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 30, 2019~~March 31, 2020



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

For the transition period from to

Commission file number 001-33003

CITIZENS COMMUNITY BANCORP, INC.

(Exact name of registrant as specified in its charter)



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

2174 EastRidge Center
Eau Claire, WI		54701
(Address of principal executive offices)		(Zip Code)

715-836-9994

(Registrant’s telephone number, including area code)

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



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

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of ~~"large~~“large accelerated ~~filer"~~filer”, ~~"accelerated filer"~~“accelerated filer”, ~~"smaller~~“smaller reporting ~~company"~~company” and ~~"emerging~~“emerging growth ~~company"~~company” in Rule 12b-2 of the Exchange 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 issuer’s classes of common stock, as of the latest practicable date:

At ~~August 8, 2019~~May 11, 2020 there were ~~11,271,007~~11,150,695 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

CITIZENS COMMUNITY BANCORP, INC.

FORM 10-Q

~~June 30, 2019~~March 31, 2020

INDEX



			Page Number
Part I – FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of ~~June 30, 2019~~March 31, 2020 (Unaudited) and December 31, ~~2018~~2019	5
		Consolidated Statements of Operations (Unaudited) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	6
		Consolidated Statements of Comprehensive Income (Unaudited) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	7
		Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and the year ended December 31, 2019	8
		Consolidated Statements of Cash Flows (Unaudited) for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	910
		Condensed Notes to Consolidated Financial Statements (Unaudited)	1112
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6864
	Item 4.	Controls and Procedures	7066
Part II – OTHER INFORMATION			7066
	Item 1.	Legal Proceedings	7066
	Item 1A.	Risk Factors	7167
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7168
	Item 3.	Defaults Upon Senior Securities	7168
	Item 4.	Mine Safety Disclosures	7169
	Item 5.	Other Information	7169
	Item 6.	Exhibits	7270
SIGNATURES			7371

PART 1 – FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Balance Sheets

~~June 30, 2019~~March 31, 2020 (unaudited) and December 31, ~~2018~~2019

(derived from audited financial statements)

(in thousands, except share and per share data)


	June 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
Assets
Cash and cash equivalents	$	47,008		$	45,778		$	41,347		$	55,840
Other interest-bearing deposits	5,980			7,460			4,006			4,744
Securities available for sale "AFS"	154,760			146,725			163,435			180,119
Securities held to maturity "HTM"	3,828			4,850			10,767			2,851
Equity securities with readily determinable fair value	177			—			163			246
Non-marketable equity securities, at cost	12,543			11,261
Other investments							14,999			15,005
Loans receivable	1,019,957			992,556			1,180,951			1,177,380
Allowance for loan losses	(8,759		)	(7,604		)	(11,835		)	(10,320		)
Loans receivable, net	1,011,198			984,952			1,169,116			1,167,060
Loans held for sale	2,475			1,927			3,281			5,893
Mortgage servicing rights	4,319			4,486			3,728			4,282
Office properties and equipment, net	15,287			13,513			21,066			21,106
Accrued interest receivable	4,452			4,307			4,822			4,738
Intangible assets	6,828			7,501			7,175			7,587
Goodwill	31,474			31,474			31,498			31,498
Foreclosed and repossessed assets, net	1,387			2,570			1,432			1,460
Bank owned life insurance ("BOLI")	18,022			17,792			23,205			23,063
Escrow merger settlement proceeds	20,555			—
Other assets	8,127			3,328			5,124			5,757
TOTAL ASSETS	$	1,348,420		$	1,287,924		$	1,505,164		$	1,531,249


Liabilities and Stockholders’ Equity
Liabilities:
Deposits	$	1,015,459		$	1,007,512		$	1,180,055		$	1,195,702
Federal Home Loan Bank advances	135,844			109,813			123,477			130,971
Other borrowings	44,551			24,647			43,576			43,560
Other liabilities	9,324			7,765			10,123			10,463
Total liabilities	1,205,178			1,149,737			1,357,231			1,380,696

Stockholders’ Equity:
Common stock— $0.01 par value, authorized 30,000,000; 10,982,008 and 10,953,512 shares issued and outstanding, respectively	110			109
Common stock— $0.01 par value, authorized 30,000,000; 11,151,009 and 11,266,954 shares issued and outstanding, respectively							112			113
Additional paid-in capital	125,822			125,512			127,732			128,856
Retained earnings	18,114			15,264			22,690			22,517
Unearned deferred compensation	(757		)	(857		)	(992		)	(462		)
Accumulated other comprehensive loss	(47		)	(1,841		)	(1,609		)	(471		)
Total stockholders’ equity	143,242			138,187			147,933			150,553
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,348,420		$	1,287,924		$	1,505,164		$	1,531,249

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Operations (unaudited)

Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~

(in thousands, except per share data)


	Three Months Ended					Six Months Ended						Three Months Ended
	June 30, 2019			June 30, 2018		June 30, 2019			June 30, 2018			March 31, 2020			March 31, 2019
Interest and dividend income:
Interest and fees on loans	$	12,976		$	8,865	$	25,390		$	17,404		$	15,459		$	12,414
Interest on investments	1,360			905		2,664			1,718			1,449			1,304
Total interest and dividend income	14,336			9,770		28,054			19,122			16,908			13,718
Interest expense:
Interest on deposits	2,926			1,432		5,519			2,682			3,180			2,593
Interest on FHLB borrowed funds	913			412		1,574			726			508			661
Interest on other borrowed funds	414			446		816			878			549			402
Total interest expense	4,253			2,290		7,909			4,286			4,237			3,656
Net interest income before provision for loan losses	10,083			7,480		20,145			14,836			12,671			10,062
Provision for loan losses	325			650		1,550			750			2,000			1,225
Net interest income after provision for loan losses	9,758			6,830		18,595			14,086			10,671			8,837
Non-interest income:
Service charges on deposit accounts	581			413		1,131			843			560			550
Interchange income	453			338		791			640			464			338
Loan servicing income	634			337		1,188			683			685			554
Gain on sale of loans	573			226		881			415			780			308
Loan fees and service charges	261			116		389			203			477			128
Insurance commission income	192			187		376			374			279			184
Gains (losses) on investment securities	21			4		55			(17		)
Gain on sale of branch	2,295			—		2,295			—
Net gains on investment securities												73			34
Other	228			146		464			301			285			236
Total non-interest income	5,238			1,767		7,570			3,442			3,603			2,332
Non-interest expense:
Compensation and related benefits	4,604			3,840		9,310			7,646			5,435			4,706
Occupancy	866			733		1,820			1,494			1,006			954
Office	528			417		1,050			843			543			522
Data processing	868			720		1,855			1,453			996			987
Amortization of intangible assets	346			161		673			322			412			327
Amortization of mortgage servicing rights	306			84		497			160
Mortgage servicing rights expense												736			191
Advertising, marketing and public relations	456			185		659			331			239			203
FDIC premium assessment	146			94		240			209			68			94
Professional services	575			735		1,400			1,058			604			825
Loss (gain) on repossessed assets, net	(90		)	450		(127		)	450
Gain on repossessed assets, net												(68		)	(37		)
Other	784			455		1,906			1,011			760			1,122
Total non-interest expense	9,389			7,874		19,283			14,977			10,731			9,894
Income before provision for income tax	5,607			723		6,882			2,551			3,543			1,275
Provision for income taxes	1,500			220		1,822			707			937			322
Net income attributable to common stockholders	$	4,107		$	503	$	5,060		$	1,844		$	2,606		$	953
Per share information:
Basic earnings	$	0.37		$	0.09	$	0.46		$	0.31		$	0.23		$	0.09
Diluted earnings	$	0.37		$	0.08	$	0.46		$	0.30		$	0.23		$	0.09
Cash dividends paid	$	—		$	—	$	0.20		$	0.20		$	0.21		$	0.20

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Comprehensive Income (unaudited)

Three ~~and~~ ~~Six~~ months ended ~~June 30, 2019~~March 31, 2020 and ~~2018~~2019

(in thousands)


	Three Months Ended					Six Months Ended					Three Months Ended
	June 30, 2019		June 30, 2018			June 30, 2019		June 30, 2018			March 31, 2020			March 31, 2019
Net income attributable to common stockholders	$	4,107	$	503		$	5,060	$	1,844		$	2,606		$	953
Other comprehensive income (loss), net of tax:
Other comprehensive income, net of tax:
Securities available for sale
Net unrealized gains (losses) arising during period	662		(304		)	1,799		(1,359		)	(1,191		)	1,137
Reclassification adjustment for net gains (losses) included in net income	13		3			40		(13		)
Reclassification adjustment for net gains included in net income											53			27
Other comprehensive income (loss)	675		(301		)	1,839		(1,372		)	(1,138		)	1,164
Comprehensive income	$	4,782	$	202		$	6,899	$	472		$	1,468		$	2,117

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statement of Changes in Stockholders’ Equity (unaudited)

~~Six~~Three Months Ended ~~June 30, 2019~~March 31, 2020

(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
Shares Amount
Balance, January 1, 2019 10,953,512
$ 109
$ 125,512
$ 15,264
$ (857 ) $ (1,841 ) $ 138,187
Net income —
—
—
5,060
—
—
5,060
Other comprehensive income, net of tax —
—
—
—
—
1,839
1,839
Forfeiture of unvested shares (8,916 ) —
(131 ) —
131
—
—
Surrender of restricted shares of common stock (3,865 ) —
(44 ) —
—
—
(44 )
Common stock awarded under the equity incentive plan 12,847
—
274
—
(274 ) —
—
Common stock options exercised 28,430
1
202
—
—
—
203
Stock option expense —
—
9
—
—
—
9
Amortization of restricted stock —
—
—
—
243
—
243
Adoption of ASU 2016-01; Equity securities —
—
—
45
—
(45 ) —
Adoption of ASU 2016-02; Leases —
—
—
(57 ) —
—
(57 )
Cash dividends ($0.20 per share) —
—
—
(2,198 ) —
—
(2,198 )
Balance, June 30, 2019 10,982,008
$ 110
$ 125,822
$ 18,114
$ (757 ) $ (47 ) $ 143,242



						Additional Paid-In Capital			Retained Earnings			Unearned Deferred Compensation			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Common Stock
	Shares		Amount
Balance, January 1, 2020	11,266,954		$	113		$	128,856		$	22,517		$	(462	)	$	(471	)	$	150,553
Net income	—		—			—			2,606			—			—			2,606
Other comprehensive income, net of tax	—		—			—			—			—			(1,138		)	(1,138		)
Surrender of restricted shares of common stock	(1,746	)	—			(21		)	—			—			—			(21		)
Common stock awarded under the equity incentive plan	41,507		—			669			—			(669		)	—			—
Common stock fractional share audit adjustment	(40	)	—			—			—			—			—			—
Common stock repurchased	(155,666	)	(1		)	(1,776		)	(61		)	—			—			(1,838		)
Stock option expense	—		—			4			—			—			—			4
Amortization of restricted stock	—		—			—			—			139			—			139
Cash dividends ($0.21 per share)	—		—			—			(2,372		)	—			—			(2,372		)
Balance at March 31, 2020	11,151,009		$	112		$	127,732		$	22,690		$	(992	)	$	(1,609	)	$	147,933

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statement of Changes in Stockholders’ Equity (unaudited)

Twelve Months Ended December 31, 2019



					Additional Paid-In Capital			Retained Earnings			Unearned Deferred Compensation			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Common Stock
	Shares		Amount
Balance, January 1, 2019	10,953,512		$	109	$	125,512		$	15,264		$	(857	)	$	(1,841	)	$	138,187
Net income	—		—		—			953			—			—			953
Other comprehensive income, net of tax	—		—		—			—			—			1,164			1,164
Forfeiture of unvested shares	(958	)	—		(13		)	—			13			—			—
Surrender of restricted shares of common stock	(798	)	—		(9		)	—			—			—			(9		)
Common stock awarded under the equity incentive plan	10,847		—		252			—			(252		)	—			—
Common stock options exercised	27,430		1		194			—			—			—			195
Stock option expense	—		—		4			—			—			—			4
Amortization of restricted stock	—		—		—			—			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)	—		—		—			(2,198		)	—			—			(2,198		)
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
Net income	—		—		—			3,169			—			—			3,169
Other comprehensive income, net of tax	—		—		—			—			—			(743		)	(743		)
Forfeiture of unvested shares	(3,251	)	—		(68		)	—			68			—			—
Surrender of restricted shares of common stock	(505	)	—		(6		)	—			—			—			(6		)
Stock option expense	—		—		4			—			—			—			4
Amortization of restricted stock	—		—		—			—			100			—			100
Balance, December 31, 2019	11,266,954		$	113	$	128,856		$	22,517		$	(462	)	$	(471	)	$	150,553

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Cash Flows (unaudited)

~~Six~~Three Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~

(in thousands)

Six Months Ended
June 30, 2019 June 30, 2018
Cash flows from operating activities:
Net income attributable to common stockholders $ 5,060
$ 1,844
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premium/accretion discount on investment securities 533
527
Provision for depreciation 705
514
Provision for loan losses 1,550
750
Net realized (gain) loss on sale of securities (55 ) 17
Increase in MSR assets resulting from transfers of financial assets (330 ) —
Amortization of MSR assets 497
—
Amortization of intangible assets 673
322
Amortization of restricted stock 243
161
Net stock based compensation expense 9
—
Gain on sale of office properties and equipment (32 ) (4 )
Provision for deferred income taxes —
137
Increase in cash surrender value of life insurance (230 ) —
Net (gain) loss from disposals of foreclosed and repossessed assets (127 ) 476
Gain on sale of loans held for sale, net (881 ) (709 )
Net change in loans held for sale 333
8,300
(Increase) decrease in accrued interest receivable and other assets (346 ) 1,702
(Decrease) increase in other liabilities (3,736 ) 3,471
Total adjustments (1,194 ) 15,664
Net cash provided by operating activities 3,866
17,508
Cash flows from investing activities:
Purchase of investment securities (24,006 ) (30,812 )
Net decrease (increase) in interest-bearing deposits 1,480
(1,005 )
Proceeds from sale of investment securities 7,976
31
Principal payments on investment securities 10,881
5,600
Net (purchases)/sales of non-marketable equity securities (1,282 ) 1,289
Proceeds from sale of foreclosed and repossessed assets 1,984
1,629
Net increase in loans (28,470 ) (38,536 )
Net capital expenditures (2,747 ) (2,012 )
Proceeds from disposal of office properties and equipment 300
73
Net cash used in investing activities (33,884 ) (63,743 )
Cash flows from financing activities:
Escrow merger settlement proceeds (20,555 ) —
Net increase (decrease) in Federal Home Loan Bank advances 26,031
(36,000 )
Proceeds from other borrowings to fund business combination, net of origination costs 29,864
—
Principal payment reduction to other borrowings (10,000 ) (840 )
Net increase in deposits 7,947
3,467
Proceeds from private placement stock offering, net of issuance costs —
61,289
Surrender of restricted shares of common stock (44 ) (25 )
Exercise of common stock options 203
41
Cash dividends paid (2,198 ) (1,181 )
Net cash provided by financing activities 31,248
26,751
Net increase (decrease) in cash and cash equivalents 1,230
(19,484 )
Cash and cash equivalents at beginning of period 45,778
47,215
Cash and cash equivalents at end of period $ 47,008
$ 27,731



	Three Months Ended
	March 31, 2020			March 31, 2019
Cash flows from operating activities:
Net income attributable to common stockholders	$	2,606		$	953
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium amortization/discount accretion on investment securities	111			287
Depreciation expense	463			351
Provision for loan losses	2,000			1,225
Net realized loss (gain) on equity securities	83			(34		)
Net realized gain on debt securities	(156		)	—
Increase in MSR assets resulting from transfers of financial assets	(182		)	(129		)
Mortgage servicing rights expense	736			191
Amortization of intangible assets	412			327
Amortization of restricted stock	139			140
Net stock based compensation expense	4			4
Loss on sale of office properties and equipment	—			27
Deferred income taxes	(150		)	—
Increase in cash surrender value of life insurance	(142		)	(113		)
Net (gain) loss from disposals of foreclosed and repossessed assets	(68		)	1
Gain on sale of loans held for sale, net	(780		)	(308		)
Net change in loans held for sale	3,392			1,004
(Decrease) increase in accrued interest receivable and other assets	1,131			(1,441		)
Decrease in other liabilities	(340		)	(3,042		)
Total adjustments	6,653			(1,510		)
Net cash provided by (used in) operating activities	9,259			(557		)
Cash flows from investing activities:
Net decrease in other interest-bearing deposits	738			1,225
Purchase of available for sale securities	(9,985		)	(17,425		)
Purchase of held to maturity securities	(8,063		)	—
Proceeds from principal payments and sale of available for sale securities	25,149			5,102
Proceeds from principal payments and maturities of held to maturity securities	142			139
Net sales of other investments	6			55
Proceeds from sale of foreclosed and repossessed assets	997			862
Net increase in loans	(4,957		)	(27,637		)
Net capital expenditures	(423		)	(352		)
Net cash provided by (used in) investing activities	3,604			(38,031		)
Cash flows from financing activities:
Net (decrease) increase in short-term Federal Home Loan Bank advances	(64,994		)	13,015
Proceeds from long-term Federal Home Loan Bank advances	57,500			—
Amortization of debt issuance costs	16			28
Net (decrease) increase in deposits	(15,647		)	23,137
Repurchase shares of common stock	(1,838		)	—
Surrender of restricted shares of common stock	(21		)	(9		)
Common stock options exercised	—			195
Cash dividends paid	(2,372		)	(2,198		)
Net cash (used in) provided by financing activities	(27,356		)	34,168
Net decrease in cash and cash equivalents	(14,493		)	(4,420		)
Cash and cash equivalents at beginning of period	55,840			45,778
Cash and cash equivalents at end of period	$	41,347		$	41,358

910


Supplemental cash flow information:
Cash paid during the period for:
Interest on deposits	$	5,474	$	2,662	$	3,238	$	2,504
Interest on borrowings	$	2,394	$	1,542	$	1,029	$	1,122
Income taxes	$	3,747	$	920	$	—	$	1,632
Supplemental noncash disclosure:
Transfers from loans receivable to foreclosed and repossessed assets	$	674	$	466	$	879	$	393

See accompanying condensed notes to unaudited consolidated financial statements.

1011

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"~~“National Bank”) and operates under the title of Citizens Community Federal National Association ("(“Citizens Community Federal N.A."” or ~~"Bank"~~“Bank” or ~~"CCFBank"~~“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. Wells Insurance Agency (“WIA”) is a wholly owned subsidiary of the Bank, providing insurance products to the Bank’s customers. F&M Investment Corp. of Tomah was a wholly owned subsidiary of the Bank that was formerly utilized by F. & M. Bancorp. of Tomah, Inc. (“F & M”) to manage its municipal bond portfolio, and has been dissolved. 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 through 28 branch ~~locations, including two branch locations acquired in the F. & M. Bancorp. of Tomah, Inc. merger on July 1, 2019.~~locations. 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 family residential 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 30, 2019~~March 31, 2020 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 July 1, 2019, the~~ ~~Company closed on the acquisition of F. & M. Bancorp. of Tomah, Inc. and completed the related data systems conversion on July 14, 2019. See Note 10, "Subsequent Events" for additional information.~~

On May 17, 2019, the Company completed 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 the branch.

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 arising from acquisitions, useful lives for depreciation and amortization, ~~indefinite-lived intangible assets, stock-based compensation~~valuation of goodwill and long-lived assets, stock based compensation, deferred tax assets, uncertain income tax positions and contingencies. Management does not anticipate any material changes to estimates made herein in the near term. Factors that may cause sensitivity to the aforementioned estimates include but are not limited to: those items described under the caption ~~"Risk Factors"~~“Risk Factors” in Item 1A ~~in our transition~~of the annual report on Form 10-K for the ~~transition period from October 1, 2018 to~~year ended December 31, ~~2018,~~2019, filed with the SEC on March ~~8, 2019,~~10, 2020, the matters described in “Risk Factors” in Item 1A of this Form 10-Q, external market factors such as market interest rates and unemployment rates, changes to operating policies and procedures, and changes in applicable banking regulations. Actual

results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period.

Investment Securities; Held to Maturity and Available for Sale – Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of the date of each balance sheet. Securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to

maturity. Held to maturity securities are stated at amortized cost. Investment securities not classified as held to maturity are classified as available for sale. Available for sale securities are stated at fair value, with unrealized holding gains and losses being reported in other comprehensive income (loss), net of tax. Unrealized losses deemed other-than-temporary due to credit issues are reported in the 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 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.

Equity ~~Securities With Readily Determinable Fair Value~~securities with readily determinable fair value - ~~Equity~~The Company is required to maintain an investment in Federal Agricultural Mortgage Corporation (“Farmer Mac”) equity securities. Farmer Mac equity securities are carried at their fair market value, ~~based on an “exit price” notion.~~which is readily determinable. Changes in ~~the~~ fair value ~~of equity investment securities~~ are recognized as ~~Gains~~gains (losses) on investment securities in the consolidated Statement of Operations.

~~Non-marketable Equity Securities —~~Other Investments - ~~Non-marketable equity securities are comprised~~As a member of the Federal Reserve Bank (“FRB”) System and the Federal Home Loan Bank ~~(FHLB)~~(“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 ~~Federal Reserve Bank (FRB) stock, and~~they have no quoted market value, these investments are carried at ~~cost.~~

The Bank is a member of the FHLB system. Members are required to own a certain amount of FHLB stock based on the Bank’s level of borrowings from the FHLB and other factors, and may invest in additional amounts of FHLB stock. FHLB stock is carried at cost ~~classified as a restricted security,~~ and periodically evaluated for impairment based on the ultimate recovery of par value. The determination of whether a decline affects the ultimate recovery is influenced by criteria such as: (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount and length of time a decline has persisted; (2) the impact of legislative and regulatory changes on the FHLB; and (3) the liquidity position of the FHLB. Cash dividends are reported as ~~income.~~other income in the consolidated statement of operations.

~~FHLB~~Also included in non-marketable equity securities is stock of our correspondent bank, Bankers’ Bank, without readily determinable fair value. This stock is ~~evaluated quarterly~~carried at cost plus or minus changes resulting from observable price changes in orderly transactions for ~~impairment. Quarterly cash dividends are paid on FHLB~~this stock, ~~owned by members as a~~less other-than-temporary impairment charges, if any.

Management’s evaluation for impairment of these other investments, includes consideration of the financial condition ~~for required membership~~ and ~~also paid on stock owned by members based on activity.~~

other available relevant information of the issuer. Based on management’s quarterly evaluation, no impairment has been recorded on these securities.

~~As a National Banking Association, the Bank must be a member~~ Other investments totaling $14,999 at March 31, 2020 consisted of ~~the~~$8,158 of FHLB stock, $5,166 of Federal Reserve ~~system. Each member bank is required to subscribe to~~Bank stock and $1,675 of Bankers’ Bank stock. Other investments totaling $15,005 at December 31, 2019 consisted of $8,196 of FHLB stock and $5,162 of Federal Reserve ~~Stock in an amount equal to 6 percent~~Bank stock and $1,647 of its capital and surplus. Although the par value of the stock is $100 per share, banks (including the Bank) pay only $50 per share at the time of purchase, with the understanding that the other half of the subscription amount is subject to call at any time. Dividends are paid at the statutory rate of 6 percent per annum, or $1.50 per share semi-annually on the last business day of June and December.Bankers’ Bank stock..

Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, and net of deferred loan fees and 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. Late charge fees are recognized into income when collected.

Interest income on commercial, mortgage and consumer loans is discontinued according to the following schedules:

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

•Commercial/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 until qualifying for return to accrual status. Loans are returned to accrual status when payments

are made that bring the loan account current with the contractual term of the loan and a six month payment history has been established. Interest on 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 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/agricultural real estate and 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 90 days or more.

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

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

Acquired Loans— Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value with no carryover of related allowance for credit losses. Any allowance for loan loss on these pools reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received). Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition-date fair value including the remaining life of the acquired loans, delinquency status, estimated 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, but are not limited to; loans 90 days or more past due, loans with an internal risk grade of substandard or below, loans classified as non-accrual by the acquired institution, and loans that have been previously modified in a troubled debt restructuring.

Under the ASC 310-30 model, the excess of cash flows expected to be collected at acquisition over recorded fair value is referred to as the accretable yield and is the interest component of expected cash flow. The accretable 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'~~loans’ carrying amount.

Loans Held for Sale — Loans held for sale are those loans the Company has the intent to sell in the foreseeable future. They are carried at the lower of aggregate cost or fair value. Gains and losses on sales of loans are recognized at settlement dates, and are determined by the difference between the sales proceeds and the carrying value of the loans after allocating costs to servicing rights retained. All sales are made without recourse. Interest rate lock commitments on mortgage loans to be funded and sold are valued at fair value, and are included in other assets or liabilities, if material.

Mortgage Servicing ~~Rights-~~Rights— Mortgage servicing rights ~~("MSR"~~(“MSR”) assets result as the Company sells loans to investors in the secondary market and retains the rights to service mortgage loans sold to others. MSR assets are initially measured at fair value; assessed 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, included in amortization of mortgage servicing rights in the Consolidated Statements of Operations, thereon are based on numerous factors, assumptions and judgments, such as those for: changes in the mix of loans, interest rates, prepayment speeds, and default rates. Changes in these factors, assumptions and judgments may have a material effect on the valuation and amortization of MSRs. Although management believes that the assumptions used to evaluate the MSRs for impairment are reasonable, ~~additional~~ future adjustment may be necessary if future economic conditions differ substantially from the economic assumptions used to determine the value of 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 write-down is recorded through expense. Costs incurred after acquisition are expensed and are included in non-interest expense, other in the Consolidated Statements of Operations.

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 December 31, ~~2018~~2019 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 December 31, ~~2018.~~2019. The Company performed a goodwill impairment analysis as of March 31, 2020, due to triggering events being identified, and determined that goodwill was not impaired.

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.

Debt and equity issuance costs—Debt issuance costs, which consist primarily of fees paid to note lenders, are deferred and included in other borrowings in the consolidated balance sheet. Debt issuance costs are amortized over the contractual term of the corresponding debt, as a component of interest expense on other borrowed funds in the consolidated statement of operations. Specific costs associated with the issuance of shares of the Company’s common or preferred stock are netted against proceeds and recorded in stockholders’ equity, as additional paid in capital, on the consolidated balance sheet, in the period of the share issuance.

Advertising, Marketing and Public Relations Expense—The Company expenses all advertising, marketing and public relations costs as they are incurred.

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

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 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 fourth quarter of fiscal 2018, based on updated information obtained in connection with the filing of our tax return and analysis of our net deferred tax asset both from the return and 2018 tax provisions, we finalized the tax analysis and recorded an additional $63 of expense, or a net increase in our tax provision for the year of $338 related to the 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 carry forward periods, any experience with utilization of operating loss and tax credit carry forwards not expiring, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. Accordingly, the Company’s evaluation is based on current tax laws as well as management’s expectations of future performance.

Revenue Recognition - The Company recognizes revenue in the consolidated statements of operations as ~~performance obligations are met~~it is earned 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 ~~performance obligations~~services are ~~met~~provided or as transactions occur. Non-interest income includes fees from brokerage and advisory service, 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 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.

Operating Segments—While our executive officers monitor the revenue streams of the various banking products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company’s banking operations are considered by management to be aggregated in one reportable operating segment.

~~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—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 2018-02; Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income - ASU 2018-02 permits, but does not require, entities to reclassify tax effects stranded in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 to retained earnings. Companies that elect to reclassify these amounts must reclassify stranded tax effects for all items accounted for in accumulated other comprehensive income. The Company adopted this standard update, effective January 1, 2019. The Company’s stranded tax effects were related to valuation of the net deferred tax asset attributable to accumulated other comprehensive income (loss), which are unrealized gains (losses) on available-for-sale debt securities. Adoption resulted in a reclassification between two categories of stockholders’ equity at January 1, 2018, with an increase of $137 in retained earnings and a decrease in accumulated other comprehensive loss for the same amount (no net change in stockholders’ equity).

ASU 2014-09; Revenue from Contracts with Customers (Topic 606)—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 uncertainty of revenue and cash flows arising from contracts with customers. The Company applied the five-step method outlined in the ASU to all revenue streams scoped-in by the ASU and elected the modified retrospective implementation method. Substantially all of the Company’s interest income and certain non-interest income were not impacted by the adoption of this ASU because the revenue from those contracts with customers is covered by other guidance in U.S. GAAP. The Company’s largest sources of non-interest revenue which are subject to the guidance include fees and service charges on loan and deposit accounts and interchange revenue from debit card transactions. ASU 2014-09, 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 related to scoped-in non-interest income recognized under the newly issued ASU is consistent with the current applicable accounting guidance. The Company has made all required additional disclosures related to non-interest income in the consolidated financial statements, primarily in Revenue Recognition policy included herein in Note 1.

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 July 2018, the FASB issued ASU 2018-10 and ASU 2018-11, Codification Improvements to Topic 842, Leases, amending various aspects of Topic 842. Topic 842 does not significantly change the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee from current U.S. GAAP. For leases with a term of 12 months or less, a lessee would be permitted to make an accounting policy election, by class of underlying asset, not to recognize lease assets and liabilities. Topic 842 became effective for the Company for annual and interim periods beginning in the first quarter 2019.

The Company ~~leases~~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~~ $5,000 on the consolidated balance sheet under Topic 842. Adoption of Topic 842 did not have a material impact on the Company’s consolidated statement of operations. Management adopted the guidance on January 1, 2019, and elected certain practical expedients offered by the FASB, 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 March 31, 2020, the Company leases (1) 6 branch locations, (2) its corporate offices (3) 1 production office and (4) office equipment under operating leases. See Note 5 for additional detail.

~~ASU 2014-09; Revenue from Contracts with Customers (Topic 606)—~~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 uncertainty of revenue and cash flows arising from contracts with customers. The Company applied the five-step method outlined in the ASU to all revenue streams scoped-in by the ASU and elected the modified retrospective implementation method. Substantially all of the Company’s interest income and certain noninterest income were not impacted by the adoption of this ASU because the revenue from those contracts with customers is covered by other guidance in U.S. GAAP. The Company’s largest sources of noninterest revenue which are subject to the 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 related to scoped-in noninterest income recognized under the newly issued ASU is consistent with the 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 Business and Summary of Significant Accounting Policies.

~~Recently Issued, But Not Yet Effective Accounting Pronouncements~~

ASU 2017-04; ~~Intangibles--Goodwill~~Intangibles - Goodwill and Other (Topic 350)--—The 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 fair value of individual assets and liabilities of the 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~~The Company adopted 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~~year ended December 31, 2019. Adoption of this ASU to ~~have a~~had no material impact on its consolidated financial statements.

ASU 2018-13, Fair Value Measurement (Topic 820)—The ASU modifies disclosure requirements on fair value measurements. This ASU removes requirements to disclose, (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and (2) the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. ASU 2018-13 clarifies that, disclosure regarding measurement uncertainty, is intended to communicate information about the uncertainty in measurement, as of the reporting date. ASU 2018-13 adds certain disclosure requirements, including (1) disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements, and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The Company adopted this ASU, in first quarter 2020. The amendments on (1) changes in unrealized gains and losses, (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and (3) the narrative description of measurement uncertainty, are being applied prospectively. All other amendments have been applied retrospectively for all periods presented. Adoption of this ASU had no material impact on its consolidated financial position or results of operations.

ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)—The ASU was issued to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement), by providing guidance for determining when the arrangement includes a software license. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract, with similar costs to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments. This guidance became effective for the Company beginning in the first quarter 2020. Adoption of this ASU had no material impact on its consolidated financial statements.

ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting--The ASU provides optional and temporary relief, in the form of optional expedients and exceptions, for applying GAAP to modifications of contacts, hedging relationships and other transactions affected by reference rate (e.g. LIBOR) reforms. ASU 2020-04 is effective for the Company immediately and through December 31, 2022. The Company utilizes LIBOR, among other indexes, as a reference rate for underwriting variable rate loans. Reference rate reform has not had, nor does the Company expect it to have, a material effect on the Company’s consolidated balance sheet, operations or cash flows.

Recently Issued, But Not Yet Effective Accounting Pronouncements

ASU 2016-13; Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments--The ASU changes accounting for credit losses on loans receivable and debt securities from an incurred loss methodology to an expected credit loss methodology. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, ASU 2016-13 requires the use of forward-looking information to form credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, though the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. ~~The amendments in~~On July 17, 2019, the FASB proposed delaying the effective date for ASU 2016-13 ~~will be~~for smaller reporting companies. In November 2019, the FASB issued ASU 2019-10 to extend the effective ~~for the Company beginning in the first quarter 2020.~~date one year. 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 financial condition and results of operations. The Company ~~will record~~anticipates recording the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which the ASU is effective, which will be ~~March 31, 2020.~~

On July 17, 2019, the FASB proposed delaying the effective date for ASU 2016-13 for smaller reporting companies. This proposed delay would result in ASU 2016-13 becoming effective in the first quarter of 2023 for the Company. The Company will continue to monitor the potential changes in the effective date of ASU 2016-13.January 1, 2023.

1719

NOTE 2 – INVESTMENT SECURITIES

The amortized cost, estimated fair value and related unrealized gains and losses on securities available for sale and held to maturity as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019, 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, 2019
March 31, 2020
U.S. government agency obligations	$	53,085	$	138	$	218	$	53,005	$	43,128	$	317	$	736	$	42,709
Obligations of states and political subdivisions	27,670		231		25		27,876		140		—		—		140
Mortgage-backed securities	41,574		424		162		41,836		62,764		2,250		12		65,002
Corporate debt securities	8,543		35		139		8,439		18,759		42		244		18,557
Corporate asset based securities	23,953		—		349		23,604		29,670		—		2,883		26,787
Trust preferred securities									11,193		10		963		10,240
Total available for sale securities	$	154,825	$	828	$	893	$	154,760	$	165,654	$	2,619	$	4,838	$	163,435

December 31, 2018
December 31, 2019
U.S. government agency obligations	$	46,215	$	13	$	930	$	45,298	$	52,020	$	132	$	347	$	51,805
Obligations of states and political subdivisions	35,162		22		456		34,728		281		—		—		281
Mortgage-backed securities	42,279		10		939		41,350		70,806		635		110		71,331
Agency Securities	104		49		5		148
Corporate debt securities	6,577		—		272		6,305		18,776		66		117		18,725
Corporate asset based securities	18,928		8		40		18,896		27,718		—		864		26,854
Trust preferred securities									11,167		35		79		11,123
Total available for sale securities	$	149,265	$	102	$	2,642	$	146,725	$	180,768	$	868	$	1,517	$	180,119


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, 2019
March 31, 2020
Obligations of states and political subdivisions	$	980	$	3	$	—	$	983	$	300	$	1	$	—	$	301
Mortgage-backed securities	2,848		96		—		2,944		10,467		462		—		10,929
Total held to maturity securities	$	3,828	$	99	$	—	$	3,927	$	10,767	$	463	$	—	$	11,230

December 31, 2018
December 31, 2019
Obligations of states and political subdivisions	$	1,701	$	—	$	3	$	1,698	$	300	$	2	$	—	$	302
Mortgage-backed securities	3,149		42		17		3,174		2,551		104		—		2,655
Total held to maturity securities	$	4,850	$	42	$	20	$	4,872	$	2,851	$	106	$	—	$	2,957

As of ~~June 30, 2019,~~March 31, 2020, the Bank has pledged U.S. Government Agency securities with a market value of ~~$5,921~~$633 and mortgage-backed securities with a market value of ~~$14,382~~$4,575 as collateral against specific municipal deposits. At ~~June 30, 2019,~~March 31, 2020, the Bank has pledged ~~U.S. Government Agency~~mortgage-backed securities with a market value of ~~$1,806~~$1,511 as collateral against a borrowing line of credit with the Federal Reserve Bank. However, as of ~~June 30, 2019,~~March 31, 2020, there were no borrowings outstanding on this Federal Reserve Bank line of credit. As of ~~June 30, 2019,~~March 31, 2020, the Bank also has ~~mortgage backed~~mortgage-backed securities with a carrying value of ~~$812~~$655 pledged as collateral to the Federal Home Loan Bank of Des Moines.

1820

The estimated fair value of securities at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, 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, 2019				December 31, 2018				March 31, 2020				December 31, 2019
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	$	3,350	$	3,351	$	2,177	$	2,172	$	—	$	—	$	141	$	141
Due after one year through five years	20,945		21,063		22,296		22,043		5,883		5,760		5,900		5,959
Due after five years through ten years	35,537		35,481		43,014		42,081		37,249		36,480		43,269		43,180
Due after ten years	53,420		53,029		39,395		38,931		59,758		56,193		60,652		59,508
Total securities with contractual maturities	$	113,252	$	112,924	$	106,882	$	105,227	$	102,890	$	98,433	$	109,962	$	108,788
Mortgage backed securities	41,573		41,836		42,279		41,350		62,764		65,002		70,806		71,331
Securities without contractual maturities	—		—		104		148		—		—		—		—
Total available for sale securities	$	154,825	$	154,760	$	149,265	$	146,725	$	165,654	$	163,435	$	180,768	$	180,119


	June 30, 2019				December 31, 2018				March 31, 2020				December 31, 2019
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	$	681	$	680	$	679	$	300	$	301	$	300	$	302
Due after one year through five years	300		302		1,021		1,020
Total securities with contractual maturities	$	980	$	983	$	1,701	$	1,699	300		301		300		302
Mortgage backed securities	2,848		2,944		3,149		3,173		10,467		10,929		2,551		2,655
Total held to maturity securities	$	3,828	$	3,927	$	4,850	$	4,872	$	10,767	$	11,230	$	2,851	$	2,957

Securities with unrealized losses at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:



	Less than 12 Months				12 Months or More				Total
Available for sale securities	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
March 31, 2020
U.S. government agency obligations	$	7,902	$	369	$	10,467	$	367	$	18,369	$	736
Mortgage backed securities	554		2		918		10		1,472		12
Corporate debt securities	5,620		123		1,379		121		6,999		244
Corporate asset based securities	5,379		465		21,407		2,418		26,786		2,883
Trust preferred securities	6,540		963		—		—		6,540		963
Total	$	25,995	$	1,922	$	34,171	$	2,916	$	60,166	$	4,838
December 31, 2019
U.S. government agency obligations	$	14,593	$	156	$	10,540	$	191	$	25,133	$	347
Mortgage backed securities	22,537		62		5,883		48		28,420		110
Corporate debt securities	7,001		15		1,398		102		8,399		117
Corporate asset based securities	8,683		285		18,171		579		26,854		864
Trust preferred securities	7,420		79		—		—		7,420		79
Total	$	60,234	$	597	$	35,992	$	920	$	96,226	$	1,517

There were no held to maturity securities in a net loss position at either March 31, 2020 or December 31, 2019.

1921

The Company evaluates AFS securities in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. In making this evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

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, 2019
U.S. government agency obligations $ 8,900
$ 21
$ 19,283
$ 197
$ 28,183
$ 218
Obligations of states and political subdivisions —
—
6,080
25
6,080
25
Mortgage backed securities —
—
13,200
162
13,200
162
Corporate debt securities —
—
1,361
139
1,361
139
Corporate asset based securities 23,604
349
—
—
23,604
349
Total $ 32,504
$ 370
$ 39,924
$ 523
$ 72,428
$ 893
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

As of March 31, 2020, the Company does not consider its AFS securities with unrealized losses to be attributable to credit-related factors, as the unrealized losses in each category have occurred as a result of changes in noncredit-related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration; thus, no other-than-temporary impairment on AFS securities was recorded. There were no other-than-temporary impairments charged to earnings during the three months ended March 31, 2020 or the three-months ended March 31, 2019.

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, 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

In the first quarter of fiscal 2020, the Bank sold approximately $10,700 of fixed-rate mortgage-backed certificates with a realized gain of $156, which is included in net gains on investment securities in the Consolidated Statements of Operations. During the three months ended March 31, 2019, there were no debt securities sold.

NOTE 3 – 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 documented income, credit scores, and collateral values. Under consumer home equity loan guidelines, the borrower will be approved for a loan based on a percentage of their home's appraised value less the balance owed on the existing first mortgage. Credit risk is minimized within the residential 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 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.

Residential real estate loans are collateralized by primary and secondary positions on real estate and are underwritten primarily based on borrower’s documented income, credit scores, and collateral values. Under consumer home equity loan guidelines, the borrower will be approved for a loan based on a percentage of their home’s appraised value less the balance owed on the existing first mortgage. Credit risk is minimized within the residential 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.

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 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.

2122

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.

2223

Below is a summary of originated and acquired loans by type and risk rating as of ~~June 30, 2019:~~March 31, 2020:


	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	$	114,787	$	54	$	2,744	$	—	$	—	$	117,585
Purchased HELOC loans	11,125		—		—		—		—		11,125
Commercial/Agricultural real estate:
Commercial real estate	237,548		349		1,154		—		—		239,051			$	307,313	$	4,978	$	856	$	—	$	—	$	313,147
Agricultural real estate	32,681		111		2,135		—		—		34,927			33,069		469		2,114		—		—		35,652
Multi-family real estate	75,663		—		1		—		—		75,664			89,474		—		—		—		—		89,474
Construction and land development	31,530		—		3,500		—		—		35,030			72,427		5,780		3,478		—		—		81,685
Consumer non-real estate:
Originated indirect paper	47,188		—		203		—		—		47,391
Purchased indirect paper	11,155		—		—		—		—		11,155
Other Consumer	15,187		—		42		—		—		15,229
Commercial/Agricultural non-real estate:
Commercial non-real estate	70,605		1,141		3,440		—		—		75,186			80,746		1,115		3,388		—		—		85,249
Agricultural non-real estate	19,778		1,157		841		—		—		21,776			21,552		428		720		—		—		22,700
Residential real estate:
One to four family														98,138		35		4,681		—		—		102,854
Purchased HELOC loans														7,367		—		234		—		—		7,601
Consumer non-real estate:
Originated indirect paper														36,153		—		261		—		—		36,414
Other Consumer														14,923		—		157		—		—		15,080
Total originated loans	$	667,247	$	2,812	$	14,060	$	—	$	—	$	684,119		$	761,162	$	12,805	$	15,889	$	—	$	—	$	789,856
Acquired Loans:
Residential real estate:
One to four family	$	71,810	$	462	$	2,033	$	—	$	—	$	74,305
Commercial/Agricultural real estate:
Commercial real estate	123,977		5,648		5,765		—		—		135,390			$	192,367	$	5,513	$	9,123	$	—	$	—	$	207,003
Agricultural real estate	50,217		1,297		5,696		—		—		57,210			39,729		—		8,037		—		—		47,766
Multi-family real estate	7,600		—		159		—		—		7,759			13,361		—		148		—		—		13,509
Construction and land development	16,630		38		373		—		—		17,041			13,982		—		251		—		—		14,233
Consumer non-real estate:
Other Consumer	3,139		—		21		—		—		3,160
Commercial/Agricultural non-real estate:
Commercial non-real estate	29,127		1,526		1,915		—		—		32,568			34,914		563		1,280		—		—		36,757
Agricultural non-real estate	13,699		195		1,157		—		—		15,051			13,700		82		1,458		—		—		15,240
Residential real estate:
One to four family														60,335		424		2,198		—		—		62,957
Consumer non-real estate:
Other Consumer														2,095		—		9		—		—		2,104
Total acquired loans	$	316,199	$	9,166	$	17,119	$	—	$	—	$	342,484		$	370,483	$	6,582	$	22,504	$	—	$	—	$	399,569
Total Loans:
Residential real estate:
One to four family	$	186,597	$	516	$	4,777	$	—	$	—	$	191,890
Purchased HELOC loans	11,125		—		—		—		—		11,125
Commercial/Agricultural real estate:
Commercial real estate	361,525		5,997		6,919		—		—		374,441			$	499,680	$	10,491	$	9,979	$	—	$	—	$	520,150
Agricultural real estate	82,898		1,408		7,831		—		—		92,137			72,798		469		10,151		—		—		83,418
Multi-family real estate	83,263		—		160		—		—		83,423			102,835		—		148		—		—		102,983
Construction and land development	48,160		38		3,873		—		—		52,071			86,409		5,780		3,729		—		—		95,918
Consumer non-real estate:
Originated indirect paper	47,188		—		203		—		—		47,391
Purchased indirect paper	11,155		—		—		—		—		11,155
Other Consumer	18,326		—		63		—		—		18,389
Commercial/Agricultural non-real estate:
Commercial non-real estate	99,732		2,667		5,355		—		—		107,754			115,660		1,678		4,668		—		—		122,006
Agricultural non-real estate	33,477		1,352		1,998		—		—		36,827			35,252		510		2,178		—		—		37,940
Residential real estate:
One to four family														158,473		459		6,879		—		—		165,811
Purchased HELOC loans														7,367		—		234		—		—		7,601
Consumer non-real estate:
Originated indirect paper														36,153		—		261		—		—		36,414
Other Consumer														17,018		—		166		—		—		17,184
Gross loans	$	983,446	$	11,978	$	31,179	$	—	$	—	$	1,026,603		$	1,131,645	$	19,387	$	38,393	$	—	$	—	$	1,189,425
Less:
Unearned net deferred fees and costs and loans in process											98													(510		)
Unamortized discount on acquired loans											(6,744		)											(7,964		)
Allowance for loan losses											(8,759		)											(11,835		)
Loans receivable, net											$	1,011,198												$	1,169,116

2324

Below is a summary of originated loans by type and risk rating as of December 31, ~~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	$	118,461	$	165	$	2,427	$	—	$	—	$	121,053
Purchased HELOC loans	12,883		—		—		—		—		12,883
Commercial/Agricultural real estate:
Commercial real estate	200,226		197		452		—		—		200,875			$	301,381	$	266	$	899	$	—	$	—	$	302,546
Agricultural real estate	27,581		987		1,021		—		—		29,589			31,129		829		2,068		—		—		34,026
Multi-family real estate	61,574		—		—		—		—		61,574			71,877		—		—		—		—		71,877
Construction and land development	15,812		—		—		—		—		15,812			67,989		—		3,478		—		—		71,467
Consumer non-real estate:
Originated indirect paper	56,371		—		214		—		—		56,585
Purchased indirect paper	15,006		—		—		—		—		15,006
Other Consumer	15,515		—		38		—		—		15,553
Commercial/Agricultural non-real estate:
Commercial non-real estate	73,412		106		—		—		—		73,518			85,248		1,023		3,459		—		—		89,730
Agricultural non-real estate	16,494		205		642		—		—		17,341			19,545		402		770		—		—		20,717
Residential real estate:
One to four family														104,428		—		4,191		—		—		108,619
Purchased HELOC loans														8,407		—		—		—		—		8,407
Consumer non-real estate:																		—
Originated indirect paper														39,339		—		246		—		—		39,585
Other Consumer														15,425		—		121		—		—		15,546
Total originated loans	$	613,335	$	1,660	$	4,794	$	—	$	—	$	619,789		$	744,768	$	2,520	$	15,232	$	—	$	—	$	762,520
Acquired Loans:
Residential real estate:
One to four family	$	84,281	$	2,657	$	1,935	$	—	$	—	$	88,873
Commercial/Agricultural real estate:
Commercial real estate	145,674		5,808		5,602		—		—		157,084			$	196,692	$	6,084	$	9,137	$	—	$	—	$	211,913
Agricultural real estate	50,215		—		6,211		—		—		56,426			42,381		534		8,422		—		—		51,337
Multi-family real estate	7,661		—		165		—		—		7,826			13,533		—		1,598		—		—		15,131
Construction and land development	6,288		183		408		—		—		6,879			14,181		—		762		—		—		14,943
Consumer non-real estate:
Other Consumer	4,639		—		22		—		—		4,661
Commercial/Agricultural non-real estate:
Commercial non-real estate	35,221		1,338		2,350		—		—		38,909			41,587		932		1,485		—		—		44,004
Agricultural non-real estate	16,644		50		2,292		—		—		18,986			15,621		350		1,092		—		—		17,063
Residential real estate:
One to four family														65,125		436		2,152		—		—		67,713
Consumer non-real estate:
Other Consumer														2,628		—		12		—		—		2,640
Total acquired loans	$	350,623	$	10,036	$	18,985	$	—	$	—	$	379,644		$	391,748	$	8,336	$	24,660	$	—	$	—	$	424,744
Total Loans:
Residential real estate:
One to four family	$	202,742	$	2,822	$	4,362	$	—	$	—	$	209,926
Purchased HELOC loans	12,883		—		—		—		—		12,883
Commercial/Agricultural real estate:							—		—
Commercial real estate	345,900		6,005		6,054		—		—		357,959			$	498,073	$	6,350	$	10,036	$	—	$	—	514,459
Agricultural real estate	77,796		987		7,232		—		—		86,015			73,510		1,363		10,490		—		—		85,363
Multi-family real estate	69,235		—		165		—		—		69,400			85,410		—		1,598		—		—		87,008
Construction and land development	22,100		183		408		—		—		22,691			82,170		—		4,240		—		—		86,410
Consumer non-real estate:							—		—
Originated indirect paper	56,371		—		214		—		—		56,585
Purchased indirect paper	15,006		—		—		—		—		15,006
Other Consumer	20,154		—		60		—		—		20,214
Commercial/Agricultural non-real estate:							—		—
Commercial non-real estate	108,633		1,444		2,350		—		—		112,427			126,835		1,955		4,944		—		—		133,734
Agricultural non-real estate	33,138		255		2,934		—		—		36,327			35,166		752		1,862		—		—		37,780
Residential real estate:
One to four family														169,553		436		6,343		—		—		176,332
Purchased HELOC loans														8,407		—		—		—		—		8,407
Consumer non-real estate:
Originated indirect paper														39,339		—		246		—		—		39,585
Other Consumer														18,053		—		133		—		—		18,186
Gross loans	$	963,958	$	11,696	$	23,779	$	—	$	—	$	999,433		$	1,136,516	$	10,856	$	39,892	$	—	$	—	$	1,187,264
Less:
Unearned net deferred fees and costs and loans in process											409													(393		)
Unamortized discount on acquired loans											(7,286		)											(9,491		)
Allowance for loan losses											(7,604		)											(10,320		)
Loans receivable, net											$	984,952												$	1,167,060

2425

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.

2526

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			Commercial/Agriculture Real Estate		Commercial/Agricultural Non-real Estate			Residential Real Estate			Consumer Non-real Estate			Unallocated		Total
Six months ended June 30, 2019:
Three months ended March 31, 2020
Allowance for Loan Losses:
Beginning balance, January 1, 2019	$	1,048		$	4,019		$	641		$	1,258	$	214		$	7,180
Beginning balance, January 1, 2020																		$	6,205	$	1,643		$	879		$	467		$	357	$	9,551
Charge-offs	(30		)	(225		)	(106		)	—		—			(361		)	—		(307		)	—			(49		)	—		(356		)
Recoveries	—			—			36			—		—			36			—		—			5			20			—		25
Provision	15			1,216			20			140		—			1,391			1,072		323			40			92			103		1,630
Allowance allocation adjustment	(56		)	—			(63		)	72		85			38
Total allowance on originated loans	977			5,010			528			1,470		299			8,284
Total Allowance on originated loans																		7,277		1,659			924			530			460		10,850
Purchased credit impaired loans	—			—			—			—		—			—			—		—			—			—			—		—
Other acquired loans:	—			—			—			—		—			—
Beginning balance, January 1, 2019	205			183			65			32		(61		)	424
Beginning balance, January 1, 2020																		526		27			163			53			—		769
Charge-offs	(60		)	—			(20		)	—		—			(80		)	—		(135		)	(27		)	(2		)	—		(164		)
Recoveries	1			3			6			—		—			10			—		—			8			2			—		10
Provision	94			30			35			—		—			159			139		268			(29		)	(8		)	—		370
Allowance allocation adjustment	(87		)	(35		)	(30		)	53		61			(38		)
Total allowance on other acquired loans	153			181			56			85		—			475
Total Allowance on other acquired loans																		665		160			115			45			—		985
Total Allowance on acquired loans	153			181			56			85		—			475			665		160			115			45			—		985
Ending balance, March 31, 2019	$	1,130		$	5,191		$	584		$	1,555	$	299		$	8,759
Allowance for Loan Losses at June 30, 2019:
Ending balance, March 31, 2020																		$	7,942	$	1,819		$	1,039		$	575		$	460	$	11,835
Allowance for Loan Losses at March 31, 2020:
Amount of allowance for loan losses arising from loans individually evaluated for impairment	$	154		$	140		$	34		$	195	$	—		$	523		$	733	$	92		$	181		$	27		$	—	$	1,033
Amount of allowance for loan losses arising from loans collectively evaluated for impairment	$	976		$	5,051		$	550		$	1,360	$	299		$	8,236		$	7,209	$	1,727		$	858		$	548		$	460	$	10,802
Loans Receivable as of June 30, 2019:															—
Loans Receivable as of March 31, 2020:																															—
Ending balance of originated loans	$	128,710		$	384,672		$	73,775		$	96,962	$	—		$	684,119		$	519,958	$	107,949		$	110,455		$	51,494		$	—	$	789,856
Ending balance of purchased credit-impaired loans	1,841			19,917			—			3,509		—			25,267			25,452		3,845			1,934			—			—		31,231
Ending balance of other acquired loans	72,464			197,483			3,160			44,110		—			317,217			257,059		48,152			61,023			2,104			—		368,338
Ending balance of loans	$	203,015		$	602,072		$	76,935		$	144,581	$	—		$	1,026,603		$	802,469	$	159,946		$	173,412		$	53,598		$	—	$	1,189,425
Ending balance: individually evaluated for impairment	$	7,669		$	12,984		$	348		$	7,040	$	—		$	28,041		$	14,298	$	5,754		$	8,500		$	496		$	—	$	29,048
Ending balance: collectively evaluated for impairment	$	195,346		$	589,088		$	76,587		$	137,541	$	—		$	998,562		$	788,171	$	154,192		$	164,912		$	53,102		$	—	$	1,160,377

2627


	Residential Real Estate			Commercial/Agriculture Real Estate			Consumer Non-real Estate			Commercial/Agricultural Non-real Estate			Unallocated		Total			Commercial/Agriculture Real Estate		Commercial/Agricultural Non-real Estate		Residential Real Estate			Consumer Non-real Estate			Unallocated			Total
Six months ended June 30, 2018:
Three months ended March 31, 2019
Allowance for Loan Losses:
Beginning balance, January 1, 2018	$	1,439		$	2,604		$	910		$	880		$	26	$	5,859
Beginning balance, January 1, 2019																		$	4,019	$	1,258	$	1,048		$	641		$	214		$	7,180
Charge-offs	(54		)	—			(72		)	(5		)	—		(131		)	—		—		(10		)	(63		)	—			(73		)
Recoveries	33			—			71			12			—		116			—		—		1			18			—			19
Provision	—			380			10			130			—		520			970		14		15			(42		)	63			1,020
Allowance allocation adjustment	(343		)	47			(232		)	(5		)	253		(280		)
Total Allowance on originated loans	$	1,075		$	3,031		$	687		$	1,012		$	279	$	6,084		$	4,989	$	1,272	$	1,054		$	554		$	277		$	8,146
Purchased credit impaired loans	—			—			—			—			—		—			—		—		—			—			—			—
Other acquired loans
Beginning balance, January 1, 2018	—			—			—			—			—		—
Beginning balance, January 1, 2019																		183		32		205			65			(61		)	424
Charge-offs	(42		)	(73		)	(30		)	—			—		(145		)	—		—		(57		)	(15		)	—			(72		)
Recoveries	6			—			3			—			—		9			—		—		—			4			—			4
Provision	70			120			25			15			—		230			17		5		94			27			62			205
Allowance allocation adjustment	114			83			65			18			—		280
Total Allowance on other acquired loans	148			130			63			33			—		374			200		37		242			81			1			561
Total Allowance on acquired loans	148			130			63			33			—		374			200		37		242			81			1			561
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, March 31, 2019																		5,189		1,309		1,296			635			278			8,707
Allowance for Loan Losses at March 31, 2019:
Amount of allowance for loan losses arising from loans individually evaluated for impairment	$	191		$	—		$	25		$	25		$	—	$	241		$	403	$	32	$	268		$	36		$	—		$	739
Amount of allowance for loan losses arising from loans collectively evaluated for impairment	$	1,032		$	3,161		$	725		$	1,020		$	279	$	6,217		$	4,786	$	1,277	$	1,028		$	599		$	278		$	7,968
Loans Receivable as of June 30, 2018:
Loans Receivable as of March 31, 2019:
Ending balance of originated loans	$	137,265		$	234,071		$	102,141		$	75,429		$	—	$	548,906		$	361,652	$	93,550	$	131,823		$	80,455		$	—		$	667,480
Ending balance of purchased credit-impaired loans	456			7,558			—			1,612			—		9,626			19,674		4,875		2,375			—			—			26,924
Ending balance of other acquired loans	79,872			98,743			3,514			24,088			—		206,217			204,531		43,632		79,944			3,925			—			332,032
Ending balance of loans	$	217,593		$	340,372		$	105,655		$	101,129		$	—	$	764,749		$	585,857	$	142,057	$	214,142		$	84,380		$	—		$	1,026,436
Ending balance: individually evaluated for impairment	$	7,668		$	8,228		$	397		$	2,472		$	—	$	18,765		$	8,952	$	9,971	$	7,998		$	391		$	—		$	27,312
Ending balance: collectively evaluated for impairment	$	209,925		$	332,144		$	105,258		$	98,657		$	—	$	745,984		$	576,905	$	132,086	$	206,144		$	83,989		$	—		$	999,124

2728

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				Commercial/Agriculture Real Estate Loans				Commercial/Agriculture non-Real Estate				Residential Real Estate				Consumer non-Real Estate				Totals
	June 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019		March 31, 2020		December 31, 2019		March 31, 2020		December 31, 2019		March 31, 2020		December 31, 2019		March 31, 2020		December 31, 2019
Performing loans
Performing TDR loans	$	3,137	$	3,319	$	2,202	$	2,209	$	82	$	99	$	478	$	428	$	5,899	$	6,055	$	1,124	$	1,730	$	10	$	366	$	2,933	$	3,206	$	69	$	68	$	4,136	$	5,370
Performing loans other	196,784		216,636		592,422		531,030		76,604		91,373		140,402		146,249		1,006,212		985,288		790,678		758,237		156,838		167,596		166,676		178,415		53,337		57,486		1,167,529		1,161,734
Total performing loans	199,921		219,955		594,624		533,239		76,686		91,472		140,880		146,677		1,012,111		991,343		791,802		759,967		156,848		167,962		169,609		181,621		53,406		57,554		1,171,665		1,167,104

Nonperforming loans (1)
Nonperforming TDR loans	374		785		1,736		577		—		—		1,991		1,305		4,101		2,667		5,290		4,868		2,056		1,973		606		383		—		—		7,952		7,224
Nonperforming loans other	2,720		2,069		5,712		2,249		249		334		1,710		771		10,391		5,423		5,377		8,405		1,042		1,579		3,197		2,735		192		217		9,808		12,936
Total nonperforming loans	3,094		2,854		7,448		2,826		249		334		3,701		2,076		14,492		8,090		10,667		13,273		3,098		3,552		3,803		3,118		192		217		17,760		20,160
Total loans	$	203,015	$	222,809	$	602,072	$	536,065	$	76,935	$	91,806	$	144,581	$	148,753	$	1,026,603	$	999,433	$	802,469	$	773,240	$	159,946	$	171,514	$	173,412	$	184,739	$	53,598	$	57,771	$	1,189,425	$	1,187,264


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

2829

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 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019, respectively, was as follows:


	30-59 Days Past Due and Accruing		60-89 Days Past Due and Accruing		Greater Than 89 Days Past Due and Accruing		Total Past Due and Accruing		Nonaccrual Loans		Total Past Due Accruing and Nonaccrual Loans		Current		Total Loans		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, 2019
Residential real estate:
One to four family	$	4,954	$	1,833	$	796	$	7,583	$	2,298	$	9,881	$	182,009	$	191,890
Purchased HELOC loans	504		—		—		504		—		504		10,621		11,125
March 31, 2020
Commercial/Agricultural real estate:
Commercial real estate	894		402		—		1,296		1,674		2,970		371,471		374,441		$	4,320	$	4,855	$	—	$	9,175	$	3,505	$	12,680	$	507,470	$	520,150
Agricultural real estate	867		146		—		1,013		5,717		6,730		85,407		92,137		23		516		—		539		7,162		7,701		75,717		83,418
Multi-family real estate	—		—		—		—		—		—		83,423		83,423		471		—		—		471		—		471		102,512		102,983
Construction and land development	91		—		—		91		58		149		51,922		52,071		2,317		—		—		2,317		—		2,317		93,601		95,918
Consumer non-real estate:
Originated indirect paper	320		65		19		404		138		542		46,849		47,391
Purchased indirect paper	271		106		56		433		—		433		10,722		11,155
Other Consumer	155		52		9		216		27		243		18,146		18,389
Commercial/Agricultural non-real estate:
Commercial non-real estate	58		133		—		191		1,785		1,976		105,778		107,754		1,377		58		—		1,435		1,360		2,795		119,211		122,006
Agricultural non-real estate	724		—		—		724		1,915		2,639		34,188		36,827		622		499		—		1,121		1,739		2,860		35,080		37,940
Total	$	8,838	$	2,737	$	880	$	12,455	$	13,612	$	26,067	$	1,000,536	$	1,026,603
December 31, 2018
Residential real estate:
One to four family	$	2,784	$	861	$	471	$	4,116	$	2,331	$	6,447	$	203,479	$	209,926	3,690		1,651		1,498		6,839		2,071		8,910		156,901		165,811
Purchased HELOC loans	820		572		51		1,443		—		1,443		11,440		12,883		421		—		165		586		68		654		6,947		7,601
Consumer non-real estate:
Originated indirect paper																	161		118		6		285		118		403		36,011		36,414
Other Consumer																	160		45		1		206		67		273		16,911		17,184
Total																	$	13,562	$	7,742	$	1,670	$	22,974	$	16,090	$	39,064	$	1,150,361	$	1,189,425
December 31, 2019
Commercial/Agricultural real estate:
Commercial real estate	1,060		872		—		1,932		745		2,677		355,282		357,959		$	2,804	$	847	$	—	$	3,651	$	4,214	$	7,865	$	506,594	$	514,459
Agricultural real estate	1,360		—		—		1,360		2,019		3,379		82,636		86,015		509		—		—		509		7,568		8,077		77,286		85,363
Multi-family real estate	—		—		—		—		—		—		69,400		69,400		—		—		—		—		1,449		1,449		85,559		87,008
Construction and land development	526		175		—		701		63		764		21,927		22,691		436		—		—		436		42		478		85,932		86,410
Consumer non-real estate:
Originated indirect paper	272		167		45		484		106		590		55,995		56,585
Purchased indirect paper	340		200		157		697		—		697		14,309		15,006
Other Consumer	179		98		12		289		14		303		19,911		20,214
Commercial/Agricultural non-real estate:
Commercial non-real estate	399		70		—		469		1,314		1,783		110,644		112,427		1,024		—		—		1,024		1,850		2,874		130,860		133,734
Agricultural non-real estate	428		40		—		468		762		1,230		35,097		36,327		73		49		—		122		1,702		1,824		35,956		37,780
Residential real estate:
One to four family																	4,929		1,597		649		7,175		2,063		9,238		167,094		176,332
Purchased HELOC loans																	293		378		407		1,078		—		1,078		7,329		8,407
Consumer non-real estate:
Originated indirect paper																	168		52		20		240		137		377		39,208		39,585
Other Consumer																	204		43		28		275		31		306		17,880		18,186
Total	$	8,168	$	3,055	$	736	$	11,959	$	7,354	$	19,313	$	980,120	$	999,433	$	10,440	$	2,966	$	1,104	$	14,510	$	19,056	$	33,566	$	1,153,698	$	1,187,264

2930

At ~~June 30, 2019,~~March 31, 2020, the Company has identified impaired loans of ~~$49,419,~~$55,951, consisting of ~~$10,000~~$12,088 TDR loans, the carrying amount of purchased credit impaired loans of ~~$21,378~~$26,904 and ~~$18,041~~$16,959 of substandard non-TDR loans. The ~~$49,419~~$55,951 total of impaired loans includes ~~$5,899~~$4,136 of performing TDR loans. At December 31, ~~2018,~~2019, the Company has identified impaired loans of ~~$47,334,~~$63,196, consisting of ~~$8,722~~$12,594 TDR loans, the carrying amount of purchased credit impaired loans of ~~$24,816~~$31,978 and ~~$13,796~~$18,624 of substandard non-TDR loans. The ~~$47,334~~$63,196 total of impaired loans includes ~~$6,055~~$5,370 of performing TDR loans. A loan is identified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Performing TDRs consist of loans that have been modified and are performing in accordance with the modified terms for a sufficient length of time, generally six months, or loans that were modified on a proactive basis.

A summary of the Company’s impaired loans as of ~~June 30,~~March 31, 2020, December 31, 2019 and ~~December~~March 31, ~~2018~~2019 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, 2019
March 31, 2020
With No Related Allowance Recorded:
Commercial/agriculture real estate											$	33,959	$	33,959	$	—	$	37,237	$	563
Commercial/agricultural non-real estate											8,343		8,343		—		8,910		119
Residential real estate	$	8,169	$	8,169	$	—	$	8,521	$	106	7,966		7,966		—		8,331		116
Commercial/agriculture real estate	29,540		29,540		—		29,195		492
Consumer non-real estate	241		241		—		234		6		397		397		—		388		8
Commercial/agricultural non-real estate	8,536		8,536		—		7,718		165
Total	$	46,486	$	46,486	$	—	$	45,668	$	769	$	50,665	$	50,665	$	—	$	54,865	$	806
With An Allowance Recorded:
Commercial/agriculture real estate											$	2,511	$	2,511	$	733	$	2,327	$	6
Commercial/agricultural non-real estate											416		416		92		453		5
Residential real estate	$	1,081	$	1,081	$	154	$	1,207	$	8	2,260		2,260		181		1,846		30
Consumer non-real estate											99		99		27		83		1
Total											$	5,286	$	5,286	$	1,033	$	4,709	$	42
March 31, 2020 Totals:
Commercial/agriculture real estate	1,134		1,134		140		1,056		—		$	36,470	$	36,470	$	733	$	39,564	$	569
Commercial/agricultural non-real estate											8,759		8,759		92		9,363		124
Residential real estate											10,226		10,226		181		10,176		146
Consumer non-real estate	107		107		34		127		1		496		496		27		471		9
Commercial/agricultural non-real estate	611		611		195		319		8
Total	$	2,933	$	2,933	$	523	$	2,708	$	17	$	55,951	$	55,951	$	1,033	$	59,574	$	848
June 30, 2019 Totals:
Residential real estate	$	9,250	$	9,250	$	154	$	9,728	$	114
Commercial/agriculture real estate	30,674		30,674		140		30,251		492
Consumer non-real estate	348		348		34		361		7
Commercial/agricultural non-real estate	9,147		9,147		195		8,037		173
Total	$	49,419	$	49,419	$	523	$	48,376	$	786

3031


	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
December 31, 2018
December 31, 2019
With No Related Allowance Recorded:
Commercial/agriculture real estate											$	40,514	$	40,514	$	—	$	24,693	$	699
Commercial/agricultural non-real estate											9,477		9,477		—		19,163		119
Residential real estate	$	8,873	$	8,873	$	—	$	7,915	$	88	8,695		8,695		—		4,461		128
Commercial/agriculture real estate	28,850		28,850		—		19,673		304
Consumer non-real estate	226		226		—		226		4		379		379		—		3,640		6
Commercial/agricultural non-real estate	6,900		6,900		—		4,522		105
Total	$	44,849	$	44,849	$	—	$	32,336	$	501	$	59,065	$	59,065	$	—	$	51,957	$	952
With An Allowance Recorded:
Commercial/agriculture real estate											$	2,143	$	2,143	$	495	$	1,738	$	4
Commercial/agricultural non-real estate											490		490		312		734		3
Residential real estate	$	1,332	$	1,332	$	156	$	1,280	$	17	1,431		1,431		136		789		15
Consumer non-real estate											67		67		13		47		—
Total											$	4,131	$	4,131	$	956	$	3,308	$	22
December 31, 2019 Totals
Commercial/agriculture real estate	979		979		25		820		—		$	42,657	$	42,657	$	495	$	26,431	$	703
Commercial/agricultural non-real estate											9,967		9,967		312		19,897		122
Residential real estate											10,126		10,126		136		5,250		143
Consumer non-real estate	147		147		37		154		1		446		446		13		3,687		6
Commercial/agricultural non-real estate	27		27		9		73		1
Total	$	2,485	$	2,485	$	227	$	2,327	$	19	$	63,196	$	63,196	$	956	$	55,265	$	974
December 31, 2018 Totals:
Residential real estate	$	10,205	$	10,205	$	156	$	9,195	$	105
Commercial/agriculture real estate	29,829		29,829		25		20,493		304
Consumer non-real estate	373		373		37		380		5
Commercial/agricultural non-real estate	6,927		6,927		9		4,595		106
Total	$	47,334	$	47,334	$	227	$	34,663	$	520



	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
March 31, 2019
With No Related Allowance Recorded:
Commercial/agriculture real estate	$	24,515	$	24,515	$	—	$	26,683	$	500
Commercial/agricultural non-real estate	13,228		13,228		—		10,064		236
Residential real estate	7,632		7,632		—		8,252		156
Consumer non-real estate	275		275		—		250		4
Total	$	45,650	$	45,650	$	—	$	45,249	$	896
With An Allowance Recorded:
Commercial/agriculture real estate	$	1,811	$	1,811	$	403	$	1,395	$	5
Commercial/agricultural non-real estate	122		122		32		74		—
Residential real estate	2,431		2,431		268		1,882		26
Consumer non-real estate	115		115		36		131		2
Total	$	4,479	$	4,479	$	739	$	3,482	$	33
March 31, 2019 Totals:
Commercial/agriculture real estate	$	26,326	$	26,326	$	403	$	28,078	$	505
Commercial/agricultural non-real estate	13,350		13,350		32		10,138		236
Residential real estate	10,063		10,063		268		10,134		182
Consumer non-real estate	390		390		36		381		6
Total	$	50,129	$	50,129	$	739	$	48,731	$	929

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 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 914 delinquent TDRs greater than 60 days past due with a recorded investment of ~~$1,176~~$3,401 at ~~June 30, 2019,~~March 31, 2020, compared to 72 such loans with a recorded investment of ~~$1,211~~$101 at December 31, ~~2018.~~2019.

Following is a summary of TDR loans by accrual status as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019.


	June 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Troubled debt restructure loans:
Accrual status	$	5,899	$	6,055	$	4,377	$	5,396
Non-accrual status	4,101		2,667		7,711		7,198
Total	$	10,000	$	8,722	$	12,088	$	12,594

There were no TDR commitments meeting our TDR criteria as of ~~June 30,~~March 31, 2020 and December 31, 2019. There were unused lines of credit totaling $33 and $12 meeting our TDR criteria as of ~~June 30, 2019.~~March 31, 2020 and December 31, 2019, respectively.

3133

The following provides detail, including specific reserve and reasons for modification, related to loans identified as TDRs during the ~~six~~three months ended ~~June 30,~~March 31, 2020, twelve months ended December 31, 2019 and three months ended ~~December~~March 31, ~~2018:~~2019:


	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
Six months ended June 30, 2019
Three months ended March 31, 2020
TDRs:
Commercial/agriculture real estate																3	$	248	$	—	$	17	$	—	$	265	$	265	$	—
Commercial/agricultural non-real estate																—	—		—		—		—		—		—		—
Residential real estate	7	$	325	$	—	$	171	$	—	$	496	$	496	$	—	1	—		—		85		—		85		85		—
Commercial/Agricultural real estate	7	18		78		1,190		—		1,286		1,286		—
Consumer non-real estate	1	2		—		—		—		2		2		—		2	3		—		4		—		7		7		—
Commercial/Agricultural non-real estate	6	165		364		409		—		938		938		—
Totals	21	$	510	$	442	$	1,770	$	—	$	2,722	$	2,722	$	—	6	$	251	$	—	$	106	$	—	$	357	$	357	$	—


	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
Three months ended December 31, 2018
Twelve months ended December 31, 2019
TDRs:
Commercial/agriculture real estate																18	$	2,028	$	159	$	3,224	$	—	$	5,411	$	5,411	$	317,867
Commercial/agricultural non-real estate																11	184		364		996		—		1,544		1,544		98,152
Residential real estate	4	$	240	$	—	$	—	$	—	$	240	$	240	$	—	14	823		—		212		—		1,035		1,035		42,035
Commercial/Agricultural real estate	2	—		581		—		21		602		602		—
Consumer non-real estate	—	—		—		—		—		—		—		—		1	2		—		—		—		2		2		—
Commercial/Agricultural non-real estate	1	24		—		—		—		24		24		—
Totals	7	$	264	$	581	$	—	$	21	$	866	$	866	$	—	44	$	3,037	$	523	$	4,432	$	—	$	7,992	$	7,992	$	458,054



	Number of Contracts	Modified Rate		Modified Payment		Modified Under- writing		Other		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserve
Three months ended March 31, 2019
TDRs:
Commercial/agriculture real estate	3	$	—	$	—	$	1,190	$	—	$	1,190	$	1,190	$	—
Commercial/agricultural non-real estate	2	70		—		397		—		467		467		—
Residential real estate	3	—		—		171		—		171		171		—
Consumer non-real estate	—	—		—		—		—		—		—		—
Totals	8	$	70	$	—	$	1,758	$	—	$	1,828	$	1,828	$	—

A summary of loans by loan segment modified in a troubled debt restructuring as of ~~June 30,~~March 31, 2020 and March 31, 2019, ~~and December 31, 2018,~~ was as follows:



	March 31, 2020			March 31, 2019
	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Troubled debt restructurings:
Commercial/agriculture real estate	28	$	6,415	17	$	3,454
Commercial/agricultural non-real estate	14	2,065		3	485
Residential real estate	42	3,539		37	3,454
Consumer non-real estate	8	69		11	90
Total troubled debt restructurings	92	$	12,088	68	$	7,483

June 30, 2019 December 31, 2018

Number of
Modifications

Recorded
Investment

Number of
Modifications

Recorded
Investment
Troubled debt restructurings:
Residential real estate 43
$ 3,511
41
$ 4,103
Commercial/Agricultural real estate 20
3,938
19
2,787
Consumer non-real estate 11
82
13
99
Commercial/Agricultural non-real estate 16
2,469
10
1,733
Total troubled debt restructurings 90
$ 10,000
83
$ 8,722

The following table provides information related to restructured loans that were considered in default as of ~~June 30, 2019~~March 31, 2020 and ~~December~~March 31, ~~2018:~~2019:


	June 30, 2019			December 31, 2018			March 31, 2020			March 31, 2019
	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Troubled debt restructurings:
Commercial/agriculture real estate							15	$	5,290	3	$	464
Commercial/agricultural non-real estate							13	2,056		9	1,598
Residential real estate	4	$	374	7	$	785	4	365		6	439
Commercial/Agricultural real estate	6	1,736		4	577
Consumer non-real estate	—	—		—	—		—	—		—	—
Commercial/Agricultural non-real estate	12	1,990		8	1,305
Total troubled debt restructurings	22	$	4,100	19	$	2,667	32	$	7,711	18	$	2,501

Included above are ~~thirteen~~ten TDR loans that became in default during the three months ended ~~June 30, 2019.~~March 31, 2020.

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, 2019		March 31, 2020		December 31, 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	$	25,267	$	31,231	$	38,268
Carrying amount	$	21,378	$	26,904	$	31,978
Accountable for under ASC 310-20 (non-PCI loans)
Outstanding balance	$	317,217	$	368,338	$	386,476
Carrying amount	$	314,362	$	364,701	$	383,275
Total acquired loans
Outstanding balance	$	342,484	$	399,569	$	424,744
Carrying amount	$	335,740	$	391,605	$	415,253

The following table provides changes in accretable yield for all acquired loans ~~accounted for under ASC 310-20:~~from prior acquisitions with deteriorated credit quality:


	June 30, 2019			March 31, 2020			March 31, 2019
Balance at beginning of period	$	3,163		$	3,201		$	3,163
Acquisitions	—			—			—
Reduction due to unexpected early payoffs	—
Reclass from non-accretable difference	80			669			—
Disposals/transfers	—
Accretion	(388		)	(233		)	(194		)
Balance at end of period	$	2,855		$	3,637		$	2,969

Non-accretable yield on purchase credit impaired loans was $4,327 and $6,290 at March 31, 2020 and December 31, 2019, respectively.

NOTE 4 – MORTGAGE SERVICING RIGHTS

Mortgage servicing rights--Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid balances of these loans as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 were ~~$518,299~~$521,649 and ~~$518,476,~~$524,715, 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 ~~$4,645~~$4,724 and ~~$3,182,~~$2,868, at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. Mortgage servicing rights activity for the ~~six~~three month period ended ~~June 30, 2019~~March 31, 2020 and ~~three month~~twelve months ended December 31, ~~2018~~2019 were as follows:

As of and for the Six Months Ended As of and for the Three Months Ended
June 30, 2019 December 31, 2018
Balance at beginning of period $ 4,486
$ 1,840
MSR asset acquired —
2,721
Increase in MSR assets resulting from transfers of financial assets 330
100
Amortization during the period (387 ) (175 )
Valuation allowance at end of period (110 ) —
Net book value at end of period $ 4,319
$ 4,486
Fair value of MSR asset at end of period $ 4,382
$ 5,214
Residential mortgage loans serviced for others $ 518,299
$ 518,476
Net book value of MSR asset to loans serviced for others 0.83 % 0.87 %



	As of and for the Three Months Ended			As of and for the Twelve Months Ended
Mortgage servicing rights:	March 31, 2020			December 31, 2019
Mortgage servicing assets, net; beginning of period	$	4,541		$	4,486
MSR asset acquired	—			—
Increase in MSR assets resulting from transfers of financial assets	182			904
Amortization during the period	(256		)	(849		)
	4,467			4,541
Valuation Allowances:
Balance at beginning of period	(259		)	—
Additions	(480		)	(259		)
Recoveries	—			—
Write-downs	—			—
Balance at end of period	(739		)	(259		)
Mortgage servicing assets, net; end of period	$	3,728		$	4,282
Fair value of MSR asset; end of period	$	3,736		$	4,309
Residential mortgage loans serviced for others	$	521,649		$	524,715
Net book value of MSR asset to loans serviced for others	0.72		%	0.82		%

3436

NOTE 5 – LEASES

We have operating leases for our corporate offices (1), bank branch offices ~~(8)~~(6), other production offices (1) and certain office equipment. ~~In May 2019, the bank acquired the previously leased Mankato, MN branch office, which is now included in Office properties and equipment on the consolidated balance sheet.~~ Our leases have remaining lease terms of ~~1.5~~1 to ~~9.25~~6.38 years, some of which include options to extend the leases for up to 5 years. As of ~~June 30, 2019,~~March 31, 2020, we have no additional lease commitments that have not yet commenced.


				Three Months Ended
	As of and for the six months ended June 30, 2019			March 31, 2020			March 31, 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	$	470		$	159		$	239
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	158		$	—		$	158

				March 31, 2020			December 31, 2019
Supplemental balance sheet information related to leases was as follows:
Operating lease right-of-use assets	$	4,220		$	2,577		$	2,787
Operating lease liabilities	$	4,280		$	2,697		$	2,845

Weighted average remaining lease term in years; operating leases	6.91			6.38			6.63
Weighted average discount rate; operating leases	3.02		%	3.07		%	3.07		%

Cash obligations under lease contracts are as follows:

Fiscal years ending December 31,
2019 $ 404
2020 771
2021 623
2022 574
2023 495
Thereafter 1,908
Total lease payments 4,775
Less: imputed interest (495 )
Total $ 4,280



Fiscal years ending December 31,
2020	$	453
2021	473
2022	437
2023	391
2024	338
Thereafter	1,168
Total	3,260
Less: effects of discounting	(563		)
Lease liability recognized	$	2,697

3537

NOTE 6 – FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

A summary of Federal Home Loan Bank advances and other borrowings at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 is as follows:

June 30, 2019 December 31, 2018
Advances from FHLB:
Fixed rates $ 136,000
$ 43,000
Overnight borrowings —
67,000
Total FHLB advances 136,000
110,000
Less: unamortized discount on acquired borrowings $ (156 ) (187 )
Net FHLB advances 135,844
$ 109,813

Other borrowings:
Senior notes:
Variable rate due in June 2031 $ 29,856
10,000
Subordinated notes:
6.75% due August 2027, variable rate commencing August 2022 15,000
15,000
Less: unamortized debt issuance costs (305 ) (353 )
Total other borrowings $ 44,551
$ 24,647

Totals $ 180,395
$ 134,460



		March 31, 2020							December 31, 2019
	Stated Maturity	Amount			Range of Stated Rates				Amount			Range of Stated Rates
Federal Home Loan Bank advances (1), (2), (3), (4), (5)	2020	$	4,000		1.67	%	2.05	%	$	69,000		1.67	%	2.05	%
	2021	4,000			1.85	%	2.16	%	4,000			1.85	%	2.16	%
	2022	15,000			2.34	%	2.45	%	15,000			2.34	%	2.45	%
	2023	20,000			1.43	%	1.44	%	—			—	%	—	%
	2024	20,530			—	%	1.45	%	530			—	%	—	%
	2025	5,000			1.45	%	1.45	%	—			—	%	—	%
	2029	42,500			1.00	%	1.13	%	42,500			1.00	%	1.13	%
	2030	12,500			0.52	%	0.86	%	—			—	%	—	%
Subtotal		123,530							131,030
Unamortized discount on acquired notes		(53		)					(59		)
Federal Home Loan Bank advances, net		$	123,477						$	130,971

Senior Notes (6)	2031	$	28,856		3.50	%	4.00	%	$	28,856		4.00	%	4.75	%
Subordinated Notes (7)	2027	$	15,000		6.75	%	6.75	%	$	15,000		6.75	%	6.75	%
Unamortized debt issuance costs		$	(280	)					$	(296	)
Total other borrowings		$	43,576						$	43,560

Totals		$	167,053						$	174,531

~~Federal Home Loan Bank Advances and Irrevocable Standby Letters of Credit~~

~~Short-term fixed rate~~(1) The FHLB advances bear fixed rates, require interest-only monthly payments, and are collateralized by a blanket lien on pre-qualifying first mortgages, home equity lines, multi-family loans and certain other loans which had a pledged balance of ~~$115,000~~$812,424 and $792,909 at March 31, 2020 and December 31, 2019, respectively. At March 31, 2020, the Bank’s available and unused portion under the FHLB borrowing arrangement was approximately $193,603 compared to $203,935 as of December 31, 2019.

(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $130,030 and $151,130, during the three months ended March 31, 2020 and the twelve months ended December 31, 2019, respectively.

(3) The weighted-average interest rates on FHLB short term borrowings outstanding as of March 31, 2020 and December 31, 2019 were 1.38% and 1.74%, respectively.

(4) The bank acquired nine remaining FHLB notes totaling $12,530, as a result of the F&M acquisition, that mature on various dates through ~~2019.~~2024 with a weighted average rate of 1.97% and weighted average maturity of 16 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~~

(5) FHLB term notes totaling $55,000, with various maturity dates in 2029 and 2030, can be called or replaced by the FHLB on a quarterly basis, beginning approximately three months ~~ended June 30, 2019,~~after the ~~Bank~~initial advance.

(6) Senior notes, entered into ~~a $10,000 FHLB~~by the Company in June 2019 consist of the following:

(a) A term note, requiring quarterly interest-only payments through June 2022, and quarterly principal and interest payments thereafter. Interest is variable, based on US Prime rate with a ~~10-year maturity, callable quarterly, at~~floor rate of 3.50%. This note included the refinancing of $10,074 of existing debt.

(b) A $5,000 line of credit, maturing in August 2020, that remains undrawn upon.

(7) Subordinated notes resulted from the Company’s private sale in August 2017, and bear a fixed interest rate of ~~1.05%. Each~~ 6.75% for five years. In August 2022, they convert to a three-month LIBOR plus 4.90% rate, and the interest rate will reset quarterly thereafter. Interest-only payments are due quarterly.

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~~Letters of ~~credit and fixed rate advances are secured by $674,727 of real estate and commercial and industrial loans.~~Credit

The Bank has an irrevocable Standby Letter of Credit Master Reimbursement Agreement with the Federal Home Loan Bank. This irrevocable standby letter of credit ~~("LOC"~~(“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 ~~$132,789~~$177,924 and ~~$87,359~~$147,991 at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

~~At June 30, 2019, the Bank’s available and unused portion of this borrowing arrangement was approximately $150,787 compared to $178,620 as of December 31, 2018.~~

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

~~Senior Notes and Revolving Line of Credit~~

On August 1, 2018, the Company entered into a credit agreement, consisting of a $10,000 term note and a $7,500 revolving note. On June 26, 2019, the Company entered into a credit agreement consisting of a $29,856 term note and a $5,000 revolving note. This term note included the refinancing of $10,074 in existing debt and matures on June 26, 2031. This revolving note becomes effective on August 1, 2019, at which time it replaces 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 contractual interest rate for the term note was 4.75% during the three and six months ended June 30, 2019. At June 30, 2019, there were no borrowings outstanding on the revolving note.~~

~~Subordinated Notes~~

NOTE 7—CAPITAL MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Although these terms are not used to represent overall financial condition, if adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 2020, 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 March 31, 2020 and December 31, 2019, respectively, are presented below:



	Actual				For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio
As of March 31, 2020
Total capital (to risk weighted assets)	$	163,087	13.6	%	$	96,152	> =	8.0	%	$	120,190	> =	10.0	%
Tier 1 capital (to risk weighted assets)	151,252		12.6	%	72,114		> =	6.0	%	96,152		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	151,252		12.6	%	54,085		> =	4.5	%	78,123		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	151,252		10.3	%	58,926		> =	4.0	%	73,657		> =	5.0	%
As of December 31, 2019
Total capital (to risk weighted assets)	$	160,302	13.1	%	$	98,174	> =	8.0	%	$	122,718	> =	10.0	%
Tier 1 capital (to risk weighted assets)	149,982		12.2	%	73,631		> =	6.0	%	98,174		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	149,982		12.2	%	55,223		> =	4.5	%	79,767		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	149,982		10.4	%	57,834		> =	4.0	%	72,293		> =	5.0	%

3639

~~On August 10, 2017, the Company issued $15,000 of subordinated notes maturing on August 10, 2027.~~ The ~~subordinated notes are unsecured~~Company’s Tier 1 (leverage) and are subordinate to the claims of other creditors of the Company. The subordinated notes mature in August 2027, with fixed interest rate for five years of 6.75%, and in August 2022, convert to a three-month LIBOR plus 4.90% variable rate, and will reset quarterly thereafter. Interest on the Notes will be payable quarterly in arrears onrisk-based capital ratios at March 31, ~~June 30, September 30~~2020 and December 31, ~~of each year through the maturity date.~~

~~Debt Issuance Costs~~

~~The unamortized amount of debt issuance costs was $305 and $353 at June 30,~~ 2019, ~~and December 31, 2018, respectively. These debt issuance costs~~respectively, are ~~included in other borrowings on the consolidated balance sheet.~~

~~Maturities of FHLB advances and other borrowings are as follows:~~presented below:

Fiscal years ending December 31,
2019 $ 115,000
2020 —
2021 —
2022 10,844
2023 —
Thereafter 54,551
$ 180,395



	Actual				For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio
As of March 31, 2020
Total capital (to risk weighted assets)	$	137,705	11.5	%	$	96,152	> =	8.0	%	$	120,190	> =	10.0	%
Tier 1 capital (to risk weighted assets)	110,870		9.2	%	72,114		> =	6.0	%	96,152		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	110,870		9.2	%	54,085		> =	4.5	%	78,123		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	110,870		7.7	%	58,926		> =	4.0	%	73,657		> =	5.0	%
As of December 31, 2019
Total capital (to risk weighted assets)	$	137,259	11.2	%	$	98,174	> =	8.0	%	$	122,718	> =	10.0	%
Tier 1 capital (to risk weighted assets)	111,939		9.1	%	73,631		> =	6.0	%	998,174		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	111,939		9.1	%	55,223		> =	4.5	%	79,767		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	111,939		7.7	%	57,834		> =	4.0	%	72,293		> =	5.0	%

NOTE 78 – 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 30, 2019~~, ~~113,910~~ ~~restricted shares under this plan were granted. In February 2005, the Company’s stockholders also approved the Company’s~~Plan and 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 30, 2019~~, ~~284,778~~ ~~options had been granted under this plan to eligible participants. This plan was~~These plans were terminated on January 18, 2018.

In February 2008, the Company’s stockholders approved the Company’s 2008 Equity Incentive ~~Plan. The aggregate number~~Plan for a term 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.~~10 years. As of ~~June 30, 2019~~,March 31, 2020, 89,183 restricted shares ~~under this plan were granted. As of~~ ~~June 30, 2019~~,and 181,000 options had been granted to eligible participants. ~~As of January 18, 2018,~~Due to the plan’s expiration, no new awards ~~will~~can be granted under ~~the 2008 Equity Incentive Plan.~~

this 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.~~date. Options granted to date under ~~these plans~~this plan 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 30, 2019, 54,068~~March 31, 2020, 95,575 restricted shares had been granted under this plan. As of ~~June 30, 2019,~~March 31, 2020, no stock options had been granted under this plan.

~~Compensation~~Net compensation expense related to restricted stock awards from these plans was ~~$103 and $243~~$139 for the three ~~and six~~ months ended ~~June 30, 2019,~~March 31, 2020, compared to ~~$94 and $161~~$140 for the three ~~and six~~ months ended ~~June 30, 2018.~~March 31, 2019.

3740

Restricted Common Stock Award
	June 30, 2019				December 31, 2018				March 31, 2020				December 31, 2019
	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 year	75,407		$	13.24	52,172		$	13.29	43,457		$	12.76	75,407		$	13.24
Granted	12,847		11.50		27,514		13.15		41,507		11.93		12,847		11.50
Vested	(13,600	)	12.69		(4,279	)	13.30		(6,577	)	12.73		(32,630	)	12.89
Forfeited	(8,916	)	13.41		—		—		—		—		(12,167	)	13.28
Unvested and outstanding at end of year	65,738		$	12.85	75,407		$	13.24	78,387		$	12.32	43,457		$	12.76

The Company accounts for stock-based employee compensation related to the Company’s ~~2004 Stock Option and~~2008 Equity Incentive Plan and ~~the 2008~~2018 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 these plans for the three month period ended March 31, 2020 and ~~six month periods ended June 30,~~March 31, 2019 was ~~$5 and $9. The compensation cost recognized for stock-based employee compensation related to these plans for the three and six month periods ended June 30, 2018, was $5 and $0.~~$4, respectively.

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
June 30, 2019
March 31, 2020
Outstanding at beginning of year		108,930		$	10.15						78,100		$	11.18
Granted		—		—
Forfeited or expired											(3,200	)	12.21
Outstanding at end of year											74,900		$	11.14	6.28
Exercisable at end of year											45,100		$	10.68	6.03	$	(191	)
Fully vested and expected to vest											74,900		$	11.14	6.28	$	(351	)
December 31, 2019
Outstanding at beginning of year											108,930		$	10.15
Exercised		(28,430	)	7.12							(28,430	)	7.12
Forfeited or expired		(800	)	13.76							(2,400	)	12.38
Outstanding at end of year		79,700		$	11.19	7.06					78,100		$	11.18	6.55
Exercisable at end of year		39,500		$	10.34	6.83	$	20			44,700		$	10.73	6.30	$	67
Fully vested and expected to vest		79,700		$	11.19	7.06	$	(28	)		78,100		$	11.18	6.55	$	81
December 31, 2018
Outstanding at beginning of year		121,670		$	9.82
Granted		—		—
Exercised		(12,740	)	7.04
Forfeited or expired		—		—
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		108,930		$	10.15	5.82	$	82

Information related to the 2004 Stock Option and Incentive Plan and 2008 Equity Incentive Plan for the ~~three month~~respective periods follows:


	June 30, 2019		December 31, 2018		Three months ended March 31, 2020		Twelve months ended December 31, 2019
Intrinsic value of options exercised	$	130	$	81	$	—	$	130
Cash received from options exercised	$	203	$	90	$	—	$	203
Tax benefit realized from options exercised	$	—	$	—	$	—	$	—

NOTE 89 – 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~~topic describes three levels of inputs that may be used to measure fair value:

Level 1- Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

Level 2- Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3- Significant unobservable inputs that reflect the Company’s assumptions about the factors that market participants would use in pricing an asset or liability.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the fair value measurement.

The fair value of securities available for sale is determined by obtaining market price quotes from independent third parties wherever such quotes are available (Level 1 inputs); or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Where such quotes are not available, ~~the Company utilizes~~we utilize independent third party valuation analysis to support ~~the Company’s~~our own estimates and judgments in determining fair value (Level 3 inputs).

Assets Measured on a Recurring Basis

The following tables present the financial instruments measured at fair value on a recurring basis as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~:2019:


	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, 2019
March 31, 2020
Investment securities:
U.S. government agency obligations	$	53,005	$	—	$	53,005	$	—	$	42,709	$	—	$	42,709	$	—
Obligations of states and political subdivisions	27,876		—		27,876		—		140		—		140		—
Mortgage-backed securities	41,836		—		41,836		—		65,002		—		65,002		—
Agency Securities	—		—		—		—
Corporate debt securities	8,439		—		8,439		—		18,557		—		18,557		—
Corporate asset based securities	23,604		—		23,604		—		26,787		—		26,787		—
Trust preferred securities									10,240		—		10,240		—
Total	$	154,760	$	—	$	154,760	$	—	$	163,435	$	—	$	163,435	$	—
December 31, 2018
December 31, 2019
Investment securities:
U.S. government agency obligations	$	45,298	$	—	$	45,298	$	—	$	51,805	$	—	$	51,805	$	—
Obligations of states and political subdivisions	34,728		—		34,728		—		281		—		281		—
Mortgage-backed securities	41,350		—		41,350		—		71,331		—		71,331		—
Agency securities	148		—		148		—
Corporate debt securities	6,305		—		6,305		—		18,725		—		18,725		—
Corporate asset backed securities									26,854		—		26,854		—
Trust preferred securities									11,123		—		11,123		—
Total	$	146,725	$	—	$	146,725	$	—	$	180,119	$	—	$	180,119	$	—

Assets Measured on Nonrecurring Basis

The following tables present the financial instruments measured at fair value on a nonrecurring basis as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~:2019:


	Fair Value		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Carrying Value		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2019
March 31, 2020
Foreclosed and repossessed assets, net	$	1,387	$	—	$	—	$	1,387	$	1,432	$	—	$	—	$	1,432
Impaired loans with allocated allowances	2,933		—		—		2,933		5,286		—		—		5,286
Mortgage servicing rights	4,382		—		—		4,382		3,728		—		—		3,736
Total	$	8,702	$	—	$	—	$	8,702	$	10,446	$	—	$	—	$	10,454
December 31, 2018
December 31, 2019
Foreclosed and repossessed assets, net	$	2,570	$	—	$	—	$	2,570	$	1,460	$	—	$	—	$	1,460
Impaired loans with allocated allowances	2,485		—		—		2,485		4,131		—		—		4,131
Mortgage servicing rights	5,214		—		—		5,214		4,282		—		—		4,309
Total	$	10,269	$	—	$	—	$	10,269	$	9,873	$	—	$	—	$	9,900

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 fair value of mortgage servicing rights was estimated using discounted cash flows based on current market rates and other factors.

The following table represents additional quantitative information about assets measured at fair value on a

recurring and nonrecurring basis and for which we have utilized Level 3 inputs to determine their fair value at

~~June 30, 2019.~~March 31, 2020.


	Fair Value		Valuation Techniques (1)	Significant Unobservable Inputs (2)	Range	Fair Value		Valuation Techniques (1)	Significant Unobservable Inputs (2)	Range
June 30, 2019
March 31, 2020
Foreclosed and repossessed assets, net	$	1,387	Appraisal value	Estimated costs to sell	10 - 15%	$	1,432	Appraisal value	Estimated costs to sell	10 - 15%
Impaired loans with allocated allowances	$	2,933	Appraisal value	Estimated costs to sell	10 - 15%	$	5,286	Appraisal value	Estimated costs to sell	10 - 15%
Mortgage servicing rights	$	4,382	Discounted cash flows	Discounted rates	9.5% - 12.5%	$	3,736	Discounted cash flows	Discounted rates	9.5% - 12.5%
December 31, 2018
December 31, 2019
Foreclosed and repossessed assets, net	$	2,570	Appraisal value	Estimated costs to sell	10 - 15%	$	1,460	Appraisal value	Estimated costs to sell	10 - 15%
Impaired loans with allocated allowances	$	2,485	Appraisal value	Estimated costs to sell	10 - 15%	$	4,131	Appraisal value	Estimated costs to sell	10 - 15%
Mortgage servicing rights	$	5,214	Discounted cash flows	Discounted rates	9.5% - 12.5%	$	4,309	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.

~~Equity securities with readily determinable fair value~~

~~Equity securities with readily determinable fair value are comprised of Federal Agricultural Mortgage Corp. Class C stock carried at fair value and represents a level 1 measurement.~~

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

Non-marketable equity securities are comprised 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 stock is restricted and represents a level 1 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 and United Bank acquisition approximates the fair value of the loans at June 30, 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 approximates the fair value of the certificates at June 30, 2019 and represents a level 3 measurement.

~~Federal Home Loan Bank ("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:



		March 31, 2020				December 31, 2019
	Valuation Method Used	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	(Level I)	$	41,347	$	41,347	$	55,840	$	55,840
Other interest-bearing deposits	(Level II)	4,006		4,046		4,744		4,792
Securities available for sale “AFS”	(Level II)	163,435		163,435		180,119		180,119
Securities held to maturity “HTM”	(Level II)	10,767		11,230		2,851		2,957
Equity securities with readily determinable fair value	(Level I)	163		163		246		246
Other investments	(Level II)	14,999		14,999		15,005		15,005
Loans receivable, net	(Level III)	1,169,116		1,192,164		1,167,060		1,161,660
Loans held for sale	(Level II)	3,281		3,281		5,893		5,893
Mortgage servicing rights	(Level III)	3,728		3,736		4,282		4,309
Accrued interest receivable	(Level 1)	4,822		4,822		4,738		4,738
Financial liabilities:
Deposits	(Level III)	$	1,180,055	$	1,185,997	$	1,195,702	$	1,192,777
FHLB advances	(Level II)	123,477		129,435		130,971		131,593
Other borrowings	(Level I)	43,576		43,576		43,560		43,560
Other liabilities	(Level I)	9,731		9,731		10,010		10,010
Accrued interest payable	(Level I)	392		392		453		453

4244

June 30, 2019 December 31, 2018
Valuation Method Used
Carrying
Amount

Estimated
Fair
Value

Carrying
Amount

Estimated
Fair
Value
Financial assets:
Cash and cash equivalents (Level I) $ 47,008
$ 47,008
$ 45,778
$ 45,778
Other interest-bearing deposits (Level II) 5,980
5,985
7,460
6,704
Securities available for sale "AFS" See above 154,760
154,760
146,725
146,725
Securities held to maturity "HTM" (Level II) 3,828
3,927
4,850
4,872
Equity securities with readily determinable fair value (Level I) 177
177
—
—
Non-marketable equity securities, at cost (Level I) 12,543
12,543
11,261
11,261
Loans receivable, net (Level III) 1,011,198
1,004,093
984,952
988,072
Loans held for sale (Level II) 2,475
2,475
1,927
1,927
Mortgage servicing rights (Level III) 4,319
4,382
4,486
5,214
Accrued interest receivable (Level 1) 4,452
4,452
4,307
4,307
Financial liabilities:
Deposits (Level III) $ 1,015,459
$ 1,017,564
$ 1,007,512
$ 1,005,488
FHLB advances (Level II) 135,844
135,158
109,813
109,665
Other borrowings (Level I) 44,551
44,551
24,647
24,647
Other liabilities (Level I) 8,554
8,554
7,359
7,359
Accrued interest payable (Level II) 770
770
406
406

NOTE 910 – OTHER COMPREHENSIVE INCOME (LOSS)

The following table shows the tax effects allocated to each component of other comprehensive income for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 and ~~2018:~~2019:

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 $ 2,482
$ (683 ) $ 1,799
$ (1,747 ) $ 388
$ (1,359 )
Reclassification adjustment for gains (losses) included in net income 55
(15 ) 40
(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) $ 2,475
$ (681 ) $ 1,794
$ (1,901 ) $ 392
$ (1,509 )

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



	2020									2019
	Before-Tax Amount			Tax Expense			Net-of-Tax Amount			Before-Tax Amount		Tax Expense			Net-of-Tax Amount
Unrealized (losses) gains on securities:
Net unrealized (losses) gains arising during the period	$	(1,643	)	$	452		$	(1,191	)	$	1,569	$	(432	)	$	1,137
Reclassification adjustment for gains included in net income	73			(20		)	53			37		(10		)	27
Other comprehensive (loss) income	$	(1,570	)	$	432		$	(1,138	)	$	1,606	$	(442	)	$	1,164

The changes in the accumulated balances for each component of other comprehensive income (loss) for the ~~three~~twelve months ended December 31, ~~2018~~2019 and the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 were as follows:

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 1,794
1,794
Ending balance, June 30, 2019 $ (47 ) $ (47 )



	Unrealized Gains (Losses) on Securities			Other Accumulated Comprehensive Income (Loss)
Beginning Balance, January 1, 2019	$	(1,704	)	$	(1,841	)
Current year-to-date other comprehensive income, net of tax	1,415			1,415
Adoption of ASU 2016-01; Equity securities (1)	(45		)	(45		)
Ending balance, December 31, 2019	$	(334	)	$	(471	)
Current year-to-date other comprehensive loss, net of tax	(1,138		)	(1,138		)
Ending balance, March 31, 2020	$	(1,472	)	$	(1,609	)

(1) Amounts reclassified to retained earnings due to January 1, 2019 adoption of ASU 2016-02. For further information, refer to Note 1, “Nature of Business and Summary of Significant Policies; Recent Pronouncements-Adopted”.

Reclassifications out of accumulated other comprehensive income (loss) for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 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
Details about Accumulated Other Comprehensive Income (Loss) Components						Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)			(1)	Affected Line Item on the Statement of Operations
Unrealized gains and losses
Gain on equity securities	$	21			Gain on investment securities
Sale of securities						$	73			Gains on available for sale securities
Tax Effect	(6		)		Provision for income taxes	(20		)		Provision for income taxes
Total reclassifications for the period	$	15			Net income attributable to common shareholders	$	53			Net gain attributable to common shareholders

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

4445

Reclassifications out of accumulated other comprehensive income (loss) for the ~~six~~three months ended ~~June 30, 2018~~March 31, 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
Details about Accumulated Other Comprehensive Income (Loss) Components						Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)			(1)	Affected Line Item on the Statement of Operations
Unrealized gains and losses
Sale of securities	$	4			Net loss on investment securities	$	34			Gains on available for sale securities
Tax Effect	(1		)		Benefit for income taxes	(9		)		Provision for income taxes
Total reclassifications for the period	$	3			Net loss attributable to common shareholders	$	25			Net gain attributable to common shareholders

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

~~NOTE 10 - SUBSEQUENT EVENTS~~

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

~~On July 1, 2019,~~ the Company completed its previously announced acquisition of F. & M. Bancorp. of Tomah, Inc. The Company acquired 100% of the common stock of F. & M. Bancorp. of Tomah, Inc., including its wholly owned subsidiary, Farmers & Merchants Bank. The transaction was valued at approximately $24 million, paid in cash and common stock of the Company. At March 31, 2019, F&M had assets of approximately $195 million, deposits of $152 million and loans of $126 million. In connection with the acquisition, the Company merged Farmers & Merchants Bank with and into the Bank, with the Bank surviving the merger. As of the filing of this report, the Company has not yet determined the accounting for the F. & M. transaction, and pro-forma information is not yet available.

4546


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~~annual report on Form 10-K for the ~~transition period from October 1, 2018 to~~year ended December 31, ~~2018,~~2019, filed with the SEC on March 8, 10, 2020 (“2019 10-K”), the matters described in “Risk Factors” in Item 1A of this Form 10-Q, and the following:

conditions in the financial markets and economic conditions generally;

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

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 maintain our reputation;

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

our ability to maintain or increase our market share;

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 ongoing 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;

changes in federal or state tax laws;

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.

4647

GENERAL

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of ~~June 30, 2019~~March 31, 2020, and our consolidated results of operations for the ~~three and~~ ~~six~~three months ended ~~June 30, 2019~~March 31, 2020, compared to the same period in the prior fiscal year for the three ~~and six~~ months ended ~~June 30, 2018.~~March 31, 2019. 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 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 March 8, 2019.~~our 2019 10-K. Unless otherwise stated, all monetary amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than share, per share and capital ratio amounts, are stated in thousands.

~~PERFORMANCE SUMMARY~~

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

Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
Net income as reported $ 4,107
$ 503
$ 5,060
$ 1,844
EPS - basic, as reported $ 0.37
$ 0.09
$ 0.46
$ 0.31
EPS - diluted, as reported $ 0.37
$ 0.08
$ 0.46
$ 0.30
Cash dividends paid $ —
$ —
$ 0.20
$ 0.20
Return on average assets (annualized) 1.23 % 0.21 % 0.78 % 0.39 %
Return on average equity (annualized) 11.72 % 2.51 % 7.33 % 4.83 %

~~Key factors behind these results were:~~

Net income totaled $4.1 million, or $0.37 per diluted share for the quarter ended June 30, 2019, compared to $503 thousand $0.08 per diluted share for the quarter ended June 30, 2018. The current quarter’s operations reflected the sale of the Rochester Hills, MI branch for a deposit premium of 7 percent, or approximately $2.3 million, net of selling costs. Other noteworthy items impacting the quarter included: (1) increased marketing costs totaling approximately $250 thousand associated with Company branding of merged banking operations, (2) merger related costs of $206 thousand primarily related to the acquisition of F. & M. Bancorp. of Tomah, Inc., (3) approximately $110 thousand in professional fees related to two one-time consulting engagements and (4) increased amortization of mortgage servicing rights by $110 thousand due to impairment resulting from higher prepayment rates. These costs were partially offset by $54 thousand in accretion related to acquired loans. In comparison to the quarter ended June 30, 2018, increases in total assets and net income reflect both the acquisition of United Bank in October of 2018 and organic loan and deposit growth.

The net interest margin declined to 3.30% for the quarter ended June 30, 2019 from 3.43% the prior quarter and 3.40% for the quarter ended June 30. 2018. The decline reflects the competitive market for deposits, the addition of time deposits while interest rates dropped sharply and the sale of the Rochester Hills branch with lower deposit costs being replaced with wholesale borrowings.

Net growth in gross loans of $167 thousand for the quarter ended June 30, 2019, resulted from an increase in the Community Banking loan portfolio of $16.859 million, and the planned run off in the Legacy Loan portfolio of $16.7 million during the quarter ended June 30, 2019. The Company experienced lower loan originations in the current quarter. Impacts on loan growth included approximately $3.8 million of payoffs/payments on classified assets - an increase from the prior quarter of approximately $1.3 million and a reduction in loan originations partially due to the Company maintaining loan pricing. Gross loans increased $265 million in the 12 month period ended June 30, 2019 which reflect both the anticipated approximately $200 million in loan growth from United Bank and approximately $65 million in organic loan growth. The organic loan growth reflects approximately 5.25% growth rate. The Community Banking loan portfolios reflect the Bank's strategy to grow its commercial banking business and consumer lending. The Legacy loan portfolios reflect the 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.

Loan loss provisions declined to $325 thousand for the quarter ended June 30, 2019 from $1.2 million the prior quarter and $650 thousand in the quarter ended June 30, 2018. The provisions for each period were primarily due to continued newly originated loan growth, charge offs not specifically reserved for in the previous quarter, and in the quarter ended March 31, 2019, the increase in specific reserves primarily related to one credit as discussed in the previous quarter.

~~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 34.0% to 24.5% for 2018, and 21.0% for 2019.~~

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amount of assets, liabilities, revenue, expenses and their related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that our management believes to be relevant at the time our consolidated financial statements are prepared. Some of these estimates are more critical than others. In addition to the policies included in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included as an exhibit in our ~~transition~~annual report on ~~Form~~our 2019 10-K, ~~for the 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 30, 2019~~March 31, 2020 which is related to its banking activities. The Company performed the required goodwill impairment test and determined that goodwill was not impaired as of December 31, ~~2018.~~

2019. The Company performed a goodwill impairment analysis as of March 31, 2020, due to triggering events being identified, and determined that goodwill was not impaired.

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 and 79 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 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 30, 2019,~~March 31, 2020, management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary.

STATEMENT OF OPERATIONS ANALYSIS

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

Interest rate spread and net interest margin are used to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest earning assets and the rate paid for interest-bearing liabilities that fund those assets. Net interest margin is expressed as the percentage of net interest income to average interest earning assets. Net interest margin currently exceeds interest rate spread because non-interest-bearing sources of funds (“net free funds”), principally demand deposits and stockholders’ equity, also support interest earning assets. The narrative below discusses net interest income, interest rate spread, and net interest margin for the ~~three~~three-month period ended March 31, 2020 and ~~six month periods ended June 30,~~March 31, 2019, ~~and 2018,~~ respectively.

Net interest income was ~~$10.1~~$12.7 million for the three months ended ~~June 30, 2019,~~March 31, 2020, compared to ~~$7.5 million for the three months ended June 30, 2018 and~~ $10.1 million for the three months ended March 31, 2019. The growth in net interest income was due to the growth in average assets from the F&M acquisition, increase in accretion of purchase credit impaired loans and organic loan growth, partially offset by a decrease in net interest margin percentage.

For the quarter ended March 31, 2020, the Company’s net interest margin benefited from $1.042 million, or 30 basis points of the accretion of purchased credit impaired discounts, compared to $15 thousand, or one basis point for the first quarter of 2019. Scheduled accretion on acquired loans, was $234 thousand for the quarter ended March 31, 2020 compared to $194 thousand for the quarter ended March 31, 2019, ~~respectively.~~ with the increase due to impact of the F&M acquisition.

The net interest margin for the three-month period ended ~~June 30, 2019~~March 31, 2020 was ~~3.30%~~3.64%, compared to ~~3.40%~~3.43% for the three-month period ended ~~June 30, 2018 and 3.43% for the three months ended~~ March 31, 2019. The increase in net interest margin was ~~3.36% for~~due to the ~~six months ended June 30, 2019 and 3.40% for~~increase in the ~~six months ended June 30, 2018~~accretion of purchased credit impaired discounts. The net interest margin, after subtracting the positive 30 basis point impact of accretion of purchased credit impaired loans and scheduled accretion of 7 basis points, was 3.27%. For the quarter ended March 31, 2019, the net interest margin of 3.43%, after subtracting the positive two basis point impact of accretion of purchased credit impaired loans and scheduled accretion of seven basis points was 3.34%. or a seven-basis point reduction ~~from 2018~~in net interest margin. This decrease is largely due to ~~the compression~~lower interest rate spreads between loans and deposits in ~~the quarter ended June 30,~~ 2019 due to the competitive market for deposits and ~~the replacement funding for the branch sale being replaced with~~ higher cost wholesale ~~funding.~~

~~For the quarter ended June 30, 2019, the Company’s net interest margin benefited $54 thousand from purchased loan accretion, or 2 bp compared~~funding required to $15 thousand, or 1 bp in the prior quarter. For the quarter ended March 31, 2019, the Company’s net interest margin benefited from $15 thousand, or 1 bp, of interest income realized on the payoff of classified loans and no such income was recognized in the June 30, 2018 or March 31, 2018 quarters. Scheduled accretion for acquired loans, was $194 thousand, $194 thousand, $142 thousand and $142 thousand for the quarters ended June 30, 2019, March 31, 2019, June 30, 2018 and March 31, 2018, respectively.

As shown in the rate/volume analysis in the following pages, volume changes resulted in an increase of $3.1 million in net interest income for the three month period ended June 30, 2019, compared to the comparable prior year period primarilyreplace deposits lost due to the acquisition of United Bank, which resulted in larger average balances of loans, deposits and borrowings. The changes in the composition of interest earning assets resulted in an increase of $4.0 million for the three-month period ended June 30,May 2019 compared to the same period in the prior year, primarily due to the acquisition of United. Rate changes on interest earning assets increased net interest income by $559 thousand for the three-month period ended June 30, 2019, compared to the same period in the prior year. Rate changes on interest-bearing liabilities increased interest expense by $1.1 million over the same period in the prior year, resulting in a net decrease of $533 thousand in net interest income as a result of changes in the deposit composition during the three-month period ended June 30, 2019. Rate changes on investment securities are reflective of changes in the composition of the investment portfolio.branch sale.

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 six month periods~~three-month period ended ~~June 30, 2019,~~March 31, 2020, and for the ~~comparable prior year three and six month periods.~~three-month period ended March 31, 2019. Non-accruing loans have been included in the table as loans carrying a zero yield.

The increase in loan interest income in the current year three-month period was primarily due to an increase in loans due to the United Bank acquisition 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 United Bank acquisition, the impact of a rising short-term interest rate environment and impact on deposit costs and organic deposit growth.

NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS

(Dollar amounts in thousands)

Three months ended ~~June 30, 2019~~March 31, 2020 compared to the three months ended ~~June 30, 2018:~~March 31, 2019:


	Three months ended June 30, 2019						Three months ended June 30, 2018						Three months ended March 31, 2020						Three months ended March 31, 2019
	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	$	30,076	$	171	2.28	%	$	19,203	$	61	1.27	%	$	31,069	$	118	1.53	%	$	26,014	$	168	2.62	%
Loans	1,023,447		12,976		5.09	%	729,390		8,865		4.87	%	1,172,246		15,459		5.30	%	996,778		12,414		5.05	%
Interest-bearing deposits	5,967		35		2.35	%	8,418		44		2.10	%	4,362		27		2.49	%	6,913		39		2.29	%
Investment securities (1)	158,991		996		2.60	%	124,715		701		2.44	%	179,287		1,131		2.54	%	156,157		947		2.57	%
Non-marketable equity securities, at cost	12,114		158		5.23	%	8,158		99		4.87	%
Other investments													15,006		173		4.64	%	10,375		150		5.86	%
Total interest earning assets (1)	$	1,230,595	$	14,336	4.68	%	$	889,884	$	9,770	4.43	%	$	1,401,970	$	16,908	4.85	%	$	1,196,237	$	13,718	4.66	%
Average interest-bearing liabilities:
Savings accounts	$	147,456	$	149	0.41	%	$	94,741	$	53	0.22	%	$	154,596	$	151	0.39	%	$	164,129	$	175	0.43	%
Demand deposits	191,858		383		0.80	%	150,666		129		0.34	%	234,822		375		0.64	%	189,348		354		0.76	%
Money market	164,402		448		1.09	%	115,625		196		0.68	%	236,470		609		1.04	%	152,963		382		1.01	%
CD’s	336,253		1,765		2.11	%	271,311		959		1.42	%	354,095		1,846		2.10	%	326,834		1,529		1.90	%
IRA’s	40,688		181		1.78	%	32,890		94		1.15	%	42,695		199		1.87	%	39,857		153		1.56	%
Total deposits	880,657		2,926		1.33	%	665,233		1,431		0.86	%	$	1,022,678	$	3,180	1.25	%	$	873,131	$	2,593	1.20	%
FHLB Advances and other borrowings	165,733		1,327		3.21	%	114,498		859		3.01	%	146,810		1,057		2.90	%	126,239		1,063		3.41	%
Total interest-bearing liabilities	$	1,046,390	$	4,253	1.63	%	$	779,731	$	2,290	1.18	%	$	1,169,488	$	4,237	1.46	%	$	999,370	$	3,656	1.48	%
Net interest income			$	10,083					$	7,480					$	12,671					$	10,062
Interest rate spread					3.05	%					3.25	%					3.39	%					3.18	%
Net interest margin (1)					3.30	%					3.40	%					3.64	%					3.43	%
Average interest earning assets to average interest-bearing liabilities					1.18						1.14						1.20						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~~quarters ended ~~June 30, 2019~~March 31, 2020 and ~~24.5% for the quarter ended June 30, 2018.~~March 31, 2019. The FTE adjustment to net interest income included in the rate calculations totaled ~~$35 thousand~~$0 and ~~$55~~$42 thousand for the three months ended ~~June 30,~~March 31, 2020 and March 31, 2019, ~~and June 30, 2018,~~ respectively.

~~NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS~~

~~(Dollar amounts in thousands)~~

~~Six months ended June 30, 2019 compared to the six months ended June 30, 2018:~~

Six months ended June 30, 2019 Six months ended June 30, 2018

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 $ 28,045
$ 339
2.44 % $ 23,488
$ 123
1.06 %
Loans 1,010,113
25,390
5.07 % 727,496
17,405
4.82 %
Interest-bearing deposits 6,440
74
2.32 % 7,850
75
1.93 %
Investment securities (1) 157,574
1,943
2.59 % 119,329
1,321
2.41 %
Non-marketable equity securities, at cost 11,244
308
5.52 % 8,082
198
4.94 %
Total interest earning assets (1) $ 1,213,416
$ 28,054
4.68 % $ 886,245
$ 19,122
4.38 %
Average interest-bearing liabilities:
Savings accounts $ 155,792
$ 324
0.42 % $ 94,619
$ 81
0.17 %
Demand deposits 190,603
737
0.78 % 151,849
243
0.32 %
Money market 158,683
831
1.06 % 117,124
357
0.61 %
CD’s 331,543
3,293
2.00 % 268,466
1,822
1.37 %
IRA’s 40,272
334
1.67 % 33,289
178
1.08 %
Total deposits 876,893
5,519
1.27 % 665,347
2,681
0.81 %
FHLB Advances and other borrowings 145,986
2,390
3.30 % 116,219
1,605
2.78 %
Total interest-bearing liabilities $ 1,022,879
$ 7,909
1.56 % $ 781,566
$ 4,286
1.11 %
Net interest income $ 20,145
$ 14,836

Interest rate spread 3.12 % 3.27 %
Net interest margin (1) 3.36 % 3.40 %
Average interest earning assets to average interest-bearing liabilities 1.19
1.13

(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 six months ended June 30, 2019 and 24.5% for the six months ended June 30, 2018. The FTE adjustment to net interest income included in the rate calculations totaled $77 thousand and $107 thousand for the six months ended June 30, 2019 and June 30, 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 and volume which cannot be segregated have been allocated in proportion~~the F&M acquisition for the three-months ended March 31, 2020 compared to the ~~relationship~~three-months ended March 31, 2019 and to a lesser extent, the impact of ~~the dollar amounts of the change in each category.~~organic loan growth.

5251

RATE / VOLUME ANALYSIS

(Dollar amounts in thousands)

Three months ended ~~June 30, 2019~~March 31, 2020 compared to the three months ended ~~June 30, 2018.~~March 31, 2019.

Increase (decrease) due to
Volume Rate Net
Interest income:
Cash and cash equivalents $ 43
$ 67
$ 110
Loans 3,708
403
4,111
Interest-bearing deposits (14 ) 5
(9 )
Investment securities 219
76
295
Non-marketable equity securities, at cost 51
8
59
Total interest earning assets 4,007
559
4,566
Interest expense:
Savings accounts 37
59
96
Demand deposits 42
212
254
Money market accounts 99
153
252
CD’s 261
545
806
IRA’s 25
62
87
Total deposits 464
1,031
1,495
FHLB Advances and other borrowings 406
62
468
Total interest bearing liabilities 870
1,093
1,963
Net interest income $ 3,137
$ (534 ) $ 2,603

~~Six months ended June 30, 2019 compared to the six months ended June 30, 2018.~~



	Increase (decrease) due to
	Volume			Rate			Net
Interest income:
Cash and cash equivalents	$	29		$	(79	)	$	(50	)
Loans	2,286			759			3,045
Interest-bearing deposits	(16		)	4			(12		)
Investment securities	146			38			184
Other investments	59			(36		)	23
Total interest earning assets	2,504			686			3,190
Interest expense:
Savings accounts	(10		)	(14		)	(24		)
Demand deposits	78			(57		)	21
Money market accounts	215			12			227
CD’s	134			183			317
IRA’s	12			34			46
Total deposits	429			158			587
FHLB Advances and other borrowings	162			(169		)	(7		)
Total interest bearing liabilities	591			(11		)	580
Net interest income	$	1,913		$	697		$	2,610

Increase (decrease) due to
Volume Rate Net
Interest income:
Cash and cash equivalents $ 27
$ 189
$ 216
Loans 7,051
934
7,985
Interest-bearing deposits (15 ) 14
(1 )
Investment securities 483
139
622
Non-marketable equity securities, at cost 84
26
110
Total interest earning assets 7,630
1,302
$ 8,932
Interest expense:
Savings accounts 68
175
243
Demand deposits 73
421
494
Money market accounts 151
323
474
CD’s 486
985
1,471
IRA’s 42
114
156
Total deposits 820
2,018
2,838
FHLB Advances and other borrowings 451
334
785
Total interest bearing liabilities 1,271
2,352
3,623
Net interest income $ 6,359
$ (1,050 ) $ 5,309

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. We continue to monitor adverse general economic conditions that could affect our commercial and agricultural portfolios in the future.

~~Provision expense~~Total provision for ~~the quarter ended June 30, 2019 of $325 thousand was due to newly originated~~ loan growth and net legacy charge-offs. Provision expense for commercial loan charge-offs for the quarter ended June 30, 2019, were provided for during the previous quarter and included a partial charge-off of the single dairy relationship reserved for last quarter.

~~Provision expense for the six months ended June 30, 2019, was $1.6 million, resulting from provision~~losses expense for the quarter ended March 31, ~~2019~~2020 was $2,000. In anticipation of ~~$1.2 million due~~a COVID 19-related economic slowdown, management recorded provision for loans losses of $750. Various “Stay-at-Home Orders” resulted in temporary business closures, reduced operating capacity and uncertainty regarding potential future revenue and cash flows for certain business, including bank borrowers. Approximately $600 of the provision was related to ~~(1) $600 thousand reflecting strong newly originated organic~~ loan growth ~~(2) $122 thousand~~in the quarter. The remaining provision was related to net ~~charge offs~~loan charge-offs of $485 and necessary increases in specific and unallocated allowance of loan losses. Provision expenses for the quarter ~~and (3)~~ended March 31, 2019 was $1,225. Approximately $600 of the provision was related to loan growth. The remaining provision expenses was primarily due to approximately $500 ~~thousand attributed to increases~~of growth in specific reserves, ~~on impaired credits. The largest specific reserve was established on a single dairy relationship~~the impact of ~~approximately $350 thousand or $0.02 per share, whose status changed to nonaccrual status during~~net charge-offs of $122 and the March 31, 2019 quarter. While this sector is experiencing difficult operating conditions, the issues related to this 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 complaintgrowth in ~~Eau Claire County Circuit Court regarding borrower representations in the loan application and approval process. Additionally, approximately half of the remaining specific~~unallocated reserves ~~increase was due to enhancements on various impaired.~~

~~The Bank recorded a provision of $650 thousand and $750 thousand for the three and six months ended June 30, 2018, respectively, reflecting organic loan growth and net charge-offs.~~

Management believes that the provision taken for the current year ~~six-month~~three-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 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 six~~ month periods ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively.

Three months ended June 30, Six months ended June 30,
2019 2018 % Change 2019 2018 % Change
Non-interest Income:
Service charges on deposit accounts $ 581
$ 413
40.68 % $ 1,131
$ 843
34.16 %
Interchange income 453
338
34.02 % 791
640
23.59 %
Loan servicing income 634
337
88.13 % 1,188
683
73.94 %
Gain on sale of loans 573
226
153.54 % 881
415
112.29 %
Loan fees and service charges 261
116
125.00 % 389
203
91.63 %
Insurance commission income 192
187
2.67 % 376
374
N/M
Gains (losses) on investment securities 21
4
N/M
55
(17 ) (423.53 )%
Gain on sale of branch 2,295
—
N/M
2,295
—
N/M
Other 228
146
56.16 % 464
301
54.15 %
Total non-interest income $ 5,238
$ 1,767
196.43 % $ 7,570
$ 3,442
119.93 %

~~N/M means not meaningful~~



	Three months ended March 31,
	2020		2019		% Change
Non-interest Income:
Service charges on deposit accounts	$	560	$	550	1.82	%
Interchange income	464		338		37.28	%
Loan servicing income	685		554		23.65	%
Gain on sale of loans	780		308		153.25	%
Loan fees and service charges	477		128		272.66	%
Insurance commission income	279		184		51.63	%
Gains on available for sale securities	73		34		114.71	%
Other	285		236		20.76	%
Total non-interest income	$	3,603	$	2,332	54.50	%

The growth in most line items, year over year, ~~includes~~are due to the impact of the ~~United Bank~~F&M acquisition on July 1, 2019.

The interchange income increase reflects both the F&M acquisition and the impact of a milder winter in ~~October~~2020 compared to 2019. In 2019, our schools were closed for inclement weather for half of ~~2018.~~the working days in the month of February.

The increase in ~~non-interest~~loan servicing income ~~during~~is largely due to the ~~current quarter, reflects a $2.3 million gain on the sale~~impact of ~~the Rochester Hills, MI branch, increased~~higher 1-4 family loan originations.

The increase in gains on the sale of loans ~~and loan fee income. The gains on~~for the ~~sale of loans reflects~~three months ended March 31, 2020 reflected increased mortgage activity ~~from~~due to the lower interest rate environment and ~~better weather.~~to a lesser extent, higher gains on the sale of commercial originated government-guaranteed loans.

~~Interchange income increased to $453 thousand for the quarter ended June 30, 2019 from $338 thousand~~The increase in loan fees for the quarter ended March 31, 2020 compared to the same three-month period in 2019 ~~reflecting~~is largely due to higher ~~consumer spending, partially~~commercial loan customer activity.

The increase in insurance income in 2020 from 2019 is largely due to higher new commission activity.

For the three months ended March 31, 2020, the gain on sale of securities is due to the ~~lower spend~~sale of $10 million of higher-premium mortgage-backed certificates to reduce prepayment risk, partially offset by approximately $70 of decreased equity value of the Company’s required holding of Farmer Mac common stock. For the three months ended March 31, 2019, the market value of the Company’s required holding of Farmer Mac stock increased $34.

Included in other non-interest income for the ~~first~~ quarter ended March 31, 2020 is a $75 prepayment fee received on the payoff of ~~2019 due to seasonal weather conditions.~~

a mortgage-backed security.

Non-interest Expense. The following table reflects the various components of non-interest expense for the three ~~and six~~ month periods ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively.

Three months ended June 30, Six months ended June 30,
2019 2018 % Change 2019 2018 % Change
Non-interest Expense:
Compensation and benefits $ 4,604
$ 3,840
19.90 % $ 9,310
$ 7,646
21.76 %
Occupancy - net 866
733
18.14 % 1,820
1,494
21.82 %
Office 528
417
26.62 % 1,050
843
24.56 %
Data processing 868
720
20.56 % 1,855
1,453
27.67 %
Amortization of intangible assets 346
161
114.91 % 673
322
109.01 %
Amortization of mortgage servicing rights 306
84
264.29 % 497
160
210.63 %
Advertising, marketing and public relations 456
185
146.49 % 659
331
99.09 %
FDIC premium assessment 146
94
55.32 % 240
209
14.83 %
Professional services 575
735
(21.77 )% 1,400
1,058
32.33 %
Losses on repossessed assets, net (90 ) 450
(120.00 )% (127 ) 450
(128.22 )%
Other 784
455
72.31 % 1,906
1,011
88.53 %
Total non-interest expense $ 9,389
$ 7,874
19.24 % $ 19,283
$ 14,977
28.75 %

Non-interest expense (annualized) / Average assets 2.93 % 3.34 % (12.22 )%

3.21 % (100.00 )%

~~N/M means not meaningful~~



	Three months ended March 31,
	2020			2019			% Change
Non-interest Expense:
Compensation and benefits	$	5,435		$	4,706		15.49	%
Occupancy - net	1,006			954			5.45	%
Office	543			522			4.02	%
Data processing	996			987			0.91	%
Amortization of intangible assets	412			327			25.99	%
Mortgage servicing rights expense	736			191			285.34	%
Advertising, marketing and public relations	239			203			17.73	%
FDIC premium assessment	68			94			(27.66	)%
Professional services	604			825			(26.79	)%
Gains (losses) on repossessed assets, net	(68		)	(37		)	(83.78	)%
Other	760			1,122			(32.26	)%
Total non-interest expense	$	10,731		$	9,894		8.46	%

Non-interest expense (annualized) / Average assets	2.85		%	3.09		%	(7.79	)%

The growth in most line items, year over year, includes the impact of the ~~United Bank~~F&M acquisition ~~in October~~on July1, 2019.

Compensation expense, for the quarter ended March 31, 2020, increased from March 31, 2019. In addition to the impact of ~~2018.~~higher salaries paid due to the impact of the F&M acquisition, we incurred higher employee benefit costs.

~~Amortization of mortgage~~Mortgage servicing rights expense increased during the quarter ended June 30, 2019 from $191 thousand in the prior quarter to $306 thousand during the current quarter due to increased prepayments in the Company’s servicing portfolio due to the current rate environment causing an impairment of $110 thousand. The increase from the same periods in fiscal 2018, reflects the larger servicing portfolio due to the United Bank acquisition and the June 30, 2019 impairment.

Advertising, marketing and public relations expenses increased to $456 thousand for the quarter ended June 30, 2019 from $185 thousand for the quarter ended June 30, 2018 and $659 thousand for the six months ended June 30, 2019March 31, 2020 by $545 compared to $331 thousand for the six months ended June 30, 2018, as the Company incurred increased costs associated with Company branding of merged banking operations. With two bank conversions in less than six months, we anticipate a modest reduction in expense during the third quarter, compared to the second quarter, and then decrease to the $200 thousand to $250 thousand range during the fourth quarter, which approximates the historic run rates for the Bank as adjusted for the marketing costs in the acquired bank markets.

Professional fees declined to $575 thousand for the second quarter of 2019 from $825 thousand the previous quarter and $735 thousand for the quarter ended June 30, 2018, as the Company recognized lower merger related fees. The reduction in merger fees during the current quarter, compared to the previous quarter, was partially offset by approximately $110 thousand of one-time consulting projects.

Merger related expenses included in the consolidated statement of operations totaled $865 thousand for the six months ended June 30, 2019. Merger related expenses incurred in the three months ended June 30, 2019, consisted of the following: (1) $126 thousand recorded in professional services and (2) $80 thousand recorded in other non-interest expense. Merger related expenses incurred in the quarter ended March 31, 2019 ~~consisted~~largely due to the impact of higher forecasted prepayments, from the current lower interest rate environment, resulting in $480 of mortgage servicing rights impairment. The remaining increase is due to higher amortization based on the interest rate environment.

The first quarter ended March 31, 2020 was favorably impacted by the FDIC application of the following: (1) $74 thousand recorded in compensation and benefits, (2) $204 thousand recorded in professional services and (3) $381 thousand recorded in other non-interest expense. Merger related expenses incurred duringSmall Bank Assessment Credits to our current quarter deposit insurance charge totaling $56. This was the six months ended June 30, 2018 and included in the consolidated statement of operations totaled $238 thousand and consisted of $228 thousand recorded in professional services during the quarter ended June 30, 2018 and $10 thousand recorded in professional services duringBank’s final quarterly insurance credit.

Professional fees for the quarter ended March 31, ~~2018.~~2020 decreased compared to the quarter ended March 31, 2019, primarily due to lower audit costs. Higher 2019 audit costs were largely due to the transition period audit required by the Company’s change in fiscal year-end.

Other expenses for the quarter ended March 31, 2020 decreased compared to March 31, 2019 largely due to lower merger-related expenses, partially offset by higher commercial loan and deposit costs.

Income Taxes. Income tax expense was $937 for the three months ended March 31, 2020 compared to $322 for the three months ended March 31, 2019. The impact of higher non-taxable municipal income in 2019 was offset by higher non-deductible merger costs, netting to approximately the same effective tax rates in both periods.

BALANCE SHEET ANALYSIS

Cash and Cash Equivalents. During March 2019, the Federal Reserve issued a rule eliminating the required deposit at the local Federal Reserve Bank effective March 26, 2020. The Bank was able to utilize a portion of the formerly required $22 million to reduce borrowings and decrease the balance on deposit at the Federal Reserve by approximately $12 million.

Investment Securities. We manage our securities portfolio to provide liquidity and enhance income. Our investment portfolio is comprised of securities available for sale and securities held to maturity. In the first quarter, the Bank sold approximately $10.7 million of fixed-rate mortgage-backed certificates, (MBS) and these were replaced with similar, lower premium MBS.

Securities available for sale, which represent the majority of our investment portfolio, were $163.4 million at March 31, 2020, compared with $180.1 million at December 31, 2019.

Securities held to maturity increased to $10.8 million at March 31, 2020, compared to $2.9 million at December 31, 2019. This increase was due to the purchase of agency mortgage-backed securities in the first quarter of 2020.

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
March 31, 2020
U.S. government agency obligations	$	43,128	$	42,709
Obligations of states and political subdivisions	140		140
Mortgage-backed securities	62,764		65,002
Corporate debt securities	18,759		18,557
Corporate asset based securities	29,670		26,787
Trust preferred securities	11,193		10,240
Totals	$	165,654	$	163,435
December 31, 2019
U.S. government agency obligations	$	52,020	$	51,805
Obligations of states and political subdivisions	281		281
Mortgage backed securities	70,806		71,331
Corporate debt securities	18,776		18,725
Corporate asset based securities	27,718		26,854
Trust preferred securities	11,167		11,123
Totals	$	180,768	$	180,119

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
March 31, 2020
Obligations of states and political subdivisions	$	300	$	301
Mortgage-backed securities	10,467		10,929
Totals	$	10,767	$	11,230
December 31, 2019
Obligations of states and political subdivisions	$	300	$	302
Mortgage-backed securities	2,551		2,655
Totals	$	2,851	$	2,957

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

~~Branch closure costs totaling $15~~



	March 31, 2020				December 31, 2019
Available for sale securities	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Agency	$	97,093	$	99,425	$	122,826	$	123,136
AAA	15,118		14,220		4,383		4,245
AA	23,491		20,992		23,475		22,749
A	18,759		18,558		18,776		18,725
Non-rated	—		—		141		141
Total available for sale securities	$	165,654	$	163,435	$	180,768	$	180,119

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



	March 31, 2020				December 31, 2019
Securities held to maturity	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. government agency	$	10,467	$	10,929	$	2,551	$	2,655
AA	125		125		125		126
A	—		—		—		—
Non-rated	175		176		175		176
Total	$	10,767	$	11,230	$	2,851	$	2,957

At March 31, 2020, securities with a market value of $1.5 million were pledged against a line of credit with the Federal Reserve Bank of Minneapolis. As of March 31, 2020, this line of credit had a zero-outstanding balance. At March 31, 2020, the Bank has pledged mortgage-backed securities with a market value of $4.575 million and U.S. Government Agency securities with a market value of $633,000 as collateral against municipal deposits. At March 31, 2020, the Bank also has mortgage-backed securities with a carrying value of $655,000 pledged as collateral to the Federal Home Loan Bank of Des Moines.

At March 31, 2020, the Bank’s unrealized loss on securities available for sale, net of tax, increased to $1.6 million compared to $471 thousand ~~incurred~~at December 31, 2019. The decrease in interest rates benefitted the Bank’s mortgage-backed securities portfolio. However, the flight to safety caused some temporary decreases in the ~~six months ended June 30, 2019~~valuation of the Banks investment in Trust Preferred Securities and ~~recorded in~~Student Loan Paper. The Bank has the ~~quarter ended March 31, 2019 consisted of $4 thousand recorded in professional services~~ability and ~~$11 thousand recorded in other non-interest expense in~~intent to hold these securities to maturity and expects to collect the consolidated statement of operations. Branch closure costs incurred in the six months ended June 30, 2018 totaled $17 thousand, and consisted of $16 thousand and $1 thousand recorded in other non-interest expense in the consolidated statement of operations during the quarters ended June 30, 2018 and March 31, 2018, respectively.

Audit and financial reporting expenses, related to our year end change, consisted of $358 thousand recorded in professional services in the consolidated statement of operations during the six months ended June 30, 2019 and recorded in the quarter ended March 31, 2019.

~~Income Taxes.~~ Income tax expense was $1.5 million and $1.8 million for the three and six months ended June 30, 2019, compared to $220 thousand and $707 thousand for the three and six months ended June 30, 2018, respectively. The effective tax rate decreased from 30.4% to 26.8% for the three month periods ended June 30, 2018 and June 30, 2019, respectively. The effective tax rate decreased from 27.7% to 26.5% for the six month periods ended June 30, 2018 and June 30, 2019, respectively due to a lower federal income rate, partially offset by higher non-deductible merger costs and an overall smaller tax-exempt investment security and loan portfolio.

~~BALANCE SHEET ANALYSIS~~principal owed at maturity.

Loans. Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, increased by ~~$27.4~~$3.6 million, ~~or 2.76%,~~ to ~~$1.020~~$1.181 billion as of ~~June 30, 2019~~March 31, 2020, from ~~$992.6 million~~$1.177 billion at December 31, ~~2018.~~2019. This $3.6 million growth includes the impact of related commercial borrowers drawing on $12.7 million of lines credit on December 30, 2019 and repayment of the lines of credit of $12.7 million. The following table reflects the composition, or mix of our loan portfolio at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:

June 30, 2019 December 31, 2018
Amount Amount
Real estate loans:
Residential real estate
One to four family $ 191,890
209,926
Purchased HELOC loans 11,125
12,883
Commercial/agricultural real estate

Commercial real estate 374,441
357,959
Agricultural real estate 92,137
86,015
Multi-family real estate 83,423
69,400
Construction and land development 52,071
22,691
Total real estate loans 805,087
758,874
Non-real estate loans:
Consumer non-real estate
Originated indirect paper 47,391
56,585
Purchased indirect paper 11,155
15,006
Other Consumer 18,389
20,214
Commercial/agricultural loans
Commercial non-real estate 107,754
112,427
Agricultural non-real estate 36,827
36,327
Total non-real estate loans 221,516
240,559
Gross loans 1,026,603
999,433
Unearned net deferred fees and costs and loans in process 98
409
Unamortized discount on acquired loans (6,744 ) (7,286 )
Total loans (net of unearned income and deferred expense) 1,019,957
992,556
Allowance for loan losses (8,759 ) (7,604 )
Total loans receivable, net $ 1,011,198
$ 984,952

The following table shows the 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 loan trends.

5756

June 30, 2019 December 31, 2018 Change FTD
Community Banking Loan Portfolios:
Commercial/Agricultural real estate:
Commercial real estate $ 374,441
$ 357,959
$ 16,482
Agricultural real estate 92,137
86,015
6,122
Multi-family real estate 83,423
69,400
14,023
Construction and land development 52,071
22,691
29,380
Commercial/Agricultural non-real estate:
Commercial non-real estate 107,754
112,427
(4,673 )
Agricultural non-real estate 36,827
36,327
500
Residential real estate:
Purchased HELOC loans 11,125
12,883
(1,758 )
Consumer non-real estate:
Other consumer 18,389
20,214
(1,825 )
Total Community Banking Loan Portfolios 776,167
717,916
58,251

Legacy Loan Portfolios:
Residential real estate:
One to four family 191,890
209,926
(18,036 )
Consumer non-real estate:
Originated indirect paper 47,391
56,585
(9,194 )
Purchased indirect paper 11,155
15,006
(3,851 )
Total Legacy Loan Portfolios 250,436
281,517
(31,081 )
Gross loans $ 1,026,603
$ 999,433
$ 27,170

The Community Banking loan portfolios reflect the Bank's strategy to grow its commercial banking business and consumer lending. The Legacy loan portfolios reflect the 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 June 30, 2019, the community banking portfolio grew by $58.3 million compared to December 31, 2018 with strong 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 $18.0 million or 8.6% from the December 31, 2018 balances as repayments, including payoffs, outpaced one to four family portfolio originations. Consumer indirect paper loans decreased $13.0 million or 18.2% from the December 31, 2018 balances. 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.



	March 31, 2020			December 31, 2019
	Amount			Amount
Real estate loans:
Commercial/agricultural real estate
Commercial real estate	$	520,150		$	514,459
Agricultural real estate	83,418			85,363
Multi-family real estate	102,983			87,008
Construction and land development	95,918			86,410
Residential real estate
One to four family	165,811			176,332
Purchased HELOC loans	7,601			8,407
Total real estate loans	975,881			957,979
Non-real estate loans:
Commercial/agricultural loans
Commercial non-real estate	122,006			133,734
Agricultural non-real estate	37,940			37,780
Consumer non-real estate
Originated indirect paper	36,414			39,585
Other Consumer	17,184			18,186
Total non-real estate loans	213,544			229,285
Gross loans	$	1,189,425		$	1,187,264
Unearned net deferred fees and costs and loans in process	(510		)	(393		)
Unamortized discount on acquired loans	(7,964		)	(9,491		)
Total loans (net of unearned income and deferred expense)	1,180,951			1,177,380
Allowance for loan losses	(11,835		)	(10,320		)
Total loans receivable, net	$	1,169,116		$	1,167,060

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 ~~June 30, 2019,~~ March 31, 2020, the Company had identified impaired loans of $56.0 million, consisting of $12.1 million TDR loans, the carrying amount of purchased credit impaired loans of $26.9 million and $17.0 million of substandard non-TDR loans. The $56.0 million total of impaired loans includes $4.1 million of performing TDR loans. At December 31, 2019, the Company had identified impaired loans of $63.2 million, consisting of $12.6 million TDR loans, the carrying amount of purchased credit impaired loans of $32.0 million and $18.6 million of substandard non-TDR loans. The $63.2 million total of impaired loans includes $5.4 million of performing TDR loans. At March 31, 2020 and December 31, ~~2018,~~2019, we had ~~356, 315~~363 and ~~209~~389 such impaired loans, respectively, all secured by real estate or personal ~~property with an aggregate recorded investment of $28.0 million $27.3 million and $22.5 million respectively.~~property. Of the impaired loans, ~~respectively,~~ there were ~~32 such~~29 individual loans where estimated fair value was less than their book value (i.e. we deemed impairment to exist) totaling ~~$2.9~~$5.3 million for which ~~$523 thousand~~$1.0 million in specific ALL was recorded as of ~~June 30, 2019.~~March 31, 2020.

At ~~June 30, 2019, the~~March 31, 2020 ALL was ~~$8.8~~$11.8 million, or ~~0.86%~~1.00% of our total loan portfolio, compared to ALL of ~~$7.6~~$10.3 million, or ~~0.77%~~0.88% of the total loan portfolio at December 31, ~~2018.~~2019. This level was based on our analysis of the loan portfolio risk at ~~June 30, 2019,~~March 31, 2020, considering the factors discussed above. A restricted cash reserve account was established by the third party seller of the purchased indirect paper consumer loans, based on a percentage of the outstanding loan balances. 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 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. In anticipation of a COVID-19-related economic slowdown, management added an additional qualitative factor in the quarter ended March 31, 2020 and increased the ALL by $750,000 for this qualitative factor. See Provision for loan losses in the Consolidated Statements of Operations (unaudited) for further details. 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 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.

5958

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, 2019 and Six Months Then Ended December 31, 2018 and Three Months Then Ended
Nonperforming assets:
Nonaccrual loans $ 13,612
$ 7,354
Accruing loans past due 90 days or more 880
736
Total nonperforming loans (“NPLs”) 14,492
8,090
Other real estate owned 1,354
2,522
Other collateral owned 33
48
Total nonperforming assets (“NPAs”) $ 15,879
$ 10,660
Troubled Debt Restructurings (“TDRs”) $ 10,000
$ 8,722
Accruing TDR's $ 5,899
$ 6,055
Nonaccrual TDRs $ 4,101
$ 2,667
Average outstanding loan balance $ 1,010,113
$ 921,951
Loans, end of period $ 1,019,957
$ 992,556
Total assets, end of period $ 1,348,420
$ 1,287,924
ALL, at beginning of period $ 7,604
$ 6,748
Loans charged off:
Residential real estate (90 ) (43 )
Commercial/Agricultural real estate (225 ) —
Consumer non-real estate (126 ) (79 )
Commercial/Agricultural non-real estate —
—
Total loans charged off (441 ) (122 )
Recoveries of loans previously charged off:
Residential real estate 1
4
Commercial/Agricultural real estate 3
—
Consumer non-real estate 42
24
Commercial/Agricultural non-real estate —
—
Total recoveries of loans previously charged off: 46
28
Net loans charged off (“NCOs”) (395 ) (94 )
Additions to ALL via provision for loan losses charged to operations 1,550
950
ALL, at end of period $ 8,759
$ 7,604
Ratios:
ALL to NCOs (annualized) 1,108.73 % 2,022.34 %
NCOs (annualized) to average loans 0.08 % 0.04 %
ALL to total loans 0.86 % 0.77 %
NPLs to total loans 1.42 % 0.82 %
NPAs to total assets 1.18 % 0.83 %



	March 31, 2020 and Three Months Then Ended			December 31, 2019 and Twelve Months Then Ended
Nonperforming assets:
Nonaccrual loans
Commercial real estate	$	3,505		$	5,705
Agricultural real estate	7,162			7,568
Commercial non-real estate	1,360			1,850
Agricultural non-real estate	1,739			1,702
One to four family	2,139			2,063
Consumer non-real estate	185			168
Total nonaccrual loans	$	16,090		$	19,056
Accruing loans past due 90 days or more	1,670			1,104
Total nonperforming loans (“NPLs”)	17,760			20,160
Other real estate owned	1,412			1,429
Other collateral owned	20			31
Total nonperforming assets (“NPAs”)	$	19,192		$	21,620
Troubled Debt Restructurings (“TDRs”)	$	12,088		$	12,594
Accruing TDR's	$	4,377		$	5,396
Nonaccrual TDRs	$	7,711		$	7,198
Average outstanding loan balance	$	1,172,246		$	1,074,952
Loans, end of period	$	1,180,951		$	1,177,380
Total assets, end of period	$	1,505,164		$	1,531,249
ALL, at beginning of period	$	10,320		$	7,604
Loans charged off:
Commercial/Agricultural real estate	—			(381		)
Commercial/Agricultural non-real estate	(442		)	—
Residential real estate	(27		)	(239		)
Consumer non-real estate	(51		)	(291		)
Total loans charged off	(520		)	(911		)
Recoveries of loans previously charged off:
Commercial/Agricultural real estate	—			3
Commercial/Agricultural non-real estate	—			1
Residential real estate	13			5
Consumer non-real estate	22			93
Total recoveries of loans previously charged off:	35			102
Net loans charged off (“NCOs”)	(485		)	(809		)
Additions to ALL via provision for loan losses charged to operations	2,000			3,525
ALL, at end of period	$	11,835		$	10,320
Ratios:
ALL to NCOs (annualized)	610.05		%	1,275.65		%
NCOs (annualized) to average loans	0.17		%	0.08		%
ALL to total loans	1.00		%	0.88		%
NPLs to total loans	1.50		%	1.71		%
NPAs to total assets	1.28		%	1.41		%

6059

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

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, 2019
Originated loans $ 5,473
$ 1,910
$ 617
$ 8,000
$ 4,220
$ 12,220
Acquired loans 3,365
827
263
4,455
9,392
13,847
Total $ 8,838
$ 2,737
$ 880
$ 12,455
$ 13,612
$ 26,067
December 31, 2018
Originated loans $ 4,829
$ 2,137
$ 279
$ 7,245
$ 1,770
$ 9,015
Acquired loans 3,339
918
457
4,714
5,584
10,298
Total $ 8,168
$ 3,055
$ 736
$ 11,959
$ 7,354
$ 19,313

Nonperforming assets ~~delinquencies and troubled debt restructures typically increase~~decreased in ~~subsequent quarters following a merger~~the quarter by $2.4 million to $19.2 million, largely due to updated reporting and risk rating of the loan portfolio to CCFBank standards. We experienced this again as nonperforming assets increased to 1.18% of total assets at June 30, 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 $49.4 million at June 30, 2019, compared to $47.3 million at December 31, 2018.

Non-performing assets included non-performing loans of $14.5 million at June 30, 2019, compared to $8.1 million at December 31, 2018. While nonperforming assets increased, classified assets decreased $1.9 million during the current quarter to $32.6 million. The majority of newdecreases in nonaccrual loans acquired in the ~~second quarter were classified loans as of March 31, 2019. Classified assets at December 31, 2018 totaled $22.7 million.~~

~~Nonaccrual Loans Rollforward:~~

Quarter Ended
June 30, 2019 March 31, 2019 December 31, 2018 June 30, 2018
Balance, beginning of period $ 9,871
$ 7,354
$ 7,210
$ 6,642
Additions 7,405
3,428
906
3,225
Acquired nonaccrual loans —
—
941
—
Charge offs (262 ) (31 ) (40 ) (38 )
Transfers to OREO (236 ) (362 ) (201 ) —
Return to accrual status (149 ) (175 ) —
—
Payments received (2,612 ) (282 ) (1,429 ) (2,915 )
Other, net (405 ) (61 ) (33 ) (287 )
Balance, end of period $ 13,612
$ 9,871
$ 7,354
$ 6,627

~~Other real estate owned ("OREO") decreased by $1.2 million from $2.5 million at December 31, 2018 to $1.4 million at June 30, 2019 as sales exceeded properties transferred from loans.~~

~~Other Real Estate Owned Rollforward:~~

Quarter Ended
June 30, 2019 March 31, 2019 December 31, 2018 June 30, 2018
Balance, beginning of period $ 2,071
$ 2,522
$ 2,749
$ 7,015
Loans transferred in 236
362
201
—
Sales (958 ) (808 ) (210 ) (889 )
Write-downs (23 ) (6 ) —
(498 )
Other, net 28
1
(218 ) (300 )
Balance, end of period $ 1,354
$ 2,071
$ 2,522
$ 5,328

~~Nonaccrual TDR loans increased $1.4 million to $4.1 million at June 30, 2019 from $2.7 million at December 31, 2018, primarily due to restructuring of nonaccrual loans.~~

June 30, 2019 March 31, 2019 December 31, 2018 June 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
$ 3,137
37
$ 3,454
34
$ 3,319
32
$ 3,580
Commercial/Agricultural real estate 14
2,202
17
3,454
15
2,209
14
1,662
Consumer non-real estate 11
82
11
90
13
99
15
122
Commercial/Agricultural non-real estate 4
478
3
485
2
428
3
496
Total loans 68
$ 5,899
68
$ 7,483
64
$ 6,055
64
$ 5,860

Nonperforming assets increased to 1.18% of total assets at June 30, 2019, compared to 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 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 both quarters of fiscal 2019.

Non-accrual loans were $13.6 million at June 30, 2019, compared to $9.9 million at March 31, 2019 and $7.4 million at December 31, 2018. While nonperforming assets increased $2.2 million, classified assets decreased approximately $1.9 million during the current quarter to $32.6 million. The majority of new nonaccrual loans in the second quarter were classified loans as of March 31, 2019.F&M acquisition. Refer to the “Allowance for Loan Losses” and “Nonperforming Loans, Potential Problem Loans and Foreclosed Properties” sections below for more information related to non-performing loans.

~~Investment Securities.~~ ~~We manage our securities portfolio~~Classified assets decreased to provide liquidity and enhance income. Our investment portfolio is comprised of securities available for sale and securities held to maturity. The 2019 purchases were approximately 67% variable rate securities. The effective duration of the investment portfolio at June 30, 2019 was 2.1 years compared to 2.6 years at December 31, 2018.

~~Securities available for sale, which represent the majority of our investment portfolio, were $154.8~~$38.4 million at ~~June 30, 2019, compared with $146.7~~March 31, 2020, from $39.9 million at December 31, ~~2018. There were no impairment charges recorded~~2019 largely due to the reduction in ~~the three~~nonperforming assets discussed above, with a modest increase in newly classified assets.

Total impaired loans, which included trouble debt restructured loans, purchased credit impaired loans and ~~six months ended June 30, 2019. One agency security had an impairment charge of $21 thousand recorded in the three months ended~~substandard non-performing loans, was $56.0 million at March 31, ~~2018. This security was sold in the quarter-ended June 30, 2018 and a $4 thousand gain was realized due~~2020 compared to ~~changes in market prices. Securities held to maturity were $3.8 million at June 30, 2019, compared with $4.9~~$63.2 million at December 31, ~~2018.~~2019. This decrease was due to the decrease in classified assets and certain other acquired loan decreases, largely from the F&M acquisition.

Nonaccrual Loans Rollforward:



	Quarter Ended
	March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019			March 31, 2019
Balance, beginning of period	$	19,056		$	19,022		$	13,612		$	9,871		$	7,354
Additions	1,811			2,641			1,493			7,405			3,428
Acquired nonaccrual loans	—			—			5,898			—			—
Charge offs	(452		)	(198		)	(134		)	(262		)	(31		)
Transfers to OREO	(1,100		)	(425		)	(209		)	(236		)	(362		)
Return to accrual status	(120		)	(14		)	(53		)	(149		)	(175		)
Payments received	(2,824		)	(1,957		)	(1,539		)	(2,612		)	(282		)
Other, net	(281		)	(13		)	(46		)	(405		)	(61		)
Balance, end of period	$	16,090		$	19,056		$	19,022		$	13,612		$	9,871

Nonaccrual TDR loans increased $513,000 to $7.7 million at March 31, 2020 from $7.2 million at December 31, 2019, primarily due to restructuring of nonaccrual loans.



	March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019
	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
Commercial/Agricultural real estate	28	$	6,415	27	$	6,599	18	$	3,574	14	$	2,202
Commercial/Agricultural non-real estate	14	2,065		16	2,338		4	452		4	478
Residential real estate	42	3,539		43	3,589		39	3,094		39	3,137
Consumer non-real estate	8	69		7	68		8	74		11	82
Total loans	92	$	12,088	93	$	12,594	69	$	7,194	68	$	5,899

COVID-19-related portfolio concentrations and modifications - Hotels and restaurants represent our portfolio’s two industry sectors most directly and adversely affected by the COVID-19 pandemic. These sector loans totaled approximately $115 million and $30 million, respectively at March 31, 2020. The weighted-average loan-to-value percentage and debt service coverage ratio on these hotel industry sector loans was 58.5% and 1.75 times. Approximately $21 million of restaurant sector loans are to franchise quick-service restaurants.

As of March 31, 2020, the Bank had not yet completed any loan modifications due to COVID-19-related borrower requests. However, by April 22, 2020, the Bank had approved $167.4 million of COVID-19-related modifications, primarily consisting of payment deferrals. Hotel and restaurant industry sectors represent approximately $94 million of the approved deferrals. While the Company has no indication that any of the modified credits are specifically impaired, additional risk and uncertainty inherent in the current COVID-19 pandemic-affected environment has been considered. See “Allowance for Loan Losses” section above for discussion of COVID-19 qualitative factor, and related provision for loan losses.

~~The amortized cost and market values of our available~~

Mortgage Servicing Rights. Mortgage servicing rights (“MSR”) assets are initially measured at fair value; assessed at least quarterly for ~~sale securities by asset categories as~~impairment; carried at the lower of the ~~dates indicated below were~~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 ~~follows:~~

Securities available for sale
Amortized
Cost

Fair
Value
June 30, 2019
U.S. government agency obligations $ 53,085
$ 53,005
Obligations of states and political subdivisions 27,670
27,876
Mortgage backed securities 41,574
41,836
Corporate debt securities 8,543
8,439
Corporate asset based securities 23,953
23,604
Totals $ 154,825
$ 154,760
December 31, 2018
U.S. government agency obligations $ 46,215
$ 45,298
Obligations of states and political subdivisions 35,162
34,728
Mortgage backed securities 42,279
41,350
Agency securities 104
148
Corporate debt securities 6,577
6,305
Corporate asset based securities 18,928
18,896
Totals $ 149,265
$ 146,725
those for: changes in the mix of loans, interest rates, prepayment speeds, and default rates. Changes in these factors, assumptions and judgments may have a material effect on the valuation and amortization of MSRs. Although management believes that the assumptions used to evaluate the MSRs for impairment are reasonable, future adjustment may be necessary if future economic conditions differ substantially from the economic assumptions used to determine the value of MSRs.

The ~~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
June 30, 2019
Obligations of states and political subdivisions $ 980
$ 983
Mortgage-backed securities 2,848
2,944
Totals $ 3,828
$ 3,927
December 31, 2018
Obligations of states and political subdivisions $ 1,701
$ 1,698
Mortgage-backed securities 3,149
3,174
Totals $ 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, 2019 December 31, 2018
Available for sale securities Amortized
Cost Fair
Value Amortized
Cost Fair
Value
Agency $ 94,658
$ 94,841
$ 88,494
$ 86,648
AAA 6,260
6,221
3,566
3,535
AA 39,672
39,553
42,608
42,305
A 12,902
12,818
12,991
12,662
Non-rated 1,333
1,327
1,606
1,575
Total available for sale securities $ 154,825
$ 154,760
$ 149,265
$ 146,725

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

June 30, 2019 December 31, 2018
Securities held to maturity Amortized
Cost Fair
Value Amortized
Cost Fair
Value
U.S. government agency $ 2,848
$ 2,944
$ 3,149
$ 3,173
AA 395
396
395
395
A 235
235
956
955
Non-rated 350
352
350
349
Total $ 3,828
$ 3,927
$ 4,850
$ 4,872

~~At June 30, 2019, securities with a~~ market value of ~~$1.8 million were pledged against a line of credit with~~ the Federal Reserve Bank of Minneapolis. As of June 30, 2019, this line of credit had a zero outstanding balance. The Bank has pledged U.S. Government Agency securities with a market value of $5.9 million, mortgage-backed securities with a market value of $14.4 million as collateral against specific municipal deposits. As of June 30, 2019, the Bank also has mortgage backed securities with a market value of $812 thousand pledged as collateral to the Federal Home Loan Bank of Des Moines.

~~Escrow Merger Settlement Proceeds.~~ ~~An escrow settlement account for $20.6 million was established with the Company's Transfer Agent on June 28, 2019, in anticipation of the closing of the F. & M. Bancorp. of Tomah, Inc. acquisition.~~

~~Other Assets.~~ ~~Other assets increased to $8.1 million at June 30, 2019,~~Company’s MSR asset decreased from ~~$3.3~~$4.3 million at December 31, ~~2018,~~2019 to $3.7 million at March 31, 2020, primarily due ~~primarily~~to increased amortization and $480,000 of impairment recorded on the MSR asset due to the ~~adoption~~impact of ~~new accounting standards requiring~~higher prepayment activity. The unpaid balances of one- to four-family residential real estate loans serviced for others as of March 31, 2020 and December 31, 2019 were $521.6 million and $524.7 million, respectively. The fair market value of the Company’s MSR asset ~~recognition for operating leases which totaled $4.2 million~~as a percentage of its servicing portfolio at ~~June 30, 2019.~~March 31, 2020 and December 31, 2019 was 0.72% and 0.82%, respectively.

Deposits. Deposits ~~increased $7.9~~decreased $15.6 million to ~~$1.015~~$1.180 billion at ~~June 30, 2019,~~March 31, 2020, from ~~$1.008~~$1.196 billion at December 31, ~~2018 and decreased $15.2~~2019. Approximately $12.7 million ~~from $1.031 billion at March 31, 2019. The decline in deposits from March~~of December 31, 2019 ~~was due in part to~~deposits represented draws on lines of credit by a single customer, taken on December 31, 2019, with the ~~sale of~~proceeds deposited into the $34.1 million Rochester Hills deposits on May 17, 2012 as discussed above. The composition of the deposit portfolio changed over the quarter as some lower-cost deposits were sold and replaced with higher cost certificates of deposit. Certificate accounts andcustomer’s money market accounts ~~increased to $391.4 million~~ and $156.0 million at June 30, 2019, from $364.5 million and $126.0 million at December 31, 2018, respectively. Meanwhile, savings accounts declined to $148.0 million from $192.3 million, interest-bearing demand deposits decreased to $180.0 million from $169.3 million and Non-interest bearing demand deposits decreased to $140.1 million from $155.4 million over the same time frame. The change in the deposit composition over the three and six month periods, contributed to an increase in the cost of deposits to 1.33% from 0.86% for the quarter ended June 30, 2019 compared to the quarter ended June 30, 2018 and to 1.27% for the six months ended June 30, 2019 compared to 0.81% for the same period in the previous year.subsequently repaid on January 2, 2020.

The following is a summary of deposits by type at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively:


	June 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Non-interest bearing demand deposits	$	140,130	$	155,405	$	150,139	$	168,157
Interest bearing demand deposits	180,001		169,310		242,824		223,102
Savings accounts	148,005		192,310		161,038		156,599
Money market accounts	155,964		126,021		243,715		246,430
Certificate accounts	391,359		364,466		382,339		401,414
Total deposits	$	1,015,459	$	1,007,512	$	1,180,055	$	1,195,702

Deposits from closed branches, in markets that the Bank no longer competes in, decreased by ~~$3.8~~$2.0 million during the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, and total ~~$31.5~~$23.5 million as of ~~June 30, 2019.~~March 31, 2020. Brokered and listing services ~~deposits were $56.5~~certificates decreased to $41 million ~~and $5.5 million, respectively,~~ at March ~~31,2019, compared to $55.3~~31, 2020 from $53 million ~~and $9.5 million, respectively,~~ at December 31, ~~2018.~~2019.

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 ~~2019~~2020 through competitive pricing of deposit products, our branch delivery systems that have already been established and electronic banking.

Federal Home Loan Bank (FHLB) advances (borrowings) and Other Borrowings. FHLB advances were ~~$135.8~~$123.5 million as of ~~June 30, 2019~~March 31, 2020 and ~~$109.8~~$131.0 million as of December 31, ~~2018,~~2019, 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 manage the ~~Bank's~~Bank’s cost of funds. 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. The Bank’s current unused borrowing capacity, supported by loan collateral as of ~~June 30, 2019,~~March 31, 2020 is approximately ~~$150.8~~$193.6 million.

~~The~~During the first quarter of 2020, the Bank added $12.5 million of 10-year maturity advances that can be called or replaced by the FHLB on a quarterly basis, beginning approximately three months from the initial advance. At March 31, 2020 and December 31, 2019, the Bank had $55 million and $42.5 million, respectively, of these 10-year, three month callable advances.

In the first quarter of 2020, the Bank extended overnight advances with $5 million maturing in each quarter of 2023, 2024 and $5 million maturing in the first quarter of 2025. See Note 6, “Federal Home Loan Bank Advances and Other Borrowings” for more information.

At March 31, 2020, the Bank has pledged ~~$674.7~~$812.4 million of loans to secure the current ~~outstandings,~~FHLB outstanding advances, letters of credit and to provide the unused borrowing ~~capacity.~~

~~On August 10, 2017, the Company issued $15.0~~capacity compared to $792.9 million of subordinated notes maturing on August 10, 2027 to fund the acquisition 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 with a fixed interest rate for five years of 6.75% and in August 2022, the interest rate converts to the three-month LIBOR plus 4.90% and will reset quarterly thereafter. Interest on the Notes will be payable quarterly in arrears on March 31, June 30, September 30 andloans pledged at December 31, ~~of each year through the maturity date.~~2019

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 matures 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 ~~becomes~~became effective on August 1, 2019, at which time it ~~replaces~~replaced the ~~Company's~~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, with a floor of 3.5% 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..~~F&M. At ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, there were no borrowings outstanding on this revolving loan.

~~Other Liabilities~~. Other liabilities increased by $1.6 million to $9.3 million, at June 30, 2019, due primarily to the new accounting standard related to liability recognition of operating leases which totaled $4.3 million at June 30, 2019.

Stockholders’ Equity. Total stockholders’ equity ~~increased~~decreased to ~~$143.2~~$147.9 million at ~~June 30, 2019,~~March 31, 2020 from ~~$138.2~~$150.6 million at December 31, ~~2018,, as~~2019. In the first quarter of 2020, the Company ~~benefitted~~declared and paid its annual cash dividend to common stockholders which increased by 5% from $0.20 per share in 2019 to $0.21 per share or $2.4 million. Additionally, during the ~~addition~~quarter, the Company purchased 156,000 shares of ~~earnings and~~its common stock at a ~~reduction~~cost of $1.8 million under the Company’s stock buyback authorization. On March 20, 2020, the Company announced the Board of Directors has suspended this stock buyback authorization. As noted in ~~accumulated other comprehensive~~the investment portfolio section earlier, the unrealized loss ~~mainly due~~on the securities available-for-sale portfolio decreased by $1.1 million in the first quarter of 2020. These decreases to ~~lower long-term interest rates.~~stockholders’ equity were partially offset by $2.6 million in net income. Book value per share ~~increased $0.42 or 3.33%~~decreased to ~~$13.04~~$13.27 at ~~June 30, 2019~~March 31, 2020, from ~~$12.62~~$13.36 per share at December 31, ~~2018.~~2019. Tangible book value per share (non-GAAP)was ~~$9.56~~$9.80 at ~~June 30, 2019 - an increase of $0.50 or 5.5%,~~March 31, 2020, compared to ~~$9.06 at~~$9.89 December 31, 2018. The components of this increase included (1) current quarter's earnings, (2) the reduction in accumulated other comprehensive loss, due to decreased unrealized losses in the Securities Available for Sale portfolio and (3) the amortization of intangible assets. Tangible book value per share is a non-GAAP measure that management believes enhances investors' ability to better understand the Company's financial position.2019.

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

Tangible book value per share at end of period June 30, 2019 December 31,
2018
Total stockholders' equity $ 143,242
$ 138,187
Less: Preferred stock —
—
Less: Goodwill (31,474 ) (31,474 )
Less: Intangible assets (6,828 ) (7,501 )
Tangible common equity (non-GAAP) $ 104,940
$ 99,212
Ending common shares outstanding 10,982,008
10,953,512
Book value per share $ 13.04
$ 12.62
Tangible book value per share (non-GAAP) $ 9.56
$ 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 borrowings. We use our sources of funds primarily to meet ongoing commitments, to pay 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 30, 2019,~~March 31, 2020, our on-balance sheet liquidity ratio was ~~11.73%~~12.2%. 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 ~~$215.9~~$240.1 million of our ~~$391.4~~$382.3 million ~~(55.2%~~(63%) CD portfolio as of ~~June 30, 2019~~March 31, 2020 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 and 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 30, 2019,~~March 31, 2020, we ~~have~~had approximately ~~$150.8~~$193.6 million available under this arrangement, supported by loan collateral, as compared to ~~$178.6~~$203.9 million at December 31, ~~2018.~~2019. We ~~also~~ maintain ~~lines~~a line of credit ~~of $1.4 million~~ with the Federal Reserve Bank ~~and~~which has a $1.2 million capacity, based on our current pledged collateral position. Additionally, we have ~~$18.5~~$15.0 million of uncommitted federal funds purchased lines of credit, as well as a ~~$7.5~~$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 30, 2019,~~March 31, 2020, the Company had ~~$202.4~~$208.2 million in unused commitments, compared to ~~$207.8~~$246.7 million in unused commitments as of December 31, ~~2018.~~2019

Capital Resources. As of ~~June 30, 2019,~~March 31, 2020, 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.

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, 2019 (Unaudited)
As of March 31, 2020 (Unaudited)
Total capital (to risk weighted assets)	$	134,399,000	13.1	%	$	82,133,000	>=	8.0	%	$	102,666,000	>=	10.0	%	$	163,087	13.6	%	$	96,152	> =	8.0	%	$	120,190	> =	10.0	%
Tier 1 capital (to risk weighted assets)	125,640,000		12.2	%	61,599,000		>=	6.0	%	82,133,000		>=	8.0	%	151,252		12.6	%	72,114		> =	6.0	%	96,152		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	125,640,000		12.2	%	46,200,000		>=	4.5	%	66,733,000		>=	6.5	%	151,252		12.6	%	54,085		> =	4.5	%	78,123		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	125,640,000		9.7	%	51,743,000		>=	4.0	%	64,679,000		>=	5.0	%	151,252		10.3	%	58,926		> =	4.0	%	73,657		> =	5.0	%
As of December 31, 2018 (Audited)
As of December 31, 2019 (Audited)
Total capital (to risk weighted assets)	$	126,440,000	12.7	%	$	79,651,000	>=	8.0	%	$	99,563,000	>=	10.0	%	$	160,302	13.1	%	$	98,174	> =	8.0	%	$	122,718	> =	10.0	%
Tier 1 capital (to risk weighted assets)	118,836,000		11.9	%	59,738,000		>=	6.0	%	79,651,000		>=	8.0	%	149,982		12.2	%	73,631		> =	6.0	%	98,174		> =	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	%	149,982		12.2	%	55,223		> =	4.5	%	79,767		> =	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	%	149,982		10.4	%	57,834		> =	4.0	%	72,293		> =	5.0	%

At ~~June 30, 2019,~~March 31, 2020, the Bank was categorized as ~~"Well Capitalized"~~“Well Capitalized” under Prompt Corrective Action Provisions, as determined by the OCC, our primary regulator.

6763

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, 2019 (Unaudited)
As of March 31, 2020 (Unaudited)
Total capital (to risk weighted assets)	$	128,746,000	12.5	%	$	82,133,000	>=	8.0	%	$	102,666,000	>=	10.0	%	$	137,705	11.5	%	$	96,152	> =	8.0	%	$	120,190	> =	10.0	%
Tier 1 capital (to risk weighted assets)	104,987,000		10.2	%	61,599,000		>=	6.0	%	82,133,000		>=	8.0	%	110,870		9.2	%	72,114		> =	6.0	%	96,152		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	104,987,000		10.2	%	46,200,000		>=	4.5	%	66,733,000		>=	6.5	%	110,870		9.2	%	54,085		> =	4.5	%	78,123		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	104,987,000		8.1	%	51,743,000		>=	4.0	%	64,679,000		>=	5.0	%	110,870		7.7	%	58,926		> =	4.0	%	73,657		> =	5.0	%
As of December 31, 2018 (Audited)
As of December 31, 2019 (Audited)
Total capital (to risk weighted assets)	$	123,657,000	12.4	%	$	79,651,000	>=	8.0	%	$	99,563,000	>=	10.0	%	$	137,259	11.2	%	$	98,174	> =	8.0	%	$	122,718	> =	10.0	%
Tier 1 capital (to risk weighted assets)	101,053,000		10.2	%	59,738,000		>=	6.0	%	79,651,000		>=	8.0	%	111,939		9.1	%	73,631		> =	6.0	%	998,174		> =	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	%	111,939		9.1	%	55,223		> =	4.5	%	79,767		> =	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	%	111,939		7.7	%	57,834		> =	4.0	%	72,293		> =	5.0	%

At ~~June 30, 2019,~~March 31, 2020, the Company was categorized as ~~"Well Capitalized"~~“Well Capitalized” under Prompt Corrective Action Provisions. ~~Need to add press release paragraph on future capital ratio post to Tomah.~~


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 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 commercial, agriculture and 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, 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.

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, 2019~~March 31, 2020 and December 31, ~~2018~~2019 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, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, 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, 2019		At December 31, 2018		At March 31, 2020		At December 31, 2019

+300 bp	1	%	(3	)%	1	%	1	%
+200 bp	1	%	(2	)%	1	%	2	%
+100 bp	1	%	(1	)%	1	%	1	%
-100 bp	1	%	(1	)%	12	%	(2	)%
-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, 2019~~March 31, 2020 and December 31, ~~2018.~~2019.


	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, 2019		At December 31, 2018		At March 31, 2020		At December 31, 2019

+300 bp	(4	)%	(6	)%	(2	)%	(5	)%
+200 bp	(3	)%	(4	)%	(1	)%	(4	)%
+100 bp	(1	)%	(2	)%	—	%	(2	)%
-100 bp	1	%	1	%	(3	)%	1	%
-200 bp	—	%	(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"~~“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 30, 2019,~~March 31, 2020, 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 30, 2019~~March 31, 2020 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,~~July 1, 2019, we completed our acquisition of ~~United Bank.~~F&M. In accordance with our integration efforts, we ~~are in the process of integrating United Bank~~plan to incorporate F&M’s 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

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.

7066


Item 1A.	RISK FACTORS

~~A detailed discussion of~~The Company is providing the 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 transition period from October 1, 2018 to December 31, 2018. Please refer to that section for disclosures regarding the risksdisclosure below and ~~uncertainties relating to our business. There have been no material changes to~~supplementing the risk factors ~~disclosed~~described in “Risk Factors” in Item 1A of our 2019 10-K with the risk factors set forth below. The information in this Form 10-Q should be read in conjunction with the risk factors described on our 2019 10-K and the information under “Forward-Looking Statements” in this Form 10-Q and in our ~~Form~~2019 10-K.

Our business may be adversely affected by conditions in the financial markets and economic conditions generally. We operate primarily in the Wisconsin and Minnesota markets. As a result, our financial condition, results of operations and cash flows are significantly impacted by changes in the economic conditions in those areas. In addition, our business is susceptible to broader economic trends within the United States economy. Economic conditions have a significant impact on the demand for our products and services, as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources. A significant decline in general economic conditions caused by inflation, recession, tariffs, unemployment, changes in securities markets, changes in housing market prices, geopolitical uncertainties, natural disasters, pandemics and election outcomes or other factors could impact economic conditions and, in turn, could have a material adverse effect on our financial condition and results of operations.

In particular, the COVID-19 (also referred to as novel coronavirus) outbreak, which has been declared a global pandemic by the World Health Organization, has significantly and negatively impacted financial markets and economic conditions in the United States and globally. As a result, consumer confidence and consumer credit factors have been, and may be further, negatively impacted. Consequently, our business, financial condition and results of operations has been and could be further significantly and adversely affected. See also “The COVID-19 pandemic could have an adverse impact on our financial condition and our results of operations and other aspects of our business.”

We are subject to interest rate risk. Through our banking subsidiary, the Bank, our profitability depends in large part on our net interest income, which is the difference between interest earned from interest-earning assets, such as loans and mortgage-backed securities, and interest paid on interest-bearing liabilities, such as deposits and borrowings. Our net interest income will be adversely affected if market interest rates change such that the interest we pay on deposits and borrowings increase faster than the interest earned on loans and investments. As a result of the economic impacts of the COVID-19 pandemic, interest rates in the United States have been reduced, and may be even further reduced. 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 due to many factors that are beyond our control, including but not limited to: general economic conditions and government policy decisions, especially policies of the Federal Reserve Bank. 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. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk. In particular, reduced interest rates negatively impact our results of operations. See also “The COVID-19 pandemic could have an adverse impact on our financial condition and our results of operations and other aspects of our business.”

We are subject to lending risk. There are inherent risks associated with our lending activities. These risks include the impact of changes in interest rates and changes in the economic conditions in the markets we serve, as well as those across the United States. An increase in interest rates or weakening economic conditions (such as high levels of unemployment), including weakening economic conditions as a result of the COVID-19 pandemic, could adversely impact the ability of borrowers to repay outstanding loans, or could substantially weaken the value of collateral securing those loans. Downward pressure on real estate values could increase the potential for problem loans and thus have a direct impact on our consolidated results of operations. See also “The COVID-19 pandemic could have an adverse impact on our financial condition and our results of operations and other aspects of our business.”

The COVID-19 pandemic could have an adverse impact on our financial condition and our results of operations and other aspects of our business.

We are closely monitoring developments related to the COVID-19 pandemic to assess its impact on our business. While still evolving, the COVID-19 pandemic has caused significant economic and financial turmoil both in the U.S. and around the world, and has fueled concerns that it will lead to a global recession. These conditions are expected to continue and worsen in the near term. At this time, it is not possible to estimate how long it will take to halt the spread of the virus or the long term effects that the COVID-19 pandemic could have on our business. The extent to which the COVID-19 pandemic impacts our business, results of operations, financial condition, liquidity or prospects will depend on future developments which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic and the actions taken to contain or address its impact.

While we have implemented risk management and contingency plans and taken preventive measures and other precautions, no predictions of specific scenarios can be made with respect to the COVID-19 pandemic and such measures may not adequately predict the impact on our business from such events. Currently, many of our employees are working remotely. An extended period of remote work arrangements could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business.

Increased economic uncertainty and increased unemployment resulting from the economic impacts of the spread of COVID-19 may also adversely impact the ability of borrowers to repay outstanding loans, or could substantially weaken the value of collateral securing those loans. In addition, any resulting downward pressure on real estate values could increase the potential for problem loans and thus have a direct impact on our consolidated results of operations.

We have begun to participate as an approved lender pursuant to the Paycheck Protection Program, which was established under the recently congressionally-approved Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (the “SBA”). The Paycheck Protection Program is a $349 billion loan program, which gives small businesses and self-employed individuals guaranteed loans and loan forgiveness to stay in business during the COVID-19 pandemic, subject to certain requirements. These first come, first-served loans are available until June 30, 2020, or until the funds are depleted. All banks are allowed to participate in the Paycheck Protection Program, provided they obtain approval from the SBA. As an SBA-approved lender, we have secured more than $136 million in authorized funding for our customers under the Paycheck Protection Program. While we anticipate that our participation in the Paycheck Protection Program will have a positive impact on our financial condition, we cannot predict the extent of the loans we will be able to secure for our customers or the extent of the impact on our business. As a result of factors including the fact that the Paycheck Protection Program is a new program that was created urgently in response to the COVID-19 outbreak, lenders and customers have experienced, and may experience further, challenges in the application process and administration.

While governmental and non-governmental organizations are engaging in efforts to combat the spread and severity of the COVID-19 pandemic and related public health issues, these measures may not be effective. We also cannot predict how legal and regulatory responses to concerns about the COVID-19 pandemic and related public health issues will impact our business. Such events or conditions could result in regulation or restrictions affecting the conduct of our business in the future.


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


(a)	Not applicable.


(b)	Not applicable.


(c)	Issuer Purchases of Equity Securities.

On October 24, 2019, the Board of Directors approved a stock repurchase program. Under this program the Company may repurchase up to approximately 5% of the outstanding shares of its common stock as of October 24, 2019, or 563,504 shares, from time to time through October 1, 2020. From February 3, 2020 through March 6, 2020, the Company repurchased 155,666 shares at an average price of $11.75, for a total investment of $1.84 million, in accordance with Rule 10b5-1 of the Securities and Exchange commission. On March 20, 2020, the Company’s Board of Directors suspended the stock repurchase plan in response to the COVID-19 pandemic until further notice.

The table below shows ~~the shares withheld from employees to satisfy tax withholding obligations~~information about our repurchases of our common stock during the three months ended ~~June 30, 2019.~~March 31, 2020.

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, 2019 - April 30, 2019 874 $12.00 — —
May 1, 2019 - May 31, 2019 1,131 10.98 — —
June 1, 2019 - June 30, 2019 1,062 11.05 — —
Total 3,067 $11.29 — —



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 Plans or Programs
January 1, 2020 - January 31, 2020	—	NA	—	563,504
February 1, 2020 - February 29, 2020	130,666	$11.91	130,666	432,838
March 1, 2020 - March 31, 2020	25,000	$10.90	25,000	407,838
Total	155,666	$11.75	155,666

~~(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.

7169

~~Item 6.~~


Item 7.6.	EXHIBITS

(a) Exhibits



~~10.1~~		Business Note, dated June 26, 2019, issued by Citizens Community Bancorp, Inc. to Chippewa Valley Bank (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on July 1, 2019 (File No. 001-33003)).
~~10.2~~		Business Credit Agreement, dated August 1, 2019, by and between Citizens Community Bancorp, Inc. and Chippewa Valley Bank (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on 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 30, 2019~~March 31, 2020 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.

7270

SIGNATURES

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



	CITIZENS COMMUNITY BANCORP, INC.

Date: ~~August 8, 2019~~May 11, 2020	By:	/s/ Stephen M. Bianchi
		Stephen M. Bianchi
		Chief Executive Officer

Date: ~~August 8, 2019~~May 11, 2020	By:	/s/ James S. Broucek
		James S. Broucek
		Chief Financial Officer

7371



	As of and for the Six Months Ended			As of and for the Three Months Ended
	June 30, 2019			December 31, 2018
Balance at beginning of period	$	4,486		$	1,840
MSR asset acquired	—			2,721
Increase in MSR assets resulting from transfers of financial assets	330			100
Amortization during the period	(387		)	(175		)
Valuation allowance at end of period	(110		)	—
Net book value at end of period	$	4,319		$	4,486
Fair value of MSR asset at end of period	$	4,382		$	5,214
Residential mortgage loans serviced for others	$	518,299		$	518,476
Net book value of MSR asset to loans serviced for others	0.83		%	0.87		%



	June 30, 2019			December 31, 2018
Advances from FHLB:
Fixed rates	$	136,000		$	43,000
Overnight borrowings	—			67,000
Total FHLB advances	136,000			110,000
Less: unamortized discount on acquired borrowings	$	(156	)	(187		)
Net FHLB advances	135,844			$	109,813

Other borrowings:
Senior notes:
Variable rate due in June 2031	$	29,856		10,000
Subordinated notes:
6.75% due August 2027, variable rate commencing August 2022	15,000			15,000
Less: unamortized debt issuance costs	(305		)	(353		)
Total other borrowings	$	44,551		$	24,647

Totals	$	180,395		$	134,460



Fiscal years ending December 31,
2019	$	115,000
2020	—
2021	—
2022	10,844
2023	—
Thereafter	54,551
	$	180,395



	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	$	2,482		$	(683	)	$	1,799		$	(1,747	)	$	388	$	(1,359	)
Reclassification adjustment for gains (losses) included in net income	55			(15		)	40			(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)	$	2,475		$	(681	)	$	1,794		$	(1,901	)	$	392	$	(1,509	)



	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	1,794			1,794
Ending balance, June 30, 2019	$	(47	)	$	(47	)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net income as reported	$	4,107		$	503		$	5,060		$	1,844
EPS - basic, as reported	$	0.37		$	0.09		$	0.46		$	0.31
EPS - diluted, as reported	$	0.37		$	0.08		$	0.46		$	0.30
Cash dividends paid	$	—		$	—		$	0.20		$	0.20
Return on average assets (annualized)	1.23		%	0.21		%	0.78		%	0.39		%
Return on average equity (annualized)	11.72		%	2.51		%	7.33		%	4.83		%



	Six months ended June 30, 2019						Six months ended June 30, 2018
	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	$	28,045	$	339	2.44	%	$	23,488	$	123	1.06	%
Loans	1,010,113		25,390		5.07	%	727,496		17,405		4.82	%
Interest-bearing deposits	6,440		74		2.32	%	7,850		75		1.93	%
Investment securities (1)	157,574		1,943		2.59	%	119,329		1,321		2.41	%
Non-marketable equity securities, at cost	11,244		308		5.52	%	8,082		198		4.94	%
Total interest earning assets (1)	$	1,213,416	$	28,054	4.68	%	$	886,245	$	19,122	4.38	%
Average interest-bearing liabilities:
Savings accounts	$	155,792	$	324	0.42	%	$	94,619	$	81	0.17	%
Demand deposits	190,603		737		0.78	%	151,849		243		0.32	%
Money market	158,683		831		1.06	%	117,124		357		0.61	%
CD’s	331,543		3,293		2.00	%	268,466		1,822		1.37	%
IRA’s	40,272		334		1.67	%	33,289		178		1.08	%
Total deposits	876,893		5,519		1.27	%	665,347		2,681		0.81	%
FHLB Advances and other borrowings	145,986		2,390		3.30	%	116,219		1,605		2.78	%
Total interest-bearing liabilities	$	1,022,879	$	7,909	1.56	%	$	781,566	$	4,286	1.11	%
Net interest income			$	20,145					$	14,836
Interest rate spread					3.12	%					3.27	%
Net interest margin (1)					3.36	%					3.40	%
Average interest earning assets to average interest-bearing liabilities					1.19						1.13



	June 30, 2019		December 31, 2018		Change FTD
Community Banking Loan Portfolios:
Commercial/Agricultural real estate:
Commercial real estate	$	374,441	$	357,959	$	16,482
Agricultural real estate	92,137		86,015		6,122
Multi-family real estate	83,423		69,400		14,023
Construction and land development	52,071		22,691		29,380
Commercial/Agricultural non-real estate:
Commercial non-real estate	107,754		112,427		(4,673		)
Agricultural non-real estate	36,827		36,327		500
Residential real estate:
Purchased HELOC loans	11,125		12,883		(1,758		)
Consumer non-real estate:
Other consumer	18,389		20,214		(1,825		)
Total Community Banking Loan Portfolios	776,167		717,916		58,251

Legacy Loan Portfolios:
Residential real estate:
One to four family	191,890		209,926		(18,036		)
Consumer non-real estate:
Originated indirect paper	47,391		56,585		(9,194		)
Purchased indirect paper	11,155		15,006		(3,851		)
Total Legacy Loan Portfolios	250,436		281,517		(31,081		)
Gross loans	$	1,026,603	$	999,433	$	27,170



	June 30, 2019 and Six Months Then Ended			December 31, 2018 and Three Months Then Ended
Nonperforming assets:
Nonaccrual loans	$	13,612		$	7,354
Accruing loans past due 90 days or more	880			736
Total nonperforming loans (“NPLs”)	14,492			8,090
Other real estate owned	1,354			2,522
Other collateral owned	33			48
Total nonperforming assets (“NPAs”)	$	15,879		$	10,660
Troubled Debt Restructurings (“TDRs”)	$	10,000		$	8,722
Accruing TDR's	$	5,899		$	6,055
Nonaccrual TDRs	$	4,101		$	2,667
Average outstanding loan balance	$	1,010,113		$	921,951
Loans, end of period	$	1,019,957		$	992,556
Total assets, end of period	$	1,348,420		$	1,287,924
ALL, at beginning of period	$	7,604		$	6,748
Loans charged off:
Residential real estate	(90		)	(43		)
Commercial/Agricultural real estate	(225		)	—
Consumer non-real estate	(126		)	(79		)
Commercial/Agricultural non-real estate	—			—
Total loans charged off	(441		)	(122		)
Recoveries of loans previously charged off:
Residential real estate	1			4
Commercial/Agricultural real estate	3			—
Consumer non-real estate	42			24
Commercial/Agricultural non-real estate	—			—
Total recoveries of loans previously charged off:	46			28
Net loans charged off (“NCOs”)	(395		)	(94		)
Additions to ALL via provision for loan losses charged to operations	1,550			950
ALL, at end of period	$	8,759		$	7,604
Ratios:
ALL to NCOs (annualized)	1,108.73		%	2,022.34		%
NCOs (annualized) to average loans	0.08		%	0.04		%
ALL to total loans	0.86		%	0.77		%
NPLs to total loans	1.42		%	0.82		%
NPAs to total assets	1.18		%	0.83		%



	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, 2019
Originated loans	$	5,473	$	1,910	$	617	$	8,000	$	4,220	$	12,220
Acquired loans	3,365		827		263		4,455		9,392		13,847
Total	$	8,838	$	2,737	$	880	$	12,455	$	13,612	$	26,067
December 31, 2018
Originated loans	$	4,829	$	2,137	$	279	$	7,245	$	1,770	$	9,015
Acquired loans	3,339		918		457		4,714		5,584		10,298
Total	$	8,168	$	3,055	$	736	$	11,959	$	7,354	$	19,313



Tangible book value per share at end of period	June 30, 2019			December 31, 2018
Total stockholders' equity	$	143,242		$	138,187
Less: Preferred stock	—			—
Less: Goodwill	(31,474		)	(31,474		)
Less: Intangible assets	(6,828		)	(7,501		)
Tangible common equity (non-GAAP)	$	104,940		$	99,212
Ending common shares outstanding	10,982,008			10,953,512
Book value per share	$	13.04		$	12.62
Tangible book value per share (non-GAAP)	$	9.56		$	9.06

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Non-accelerated filer

Smaller reporting company

Emerging growth company