
	Amount			Amount			Amount			Amount
Real estate loans:
Residential real estate
One to four family	$	202,356		229,563			$	188,070		209,926
Purchased HELOC loans	15,237			18,071			10,120			12,883
Commercial/agricultural real estate
Commercial real estate	208,526			159,962			465,046			357,959
Agricultural real estate	70,881			68,002			89,441			86,015
Multi-family real estate	45,707			26,228			87,758			69,400
Construction and land development	15,258			19,708			65,550			22,691
Total real estate loans	557,965			521,534			905,985			758,874
Non-real estate loans:
Consumer non-real estate
Originated indirect paper	66,791			85,732			42,894			56,585
Purchased indirect paper	19,801			29,555			—			15,006
Other Consumer	19,063			20,668			18,770			20,214
Commercial/agricultural loans
Commercial non-real estate	74,763			55,251			127,232			112,427
Agricultural non-real estate	26,366			23,873			39,827			36,327
Total non-real estate loans	206,784			215,079			228,723			240,559
Gross loans	764,749			736,613			1,134,708			999,433
Unearned net deferred fees and costs and loans in process	693			1,471			(158		)	409
Unamortized discount on acquired loans	(4,355		)	(5,089		)	(10,172		)	(7,286		)
Total loans (net of unearned income and deferred expense)	761,087			732,995			1,124,378			992,556
Allowance for loan losses	(6,458		)	(5,942		)	(9,177		)	(7,604		)
Total loans receivable, net	$	754,629		$	727,053		$	1,115,201		$	984,952

The following table shows the ~~Bank's~~Bank’s Community Banking loan portfolio, consisting of commercial banking business and consumer lending, and the Legacy loan portfolio, consisting of one to four family loans and indirect paper loans. The loan categories and amounts shown are the same as on the preceding page and are presented in a different format. We have added this table in this report to better help understand the ~~Bank's~~Bank’s loan trends.

5460

June 30, 2018 September 30, 2017 Change FTD
Community Banking Loan Portfolios:
Commercial/Agricultural real estate:
Commercial real estate $ 208,526
$ 159,962
$ 48,564
Agricultural real estate 70,881
68,002
2,879
Multi-family real estate 45,707
26,228
19,479
Construction and land development 15,258
19,708
(4,450 )
Commercial/Agricultural non-real estate:
Commercial non-real estate 74,763
55,251
19,512
Agricultural non-real estate 26,366
23,873
2,493
Residential real estate:
Purchased HELOC loans 15,237
18,071
(2,834 )
Consumer non-real estate:
Other consumer 19,063
20,668
(1,605 )
Total Community Banking Loan Portfolios 475,801
391,763
84,038

Legacy Loan Portfolios:
Residential real estate:
One to four family 202,356
229,563
(27,207 )
Consumer non-real estate:
Originated indirect paper 66,791
85,732
(18,941 )
Purchased indirect paper 19,801
29,555
(9,754 )
Total Legacy Loan Portfolios 288,948
344,850
(55,902 )
Gross loans $ 764,749
$ 736,613
$ 28,136

At June 30, 2018, commercial/agricultural real estate loans increased $66,472 or 24.27% from their September 30, 2017 balance. Commercial/agricultural non-real estate loans increased $22,005 or 27.81% from their September 30, 2017 balance. These increases are a result of commercial loan origination growth. One to four family residential real estate loans, decreased $27,207 or 11.85% from their September 30, 2017 balances, as paydowns outpaced one to four family originations. Based on current amortization, payoffs and planned origination sales, we expect this balance to continue to decrease. Consumer indirect paper loans decreased $28,695 or 24.89% from their September 30, 2017 balances. The decrease in this portion of consumer non-real estate loans relates to the Company's decision to cease originating loan volume through its indirect dealer network in fiscal 2017 and the elimination of purchased indirect loan originations.



	September 30, 2019		December 31, 2018		Change
Community Banking Loan Portfolios:
Commercial/Agricultural real estate:
Commercial real estate	465,046		$	357,959	$	107,087
Agricultural real estate	89,441		86,015		3,426
Multi-family real estate	87,758		69,400		18,358
Construction and land development	65,550		22,691		42,859
Commercial/Agricultural non-real estate:
Commercial non-real estate	127,232		112,427		14,805
Agricultural non-real estate	39,827		36,327		3,500
Residential real estate:
Purchased HELOC loans	10,120		12,883		(2,763		)
Consumer non-real estate:
Other consumer	18,770		20,214		(1,444		)
Total Community Banking Loan Portfolios	903,744		717,916		185,828

Legacy Loan Portfolios:
Residential real estate:
One to four family	188,070		209,926		(21,856		)
Consumer non-real estate:
Originated indirect paper	42,894		56,585		(13,691		)
Purchased indirect paper	—		15,006		(15,006		)
Total Legacy Loan Portfolios	230,964		281,517		(50,553		)
Gross loans	$	1,134,708	$	999,433	$	135,275

The Community Banking loan portfolios reflect the ~~Bank's~~Bank’s strategy to grow its commercial banking ~~business~~ and consumer ~~lending.~~lending portfolios. The Legacy loan portfolios reflect the ~~Bank's~~Bank’s strategy to sell substantially all newly originated one to four family loans in the secondary market and the discontinuation of originated and purchased indirect paper loans, effective in the first quarter of fiscal 2017.

At September 30, 2019, the community banking portfolio grew by $185.8 million compared to December 31, 2018, largely due to the acquisition of F&M which increased the portfolio $123.7 million at September 30, 2019. In addition, there was strong organic growth in all real estate categories. The growth in construction loans reflects the funding on projects that moved closer to completion.

As expected, the legacy portfolio continues to decrease. One to four family residential real estate loans, decreased $21.9 million, net of increases from F&M of $8.1 million, from the December 31, 2018 balances as repayments, including payoffs, outpaced one to four family portfolio originations. Consumer originated indirect paper loans decreased $13.7 million or 24.2% from the December 31, 2018 balances. As noted above, in September the Bank sold the remaining purchased indirect paper portfolio at par. While the portfolio decrease percentage this quarter remains in the historical range of shrinkage percentages, the absolute dollar shrinkage of the legacy portfolio is expected to slow over time as the portfolio decreases in size.

Allowance for Loan Losses. The loan portfolio is our primary asset subject to credit risk. To address this credit risk, we maintain an ALL for probable and inherent credit losses through periodic charges to our earnings. These charges are shown in our consolidated statements of operations as PLL. See “Provision for Loan Losses” earlier in this quarterly report. We attempt to control, monitor and minimize credit risk through the use of prudent lending standards, a thorough review of potential borrowers prior to lending and ongoing and timely review of payment performance. Asset quality administration, including early identification of loans performing in a substandard manner, as well as timely and active resolution of problems, further enhances management of credit risk and minimization of loan losses. Any losses that occur and that are charged off against the ALL are periodically reviewed with specific efforts focused on achieving maximum recovery of both principal and interest.

At least quarterly, we review the adequacy of the ALL. Based on an estimate computed pursuant to the requirements of ASC 450-10, “Accounting for Contingencies” and ASC 310-10, “Accounting by Creditors for Impairment of a Loan”, the analysis of the ALL consists of three components: (i) specific credit allocation established for expected losses relating to specific impaired loans for which the recorded investment in the loan exceeds its fair value; (ii) general portfolio allocation based on historical loan loss experience for significant loan categories; and (iii) general portfolio allocation based on qualitative factors such as economic conditions and other relevant factors specific to the markets in which we operate. We continue to

refine our ALL methodology by introducing a greater level of granularity to our loan portfolio. We currently segregate loans into pools based on common risk characteristics for purposes of determining the ALL. The additional segmentation of the

portfolio is intended to provide a more effective basis for the determination of qualitative factors affecting our ALL. In addition, management continually evaluates our ALL methodology to assess whether modifications in our methodology are appropriate in light of underwriting practices, market conditions, identifiable trends, regulatory pronouncements or other factors. We believe that any modifications or changes to the ALL methodology would be to enhance the ALL. However, any such modifications could result in materially different ALL levels in future periods.

The specific credit allocation for the ALL is based on a regular analysis of all loans that are considered impaired. In compliance with ASC 310-10, the fair value of the loan is determined based on either the present value of expected cash flows discounted at the loan’s effective interest rate, the market price of the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral less the expected cost of sale for such collateral. At September 30, 2019, June 30, ~~2018~~2019, March 31, 2019 and ~~September 30, 2017,~~December 31, 2018, we had ~~231~~416, 356, 315 and ~~134~~209 such impaired loans, all secured by real estate or personal property with an aggregate recorded investment of ~~$18,765~~$32.7 million, $28.0 million $27.3 million and ~~$7,510,~~$22.5 million respectively. Of the impaired loans, respectively, there were 1834 such individual loans where estimated fair value was less than their book value (i.e. we deemed impairment to exist) totaling ~~$1,865~~$3.8 million for which ~~$241~~$663 thousand in specific ALL was recorded as of ~~June~~September 30, ~~2018.~~2019.

At ~~June~~September 30, ~~2018,~~2019, the ALL was ~~$6,458,~~$9.2 million, or ~~0.85%~~0.82% of our total loan portfolio, compared to ALL of ~~$5,942~~,$7.6 million, or ~~0.81%~~0.77% of the total loan portfolio at ~~September 30, 2017~~.December 31, 2018. This level was based on our analysis of the loan portfolio risk at ~~June~~September 30, ~~2018, taking into account~~2019, considering the factors discussed above. At ~~June 30, 2018~~,Due to the ~~ALL was 0.87%~~sale of ~~our total loan portfolio, excluding~~the purchased indirect loans in the third ~~party purchased consumer loans referenced elsewhere herein, compared to 0.84% of~~quarter, the ~~total loan portfolio excluding these third party purchased consumer loans at~~ ~~September 30, 2017. We have established a separate~~previous restricted cash reserve account ~~for these~~established by the third party seller of the purchased indirect paper consumer ~~loans.~~loans, based on a percentage of the outstanding loan balances was eliminated. The funds in the reserve account are to be released to compensate the Bank for any nonperforming purchased consumer loans that are not purchased back by the seller or substituted with performing consumer loans and as a result, the Bank records a charged off loan. The Bank has not drawn on the restricted cash reserve account as the third party has repurchased all loans presented to them.

All of the nine factors identified in the ~~FFIEC's~~FFIEC’s Interagency Policy Statement on the Allowance for Loan and Lease Losses are taken into account in determining the ALL. The impact of the factors in general categories are subject to change; thus, the allocations are management’s estimate of the loan loss categories in which the probable and inherent loss has occurred as of the date of our assessment. Of the nine factors, we believe the following have the greatest impact on our customers’ ability to repay loans and our ability to recover potential losses through collateral sales: (1) lending policies and procedures; (2) economic and business conditions; and (3) the value of the underlying collateral. As loan balances and estimated losses in a particular loan type decrease or increase and as the factors and resulting allocations are monitored by management, changes in the risk profile of the various parts of the loan portfolio may be reflected in the allocated allowance. The general component covers non-impaired loans and is based on historical loss experience adjusted for these and other qualitative factors. In addition, management continues to refine the ALL estimation process as new information becomes available. These refinements could also cause increases or decreases in the ALL. The unallocated portion of the ALL is intended to account for imprecision in the estimation process or relevant current information that may not have been considered in the process.

Nonperforming Loans, Potential Problem Loans and Foreclosed Properties. We practice early identification of non-accrual and problem loans in order to minimize the ~~Bank's~~Bank’s risk of loss. Non-performing loans are defined as non-accrual 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;

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

•Closed ended consumer non-real estate loans past due 120 days or more; and

•Residential real estate loans and ~~open ended~~open-ended consumer non-real estate 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. A TDR typically involves the granting of some concession to the borrower involving a loan modification, such as modifying the payment schedule or making interest rate changes. TDR loans may involve loans that have 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 non-performing assets and other balance sheet information as of the dates indicated below and changes in the ALL for the periods then ended:

June 30, 2018 and Nine Months Then Ended September 30, 2017
and Twelve Months
Then Ended
Nonperforming assets:
Nonaccrual loans $ 6,627
$ 7,452
Accruing loans past due 90 days or more 710
589
Total nonperforming loans (“NPLs”) 7,337
8,041
Other real estate owned 5,328
5,962
Other collateral owned 64
55
Total nonperforming assets (“NPAs”) $ 12,729
$ 14,058
Troubled Debt Restructurings (“TDRs”) $ 8,210
$ 5,851
Accruing TDR's $ 5,860
$ 5,230
Nonaccrual TDRs $ 2,350
$ 621
Average outstanding loan balance $ 732,606
$ 653,717
Loans, end of period $ 761,087
$ 732,995
Total assets, end of period $ 975,070
$ 940,664
ALL, at beginning of period $ 5,942
$ 6,068
Loans charged off:
Residential real estate (120 ) (233 )
Commercial/Agricultural real estate (74 ) —
Consumer non-real estate (295 ) (389 )
Commercial/Agricultural non-real estate (5 ) (9 )
Total loans charged off (494 ) (631 )
Recoveries of loans previously charged off:
Residential real estate 51
14
Commercial/Agricultural real estate —
—
Consumer non-real estate 96
171
Commercial/Agricultural non-real estate 13
1
Total recoveries of loans previously charged off: 160
186
Net loans charged off (“NCOs”) (334 ) (445 )
Additions to ALL via provision for loan losses charged to operations 850
319
ALL, at end of period $ 6,458
$ 5,942
Ratios:
ALL to NCOs (annualized) 1,450.15 % 1,335.28 %
NCOs (annualized) to average loans 0.06 % 0.07 %
ALL to total loans 0.85 % 0.81 %
NPLs to total loans 0.96 % 1.10 %
NPAs to total assets 1.31 % 1.49 %



	September 30, 2019 and Nine Months Then Ended			December 31, 2018 and Three Months Then Ended
Nonperforming assets:
Nonaccrual loans
One to four family	$	2,255		$	2,331
Commercial real estate	6,324			808
Agricultural real estate	6,191			2,019
Consumer non-real estate	191			120
Commercial non-real estate	2,072			1,314
Agricultural non-real estate	1,989			762
Total nonaccrual loans	$	19,022		$	7,354
Accruing loans past due 90 days or more	1,099			736
Total nonperforming loans (“NPLs”)	20,121			8,090
Other real estate owned	1,348			2,522
Other collateral owned	25			48
Total nonperforming assets (“NPAs”)	$	21,494		$	10,660
Troubled Debt Restructurings (“TDRs”)	$	11,795		$	8,722
Accruing TDR's	$	7,194		$	6,055
Nonaccrual TDRs	$	4,601		$	2,667
Average outstanding loan balance	$	1,054,492		$	921,951
Loans, end of period	$	1,124,378		$	992,556
Total assets, end of period	$	1,475,364		$	1,287,924
ALL, at beginning of period	$	7,604		$	6,748
Loans charged off:
Residential real estate	(224		)	(43		)
Commercial/Agricultural real estate	(225		)	—
Consumer non-real estate	(171		)	(79		)
Commercial/Agricultural non-real estate	—			—
Total loans charged off	(620		)	(122		)
Recoveries of loans previously charged off:
Residential real estate	2			4
Commercial/Agricultural real estate	3			—
Consumer non-real estate	63			24
Commercial/Agricultural non-real estate	—			—
Total recoveries of loans previously charged off:	68			28
Net loans charged off (“NCOs”)	(552		)	(94		)
Additions to ALL via provision for loan losses charged to operations	2,125			950
ALL, at end of period	$	9,177		$	7,604
Ratios:
ALL to NCOs (annualized)	1,246.88		%	2,022.34		%
NCOs (annualized) to average loans	0.07		%	0.04		%
ALL to total loans	0.82		%	0.77		%
NPLs to total loans	1.79		%	0.82		%
NPAs to total assets	1.46		%	0.83		%

5763

An aging analysis of the Company’s originated and acquired loans as of ~~June 30, 2018 and~~ September 30, ~~2017,~~2019 and December 31, 2018, respectively, was as follows:


	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days		Total Past Due		Nonaccrual Loans		Recorded Investment > 89 Days and Accruing		30-59 Days Past Due and Accruing		60-89 Days Past Due and Accruing		Greater Than 89 Days and Accruing		Total Past Due and Accruing		Nonaccrual Loans		Total Past Due and Accruing and Nonaccrual Loans
June 30, 2018
September 30, 2019
Originated loans	$	3,533	$	1,108	$	1,646	$	6,287	$	1,697	$	395	$	5,576	$	1,082	$	842	$	7,500	$	4,816	$	12,316
Acquired loans	4,520		1,320		3,271		9,111		4,930		315		3,678		711		257		4,646		14,206		18,852
Total	$	8,053	$	2,428	$	4,917	$	15,398	$	6,627	$	710	$	9,254	$	1,793	$	1,099	$	12,146	$	19,022	$	31,168
September 30, 2017
December 31, 2018
Originated loans	$	3,376	$	725	$	1,744	$	5,845	$	1,785	$	458	$	4,829	$	2,137	$	279	$	7,245	$	1,770	$	9,015
Acquired loans	2,053		257		2,848		5,158		5,667		131		3,339		918		457		4,714		5,584		10,298
Total	$	5,429	$	982	$	4,592	$	11,003	$	7,452	$	589	$	8,168	$	3,055	$	736	$	11,959	$	7,354	$	19,313

~~Non-performing loans of $7,337 at June 30, 2018, which included $2,350 of non-accrual~~Nonperforming assets, delinquencies and troubled debt ~~restructured originated loans, reflected~~restructures typically increase in subsequent quarters following a ~~decrease~~merger, due to updated reporting and risk rating of ~~$704 from~~ the ~~non-performing loans balance~~loan portfolio to the Bank’s standards. We experienced this again as nonperforming assets increased to 1.46% of ~~$8,041~~total assets at September 30, ~~2017. This decrease~~2019, from 0.83% of total assets at December 31, 2018. Total impaired loans, which included trouble debt restructured loans, purchased credit impaired loans and substandard non-performing loans, was ~~largely~~$67.4 million at September 30, 2019, compared to $47.3 million at December 31, 2018. $17.7 million of this increase in impaired loans was due to the ~~resolution or repayment~~F&M acquisition.

Non-performing assets included non-performing loans of ~~nonaccrual~~$20.1 million at September 30, 2019, compared to $8.1 million at December 31, 2018. Of this increase in non-performing assets, $5.9 million was due to the F&M acquisition and $4.3 million were acquired ~~loans. Most of these non-performing loan relationships are secured primarily by collateral including residential real estate and commercial or agricultural assets.~~in the United acquisition. Classified assets increased to $39.9 million at September 30, 2019. Classified assets increased $7.5 million due to the F&M acquisition in the third quarter. Classified assets at December 31, 2018 totaled $22.7 million.

Nonaccrual Loans Rollforward:



	Quarter Ended
	September 30, 2019			June 30, 2019			December 31, 2018			September 30, 2018
Balance, beginning of period	$	13,612		$	9,871		$	7,210		$	6,627
Additions	1,493			7,405			906			2,030
Acquired nonaccrual loans	5,898			—			941			—
Charge offs	(134		)	(262		)	(40		)	(68		)
Transfers to OREO	(209		)	(236		)	(201		)	(400		)
Return to accrual status	(53		)	(149		)	—			(93		)
Payments received	(1,539		)	(2,612		)	(1,429		)	(676		)
Other, net	(46		)	(405		)	(33		)	(210		)
Balance, end of period	$	19,022		$	13,612		$	7,354		$	7,210

Other real estate owned ~~("OREO"~~(“OREO”) decreased ~~by $634, from $5,962~~to $1.3 million at September 30, ~~2017~~2019 from $2.5 million at December 31, 2018 as sales exceeded properties transferred from loans.

Other Real Estate Owned Rollforward:



	Quarter Ended
	September 30, 2019			June 30, 2019			December 31, 2018			September 30, 2018
Balance, beginning of period	$	1,354		$	2,071		$	2,749		$	5,328
Loans transferred in	209			236			201			400
Branch properties sales	—			—			—			(1,245		)
Sales	(220		)	(958		)	(210		)	(1,762		)
Write-downs	—			(23		)	—			(127		)
Other, net	5			28			(218		)	155
Balance, end of period	$	1,348		$	1,354		$	2,522		$	2,749

Nonaccrual TDR loans increased $1.9 million to ~~$5,328~~$4.6 million at ~~June 30, 2018. Other collateral owned increased $9 during the nine months ended June 30, 2018 to $64 from the~~ September 30, ~~2017 balance of $55. The decrease in OREO was~~2019 from $2.7 million at December 31, 2018, primarily due to ~~sales and writedowns on OREO properties, including two OREO branch offices totaling $449.The Bank has accepted offers~~restructuring of nonaccrual loans.



	September 30, 2019			June 30, 2019			December 31, 2018			September 30, 2018
	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Troubled debt restructurings: Accrual Status
Residential real estate	39	$	3,094	39	$	3,137	34	$	3,319	34	$	3,495
Commercial/Agricultural real estate	18	3,574		14	2,202		15	2,209		14	1,646
Consumer non-real estate	8	74		11	82		13	99		14	109
Commercial/Agricultural non-real estate	4	452		4	478		2	428		3	481
Total loans	69	$	7,194	68	$	5,899	64	$	6,055	65	$	5,731

Nonperforming assets increased to ~~sell these two facilities.~~

~~Our non-performing assets were~~ ~~$12,729~~ at ~~June 30, 2018, or~~ ~~1.31%~~ ~~of total assets, compared to~~ ~~$14,058, or~~ ~~1.49%~~1.46% of total assets at September 30, ~~2017. The decrease~~2019, compared to 1.18% at June 30,2019, 1.03% at March 31, 2019 and 0.83% of total assets at December 31, 2018. Nonperforming assets, delinquencies and troubled debt restructures typically increase in ~~non-performing assets since~~ the quarters immediately following a merger due to updated reporting and risk rating of the loan portfolio to CCFBank standards and the Company experienced this increase in all three quarters of fiscal 2019.

Non-accrual loans were $19.0 million at September 30 ~~2017~~2019, compared to $7.4 million at December 31, 2018. The increase in non-accrual-loans was ~~primarily~~largely due to acquired loans from the ~~decrease~~F&M and United Bank acquisition. In the quarter ended September 30, 2019, the Bank added $5.9 million in ~~nonaccrual~~non-accrual loans ~~and reduction in OREO.~~

~~Net charge offs for the~~ ~~nine~~ ~~month period ended~~ ~~June 30, 2018~~ ~~were~~ ~~$334, compared to $445 for the same prior year period. The decrease in net charge offs is primarily due~~from F&M. Refer to the ~~planned reduction in indirect~~“Allowance for Loan Losses” and ~~purchased consumer non-real estate loan balances. The ratio of annualized net charge-offs~~“Nonperforming Loans, Potential Problem Loans and Foreclosed Properties” sections below for more information related to ~~average loans receivable was~~ ~~0.06%~~ ~~for the~~ ~~nine~~ ~~month period ended~~ ~~June 30, 2018, compared to~~ ~~0.07%~~ ~~for the twelve months ended~~ ~~September 30, 2017~~.non-performing loans.

Investment Securities. We manage our securities portfolio ~~in an effort~~ to provide liquidity and enhance ~~income and provide liquidity.~~income. Our investment portfolio is comprised of securities available for sale and securities held to maturity. The ~~2018~~2019 purchases ~~are~~were approximately ~~evenly split between fixed and~~56% variable rate securities. The effective duration of the investment portfolio at ~~June~~September 30, ~~2018~~2019 was ~~3.4~~2.0 years compared to ~~4.1~~2.6 years at ~~September 30, 2017.~~December 31, 2018.

Securities available for sale, which represent the majority of our investment portfolio, were ~~$119,702~~$183.0 million at ~~June~~September 30, ~~2018~~,2019, compared with ~~$95,883~~$146.7 million at ~~September 30, 2017. One agency security had an impairment charge of $21 recorded in the three and six months ended March~~December 31, 2018. There were no impairment charges recorded in the three ~~months ended June 30, 2018~~ and ~~the~~ nine months ended ~~June~~September 30, ~~2017.~~2019. One agency security had an impairment charge of $21 thousand recorded in the three months ended March 31, 2018. This security was sold in the ~~current third quarter~~quarter-ended June 30, 2018 and a $4 thousand gain was realized due to changes in market prices. Securities held to maturity were ~~$4,809 at June 30, 2018, compared with $5,453~~$3.7 million at September 30, ~~2017.~~2019, compared with $4.9 million at December 31, 2018.

5865

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


Securities available for sale	Amortized Cost		Fair Value		Amortized Cost		Fair Value
June 30, 2018
September 30, 2019
U.S. government agency obligations					$	53,405	$	53,378
Obligations of states and political subdivisions					27,648		27,937
Mortgage backed securities					54,979		55,658
Corporate debt securities					18,793		18,834
Corporate asset based securities					27,756		27,149
Totals					$	182,581	$	182,956
December 31, 2018
U.S. government agency obligations	$	37,067	$	35,986	$	46,215	$	45,298
Obligations of states and political subdivisions	35,518		34,978		35,162		34,728
Mortgage backed securities	44,653		43,463		42,279		41,350
Agency securities	104		223		104		148
Corporate debt securities	5,360		5,052		6,577		6,305
Corporate asset based securities					18,928		18,896
Totals	$	122,702	$	119,702	$	149,265	$	146,725
September 30, 2017
U.S. government agency obligations	$	18,454	$	18,041
Obligations of states and political subdivisions	35,656		35,795
Mortgage backed securities	36,661		36,474
Agency securities	147		230
Corporate debt securities	5,410		5,343
Totals	$	96,328	$	95,883

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


Securities held to maturity	Amortized Cost		Fair Value		Amortized Cost		Fair Value
June 30, 2018
September 30, 2019
Obligations of states and political subdivisions	$	1,308	$	1,307	$	980	$	982
Mortgage-backed securities	3,501		3,520		2,685		2,788
Totals	$	4,809	$	4,827	$	3,665	$	3,770
September 30, 2017
December 31, 2018
Obligations of states and political subdivisions	$	1,311	$	1,328	$	1,701	$	1,698
Mortgage-backed securities	4,142		4,277		3,149		3,174
Totals	$	5,453	$	5,605	$	4,850	$	4,872

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


	June 30, 2018				September 30, 2017				September 30, 2019				December 31, 2018
Available for sale securities	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Agency	$	81,720	$	79,449	$	55,115	$	54,515	$	108,384	$	109,036	$	88,494	$	86,648
AAA	1,302		1,291		725		730		6,196		6,144		3,566		3,535
AA	26,524		26,130		26,405		26,474		43,524		43,225		42,608		42,305
A	11,548		11,256		7,776		7,876		23,145		23,222		12,991		12,662
BBB	—		—		3,618		3,579
Non-rated	1,608		1,576		2,689		2,709		1,332		1,329		1,606		1,575
Total available for sale securities	$	122,702	$	119,702	$	96,328	$	95,883	$	182,581	$	182,956	$	149,265	$	146,725

5966

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


	June 30, 2018				September 30, 2017				September 30, 2019				December 31, 2018
Securities held to maturity	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. government agency	$	3,501	$	3,520	$	4,142	$	4,277	$	2,685	$	2,788	$	3,149	$	3,173
AAA	—		—		—		—
AA	—		—		—		—		395		396		395		395
A	958		957		961		969		235		235		956		955
BBB	—		—		—		—
Below investment grade	—		—		—		—
Non-rated	350		350		350		359		350		351		350		349
Total	$	4,809	$	4,827	$	5,453	$	5,605	$	3,665	$	3,770	$	4,850	$	4,872

At ~~June~~September 30, ~~2018~~,2019, securities with a market value of ~~$2,191~~$1.7 million were pledged against a line of credit with the Federal Reserve Bank of Minneapolis. As of ~~June~~September 30, ~~2018~~,2019, this line of credit had a zero outstanding balance. The Bank has pledged U.S. Government Agency securities with a market value of ~~$5,490,~~$6.0 million, mortgage-backed securities with a market value of ~~$22,779 and interest bearing investment CDs with a carrying value of $746~~$13.7 million as collateral against specific municipal deposits. As of ~~June~~September 30, ~~2018,~~2019, the Bank also has mortgage backed securities with a market value of ~~$1,065~~$760 thousand pledged as collateral to the Federal Home Loan Bank of Des ~~Moines against~~Moines.

Other Assets and Other Liabilities. Other assets and other liabilities decreased in the ~~MPF Credit Enhancement fee.~~

~~Deposits.~~ ~~Deposits increased~~third quarter compared to ~~$744,536 at~~ June 30, 2019, due to the purchase of two previously leased branches. Other assets increased from December 31, 2018, ~~from $742,504~~primarily due to the adoption of new accounting standards requiring asset recognition for operating leases which totaled $2.9 million at September 30, ~~2017. Noninterest bearing deposits~~2019.

Deposits. Deposits increased $154.2 million to ~~$82,135 at June 30, 2018, compared to $75,318~~$1.162 billion at September 30, ~~2017. Non-maturity deposits decreased~~2019, from $1.008 billion at December 31, 2018. Deposits increased by $127.5 million due to ~~$447,048 or 60% of total deposits compared to $451,735~~F&M account balances at September 30, ~~2017, or 61%~~2019, decreased $34.1 million due to the sale of ~~total deposits.~~Rochester Hills deposits on May 17, 2019 as discussed above and increased $60.8 million due to organic growth.

The following is a summary of deposits by type at ~~June 30, 2018 and~~ September 30, ~~2017,~~2019 and December 31, 2018, respectively:


	June 30, 2018		September 30, 2017		September 30, 2019		December 31, 2018
Non-interest bearing demand deposits	$	82,135	$	75,318	$	174,202	$	155,405
Interest bearing demand deposits	151,117		147,912		209,644		169,310
Savings accounts	98,427		102,756		165,419		192,310
Money market accounts	115,369		125,749		193,654		126,021
Certificate accounts	297,488		290,769		418,831		364,466
Total deposits	$	744,536	$	742,504	$	1,161,750	$	1,007,512

Deposits from closed branches, in markets that the Bank no longer competes in, decreased by ~~$11,698~~$7.5 million during the nine months ended ~~June~~September 30, ~~2018,~~2019, and total ~~$44,218~~$27.9 million as of ~~June~~September 30, ~~2018. This deposit balance decrease was primarily due~~2019. Brokered and listing services deposits were $63.0 million and $4.6 million, respectively, at September 30, 2019, compared to ~~certificates of deposit account closures in the amount of $9,216 during the nine months ended June 30,~~$55.3 million and $9.5 million, respectively, at December 31, 2018.

Our objective is to grow deposits and build customer relationships in our core markets through our branch network, deposit product offerings, including Treasury Management, and providing excellent customer service. Management expects to continue to place emphasis on both retaining and generating additional deposits in ~~2018~~2019 through competitive pricing of deposit products, our branch delivery systems that have already been established and electronic banking.

~~Institutional certificates of deposit as a funding source decreased to $10,250 at June 30, 2018 from $14,402 as of~~ ~~September 30, 2017. Institutional certificates of deposit remain a part of our deposit mix as we continue to pursue funding sources to lower the Bank's cost of funds.~~

~~The Bank had $50,439 and $42,840 in brokered deposits at~~ ~~June 30, 2018~~ ~~and~~ ~~September 30, 2017, with average yields of 1.68% and 1.24%, respectively. Brokered deposit levels are within all regulatory directives thereon.~~

Federal Home Loan Bank (FHLB) advances (borrowings) and Other Borrowings. FHLB advances were ~~$58,000 as of~~ ~~June 30, 2018~~ ~~and $90,000~~$113.5 million as of September 30, ~~2017,~~2019 and $109.8 million as of December 31, 2018, as we continue to utilize these advances, as necessary, to supplement core deposits to meet our funding and liquidity needs, and as we evaluate all options to ~~lower~~manage the ~~Bank's~~Bank’s cost of funds. FHLB advances were used to fund loan growth during the quarter and then paid down with the preferred stock proceeds placed on deposit with the Bank. The Bank utilized the increase in deposits, which are eliminated in consolidation, to temporarily reduce FHLB advances. 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"~~(“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~~interest-bearing deposit balances. The Bank’s current unused borrowing capacity, supported by loan collateral as of ~~June~~September 30, ~~2018,~~2019, is approximately ~~$208,160.~~$153.9 million.

The Bank ~~had an outstanding balance~~has pledged $670.9 million of ~~$29,000 with a rate of 2.12% on~~loans to secure the FHLB variable rate overnight borrowings at June 30, 2018. All fixed rate advances from the FHLB mature on various dates through July 2018. Each Federal Home Loan Bank advance is payable at the maturity date, with a prepayment penalty for fixed rate advances. The FHLB variable rate open linecurrent outstandings, letters of credit and ~~fixed rate advances are secured by $311,179 of real estate and commercial and industrial loans.~~

~~On May 16, 2016,~~to provide the Company entered into a Loan Agreement evidencing an $11,000 term loan maturing on May 15, 2021, payable in sixteen consecutive quarterly principal installments beginning on August 15, 2017. Installment nos. 1 to 15, both inclusive, being in the amount of approximately $306 each, and installment no. 16, a balloon payment, being for the entire then-unpaid principal balance, due and payable on May 15, 2021, if not paid sooner. The proceeds from the Loan were used by the Company for the sole purpose of financing the acquisition, by merger, of CBN.

On May 30, 2017, the Company extended a $5,000 term loan facility for the sole purpose of financing the acquisition, by merger, of Wells Financial Corporation. On August 17, 2017, this term loan was funded and matures on August 15, 2022 with a ten year amortization.

The variable rate senior notes provide for a floating interest rate that resets quarterly at rates that are indexed to the three-month London interbank offered rate ("LIBOR") plus 2.70%. The contractual interest rates for those notes ranged from 4.01% to 5.07% during the nine months ended June 30, 2018, and from 3.44% to 4.01% during the year ended September 30, 2017. ~~The weighted average contractual interest rates payable were 5.07% and 4.01% at June 30, 2018 and September 30, 2017, respectively.~~unused borrowing capacity.

On August 10, 2017, the Company issued ~~$15,000~~$15.0 million of subordinated notes maturing on August 10, ~~2027. The proceeds of~~2027 to fund the ~~loans were used by the Company for the sole purpose of financing the~~ acquisition ~~by merger,~~ of Wells Financial Corporation.

The subordinated notes are unsecured and are subordinate to the claims of other creditors of the Company. The subordinated notes mature in August 2027 ~~and convert to variable interest rate notes in August 2022. These notes provide for an annual~~with a fixed interest rate for ~~the first~~ five years of 6.75%~~. After the fixed interest period~~ and ~~through maturity,~~in August 2022, the interest rate ~~will be reset quarterly~~converts to ~~equal~~ the three-month LIBOR ~~rate,~~ plus 4.90%. and will reset quarterly thereafter. Interest on the Notes ~~will be~~is payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year through the maturity date.

On August 1, 2018, the Company entered into a Business Credit Agreement and related $7.5 million revolving loan and Business Note in an initial principal amount of $10.0 million. The Revolving Loan matured on August 1, 2019. On June 26, 2019, the Company entered into a credit agreement consisting of a $29.9 million term note and a $5.0 million revolving note. This term note included the refinancing of $10.1 million in existing debt and matures on June 26, 2031. This revolving note became effective on August 1, 2019, at which time it replaced the Company’s existing revolving loan arrangement, and it matures on August 1, 2020. The Revolving Loans and the Note each bear interest at a variable rate based on the U.S. Prime Rate as published in the Wall Street Journal less 75 basis points and are payable in accordance with the terms of the Loan Agreement and the Note, respectively. The proceeds from the Business Note were used to refinance the existing senior note, pay transaction fees and expenses and for financing the acquisition, by merger, of F. & M. Bancorp. of Tomah Inc.. At September 30, 2019 and December 31, 2018, there were no borrowings outstanding on this revolving loan.

Stockholders’ Equity. Total stockholders’ equity ~~was $135,211 at June 30, 2018, compared~~increased to ~~$73,483~~$148.0 million at September 30, ~~2017. Total stockholders’ equity increased by $61,728 during~~2019, from $138.2 million at December 31, 2018, as the ~~nine months ended June 30, 2018, primarily as a result~~Company benefitted from the addition of the sale of 500,000 shares of the Company's 8.00% Series A Preferred Stock, totaling $61,289, net of issuance costs. Each share of Series A Preferred Stock will be mandatorily convertible into ten shares of common stock following receipt of stockholder approval ofearnings, the issuance of stock in the ~~shares~~F&M acquisition and a reduction in accumulated other comprehensive loss, mainly due to lower long-term interest rates. Book value per share increased to $13.13 at September 30, 2019, from $12.62 per share at December 31, 2018. Tangible book value per share (non-GAAP)was $9.60 at September 30, 2019 - an increase of ~~common stock into which~~$0.54 from December 31, 2018. The components of this increase included (1) current year-to-date earnings, (2) the ~~Series A Preferred Stock is expected to be converted. The Company has scheduled a special meeting of stockholders on September 25, 2018 for purposes of a stockholder vote regarding approval of~~ issuance of stock in the ~~shares~~F&M acquisitions, (3)reduction in accumulated other comprehensive loss, due to the modest gain in the Securities Available for Sale portfolio (4) the amortization of ~~common stock into which~~intangible assets, partially offset by (5) the ~~Series A Preferred Stock~~intangible created in the F&M acquisition.. Tangible book value per share is ~~expected~~a non-GAAP measure that management believes enhances investors’ ability to ~~be converted.~~better understand the Company’s financial position.

Reconciliation of tangible book value per share (non-GAAP):



Tangible book value per share at end of period	September 30, 2019			December 31, 2018
Total stockholders’ equity	$	148,029		$	138,187
Less: Preferred stock	—			—
Less: Goodwill	(31,841		)	(31,474		)
Less: Intangible assets	(7,999		)	(7,501		)
Tangible common equity (non-GAAP)	$	108,189		$	99,212
Ending common shares outstanding	11,270,710			10,953,512
Book value per share	$	13.13		$	12.62
Tangible book value per share (non-GAAP)	$	9.60		$	9.06

Liquidity and Asset / Liability Management. Our primary sources of funds are deposits; amortization, prepayments and maturities of outstanding loans; short-term investments; and ~~funds provided from operations.~~borrowings. We use our sources of funds primarily to meet ongoing commitments, to pay ~~nonrenewing,~~non-renewing, maturing certificates of deposit and savings withdrawals, and to fund loan commitments. We have enhanced our liquidity monitoring and updated what we consider to be sources of on-balance sheet cash. We consider our interest-bearing cash and unpledged investment securities to be our sources of on-balance sheet liquidity. At ~~June~~September 30, ~~2018,~~2019, our on-balance sheet liquidity ratio was ~~11.05%~~12.0%. 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 influenced by factors partially outside of the ~~Bank's~~Bank’s control, including general interest rates, economic conditions and competition. Although ~~$173,234~~$249.4 million of our ~~$297,488 (58.23%~~$418.8 million (59.6%) CD portfolio as of ~~June~~September 30, ~~2018~~2019 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 may decrease in the future. 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. In our present interest rate environment, and based on maturing yields, this is intended to also reduce our cost of funds.

We maintain access to additional sources of funds including FHLB borrowings and lines of credit with the Federal Reserve Bank ~~US Bank, Bankers’ Bank~~ and ~~First Tennessee Bank.~~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 loans and borrowing up to 75% of the value of those loans, not to exceed 35% of the Bank’s total assets. As of ~~June~~September 30, ~~2018,~~2019, we have approximately ~~$208,160~~$153.9 million available under this arrangement, supported by loan collateral, as compared to ~~$193,913~~$178.6 million at ~~September 30, 2017.~~December 31, 2018. We ~~also~~ maintain ~~lines~~a line of credit ~~of $1,726~~ with the Federal Reserve Bank ~~and~~which has a $1.3 million capacity, based on our current pledged collateral position. Additionally we have ~~$29,500~~$15.0 million of uncommitted federal funds purchased lines of ~~credit.~~credit, as well as a $5.0 million revolving line of credit which is available as needed for general liquidity purposes.

In reviewing our adequacy of 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. Some of our financial instruments have off-balance sheet risk. 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 ~~June~~September 30, ~~2018~~,2019, the Company had ~~$117,066~~$232.1 million in unused commitments, compared to ~~$79,794~~$207.8 million in unused commitments as of ~~September 30, 2017~~.December 31, 2018.

Capital Resources. As of ~~June~~September 30, ~~2018~~,2019, as shown in the table below, our Tier 1 and Risk-based capital levels exceeded levels necessary to be considered “Well Capitalized” under Prompt Corrective Action provisions for both the Bank and at the Company level.

On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act ("EGRRCPA") was enacted into law, which provides certain modifications to the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), which will provide regulatory relief for smaller and certain regional banking organizations. In addition, the legislation establishes new consumer protections and amends various securities- and investment company-related requirements. In addition to the sections that reduce the regulatory burden on the Bank, the following sections of EGRRCPA will impact or potentially impact the Company’s financial statements:

Section 201 requires the Federal banking agencies to promulgate a rule establishing a new “Community Bank Leverage Ratio” of 8%-10% for depository institutions and depository institution holding companies, including banks and bank holding companies, with less than $10 billion in total consolidated assets. If such a depository institution or holding company maintains tangible equity in excess of this leverage ratio, it would be deemed to be in compliance with (1) the leverage and risk-based capital requirements promulgated by the Federal banking agencies; (2) in the case of a depository institution, the capital ratio requirements to be considered “well capitalized” under the Federal banking agencies’ “prompt corrective action” regime; and (3) “any other capital or leverage requirements” to which the depository institution or holding company is subject, in each case unless the appropriate Federal banking agency determines otherwise based on the particular institution’s risk profile. In carrying out these requirements, the Federal banking agencies are required to consult with State banking regulators and notify the applicable State banking regulator of any qualifying community bank that exceeds or no longer exceeds the Community Bank Leverage Ratio.

Section 214 statutorily prescribes that the Federal banking agencies may only require depository institutions to apply a heightened risk-weight to exposures that are “high volatility commercial real estate” ("HVCRE") if the exposures meet the definition of a HVCRE Acquisition, Development or Construction ("ADC") loan as set forth in that section. The new definition applies to a narrower scope of exposures. The new definition of HVCRE ADC loan excludes loans made prior to January 1, 2015, amends the loan-to-value/capital contribution exemption, specifies the loan must primarily finance the property, has the purpose of providing financing to acquire, develop or improve such real property in income-producing property and is dependent upon future income or sales proceeds or refinancing of such property to repay the loan. Once the property sufficiently produces cash-flows to support the debt service and expenses in accordance with the bank’s underwriting criteria for permanent financing, the loan meets the exemption as a HVCRE ADC loan.

Section 217 requires a reduction of the Federal Reserve Bank’s combined surplus fund from $7.5 billion to $6.825 billion. This surplus fund was decreased earlier this year from $10 billion to $7.5 billion as part of the Bipartisan Budget Act of 2018. This will impact the calculation of the Company’s Deposit Insurance.

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					Actual				For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio		Amount		Ratio		Amount			Ratio		Amount			Ratio
As of June 30, 2018 (Unaudited)
As of September 30, 2019 (Unaudited)
Total capital (to risk weighted assets)	$	93,564,000	12.8	%	$	58,527,000	>=	8.0	%	$	73,159,000	>=	10.0	%	$	157,069,000	13.5	%	$	92,966,000	>=	8.0	%	$	116,208,000	>=	10.0	%
Tier 1 capital (to risk weighted assets)	87,106,000		11.9	%	43,895,000		>=	6.0	%	58,527,000		>=	8.0	%	147,892,000		12.7	%	69,725,000		>=	6.0	%	92,966,000		>=	8.0	%
Common equity tier 1 capital (to risk weighted assets)	87,106,000		11.9	%	32,921,000		>=	4.5	%	47,553,000		>=	6.5	%	147,892,000		12.7	%	52,293,000		>=	4.5	%	75,535,000		>=	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	87,106,000		9.3	%	37,272,000		>=	4.0	%	46,590,000		>=	5.0	%	147,892,000		10.2	%	57,777,000		>=	4.0	%	72,221,000		>=	5.0	%
As of September 30, 2017 (Audited)
As of December 31, 2018 (Audited)
Total capital (to risk weighted assets)	$	88,511,000	13.2	%	$	53,504,000	>=	8.0	%	$	66,880,000	>=	10.0	%	$	126,440,000	12.7	%	$	79,651,000	>=	8.0	%	$	99,563,000	>=	10.0	%
Tier 1 capital (to risk weighted assets)	82,569,000		12.4	%	40,128,000		>=	6.0	%	53,504,000		>=	8.0	%	118,836,000		11.9	%	59,738,000		>=	6.0	%	79,651,000		>=	8.0	%
Common equity tier 1 capital (to risk weighted assets)	82,569,000		12.4	%	30,096,000		>=	4.5	%	43,472,000		>=	6.5	%	118,836,000		11.9	%	44,804,000		>=	4.5	%	64,716,000		>=	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	82,569,000		9.2	%	35,776,000		>=	4.0	%	44,720,000		>=	5.0	%	118,836,000		9.7	%	48,976,000		>=	4.0	%	61,220,000		>=	5.0	%

At ~~June~~September 30, ~~2018,~~2019, the Bank was categorized as ~~"Well Capitalized"~~“Well Capitalized” under Prompt Corrective Action Provisions, as determined by the OCC, our primary regulator.

6369

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


	Actual				For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions					Actual				For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio		Amount		Ratio		Amount			Ratio		Amount			Ratio
As of June 30, 2018 (Unaudited)
As of September 30, 2019 (Unaudited)
Total capital (to risk weighted assets)	$	143,434,000	19.6	%	$	58,527,000	>=	8.0	%	$	73,159,000	>=	10.0	%	$	132,094,000	11.4	%	$	92,966,000	>=	8.0	%	$	116,208,000	>=	10.0	%
Tier 1 capital (to risk weighted assets)	121,976,000		16.7	%	43,895,000		>=	6.0	%	58,527,000		>=	8.0	%	107,917,000		9.3	%	69,725,000		>=	6.0	%	92,966,000		>=	8.0	%
Common equity tier 1 capital (to risk weighted assets)	60,687,000		8.3	%	32,921,000		>=	4.5	%	47,553,000		>=	6.5	%	107,917,000		9.3	%	52,293,000		>=	4.5	%	75,535,000		>=	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	121,976,000		13.1	%	37,272,000		>=	4.0	%	46,590,000		>=	5.0	%	107,917,000		7.5	%	57,777,000		>=	4.0	%	72,221,000		>=	5.0	%
As of September 30, 2017 (Audited)
As of December 31, 2018 (Audited)
Total capital (to risk weighted assets)	$	79,889,000	12.0	%	$	53,504,000	>=	8.0	%	$	66,880,000	>=	10.0	%	$	123,657,000	12.4	%	$	79,651,000	>=	8.0	%	$	99,563,000	>=	10.0	%
Tier 1 capital (to risk weighted assets)	58,947,000		8.8	%	40,128,000		>=	6.0	%	53,504,000		>=	8.0	%	101,053,000		10.2	%	59,738,000		>=	6.0	%	79,651,000		>=	8.0	%
Common equity tier 1 capital (to risk weighted assets)	58,947,000		8.8	%	30,096,000		>=	4.5	%	43,472,000		>=	6.5	%	101,053,000		10.2	%	44,804,000		>=	4.5	%	64,716,000		>=	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	58,947,000		6.6	%	35,776,000		>=	4.0	%	44,720,000		>=	5.0	%	101,053,000		8.3	%	48,976,000		>=	4.0	%	61,220,000		>=	5.0	%

At ~~June~~September 30, ~~2018,~~2019, the Company was categorized as ~~"Well Capitalized"~~“Well Capitalized” under Prompt Corrective Action Provisions.


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~~Bank’s senior management and ~~a member of the~~ 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 order to manage our assets and liabilities and achieve desired levels of liquidity, credit quality, cash flow, interest rate risk, profitability and capital targets, we have focused our strategies on:

originating shorter-term secured ~~consumer,~~ commercial, agriculture and ~~agriculture~~consumer loan maturities;

originating variable rate commercial and agriculture loans;

managing our exposure to changes in interest rates, including, but not limited to the sale of longer-term fixed-rate residential loans in the secondary market with retained servicing;

originating balloon mortgage loans with a term of five years or less to minimize the impact of sudden rate changes;

managing our funding needs by utilizing core deposits, ~~institutional~~brokered certificates of deposits and borrowings as appropriate to extend terms and lock in fixed interest rates;

reducing non-interest expense and managing our efficiency ratio by implementing technologies to enhance customer service and increase employee productivity; and

realigning supervision and control of our branch network by modifying their configuration, staffing, locations and reporting structure to focus resources on our most productive ~~markets;~~

~~managing our exposure to changes in interest rates, including, but not limited to the sale of longer term fixed rate consumer loans;~~

~~with the acquisition of WFC, entering into selling loans on the secondary market with retained servicing; and~~

~~originating balloon mortgage loans with a term of seven years or less to minimize the impact of sudden rate changes.~~markets.

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 ~~June 30, 2018 and~~ September 30, ~~2017~~2019 and December 31, 2018 an analysis of our interest rate risk as measured by the estimated changes in Economic Value of Equity ~~("EVE"~~(“EVE”) resulting from an immediate and permanent shift in the yield curve (up 300 basis points and down 100 basis points). As of ~~June 30, 2018 and~~ September 30, ~~2017,~~2019 and December 31, 2018, due to the current level of interest rates, EVE estimates for decreases in interest rates greater than 200 and 100 basis points are not meaningful.


	Percent Change in Economic Value of Equity (EVE)				Percent Change in Economic Value of Equity (EVE)
Change in Interest Rates in Basis Points (“bp”) Rate Shock in Rates (1)	At June 30, 2018		At September 30, 2017		At September 30, 2019		At December 31, 2018

+300 bp	(19.0	)%	(18.0	)%	—	%	(3	)%
+200 bp	(10.5	)%	(9.7	)%	—	%	(2	)%
+100 bp	(3.5	)%	(2.8	)%	1	%	(1	)%
0 bp	—	%	—	%
-100 bp	(3.9	)%	(5.3	)%	(2	)%	(1	)%
-200 bp					3	%	(5	)%


(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 100 basis points). The table below presents our projected change in net interest income for the various rate shock levels at ~~June 30, 2018 and~~ September 30, ~~2017.~~

2019 and December 31, 2018.


	Percent Change in Net Interest Income Over One Year Horizon				Percent Change in Net Interest Income Over One Year Horizon
Change in Interest Rates in Basis Points (“bp”) Rate Shock in Rates (1)	At June 30, 2018		At September 30, 2017		At September 30, 2019		At December 31, 2018

+300 bp	(9.6	)%	(9.6	)%	(1	)%	(6	)%
+200 bp	(5.6	)%	(5.7	)%	(1	)%	(4	)%
+100 bp	(1.7	)%	(2.0	)%	(1	)%	(2	)%
0 bp	—	%	—	%
-100 bp	0.2	%	(1.0	)%	(1	)%	1	%
-200 bp					(5	)%	(1	)%


(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 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"~~(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 ~~June~~September 30, ~~2018,~~2019, 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 ~~June~~September 30, ~~2018~~2019 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. On October 19, 2018, we completed our acquisition of United Bank. In accordance with our integration efforts, we are in the process of integrating United Bank operations into our internal control over financial reporting structure within the time frame provided by applicable SEC rules and regulations.

PART II – OTHER INFORMATION


Item 1.	LEGAL PROCEEDINGS

On April 24, 2018, Associated Banc-Corp (“Associated”) commenced an action against the Bank and Timothy Nelson in Pierce County, Wisconsin district court alleging misappropriation of trade secrets, civil theft, unjust enrichment and conversion in connection with the Bank’s intended opening of a branch in Ellsworth, Wisconsin, where it hired four individuals including Mr. Nelson. The Complaint alleged that Mr. Nelson emailed to his wife’s email account a detailed customer lists of Associated and other alleged proprietary information before leaving Associated and going to work for the Bank. The Complaint seeks an unspecified amount of damages and a temporary and permanent injunction.

On April 25, 2018, Associated brought a motion for temporary injunction requesting that the Court enjoin the Bank and Mr. Nelson from contacting or marketing to 1,094 customers identified on the customer lists the subject of the motion. The Bank opposed the motion and denied the allegations against it. On May 4, 2018, at the hearing on the temporary injunction the Court denied Associated’s motion for temporary injunction, and directed that the customer information be removed from Mr.

Nelson’s email account. On June 29, 2018, the Bank entered into an agreement with Mr. Nelson and Associated Bank. The Bank admitted no wrongdoing and agreed to pay Associated $103 in reimbursement of their legal fees.

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.

6772


Item 1A.	RISK FACTORS

A detailed discussion of the ~~Company's~~Company’s risk factors is disclosed in Part I, Item 1A, “Risk Factors,” of the Company’s transition report on Form 10-K for the ~~fiscal year ended~~ ~~September 30, 2017~~.transition period from October 1, 2018 to December 31, 2018. Please refer to that section for disclosures regarding the risks and uncertainties relating to our business. ~~With the exception of the following risk factors, there~~There have been no material changes to the risk factors disclosed in our Form 10-K. The following additional risk factors have been added or amended and restated due to the implementation of the Tax Cuts and Jobs Act of 2017 (the "Tax Act") enacted in December 2017 and the Acquisition:

~~Changes in federal or state tax laws could adversely affect our business, financial condition and results of operations.~~ Our business, financial condition and results of operations are impacted by tax policy implemented at the federal and state level. The Tax Act was enacted in December 2017. Among other things, the Tax Act reduces the corporate federal income tax rate for the Company from 34 percent to 24.5 percent for 2018, and 21 percent for 2019, which would result in changes in the valuation of deferred tax asset and liabilities, and includes a number of provisions that will have an impact on the banking industry, borrowers and the market for single-family residential real estate. We revalued our net deferred tax assets to account for the future impact of the lower corporate tax rates. The recent changes in the tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand for such loans in the future, and could make it harder for borrowers to make their loan payments. In addition, these recent changes may also have a disproportionate effect on taxpayers in states with high residential home prices and high state and local taxes. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could reduce our profitability and materially adversely affect our business, financial condition and results of operations.

We cannot predict whether any other tax legislation will be enacted in the future or whether any such changes to existing federal or state tax law would have a material adverse effect on our business, financial condition and results of operations. We continue to evaluate the impact the Tax Act and other enacted tax reform may have on our business, financial conduction and results of operations.

~~Acquisitions and expansion activities may disrupt our business, dilute existing stockholders and adversely affect our operating results.~~ ~~We recently acquired through merger, CBN and WFC. On June 20, 2018, the Company entered into aStock Purchase Agreement with United Bancorporation and its wholly-owned subsidiary, United Bank, a Wisconsinchartered bank, pursuant to which the Company will, subject to the terms and conditions set forth therein, acquire 100% ofthe common stock of United Bank. We intend to continue to evaluate potential acquisitions and expansion opportunities inthe normal course of our business. Although the integration of CBN and WFC into our operations is successfully~~proceeding, we cannot assure you that we will be able to adequately or profitably manage the Acquisition of United Bank orany such future acquisitions. Acquiring other banks or financial service companies, such as United Bank, as well as other~~geographic and product expansion activities, involve various risks including:~~

~~risks of unknown or contingent liabilities;~~

~~unanticipated costs and delays;~~

~~risks that acquired new businesses do not perform consistent with our growth and profitability~~

~~expectations;~~

~~risks of entering new markets or product areas where we have limited experience;~~

~~risks that growth will strain our infrastructure, staff, internal controls and management, which may~~

~~require additional personnel, time and expenditures;~~

~~exposure to potential asset quality issues with acquired institutions;~~

~~difficulties, expenses and delays of integrating the operations and personnel of acquired institutions, and~~

~~start-up delays and costs of other expansion activities;~~

~~potential disruptions to our business;~~

~~possible loss of key employees and customers of acquired institutions;~~

~~potential short-term decreases in profitability; and~~

~~diversion of our management’s time and attention from our existing operations and business.~~

~~Our failure to execute our acquisition strategy could adversely affect our business, results of operations, financial condition and future prospects.~~

~~We may fail to realize the anticipated cost savings and other financial benefits of the Acquisition on the anticipated schedule, if at all.~~ ~~The Company and United Bank have operated and, until the effective time of the Acquisition, willcontinue to operate, independently. Our ability to realize success following consummation of the Acquisition will depend, inpart, on our ability to successfully combine and integrate the businesses of the Company and United Bank. We may facesignificant~~

~~challenges in integrating United Bank’s operations into our operations in a timely and efficient manner and inretaining personnel from United Bank that we anticipate needing. Achieving the anticipated cost savings and financialbenefits of the Acquisition will depend, in part, on whether we can successfully integrate these businesses. It is possible thatthe integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses orinconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships withclients, customers, depositors and employees or to achieve the anticipated benefits of the Acquisition. In addition, theintegration of certain operations following the Acquisition will require the dedication of significant management resources,~~

which may temporarily distract management’s attention from the day-to-day business of the combined company. Any inability to realize the full extent of, or any of, the anticipated cost savings and financial benefits of the Acquisition, as well as any delays encountered in the integration process, could have an adverse effect on the business and results of operations of the combined company, which may affect the market price of our common stock.

~~The Acquisition is subject to the receipt of consents and approvals from government entities that may not be~~

~~received, may take longer than expected or may impose conditions that could have an adverse effect on the combined company following the Acquisition.~~ ~~Before the Acquisition may be completed, various approvals or consents must beobtained from the Federal Reserve Board, the OCC, and the State of Wisconsin. These regulators may impose conditions onthe completion of the Acquisition or require changes to the terms of the Acquisition. Although we do not currently expectthat any such material conditions or changes would be imposed, there can be no assurance that they will not be, and suchconditions or changes could have the effect of delaying completion of the Acquisition or imposing additional costs on orlimiting the revenues of the combined company following the Acquisition, any of which might have an adverse effect on ourCompany and our common stock following the Acquisition.~~

~~If the Acquisition is not completed, we will have incurred substantial expenses without realizing the expected~~

~~benefits of the Acquisition.~~ ~~We have incurred substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Acquisition~~. If the Acquisition is not completed for any reason, we would not realize any of the expected benefits of having completed the Acquisition, and the ongoing business of the Company and the market price of our common stock may be adversely affected.

~~The Acquisition may not produce revenue or earnings enhancements or cost savings at levels or within timeframes originally anticipated and may result in unforeseen integration difficulties.~~ ~~Difficulty in integrating United Bank may causeus not to realize expected revenue increases, cost savings or other anticipated benefits from the Acquisition. The integrationcould result in higher than expected deposit attrition (also known as run-off), loss of key employees, disruption of ourbusiness or the business of United Bank, or otherwise adversely affect our ability to maintain relationships with customersand employees or achieve the anticipated benefits of the Acquisition. We are likely to need to make additional investment inequipment and personnel to manage higher asset levels and loan balances as a result of the Acquisition, which may adverselyimpact our earnings. Also, the negative effect of any divestitures required by regulatory authorities in the Acquisition orbusiness combinations may be greater than expected.~~


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


(a)	Not applicable.


(b)	Not applicable.


(c)	Issuer Purchases of Equity Securities.

The table below shows the shares withheld from employees to satisfy tax withholding obligations during the three months ended ~~June~~September 30, ~~2018.~~2019.

Period Total number of Shares Purchased (1) 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 Pans or Programs
April 1, 2018 - April 30, 2018 — — — —
May 1, 2018 - May 31, 2018 855 $13.93 — —
June 1, 2018 - June 30, 2018 954 $13.84 — —
Total 1,809 $13.88 — —



Period	Total number of Shares Purchased (1)	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 Pans or Programs
July 1, 2019 - July 31, 2019	—	NA	—	—
August 1, 2019 - August 31, 2019	64	$11.00	—	—
September 1, 2019 - September 30, 2019	233	$11.00	—	—
Total	297	$11.00	—	—

(1) Represents shares of common stock withheld from employees to satisfy tax withholding obligations associated with the vesting of restricted stock awards.


Item 3.	DEFAULTS UPON SENIOR SECURITIES

Not applicable.


Item 4.	MINE SAFETY DISCLOSURES

Not applicable.


Item 5.	OTHER INFORMATION

Not applicable.

Item 6.


Item 6.7.	EXHIBITS

(a) Exhibits



~~2.1~~		Stock Purchase Agreement between Citizens Community Bancorp, Inc., United Bank and United Bancorporation, dated June 20, 2018 (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on June 21, 2018 (File No. 001-33003)).
~~3.1~~		Articles Supplementary with respect to the Series A Preferred Stock of Citizens Community Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on June 21, 2018 (File No. 001-33003)).
10.1		~~Securities Purchase Agreement between the~~Business Note, dated June 26, 2019, issued by Citizens Community Bancorp, Inc. ~~and the Purchasers provided therein, dated June 20, 2018~~to Chippewa Valley Bank (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on ~~June 21, 2018~~July 1, 2019 (File No. 001-33003)).
10.2		~~Registration Rights~~Business Credit Agreement, dated August 1, 2019, by and between ~~the~~ Citizens Community Bancorp, Inc. and ~~the Purchasers provided therein, dated June 20, 2018~~Chippewa Valley Bank (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on ~~June 21, 2018~~July 1, 2019 (File No. 001-33003)).
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 materials from Citizens Community Bancorp, Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended ~~June~~September 30, ~~2018~~2019 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statement of Changes in Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Condensed Notes to Consolidated Financial Statements.



*	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.

7074

SIGNATURES

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



	CITIZENS COMMUNITY BANCORP, INC.

Date: ~~August 10, 2018~~November 7, 2019	By:		/s/ Stephen M. Bianchi
			Stephen M. Bianchi
			Chief Executive Officer

Date: ~~August 10, 2018~~November 7, 2019	By:	��	/s/ James S. Broucek
			James S. Broucek
			Chief Financial Officer

7175



	2018		2017
Dividend yield	1.18	%	1.16	%
Risk-free interest rate	2.4	%	2.2	%
Weighted average expected life (years)	10		10
Expected volatility	2.3	%	2.4	%



	Unrealized Gains (Losses) on Securities			Defined Benefit Plans		Other Accumulated Comprehensive Income (Loss)
Balance, October 1, 2016	$	614		$	—	$	614
Current year-to-date other comprehensive loss, net of tax	(881		)	—		(881		)
Ending balance, September 30, 2017	$	(267	)	$	—	$	(267	)
Current year-to-date other comprehensive loss, net of tax	(1,908		)	—		(1,908		)
Ending balance, June 30, 2018	$	(2,175	)	$	—	$	(2,175	)



	June 30, 2018		September 30, 2017		Change FTD
Community Banking Loan Portfolios:
Commercial/Agricultural real estate:
Commercial real estate	$	208,526	$	159,962	$	48,564
Agricultural real estate	70,881		68,002		2,879
Multi-family real estate	45,707		26,228		19,479
Construction and land development	15,258		19,708		(4,450		)
Commercial/Agricultural non-real estate:
Commercial non-real estate	74,763		55,251		19,512
Agricultural non-real estate	26,366		23,873		2,493
Residential real estate:
Purchased HELOC loans	15,237		18,071		(2,834		)
Consumer non-real estate:
Other consumer	19,063		20,668		(1,605		)
Total Community Banking Loan Portfolios	475,801		391,763		84,038

Legacy Loan Portfolios:
Residential real estate:
One to four family	202,356		229,563		(27,207		)
Consumer non-real estate:
Originated indirect paper	66,791		85,732		(18,941		)
Purchased indirect paper	19,801		29,555		(9,754		)
Total Legacy Loan Portfolios	288,948		344,850		(55,902		)
Gross loans	$	764,749	$	736,613	$	28,136



	June 30, 2018 and Nine Months Then Ended			September 30, 2017 and Twelve Months Then Ended
Nonperforming assets:
Nonaccrual loans	$	6,627		$	7,452
Accruing loans past due 90 days or more	710			589
Total nonperforming loans (“NPLs”)	7,337			8,041
Other real estate owned	5,328			5,962
Other collateral owned	64			55
Total nonperforming assets (“NPAs”)	$	12,729		$	14,058
Troubled Debt Restructurings (“TDRs”)	$	8,210		$	5,851
Accruing TDR's	$	5,860		$	5,230
Nonaccrual TDRs	$	2,350		$	621
Average outstanding loan balance	$	732,606		$	653,717
Loans, end of period	$	761,087		$	732,995
Total assets, end of period	$	975,070		$	940,664
ALL, at beginning of period	$	5,942		$	6,068
Loans charged off:
Residential real estate	(120		)	(233		)
Commercial/Agricultural real estate	(74		)	—
Consumer non-real estate	(295		)	(389		)
Commercial/Agricultural non-real estate	(5		)	(9		)
Total loans charged off	(494		)	(631		)
Recoveries of loans previously charged off:
Residential real estate	51			14
Commercial/Agricultural real estate	—			—
Consumer non-real estate	96			171
Commercial/Agricultural non-real estate	13			1
Total recoveries of loans previously charged off:	160			186
Net loans charged off (“NCOs”)	(334		)	(445		)
Additions to ALL via provision for loan losses charged to operations	850			319
ALL, at end of period	$	6,458		$	5,942
Ratios:
ALL to NCOs (annualized)	1,450.15		%	1,335.28		%
NCOs (annualized) to average loans	0.06		%	0.07		%
ALL to total loans	0.85		%	0.81		%
NPLs to total loans	0.96		%	1.10		%
NPAs to total assets	1.31		%	1.49		%

Large accelerated filer

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Non-accelerated filer

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Smaller reporting company

Emerging growth company