0001367859 czwi:CommercialAgriculturalRealEstatePortfolioSegmentMember czwi:AgriculturalRealEstateMember us-gaap:PassMember 2020-06-30

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 ~~September~~June 30, ~~2019~~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~~2174 EastRidge Center

Eau Claire, WI54701

(Address and Zip Code of principal executive offices)

715-836-9994

(Registrant’s telephone number, including area code)

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



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

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

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

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 ~~November 7, 2019~~August 6, 2020 there were ~~11,269,726~~11,150,695 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

CITIZENS COMMUNITY BANCORP, INC.

FORM 10-Q

~~September~~June 30, ~~2019~~2020

INDEX



			Page Number
Part I – FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of ~~September~~June 30, ~~2019~~2020 (Unaudited) and December 31, ~~2018~~2019	5
		Consolidated Statements of Operations (Unaudited) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	6
		Consolidated Statements of Comprehensive Income (Unaudited) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	7
		Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the ~~nine~~six months ended ~~September~~June 30, 2020 and the year ended December 31, 2019	8
		Consolidated Statements of Cash Flows (Unaudited) for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	10
		Condensed Notes to Consolidated Financial Statements (Unaudited)	12
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4946
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	68
	Item 4.	Controls and Procedures	70
Part II – OTHER INFORMATION			70
	Item 4.1.	~~Controls and Procedures~~Legal Proceedings	7270
	Item 1A.	~~Part II – OTHER INFORMATION~~Risk Factors	71
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72
	Item 1.3.	~~Legal Proceedings~~Defaults Upon Senior Securities	72
	Item ~~1A.~~4.	~~Risk Factors~~Mine Safety Disclosures	73
	~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	73
	~~Item 3.~~	~~Defaults Upon Senior Securities~~	73
	~~Item 4.~~	~~Mine Safety Disclosures~~	7372
	Item 5.	Other Information	7372
	Item 6.	Exhibits	73
SIGNATURES			74
~~SIGNATURES~~			75

PART 1 – FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Balance Sheets

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

(derived from audited financial statements)

(in thousands, except share and per share data)


	September 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
Assets
Cash and cash equivalents	$	52,276		$	45,778		$	39,581		$	55,840
Other interest-bearing deposits	5,245			7,460			3,752			4,744
Securities available for sale "AFS"	182,956			146,725			162,716			180,119
Securities held to maturity "HTM"	3,665			4,850			10,541			2,851
Equity securities with readily determinable fair value							188			246
Other investments	12,863			11,261			15,193			15,005
Loans receivable	1,124,378			992,556			1,281,175			1,177,380
Allowance for loan losses	(9,177		)	(7,604		)	(13,373		)	(10,320		)
Loans receivable, net	1,115,201			984,952			1,267,802			1,167,060
Loans held for sale	3,262			1,927			8,876			5,893
Mortgage servicing rights	4,245			4,486			3,509			4,282
Office properties and equipment, net	20,938			13,513			21,318			21,106
Accrued interest receivable	4,993			4,307			5,855			4,738
Intangible assets	7,999			7,501			6,293			7,587
Goodwill	31,841			31,474			31,498			31,498
Foreclosed and repossessed assets, net	1,373			2,570			734			1,460
Bank owned life insurance ("BOLI")	22,895			17,792			23,357			23,063
Other assets	5,612			3,328			6,301			5,757
TOTAL ASSETS	$	1,475,364		$	1,287,924		$	1,607,514		$	1,531,249


Liabilities and Stockholders’ Equity
Liabilities:
Deposits	$	1,161,750		$	1,007,512		$	1,272,197		$	1,195,702
Federal Home Loan Bank advances	113,466			109,813
Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) advances							124,484			130,971
Other borrowings	44,545			24,647			43,595			43,560
Other liabilities	7,574			7,765			14,448			10,463
Total liabilities	1,327,335			1,149,737			1,454,724			1,380,696

Stockholders’ Equity:
Common stock— $0.01 par value, authorized 30,000,000; 11,270,710 and 10,953,512 shares issued and outstanding, respectively	113			109
Common stock— $0.01 par value, authorized 30,000,000; 11,150,695 and 11,266,954 shares issued and outstanding, respectively							112			113
Additional paid-in capital	128,926			125,512			127,734			128,856
Retained earnings	19,348			15,264			25,759			22,517
Unearned deferred compensation	(630		)	(857		)	(834		)	(462		)
Accumulated other comprehensive loss	272			(1,841		)
Accumulated other comprehensive income (loss)							19			(471		)
Total stockholders’ equity	148,029			138,187			152,790			150,553
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,475,364		$	1,287,924		$	1,607,514		$	1,531,249

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Operations (unaudited)

Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

(in thousands, except per share data)



	Three Months Ended						Six Months Ended
	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019
Interest and dividend income:
Interest and fees on loans	$	14,687		$	12,976		$	30,146		$	25,390
Interest on investments	1,199			1,360			2,648			2,664
Total interest and dividend income	15,886			14,336			32,794			28,054
Interest expense:
Interest on deposits	2,607			2,926			5,787			5,519
Interest on FHLB and FRB borrowed funds	448			913			956			1,574
Interest on other borrowed funds	528			414			1,077			816
Total interest expense	3,583			4,253			7,820			7,909
Net interest income before provision for loan losses	12,303			10,083			24,974			20,145
Provision for loan losses	1,750			325			3,750			1,550
Net interest income after provision for loan losses	10,553			9,758			21,224			18,595
Non-interest income:
Service charges on deposit accounts	345			581			905			1,131
Interchange income	489			453			953			791
Loan servicing income	1,315			634			2,000			1,188
Gain on sale of loans	1,818			573			2,598			881
Loan fees and service charges	244			261			721			389
Insurance commission income	195			192			474			376
Net gains on investment securities	25			21			98			55
Gain on sale of branch	—			2,295			—			2,295
Gain on sale of insurance agency	252			—			252			—
Settlement proceeds	131			—			131			—
Other	199			228			484			464
Total non-interest income	5,013			5,238			8,616			7,570
Non-interest expense:
Compensation and related benefits	5,908			4,604			11,343			9,310
Occupancy	899			866			1,905			1,820
Office	575			528			1,118			1,050
Data processing	1,024			868			2,020			1,855
Amortization of intangible assets	412			346			824			673
Mortgage servicing rights expense	991			306			1,727			497
Advertising, marketing and public relations	303			456			542			659
FDIC premium assessment	180			146			248			240
Professional services	353			575			957			1,400
Gain on repossessed assets, net	(22		)	(90		)	(90		)	(127		)
Other	769			784			1,529			1,906
Total non-interest expense	11,392			9,389			22,123			19,283
Income before provision for income tax	4,174			5,607			7,717			6,882
Provision for income taxes	1,105			1,500			2,042			1,822
Net income attributable to common stockholders	$	3,069		$	4,107		$	5,675		$	5,060
Per share information:
Basic earnings	$	0.28		$	0.37		$	0.51		$	0.46
Diluted earnings	$	0.28		$	0.37		$	0.51		$	0.46
Cash dividends paid	$	—		$	—		$	0.21		$	0.20

Three Months Ended Nine Months Ended
September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018
Interest and dividend income:
Interest and fees on loans $ 14,646
$ 9,414
$ 40,036
$ 26,818
Interest on investments 1,577
948
4,241
2,666
Total interest and dividend income 16,223
10,362
44,277
29,484
Interest expense:
Interest on deposits 3,371
1,659
8,890
4,341
Interest on FHLB borrowed funds 639
323
2,213
1,049
Interest on other borrowed funds 620
440
1,436
1,318
Total interest expense 4,630
2,422
12,539
6,708
Net interest income before provision for loan losses 11,593
7,940
31,738
22,776
Provision for loan losses 575
450
2,125
1,200
Net interest income after provision for loan losses 11,018
7,490
29,613
21,576
Non-interest income:
Service charges on deposit accounts 625
489
1,756
1,332
Interchange income 476
338
1,267
978
Loan servicing income 714
368
1,902
1,051
Gain on sale of loans 679
234
1,560
649
Loan fees and service charges 471
164
860
367
Insurance commission income 197
180
573
554
Gains (losses) on investment securities 96
—
151
(17 )
Gain on sale of branch —
—
2,295
—
Other 363
216
827
517
Total non-interest income 3,621
1,989
11,191
5,431
Non-interest expense:
Compensation and related benefits 5,295
3,778
14,605
11,424
Occupancy 905
776
2,725
2,270
Office 599
468
1,649
1,311
Data processing 1,092
771
2,953
2,224
Amortization of intangible assets 412
161
1,085
483
Amortization of mortgage servicing rights 325
85
822
245
Advertising, marketing and public relations 315
265
974
596
FDIC premium assessment 78
121
318
330
Professional services 561
577
1,961
1,635
Loss (gain) on repossessed assets, net (16 ) 71
(143 ) 521
Other 3,409
571
5,309
1,582
Total non-interest expense 12,975
7,644
32,258
22,621
Income before provision for income tax 1,664
1,835
8,546
4,386
Provision for income taxes 430
736
2,252
1,443
Net income attributable to common stockholders $ 1,234
$ 1,099
$ 6,294
$ 2,943
Per share information:
Basic earnings $ 0.11
$ 0.18
$ 0.57
$ 0.49
Diluted earnings $ 0.11
$ 0.10
$ 0.57
$ 0.38
Cash dividends paid $ —
$ —
$ 0.20
$ 0.20

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Comprehensive Income (unaudited)

Three and ~~Nine~~Six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

(in thousands)

Three Months Ended Nine Months Ended
September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018
Net income attributable to common stockholders $ 1,234
$ 1,099
$ 6,294
$ 2,943
Other comprehensive income (loss), net of tax:
Securities available for sale
Net unrealized gains (losses) arising during period 250
(531 ) 2,049
(1,753 )
Reclassification adjustment for net gains (losses) included in net income 69
—
109
(13 )
Other comprehensive income (loss) 319
(531 ) 2,158
(1,766 )
Comprehensive income $ 1,553
$ 568
$ 8,452
$ 1,177



	Three Months Ended					Six Months Ended
	June 30, 2020		June 30, 2019			June 30, 2020			June 30, 2019
Net income attributable to common stockholders	$	3,069	$	4,107		$	5,675		$	5,060
Other comprehensive income, net of tax:
Securities available for sale
Net unrealized gains arising during period	1,628		694			603			1,858
Reclassification adjustment for net gains included in net income	—		(19		)	(113		)	(19		)
Other comprehensive income	1,628		675			490			1,839
Comprehensive income	$	4,697	$	4,782		$	6,165		$	6,899

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statement of Changes in Stockholders’ Equity (unaudited)

~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~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, 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
Net income	—		—			—			3,069			—			—			3,069
Other comprehensive income, net of tax	—		—			—			—			—			1,628			1,628
Surrender of restricted shares of common stock	(314	)	—			(2		)	—			—			—			(2		)
Stock option expense	—		—			4			—			—			—			4
Amortization of restricted stock	—		—			—			—			158			—			158
Balance at June 30, 2020	11,150,695		$	112		$	127,734		$	25,759		$	(834	)	$	19		$	152,790

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

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statement of Changes in Stockholders’ Equity (unaudited)

~~Nine~~Twelve Months Ended ~~September 30, 2018~~December 31, 2019

(in thousands, except shares and per share data)


								Additional Paid-In Capital				Retained Earnings				Unearned Deferred Compensation				Accumulated Other Comprehensive Income (Loss)				Total Stockholders’ Equity								Additional Paid-In Capital			Retained Earnings			Unearned Deferred Compensation			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Common Stock				Preferred Stock										Common Stock
	Shares		Amount		Amount										Shares								Amount
Balance, January 1, 2018	5,883,603		$	59	$	—					$	63,348			$				12,104				$				(391	)	$	(666	)	$	74,454
Balance, January 1, 2019																											10,953,512		$	109		$	125,512		$	15,264		$	(857	)	$	(1,841	)	$	138,187
Net income	—		—		—						—				1,341				—				—					1,341		—		—			—			953			—			—			953
Reclassification of certain deferred tax effects (1)	—		—		—			—				137					—				(137		)			—
Other comprehensive loss, net of tax	—		—		—			—				—				—				(1,208		)		(1,208		)
Other comprehensive income, net of tax																											—		—			—			—			—			1,164			1,164
Forfeiture of unvested shares	(1,437	)	—		—			(20		)		—				20				—				—			(958	)	—			(13		)	—			13			—			—
Surrender of restricted shares of common stock																											(798	)	—			(9		)	—			—			—			(9		)
Common stock awarded under the equity incentive plan	15,523		—		—			211				—				(211		)		—				—			10,847		—			252			—			(252		)	—			—
Common stock options exercised	4,792		—		—			41				—				—				—				41			27,430		1			194			—			—			—			195
Stock option expense	—		—		—			(5		)		—				—				—				(5		)	—		—			4			—			—			—			4
Amortization of restricted stock	—		—		—			—				—				67				—				67			—		—			—			—			140			—			140
Adoption of ASU 2016-01; Equity securities																											—		—			—			45			—			(45		)	—
Adoption of ASU 2016-02; Leases																											—		—			—			(56		)	—			—			(56		)
Cash dividends ($0.20 per share)	—		—		—			—				(1,181		)		—				—				(1,181		)	—		—			—			(2,198		)	—			—			(2,198		)
Balance at March 31, 2018	5,902,481		59		—			63,575				12,401				(515		)		(2,011		)		73,509
Balance at March 31, 2019																											10,990,033		110			125,940			14,008			(956		)	(722		)	138,380
Net income	—		—		—			—				503				—				—				503			—		—			—			4,107			—			—			4,107
Preferred stock issued (net of issuance costs)	—		—		61,289			—				—				—				—				61,289
Other comprehensive loss, net of tax	—		—		—			—				—				—				(164		)		(164		)
Other comprehensive income, net of tax																											—		—			—			—			—			675			675
Forfeiture of unvested shares																											(7,958	)	—			(118		)	—			118			—			—
Surrender of restricted shares of common stock	(1,809	)	—		—			(25		)		—				—				—				(25		)	(3,067	)	—			(35		)	—			—			—			(35		)
Common stock awarded under the equity incentive plan	13,707		—		—			295				—				(295		)		—				—			2,000		—			22			—			(22		)	—			—
Common stock options exercised																											1,000		—			8			—			—			—			8
Stock option expense	—		—		—			5				—				—				—				5			—		—			5			—			—			—			5
Amortization of restricted stock	—		—		—			—				—				94				—				94			—		—			—			—			103			—			103
Balance at June 30, 2018	5,914,379		59		61,289			63,850				12,904				(716		)		(2,175		)		135,211
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	—		—		—			—				1,099				—				—				1,099			—		—			—			1,234			—			—			1,234
Preferred stock issued net of issuance costs	—		—		(24		)	—				—				—				—				(24		)
Preferred stock converted to common stock	5,000,000		50		(61,265		)	61,215				—				—				—				—
Other comprehensive loss, net of tax	—		—		—			—				—				—				(531		)		(531		)
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	(526	)	—		—			(8		)		—				—				—				(8		)	(505	)	—			(6		)	—			—			—			(6		)
Stock option expense	—		—		—			6				—				—				—				6			—		—			4			—			—			—			4
Amortization of restricted stock	—		—		—			—				—				94				—				94			—		—			—			—			100			—			100
Balance, September 30, 2018	10,913,853		$	109	$	—		$	125,063			$	14,003			$	(622	)		$	(2,706	)		$	135,847
Balance, December 31, 2019																											11,266,954		$	113		$	128,856		$	22,517		$	(462	)	$	(471	)	$	150,553

~~(1) Amounts reclassified to retained earnings due to early adoption of ASU 2018-02.~~

See accompanying condensed notes to unaudited consolidated financial statements.

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Cash Flows (unaudited)

~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

(in thousands)


	Nine Months Ended						Six Months Ended
	September 30, 2019			September 30, 2018			June 30, 2020			June 30, 2019
Cash flows from operating activities:
Net income attributable to common stockholders	$	6,294		$	2,943		$	5,675		$	5,060
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premium/accretion discount on investment securities	762			843
Provision for depreciation	1,110			819
Premium amortization, net of discount accretion on investment securities							148			533
Depreciation expense							943			705
Provision for loan losses	2,125			1,200			3,750			1,550
Net realized (gain) loss on sale of securities	(151		)	17
Net realized loss (gain) on equity securities							58			(29		)
Net realized gain on debt securities							(156		)	(26		)
Increase in MSR assets resulting from transfers of financial assets	(581		)	(289		)	(954		)	(330		)
Amortization of MSR assets	822			335
Mortgage servicing rights expense							1,727			497
Amortization of intangible assets	1,085			483			824			673
Amortization of restricted stock	370			255			297			243
Net stock based compensation expense	14			6			8			9
Gain on sale of office properties and equipment	(32		)	(3		)
Benefit for deferred income taxes	—			(194		)
Loss (gain) on sale of office properties and equipment							21			(32		)
Deferred income taxes							(799		)	—
Increase in cash surrender value of life insurance	(384		)	(318		)	(294		)	(230		)
Net (gain) loss from disposals of foreclosed and repossessed assets	(143		)	522			(90		)	(127		)
Gain on sale of loans held for sale, net	(1,560		)	(943		)	(2,598		)	(881		)
Net change in loans held for sale	225			1,360			(385		)	333
Decrease in accrued interest receivable and other assets	3,009			433			(1,048		)	(346		)
(Decrease) increase in other liabilities	(6,482		)	620
Increase (decrease) in other liabilities							3,580			(3,776		)
Net gain on sale of insurance agency							(252		)	—
Total adjustments	189			5,146			4,780			(1,234		)
Net cash provided by operating activities	6,483			8,089			10,455			3,826
Cash flows from investing activities:
Purchase of investment securities	(23,457		)	(33,622		)
Net decrease (increase) in interest-bearing deposits	3,207			(25		)
Proceeds from sale of investment securities	7,976			26
Principal payments on investment securities	19,579			8,776
Net decrease in other interest-bearing deposits							992			1,480
Purchase of available for sale securities							(13,855		)	(24,006		)
Purchase of held to maturity securities							(8,062		)	—
Proceeds from principal payments and sale of available for sale securities							31,952			17,835
Proceeds from principal payments and maturities of held to maturity securities							362			1,022
Net sales of other investments	1,084			933			(188		)	(1,282		)
Proceeds from sale of foreclosed and repossessed assets	2,238			4,805			1,767			1,984
Net increase in loans	(6,710		)	(28,644		)	(105,443		)	(28,470		)
Net capital expenditures	(6,149		)	(2,405		)	(1,184		)	(2,747		)
Net cash acquired in business combinations	(8,137		)	—
Proceeds from disposal of office properties and equipment	300			74			8			300
Net proceeds from sale of insurance agency							1,127			—
Net cash used in investing activities	(10,069		)	(50,082		)	(92,524		)	(33,884		)
Cash flows from financing activities:
Net decrease in Federal Home Loan Bank advances	(16,469		)	(31,000		)
Proceeds from other borrowings, net of debt issuance costs	—			9,911
Escrow merger settlement proceeds							—			(20,555		)
Net (decrease) increase in short-term Federal Home Loan Bank advances							(40,987		)	26,031
Long-term Federal Home Loan Bank advances							66,500			—
Long-term Federal Home Loan Bank maturities							(32,000		)	—
Amortization of debt issuance costs							35			55
Proceeds from other borrowings to fund business combination, net of origination costs	29,889			—			—			29,849
Principal payment reduction to other borrowings	(10,000		)	(15,191		)	—			(10,000		)
Net increase in deposits	5,601			5,460			76,495			7,947
Proceeds from private placement stock offering, net of issuance costs	—			61,265
Common stock issued in F&M acquisition less capitalized equity costs	3,105			—
Repurchase shares of common stock							(1,838		)	—
Surrender of restricted shares of common stock	(47		)	(33		)	(23		)	(44		)
Exercise of common stock options	203			41
Common stock options exercised							—			203
Cash dividends paid	(2,198		)	(1,181		)	(2,372		)	(2,198		)
Net cash provided by financing activities	10,084			29,272			65,810			31,288
Net increase (decrease) in cash and cash equivalents	6,498			(12,721		)
Net (decrease) increase in cash and cash equivalents							(16,259		)	1,230
Cash and cash equivalents at beginning of period	45,778			47,215			55,840			45,778
Cash and cash equivalents at end of period	$	52,276		$	34,494		$	39,581		$	47,008


Supplemental cash flow information:
Cash paid during the period for:
Interest on deposits	$	8,775	$	4,285	$	5,854	$	5,474
Interest on borrowings	$	3,966	$	2,366	$	2,032	$	2,394
Income taxes	$	3,847	$	1,160	$	115	$	3,747
Supplemental noncash disclosure:
Transfers from loans receivable to foreclosed and repossessed assets	$	898	$	1,064	$	879	$	674
Fair value of assets acquired, net of cash and cash equivalents	$	177,494	$	—
Fair value of liabilities assumed, net of cash and cash equivalents	$	169,724	$	—

See accompanying condensed notes to unaudited consolidated financial statements.

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”), and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. As used in this quarterly report, the terms “we”, “us”, “our”, and “Citizens Community Bancorp, Inc.” mean the Company and its wholly owned subsidiary, the Bank, unless the context indicates other meaning.

The Bank is a national banking association (a “National Bank”) and operates under the title of Citizens Community Federal National Association (“Citizens Community Federal N.A.” or “Bank” or “CCFBank”). The Company is a bank holding company, supervised by the Federal Reserve Bank of Minneapolis (the “FRB”), and operates under the title of Citizens Community Bancorp, Inc. Wells Insurance Agency (“WIA”) was a wholly owned subsidiary of the Bank, providing insurance products to the Bank’s customers and was sold on June 30, 2020. 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”), 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.~~mortgages.

The Bank is subject to competition from other financial institutions and non-financial institutions providing financial products. Additionally, the Bank is subject to the regulations of certain regulatory agencies and undergoes periodic examination by those regulatory agencies.

In preparing these consolidated financial statements, we evaluated the events and transactions that occurred subsequent to the balance sheet date as of ~~September~~June 30, ~~2019~~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 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.

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 2, “Acquisitions” for additional information.

On October 25, 2019, the Department of the Treasury released regulations which clarified the tax status of acquired life insurance policies, resulting in policies acquired from United Bank and F&M retaining their tax-free status. As a result, the Company will be reducing its related deferred tax liabilities by $350 thousand (F&M), and $300 thousand (United Bank) and F&M’s initial goodwill will be reduced by $350 thousand on the December 31, 2019 consolidated balance sheet. $300 thousand will be recorded as a discrete tax credit reduction on the Company’s statement of operations for the three and twelve-months ended December 31, 2019. See Note 12, “Subsequent Event” for additional information.

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

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

~~Use of Estimates –~~Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, fair value of financial instruments, the allowance for loan losses, mortgage servicing rights, foreclosed and repossessed assets, valuation of ~~acquired~~ intangible assets 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” 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 our Form 10-Q for the quarter ended March 31, 2020 and 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 intent and ability to sell the debt security prior to recovery, that it is more likely than not that the Company will not sell the security prior to recovery, default and delinquency rates of the underlying collateral, remaining credit support, and historical loss severities. Adjustments to market value of available for sale securities that are considered temporary are recorded in other comprehensive income or loss as separate components of stockholders’ equity, net of tax. If the unrealized loss of a security is identified as other-than-temporary based on information available, such as the decline in the creditworthiness of the issuer, external market ratings, or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if credit loss exists. If there is a credit loss, it will be recorded in the Company’s consolidated statement of operations. Non-credit components of the unrealized losses on available for sale securities will continue to be recognized in other comprehensive income (loss), net of tax.

~~Other Investments -~~ ~~Other investments includes equity~~Equity securities with readily determinable fair ~~values, “restricted”~~value - The Company is required to maintain an investment in Federal Agricultural Mortgage Corporation (“Farmer Mac”) equity ~~securities, and private company~~ securities. ~~Other investments includes $241 of~~Farmer Mac equity ~~securities with readily determinable fair values. Equity investment~~ 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.

Other Investments - As a member of the Federal Reserve Bank (“FRB”) System and the Federal Home Loan Bank (“FHLB”) System, the Bank is required to maintain an investment in the capital stock of these entities. These securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other exchange traded equity securities. As no ready market exists for these stocks, and they have no quoted market value, these investments are carried at cost and periodically evaluated for impairment based on the ultimate recovery of par value. Cash dividends are reported as ~~income.~~other income in the consolidated statement of operations.

Also included in ~~other investments~~non-marketable equity securities is stock ~~in a private company that does not have a quoted market price.~~of our correspondent bank, Bankers’ Bank, without readily determinable fair value. This stock is carried at cost plus or minus changes resulting from observable price changes in orderly transactions for this stock, less other-than-temporary impairment charges, if any.

Management’s evaluation for impairment of these other investments, includes consideration of the financial condition and other available relevant information of the issuer. Based on management’s quarterly evaluation, no impairment has been recorded on these securities. Other investments totaling $15,193 at June 30, 2020 consisted of $8,349 of FHLB stock, $5,169 of Federal Reserve 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 Bank stock and $1,647 of Bankers’ Bank stock.

Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of 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/~~Commercial and industrial/agricultural ~~non-real estate~~operating loans past due 90 days or more;

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

•Residential ~~real estate~~mortgage loans and open ended consumer ~~non-real estate~~installment loans past due 180 days or more.

Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for a loan placed on nonaccrual status is reversed against interest income. Interest received on such loans is accounted for on the cash

basis or cost recovery method until qualifying for return to accrual status. Loans are returned to accrual status when payments are made that bring the loan account current with the contractual term of the loan and a six month payment history has been established. 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~~mortgage loans and open ended consumer ~~non-real estate~~installment loans are charged off to estimated net realizable value less estimated selling costs at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 180 days or more. Closed ended consumer ~~non-real estate~~installment loans are charged off to net realizable value at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 120 days or more. Commercial/agricultural real estate, commercial and ~~non-real estate~~industrial and agricultural operating loans are charged off to net realizable value at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 90 days or more.

Allowance for 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 4,3, “Loans, Allowance for Loan Losses and Impaired Loans” for more information on what we consider to be a TDR. For 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 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’ 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”) 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 - 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~~1 operating segment for which complete, discrete financial information is available and reviewed regularly by the segment’s management. The Company has ~~one~~1 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 June 30, 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 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~~1 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 (0 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 leased (1) 9 branch locations, (2) its corporate offices (3) 1 production office and (4) office equipment under operating leases that resulted in the recognition of right-of-use assets and corresponding lease liabilities of approximately $5,000 on the consolidated balance sheet under Topic 842. Adoption of Topic 842 did not 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 ~~September~~June 30, ~~2019,~~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 65 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. On July 17, 2019, the FASB proposed delaying the effective date for ASU 2016-13 for smaller reporting companies. ~~This proposal was approved on October 18,~~In November 2019, ~~resulting in~~the FASB issued ASU ~~2016-13 becoming~~2019-10 to extend the effective ~~in the first quarter of 2023 for the Company.~~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 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 January 1, 2023.

~~NOTE 2 – ACQUISITION~~

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

F&M

Fair value of consideration paid $ 23,894

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

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

NOTE 32 – INVESTMENT SECURITIES

The amortized cost, estimated fair value and related unrealized gains and losses on securities available for sale and held to maturity as of ~~September~~June 30, ~~2019~~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
June 30, 2020
U.S. government agency obligations	$	35,109	$	355	$	110	$	35,354
Obligations of states and political subdivisions	140		—		—		140
Mortgage-backed securities	57,057		2,315		—		59,372
Corporate debt securities	19,942		259		122		20,079
Corporate asset based securities	36,542		—		1,720		34,822
Trust preferred securities	13,899		—		950		12,949
Total available for sale securities	$	162,689	$	2,929	$	2,902	$	162,716

December 31, 2019
U.S. government agency obligations	$	52,020	$	132	$	347	$	51,805
Obligations of states and political subdivisions	281		—		—		281
Mortgage-backed securities	70,806		635		110		71,331
Corporate debt securities	18,776		66		117		18,725
Corporate asset based securities	27,718		—		864		26,854
Trust preferred securities	11,167		35		79		11,123
Total available for sale securities	$	180,768	$	868	$	1,517	$	180,119

Available for sale securities
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value
September 30, 2019
U.S. government agency obligations $ 53,405
$ 184
$ 211
$ 53,378
Obligations of states and political subdivisions 27,648
301
12
27,937
Mortgage-backed securities 54,979
741
62
55,658
Corporate debt securities 18,793
131
90
18,834
Corporate asset based securities 27,756
—
607
27,149
Total available for sale securities $ 182,581
$ 1,357
$ 982
$ 182,956

December 31, 2018
U.S. government agency obligations $ 46,215
$ 13
$ 930
$ 45,298
Obligations of states and political subdivisions 35,162
22
456
34,728
Mortgage-backed securities 42,279
10
939
41,350
Agency Securities 104
49
5
148
Corporate debt securities 6,577
—
272
6,305
Corporate asset based securities 18,928
8
40
18,896
Total available for sale securities $ 149,265
$ 102
$ 2,642
$ 146,725



Held to maturity securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
June 30, 2020
Obligations of states and political subdivisions	$	300	$	1	$	—	$	301
Mortgage-backed securities	10,241		380		—		10,621
Total held to maturity securities	$	10,541	$	381	$	—	$	10,922

December 31, 2019
Obligations of states and political subdivisions	$	300	$	2	$	—	$	302
Mortgage-backed securities	2,551		104		—		2,655
Total held to maturity securities	$	2,851	$	106	$	—	$	2,957

Held to maturity securities
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value
September 30, 2019
Obligations of states and political subdivisions $ 980
$ 2
$ —
$ 982
Mortgage-backed securities 2,685
103
—
2,788
Total held to maturity securities $ 3,665
$ 105
$ —
$ 3,770

December 31, 2018
Obligations of states and political subdivisions $ 1,701
$ —
$ 3
$ 1,698
Mortgage-backed securities 3,149
42
17
3,174
Total held to maturity securities $ 4,850
$ 42
$ 20
$ 4,872

As of ~~September~~June 30, ~~2019,~~2020, the Bank has pledged U.S. Government Agency securities with a market value of ~~$5,974~~$613 and mortgage-backed securities with a market value of ~~$13,710~~$3,950 as collateral against specific municipal deposits. At ~~September~~June 30, ~~2019,~~2020, the Bank has pledged ~~U.S. Government Agency~~mortgage-backed securities with a market value of ~~$1,703~~$1,403 as collateral against a borrowing line of credit with the Federal Reserve Bank. However, as of ~~September~~June 30, ~~2019,~~2020, there were no0 borrowings outstanding on this Federal Reserve Bank line of credit. As of ~~September~~June 30, ~~2019,~~2020, the Bank also has ~~mortgage backed~~mortgage-backed securities with a carrying value of ~~$760~~$594 pledged as collateral to the Federal Home Loan Bank of Des Moines.

2120

The estimated fair value of securities at ~~September~~June 30, ~~2019~~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, 2020				December 31, 2019
Available for sale securities	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	—	$	—	$	141	$	141
Due after one year through five years	5,866		6,086		5,900		5,959
Due after five years through ten years	40,544		39,811		43,269		43,180
Due after ten years	59,222		57,447		60,652		59,508
Total securities with contractual maturities	$	105,632	$	103,344	$	109,962	$	108,788
Mortgage backed securities	57,057		59,372		70,806		71,331
Securities without contractual maturities	—		—		—		—
Total available for sale securities	$	162,689	$	162,716	$	180,768	$	180,119

September 30, 2019 December 31, 2018
Available for sale securities
Amortized
Cost

Estimated
Fair Value

Amortized
Cost

Estimated
Fair Value
Due in one year or less $ 3,984
$ 3,986
$ 2,177
$ 2,172
Due after one year through five years 19,572
19,806
22,296
22,043
Due after five years through ten years 40,350
40,437
43,014
42,081
Due after ten years 63,696
63,069
39,395
38,931
Total securities with contractual maturities $ 127,602
$ 127,298
$ 106,882
$ 105,227
Mortgage backed securities 54,979
55,658
42,279
41,350
Securities without contractual maturities —
—
104
148
Total available for sale securities $ 182,581
$ 182,956
$ 149,265
$ 146,725



	June 30, 2020				December 31, 2019
Held to maturity securities	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	300	$	301	$	300	$	302
Total securities with contractual maturities	300		301		300		302
Mortgage backed securities	10,241		10,621		2,551		2,655
Total held to maturity securities	$	10,541	$	10,922	$	2,851	$	2,957

September 30, 2019 December 31, 2018
Held to maturity securities
Amortized
Cost

Estimated
Fair Value

Amortized
Cost

Estimated
Fair Value
Due in one year or less $ 680
$ 680
$ 680
$ 679
Due after one year through five years 300
302
1,021
1,020
Total securities with contractual maturities $ 980
$ 982
$ 1,701
$ 1,699
Mortgage backed securities 2,685
2,788
3,149
3,173
Total held to maturity securities $ 3,665
$ 3,770
$ 4,850
$ 4,872

Securities with unrealized losses at ~~September~~June 30, ~~2019~~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
June 30, 2020
U.S. government agency obligations	$	12,277	$	41	$	7,558	$	69	$	19,835	$	110
Mortgage backed securities	—		—		—		—		—		—
Corporate debt securities	3,686		14		1,392		108		5,078		122
Corporate asset based securities	9,466		279		25,356		1,441		34,822		1,720
Trust preferred securities	12,949		950		—		—		12,949		950
Total	$	38,378	$	1,284	$	34,306	$	1,618	$	72,684	$	2,902
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 June 30, 2020 or December 31, 2019.

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
September 30, 2019
U.S. government agency obligations $ 10,815
$ 51
$ 10,694
$ 160
$ 21,509
$ 211
Obligations of states and political subdivisions 4,118
4
737
8
4,855
12
Mortgage backed securities 2,380
4
6,216
57
8,596
61
Corporate debt securities 1,993
7
1,417
84
3,410
91
Corporate asset based securities 17,372
357
9,777
250
27,149
607
Total $ 36,678
$ 423
$ 28,841
$ 559
$ 65,519
$ 982
December 31, 2018
U.S. government agency obligations $ 25,061
$ 165
$ 19,755
$ 765
$ 44,816
$ 930
Obligations of states and political subdivisions 5,807
28
24,124
428
29,931
456
Mortgage backed securities 3,518
9
31,040
930
34,558
939
Agency securities 28
5
—
—
28
5
Corporate debt securities 1,233
17
5,071
255
6,304
272
Corporate asset based securities 10,142
40
—
—
10,142
40
Total $ 45,789
$ 264
$ 79,990
$ 2,378
$ 125,779
$ 2,642

As of June 30, 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 0 other-than-temporary impairments charged to earnings during the three or six months ended June 30, 2020 or the three or six months ended June 30, 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
September 30, 2019
Obligations of states and political subdivisions $ —
$ —
$ —
$ —
$ —
$ —
Mortgage-backed securities —
—
—
—
—
—
Total $ —
$ —
$ —
$ —
$ —
$ —
December 31, 2018
Obligations of states and political subdivisions $ 1,290
$ 1
$ 409
$ 2
$ 1,699
$ 3
Mortgage-backed securities 1,238
3
1,319
14
2,557
17
Total $ 2,528
$ 4
$ 1,728
$ 16
$ 4,256
$ 20

During the three and six months ended June 30, 2020, the Bank sold approximately $0 and $10,700 of fixed-rate mortgage-backed certificates with a realized gain of $0 and $156, respectively, which is included in net gains on investment securities in the Consolidated Statements of Operations. During the three and six months ended June 30, 2019, the Bank sold approximately $7,950 of fixed rate securities with a realized gain of $26, which is included in net gains on investment securities in the Consolidated Statements of Operations.

NOTE 43 – 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~~Commercial 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~~industrial 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~~operating loans are generally comprised of term loans to fund the purchase of equipment, livestock and seasonal operating lines. Operating lines are typically written for one year and secured by the crop and other farm assets as considered necessary. Agricultural loans carry significant credit risks as they may involve larger balances concentrated with single borrowers or groups of related borrowers. In addition, repayment of such loans depends on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. Farming operations may be affected by adverse weather conditions such as drought, hail or floods that can severely limit crop yields.

Residential mortgage loans are collateralized by primary and secondary positions on real estate and are underwritten primarily based on borrower’s documented income, credit scores, and collateral values. Under consumer home equity loan guidelines, the borrower will be approved for a loan based on a percentage of their home’s appraised value less the balance owed on the existing first mortgage. Credit risk is minimized within the residential mortgage portfolio 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 installment loans are comprised of originated indirect paper loans secured primarily by boats and recreational vehicles and other consumer loans secured primarily by automobiles and other personal assets. The Bank ceased new originations of originated indirect paper 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 installment loan default. This shortage is a result of the greater likelihood of damage, loss and depreciation for consumer based collateral.

2422

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” loan means that the condition of the borrower and the performance of the loan is satisfactory or better.

5 - Watch. A “Watch” loan has clearly identifiable developing weaknesses that deserve additional attention from management. Weaknesses that are not corrected or mitigated, may jeopardize the ability of the borrower to repay the loan in the future.

6 - Special Mention. A “Special Mention” loan has one or more potential weakness that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position in the future.

7 - Substandard. A “Substandard” loan is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Assets classified as substandard must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

8 - Doubtful. A “Doubtful” loan has all the weaknesses inherent in a Substandard loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

9 - Loss. Loans classified as “Loss” are considered uncollectible, and their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, and a partial recovery may occur in the future.

2523

Below is a summary of originated and acquired loans by type and risk rating as of ~~September~~June 30, ~~2019:~~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	$	110,440	$	53	$	4,014	$	—	$	—	$	114,507
Purchased HELOC loans	10,120		—		—		—		—		10,120
Commercial/Agricultural real estate:
Commercial real estate	243,656		—		1,153		—		—		244,809			$	308,633	$	4,952	$	805	$	—	$	—	$	314,390
Agricultural real estate	32,278		112		2,137		—		—		34,527			32,592		469		2,077		—		—		35,138
Multi-family real estate	69,556		—		—		—		—		69,556			90,617		—		—		—		—		90,617
Construction and land development	48,841		—		3,478		—		—		52,319			85,511		5,867		3,478		—		—		94,856
Consumer non-real estate:
C&I/Agricultural operating:
Commercial and industrial														76,447		661		3,261		—		—		80,369
C&I SBA PPP loans														137,330		—		—		—		—		137,330
Agricultural operating														24,488		768		557		—		—		25,813
Residential mortgage:
Residential mortgage														91,649		—		4,015		—		—		95,664
Purchased HELOC loans														6,534		—		327		—		—		6,861
Consumer installment:
Originated indirect paper	42,623		—		271		—		—		42,894			31,815		—		216		—		—		32,031
Purchased indirect paper	—		—		—		—		—		—
Other Consumer	15,657		—		61		—		—		15,718
Commercial/Agricultural non-real estate:
Commercial non-real estate	76,555		866		3,520		—		—		80,941
Agricultural non-real estate	20,740		507		810		—		—		22,057
Other consumer														14,082		—		93		—		—		14,175
Total originated loans	$	670,466	$	1,538	$	15,444	$	—	$	—	$	687,448		$	899,698	$	12,717	$	14,829	$	—	$	—	$	927,244
Acquired Loans:
Residential real estate:
One to four family	$	70,584	$	450	$	2,529	$	—	$	—	$	73,563
Commercial/Agricultural real estate:
Commercial real estate	204,056		6,729		9,452		—		—		220,237			$	180,003	$	6,699	$	8,633	$	—	$	—	$	195,335
Agricultural real estate	46,308		3,010		5,596		—		—		54,914			35,712		—		7,342		—		—		43,054
Multi-family real estate	16,427		—		1,775		—		—		18,202			12,874		—		148		—		—		13,022
Construction and land development	12,434		—		797		—		—		13,231			15,086		—		190		—		—		15,276
Consumer non-real estate:
Other Consumer	3,038		—		14		—		—		3,052
Commercial/Agricultural non-real estate:
Commercial non-real estate	43,492		1,101		1,698		—		—		46,291
Agricultural non-real estate	16,417		131		1,222		—		—		17,770
C&I/Agricultural operating:
Commercial and industrial														28,274		59		1,144		—		—		29,477
Agricultural operating														10,723		80		1,321		—		—		12,124
Residential mortgage:
Residential mortgage														54,058		403		2,299		—		—		56,760
Consumer installment:
Other consumer														1,634		—		5		—		—		1,639
Total acquired loans	$	412,756	$	11,421	$	23,083	$	—	$	—	$	447,260		$	338,364	$	7,241	$	21,082	$	—	$	—	$	366,687
Total Loans:
Residential real estate:
One to four family	$	181,024	$	503	$	6,543	$	—	$	—	$	188,070
Purchased HELOC loans	10,120		—		—		—		—		10,120
Commercial/Agricultural real estate:
Commercial real estate	447,712		6,729		10,605		—		—		465,046			$	488,636	$	11,651	$	9,438	$	—	$	—	$	509,725
Agricultural real estate	78,586		3,122		7,733		—		—		89,441			68,304		469		9,419		—		—		78,192
Multi-family real estate	85,983		—		1,775		—		—		87,758			103,491		—		148		—		—		103,639
Construction and land development	61,275		—		4,275		—		—		65,550			100,597		5,867		3,668		—		—		110,132
Consumer non-real estate:
Commercial/Agricultural non-real estate:
Commercial and industrial														104,721		720		4,405		—		—		109,846
C&I SBA PPP loans														137,330		—		—		—		—		137,330
Agricultural operating														35,211		848		1,878		—		—		37,937
Residential mortgage:
Residential mortgage														145,707		403		6,314		—		—		152,424
Purchased HELOC loans														6,534		—		327		—		—		6,861
Consumer installment:
Originated indirect paper	42,623		—		271		—		—		42,894			31,815		—		216		—		—		32,031
Purchased indirect paper	—		—		—		—		—		—
Other Consumer	18,695		—		75		—		—		18,770			15,716		—		98		—		—		15,814
Commercial/Agricultural non-real estate:
Commercial non-real estate	120,047		1,967		5,218		—		—		127,232
Agricultural non-real estate	37,157		638		2,032		—		—		39,827
Gross loans	$	1,083,222	$	12,959	$	38,527	$	—	$	—	$	1,134,708		$	1,238,062	$	19,958	$	35,911	$	—	$	—	$	1,293,931
Less:
Unearned net deferred fees and costs and loans in process											(158		)											(5,369		)
Unamortized discount on acquired loans											(10,172		)											(7,387		)
Allowance for loan losses											(9,177		)											(13,373		)
Loans receivable, net											$	1,115,201												$	1,267,802

2624

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
Originated Loans:
Commercial/Agricultural real estate:
Commercial real estate	$	301,381	$	266	$	899	$	—	$	—	$	302,546
Agricultural real estate	31,129		829		2,068		—		—		34,026
Multi-family real estate	71,877		—		—		—		—		71,877
Construction and land development	67,989		—		3,478		—		—		71,467
C&I/Agricultural operating:
Commercial and industrial	85,248		1,023		3,459		—		—		89,730
Agricultural operating	19,545		402		770		—		—		20,717
Residential mortgage:
Residential mortgage	104,428		—		4,191		—		—		108,619
Purchased HELOC loans	8,407		—		—		—		—		8,407
Consumer installment:					—
Originated indirect paper	39,339		—		246		—		—		39,585
Other Consumer	15,425		—		121		—		—		15,546
Total originated loans	$	744,768	$	2,520	$	15,232	$	—	$	—	$	762,520
Acquired Loans:
Commercial/Agricultural real estate:
Commercial real estate	$	196,692	$	6,084	$	9,137	$	—	$	—	$	211,913
Agricultural real estate	42,381		534		8,422		—		—		51,337
Multi-family real estate	13,533		—		1,598		—		—		15,131
Construction and land development	14,181		—		762		—		—		14,943
C&I/Agricultural operating:
Commercial and industrial	41,587		932		1,485		—		—		44,004
Agricultural operating	15,621		350		1,092		—		—		17,063
Residential mortgage:
Residential mortgage	65,125		436		2,152		—		—		67,713
Consumer installment:
Other Consumer	2,628		—		12		—		—		2,640
Total acquired loans	$	391,748	$	8,336	$	24,660	$	—	$	—	$	424,744
Total Loans:
Commercial/Agricultural real estate:
Commercial real estate	$	498,073	$	6,350	$	10,036	$	—	$	—	514,459
Agricultural real estate	73,510		1,363		10,490		—		—		85,363
Multi-family real estate	85,410		—		1,598		—		—		87,008
Construction and land development	82,170		—		4,240		—		—		86,410
C&I/Agricultural operating:
Commercial and industrial	126,835		1,955		4,944		—		—		133,734
Agricultural operating	35,166		752		1,862		—		—		37,780
Residential mortgage:
Residential mortgage	169,553		436		6,343		—		—		176,332
Purchased HELOC loans	8,407		—		—		—		—		8,407
Consumer installment:
Originated indirect paper	39,339		—		246		—		—		39,585
Other Consumer	18,053		—		133		—		—		18,186
Gross loans	$	1,136,516	$	10,856	$	39,892	$	—	$	—	$	1,187,264
Less:
Unearned net deferred fees and costs and loans in process											(393		)
Unamortized discount on acquired loans											(9,491		)
Allowance for loan losses											(10,320		)
Loans receivable, net											$	1,167,060

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
Agricultural real estate 27,581
987
1,021
—
—
29,589
Multi-family real estate 61,574
—
—
—
—
61,574
Construction and land development 15,812
—
—
—
—
15,812
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
Agricultural non-real estate 16,494
205
642
—
—
17,341
Total originated loans $ 613,335
$ 1,660
$ 4,794
$ —
$ —
$ 619,789
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
Agricultural real estate 50,215
—
6,211
—
—
56,426
Multi-family real estate 7,661
—
165
—
—
7,826
Construction and land development 6,288
183
408
—
—
6,879
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
Agricultural non-real estate 16,644
50
2,292
—
—
18,986
Total acquired loans $ 350,623
$ 10,036
$ 18,985
$ —
$ —
$ 379,644
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
Agricultural real estate 77,796
987
7,232
—

—
86,015
Multi-family real estate 69,235
—
165
—

—
69,400
Construction and land development 22,100
183
408
—

—
22,691
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
Agricultural non-real estate 33,138
255
2,934
—

—
36,327
Gross loans $ 963,958
$ 11,696
$ 23,779
$ —
$ —
$ 999,433
Less:
Unearned net deferred fees and costs and loans in process 409
Unamortized discount on acquired loans (7,286 )
Allowance for loan losses (7,604 )
Loans receivable, net $ 984,952

2725

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.

2826

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		C&I/Agricultural operating			Residential Mortgage			Consumer Installment			Unallocated		Total
Nine months ended September 30, 2019
Six months ended June 30, 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	(119		)	(225		)	(142		)	—		—			(486		)	—		(529		)	—			(114		)	—		(643		)
Recoveries	—			—			53			—		—			53			—		—			5			37			—		42
Provision	115			1,516			20			315		—			1,966			2,092		664			96			90			217		3,159
Allowance allocation adjustment	(39		)	(19		)	(75		)	27		87			(19		)
Total allowance on originated loans	1,005			5,291			497			1,600		301			8,694
Total Allowance on originated loans																		8,297		1,778			980			480			574		12,109
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	(105		)	—			(29		)	—		—			(134		)	—		(159		)	(27		)	(2		)	—		(188		)
Recoveries	2			3			10			—		—			15			76		—			14			2			—		92
Provision	94			30			35			—		—			159			144		466			(38		)	19			—		591
Allowance allocation adjustment	(26		)	(45		)	(26		)	55		61			19
Total allowance on other acquired loans	170			171			55			87		—			483
Total Allowance on other acquired loans																		746		334			112			72			—		1,264
Total Allowance on acquired loans	170			171			55			87		—			483			746		334			112			72			—		1,264
Ending balance, September 30, 2019	$	1,175		$	5,462		$	552		$	1,687	$	301		$	9,177
Allowance for Loan Losses at September 30, 2019:
Ending balance, June 30, 2020																		$	9,043	$	2,112		$	1,092		$	552		$	574	$	13,373
Allowance for Loan Losses at June 30, 2020:
Amount of allowance for loan losses arising from loans individually evaluated for impairment	$	191		$	205		$	15		$	252	$	—		$	663		$	815	$	181		$	101		$	1		$	—	$	1,098
Amount of allowance for loan losses arising from loans collectively evaluated for impairment	$	984		$	5,257		$	537		$	1,435	$	301		$	8,514		$	8,228	$	1,931		$	991		$	551		$	574	$	12,275
Loans Receivable as of September 30, 2019:															—
Loans Receivable as of June 30, 2020:																															—
Ending balance of originated loans	$	124,627		$	401,211		$	58,612		$	102,998	$	—		$	687,448		$	535,001	$	243,512		$	102,525		$	46,206		$	—	$	927,244
Ending balance of purchased credit-impaired loans	2,273			33,840			—			5,320		—			41,433			22,452		2,559			1,788			—			—		26,799
Ending balance of other acquired loans	71,290			272,744			3,052			58,741		—			405,827			244,235		39,042			54,972			1,639			—		339,888
Ending balance of loans	$	198,190		$	707,795		$	61,664		$	167,059	$	—		$	1,134,708		$	801,688	$	285,113		$	159,285		$	47,845		$	—	$	1,293,931
Ending balance: individually evaluated for impairment	$	8,626		$	16,458		$	419		$	7,215	$	—		$	32,718		$	14,456	$	5,587		$	7,823		$	377		$	—	$	28,243
Ending balance: collectively evaluated for impairment	$	189,564		$	691,337		$	61,245		$	159,844	$	—		$	1,101,990		$	787,232	$	279,526		$	151,462		$	47,468		$	—	$	1,265,688

2927



	Commercial/Agriculture Real Estate			C&I/Agricultural operating		Residential Mortgage			Consumer Installment			Unallocated			Total
Six months ended June 30, 2019
Allowance for Loan Losses:
Beginning balance, January 1, 2019	$	4,019		$	1,258	$	1,048		$	641		$	214		$	7,180
Charge-offs	(225		)	—		(30		)	(106		)	—			(361		)
Recoveries	—			—		—			36			—			36
Provision	1,216			212		(41		)	(43		)	85			1,429
Total Allowance on originated loans	$	5,010		$	1,470	$	977		$	528		$	299		$	8,284
Purchased credit impaired loans	—			—		—			—			—			—
Other acquired loans
Beginning balance, January 1, 2019	183			32		205			65			(61		)	424
Charge-offs	—			—		(60		)	(20		)	—			(80		)
Recoveries	3			—		1			6			—			10
Provision	(5		)	53		7			5			61			121
Total Allowance on other acquired loans	181			85		153			56			—			475
Total Allowance on acquired loans	181			85		153			56			—			475
Ending balance, June 30, 2019	5,191			1,555		1,130			584			299			8,759
Allowance for Loan Losses at June 30, 2019:
Amount of allowance for loan losses arising from loans individually evaluated for impairment	$	140		$	195	$	154		$	34		$	—		$	523
Amount of allowance for loan losses arising from loans collectively evaluated for impairment	$	5,051		$	1,360	$	976		$	550		$	299		$	8,236
Loans Receivable as of June 30, 2019:
Ending balance of originated loans	$	384,672		$	96,962	$	128,710		$	73,775		$	—		$	684,119
Ending balance of purchased credit-impaired loans	19,917			3,509		1,841			—			—			25,267
Ending balance of other acquired loans	197,483			44,110		72,464			3,160			—			317,217
Ending balance of loans	$	602,072		$	144,581	$	203,015		$	76,935		$	—		$	1,026,603
Ending balance: individually evaluated for impairment	$	12,984		$	7,040	$	7,669		$	348		$	—		$	28,041
Ending balance: collectively evaluated for impairment	$	589,088		$	137,541	$	195,346		$	76,587		$	—		$	998,562

Residential Real Estate Commercial/Agriculture Real Estate Consumer Non-real Estate Commercial/Agricultural Non-real Estate Unallocated Total
Nine months ended September 30, 2018
Allowance for Loan Losses:
Beginning balance, January 1, 2018 $ 1,439
$ 2,604
$ 910
$ 880
$ 26
$ 5,859
Charge-offs (72 ) —
(116 ) (52 ) —
(240 )
Recoveries 32
—
95
12
—
139
Provision —
680
60
230
—
970
Allowance allocation adjustment (364 ) (8 ) (285 ) (30 ) 256
(431 )
Total Allowance on originated loans $ 1,035
$ 3,276
$ 664
$ 1,040
$ 282
$ 6,297
Purchased credit impaired loans —
—
—
—
—
—
Other acquired loans
Beginning balance, January 1, 2018 —
—
—
—
—
—
Charge-offs (106 ) (73 ) (70 ) —
—
(249 )
Recoveries 34
—
5
—
—
39
Provision 70
120
25
15
—
230
Allowance allocation adjustment 171
121
125
14
—
431
Total Allowance on other acquired loans 169
168
85
29
—
451
Total Allowance on acquired loans 169
168
85
29
—
451
Ending balance, September 30, 2018 1,204
3,444
749
1,069
282
6,748
Allowance for Loan Losses at September 30, 2018:
Amount of allowance for loan losses arising from loans individually evaluated for impairment $ 97
$ 23
$ 39
$ 43
$ —
$ 202
Amount of allowance for loan losses arising from loans collectively evaluated for impairment $ 1,107
$ 3,421
$ 710
$ 1,026
$ 282
$ 6,546
Loans Receivable as of September 30, 2018:
Ending balance of originated loans $ 136,526
$ 254,751
$ 94,236
$ 79,710
$ —
$ 565,223
Ending balance of purchased credit-impaired loans 450
7,173
645
739
—
9,007
Ending balance of other acquired loans 72,805
91,096
2,208
22,354
—
188,463
Ending balance of loans $ 209,781
$ 353,020
$ 97,089
$ 102,803
$ —
$ 762,693
Ending balance: individually evaluated for impairment $ 8,198
$ 10,894
$ 393
$ 2,894
$ —
$ 22,379
Ending balance: collectively evaluated for impairment $ 201,583
$ 342,126
$ 96,696
$ 99,909
$ —
$ 740,314

3028

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				C&I/Agricultural Operating				Residential Mortgage				Consumer Installment				Totals
	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		June 30, 2020		December 31, 2019		June 30, 2020		December 31, 2019		June 30, 2020		December 31, 2019		June 30, 2020		December 31, 2019		June 30, 2020		December 31, 2019
Performing loans
Performing TDR loans	$	2,876	$	3,319	$	3,574	$	2,209	$	74	$	99	$	452	$	428	$	6,976	$	6,055	$	1,885	$	1,730	$	1,199	$	366	$	2,576	$	3,206	$	63	$	68	$	5,723	$	5,370
Performing loans other	191,990		216,636		691,706		531,030		61,369		91,373		162,546		146,249		1,107,611		985,288		790,603		758,237		281,112		167,596		152,163		178,415		47,663		57,486		1,271,541		1,161,734
Total performing loans	194,866		219,955		695,280		533,239		61,443		91,472		162,998		146,677		1,114,587		991,343		792,488		759,967		282,311		167,962		154,739		181,621		47,726		57,554		1,277,264		1,167,104

Nonperforming loans (1)
Nonperforming TDR loans	562		785		2,343		577		—		—		1,914		1,305		4,819		2,667		5,255		4,868		1,381		1,973		760		383		—		—		7,396		7,224
Nonperforming loans other	2,762		2,069		10,172		2,249		221		334		2,147		771		15,302		5,423		3,945		8,405		1,421		1,579		3,786		2,735		119		217		9,271		12,936
Total nonperforming loans	3,324		2,854		12,515		2,826		221		334		4,061		2,076		20,121		8,090		9,200		13,273		2,802		3,552		4,546		3,118		119		217		16,667		20,160
Total loans	$	198,190	$	222,809	$	707,795	$	536,065	$	61,664	$	91,806	$	167,059	$	148,753	$	1,134,708	$	999,433	$	801,688	$	773,240	$	285,113	$	171,514	$	159,285	$	184,739	$	47,845	$	57,771	$	1,293,931	$	1,187,264


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

3129

An aging analysis of the Company’s ~~residential~~commercial/agricultural real estate, ~~commercial/agriculture real estate,~~C&I, agricultural operating, residential mortgage, consumer ~~and other loans~~installment and purchased third party loans as of ~~September~~June 30, ~~2019~~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
September 30, 2019
Residential real estate:
One to four family	$	3,608	$	1,016	$	1,069	$	5,693	$	2,255	$	7,948	$	180,122	$	188,070
Purchased HELOC loans	466		338		—		804		—		804		9,316		10,120
June 30, 2020
Commercial/Agricultural real estate:
Commercial real estate	389		68		—		457		4,808		5,265		459,781		465,046		$	5,574	$	329	$	—	$	5,903	$	3,073	$	8,976	$	500,749	$	509,725
Agricultural real estate	1,853		81		—		1,934		6,191		8,125		81,316		89,441		449		63		—		512		5,979		6,491		71,701		78,192
Multi-family real estate	—		—		—		—		1,471		1,471		86,287		87,758		—		—		—		—		148		148		103,491		103,639
Construction and land development	—		—		—		—		45		45		65,505		65,550		—		—		—		—		—		—		110,132		110,132
Consumer non-real estate:
C&I/Agricultural operating:
Commercial and industrial																	466		16		—		482		1,306		1,788		108,058		109,846
C&I SBA PPP loans																	—		—		—		—		—		—		137,330		137,330
Agricultural operating																	296		40		—		336		1,496		1,832		36,105		37,937
Residential mortgage:
Residential mortgage																	3,044		1,004		1,786		5,834		2,433		8,267		144,157		152,424
Purchased HELOC loans																	—		520		94		614		234		848		6,013		6,861
Consumer installment:
Originated indirect paper	250		25		16		291		165		456		42,438		42,894		109		—		—		109		94		203		31,828		32,031
Purchased indirect paper	—		—		—		—		—		—		—		—
Other Consumer	75		44		14		133		26		159		18,611		18,770		22		3		—		25		24		49		15,765		15,814
Commercial/Agricultural non-real estate:
Commercial non-real estate	957		80		—		1,037		2,072		3,109		124,123		127,232
Agricultural non-real estate	1,656		141		—		1,797		1,989		3,786		36,041		39,827
Total	$	9,254	$	1,793	$	1,099	$	12,146	$	19,022	$	31,168	$	1,103,540	$	1,134,708	$	9,960	$	1,975	$	1,880	$	13,815	$	14,787	$	28,602	$	1,265,329	$	1,293,931
December 31, 2018
Residential real estate:
One to four family	$	2,784	$	861	$	471	$	4,116	$	2,331	$	6,447	$	203,479	$	209,926
Purchased HELOC loans	820		572		51		1,443		—		1,443		11,440		12,883
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:
C&I/Agricultural operating:
Commercial and industrial																	1,024		—		—		1,024		1,850		2,874		130,860		133,734
Agricultural operating																	73		49		—		122		1,702		1,824		35,956		37,780
Residential mortgage:
One to four family																	4,929		1,597		649		7,175		2,063		9,238		167,094		176,332
Residential mortgage																	293		378		407		1,078		—		1,078		7,329		8,407
Consumer installment:
Originated indirect paper	272		167		45		484		106		590		55,995		56,585		168		52		20		240		137		377		39,208		39,585
Purchased indirect paper	340		200		157		697		—		697		14,309		15,006
Other Consumer	179		98		12		289		14		303		19,911		20,214		204		43		28		275		31		306		17,880		18,186
Commercial/Agricultural non-real estate:
Commercial non-real estate	399		70		—		469		1,314		1,783		110,644		112,427
Agricultural non-real estate	428		40		—		468		762		1,230		35,097		36,327
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

3230

At ~~September~~June 30, ~~2019,~~2020, the Company has identified impaired loans of ~~$67,414,~~$51,688, consisting of ~~$11,795~~$13,119 TDR loans, the carrying amount of purchased credit impaired loans of ~~$34,696~~$23,444 and ~~$20,924~~$15,125 of substandard non-TDR loans. The ~~$67,414~~$51,688 total of impaired loans includes ~~$6,976~~$5,723 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 ~~September~~June 30, 2020, December 31, 2019 and ~~December 31, 2018~~June 30, 2019 was as follows:

Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized
September 30, 2019
With No Related Allowance Recorded:
Residential real estate $ 9,016
$ 9,016
$ —
$ 8,945
$ 141
Commercial/agriculture real estate 43,907
43,907
—
36,379
721
Consumer non-real estate 358
358
—
292
7
Commercial/agricultural non-real estate 10,298
10,298
—
8,599
166
Total $ 63,579
$ 63,579
$ —
$ 54,214
$ 1,035
With An Allowance Recorded:
Residential real estate $ 1,598
$ 1,598
$ 191
$ 1,465
$ 24
Commercial/agriculture real estate 1,634
1,634
205
1,307
—
Consumer non-real estate 62
62
15
104.5
—
Commercial/agricultural non-real estate 541
541
252
284
—
Total $ 3,835
$ 3,835
$ 663
$ 3,160
$ 24
September 30, 2019 Totals:
Residential real estate $ 10,614
$ 10,614
$ 191
$ 10,410
$ 165
Commercial/agriculture real estate 45,541
45,541
205
37,685
721
Consumer non-real estate 420
420
15
397
7
Commercial/agricultural non-real estate 10,839
10,839
252
8,883
166
Total $ 67,414
$ 67,414
$ 663
$ 57,374
$ 1,059



	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
June 30, 2020
With No Related Allowance Recorded:
Commercial/agriculture real estate	$	30,268	$	30,268	$	—	$	35,391	$	369
C&I/Agricultural operating	7,280		7,280		—		8,379		44
Residential mortgage	8,621		8,621		—		8,658		125
Consumer installment	363		363		—		371		8
Total	$	46,532	$	46,532	$	—	$	52,799	$	546
With An Allowance Recorded:
Commercial/agriculture real estate	$	4,017	$	4,017	$	815	$	3,080	$	12
C&I/Agricultural operating	303		303		181		397		1
Residential mortgage	822		822		101		1,127		4
Consumer installment	14		14		1		41		—
Total	$	5,156	$	5,156	$	1,098	$	4,645	$	17
June 30, 2020 Totals:
Commercial/agriculture real estate	$	34,285	$	34,285	$	815	$	38,471	$	381
C&I/Agricultural operating	7,583		7,583		181		8,776		45
Residential mortgage	9,443		9,443		101		9,785		129
Consumer installment	377		377		1		412		8
Total	$	51,688	$	51,688	$	1,098	$	57,444	$	563

3331

Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized
December 31, 2018
With No Related Allowance Recorded:
Residential real estate $ 8,873
$ 8,873
$ —
$ 7,915
$ 88
Commercial/agriculture real estate 28,850
28,850
—
19,673
304
Consumer non-real estate 226
226
—
226
4
Commercial/agricultural non-real estate 6,900
6,900
—
4,522
105
Total $ 44,849
$ 44,849
$ —
$ 32,336
$ 501
With An Allowance Recorded:
Residential real estate $ 1,332
$ 1,332
$ 156
$ 1,280
$ 17
Commercial/agriculture real estate 979
979
25
820
—
Consumer non-real estate 147
147
37
154
1
Commercial/agricultural non-real estate 27
27
9
73
1
Total $ 2,485
$ 2,485
$ 227
$ 2,327
$ 19
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
December 31, 2019
With No Related Allowance Recorded:
Commercial/agriculture real estate	$	40,514	$	40,514	$	—	$	24,693	$	699
C&I/Agricultural operating	9,477		9,477		—		19,163		119
Residential mortgage	8,695		8,695		—		4,461		128
Consumer installment	379		379		—		3,640		6
Total	$	59,065	$	59,065	$	—	$	51,957	$	952
With An Allowance Recorded:
Commercial/agriculture real estate	$	2,143	$	2,143	$	495	$	1,738	$	4
C&I/Agricultural operating	490		490		312		734		3
Residential mortgage	1,431		1,431		136		789		15
Consumer installment	67		67		13		47		—
Total	$	4,131	$	4,131	$	956	$	3,308	$	22
December 31, 2019 Totals
Commercial/agriculture real estate	$	42,657	$	42,657	$	495	$	26,431	$	703
C&I/Agricultural operating	9,967		9,967		312		19,897		122
Residential mortgage	10,126		10,126		136		5,250		143
Consumer installment	446		446		13		3,687		6
Total	$	63,196	$	63,196	$	956	$	55,265	$	974



	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
June 30, 2019
With No Related Allowance Recorded:
Commercial/agriculture real estate	$	29,540	$	29,540	$	—	$	29,195	$	492
C&I/Agricultural operating	8,536		8,536		—		7,718		165
Residential mortgage	8,169		8,169		—		8,521		106
Consumer installment	241		241		—		234		6
Total	$	46,486	$	46,486	$	—	$	45,668	$	769
With An Allowance Recorded:
Commercial/agriculture real estate	$	1,134	$	1,134	$	140	$	1,056	$	—
C&I/Agricultural operating	611		611		195		319		8
Residential mortgage	1,081		1,081		154		1,207		8
Consumer installment	107		107		34		127		1
Total	$	2,933	$	2,933	$	523	$	2,709	$	17
June 30, 2019 Totals:
Commercial/agriculture real estate	$	30,674	$	30,674	$	140	$	30,251	$	492
C&I/Agricultural operating	9,147		9,147		195		8,037		173
Residential mortgage	9,250		9,250		154		9,728		114
Consumer installment	348		348		34		361		7
Total	$	49,419	$	49,419	$	523	$	48,377	$	786

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 145 delinquent accruing TDRs greater than 60 days past due with a recorded investment of ~~$3,293~~$563 at ~~September~~June 30, ~~2019,~~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 ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019.



	June 30, 2020		December 31, 2019
Troubled debt restructure loans:
Accrual status	$	6,127	$	5,396
Non-accrual status	6,992		7,198
Total	$	13,119	$	12,594

September 30, 2019 December 31, 2018
Troubled debt restructure loans:
Accrual status $ 7,194
$ 6,055
Non-accrual status 4,601
2,667
Total $ 11,795
$ 8,722

~~We committed to refinance two loans totaling $33~~There was 1 TDR commitment meeting our TDR criteria ~~at September~~as of June 30, 2020 totaling $50 and 0 TDR commitments meeting our TDR criteria as of December 31, 2019. There were unused lines of credit totaling ~~$17~~$34 and $12 meeting our TDR criteria as of ~~September~~June 30, ~~2019.~~2020 and December 31, 2019, respectively.

3433

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



	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, 2020
TDRs:
Commercial/agriculture real estate	9	$	892	$	198	$	17	$	—	$	1,107	$	1,107	$	—
C&I/Agricultural operating	3	295		78		—		—		373		373		—
Residential mortgage	5	89		358		85		—		532		532		—
Consumer installment	2	3		—		4		—		7		7		—
Totals	19	$	1,279	$	634	$	106	$	—	$	2,019	$	2,019	$	—

Number of Contracts Modified Rate Modified Payment Modified Under- writing Other Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific Reserve
Nine months ended September 30, 2019
TDRs:
Residential real estate 9
$ 431
$ —
$ 171
$ —
$ 602
$ 602
$ —
Commercial/Agricultural real estate 14
2,005
78
1,215
—
3,298
3,298
—
Consumer non-real estate 1
2
—
—
—
2
2
—
Commercial/Agricultural non-real estate 7
165
364
469
—
998
998
—
Totals 31
$ 2,603
$ 442
$ 1,855
$ —
$ 4,900
$ 4,900
$ —



	Number of Contracts	Modified Rate		Modified Payment		Modified Under- writing		Other		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserve
Six months ended June 30, 2019
TDRs:
Commercial/agriculture real estate	7	$	18	$	78	$	1,190	$	—	$	1,286	$	1,286	$	—
C&I/Agricultural operating	6	165		364		409		—		938		938		—
Residential mortgage	7	325		—		171		—		496		496		—
Consumer installment	1	2		—		—		—		2		2		—
Totals	21	$	510	$	442	$	1,770	$	—	$	2,722	$	2,722	$	—

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
TDRs:
Residential real estate 4
$ 240
$ —
$ —
$ —
$ 240
$ 240
$ —
Commercial/Agricultural real estate 2
—
581
—
21
602
602
—
Consumer non-real estate —
—
—
—
—
—
—
—
Commercial/Agricultural non-real estate 1
24
—
—
—
24
24
—
Totals 7
$ 264
$ 581
$ —
$ 21
$ 866
$ 866
$ —

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



	June 30, 2020			June 30, 2019
	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Troubled debt restructurings:
Commercial/agriculture real estate	34	$	7,140	20	$	3,938
C&I/Agricultural operating	17	2,580		16	2,469
Residential mortgage	43	3,336		43	3,511
Consumer installment	8	63		11	82
Total troubled debt restructurings	102	$	13,119	90	$	10,000

September 30, 2019 December 31, 2018

Number of
Modifications

Recorded
Investment

Number of
Modifications

Recorded
Investment
Troubled debt restructurings:
Residential real estate 42
$ 3,438
41
$ 4,103
Commercial/Agricultural real estate 27
5,917
19
2,787
Consumer non-real estate 8
74
13
99
Commercial/Agricultural non-real estate 16
2,366
10
1,733
Total troubled debt restructurings 93
$ 11,795
83
$ 8,722

3534

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



	June 30, 2020			June 30, 2019
	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Troubled debt restructurings:
Commercial/agriculture real estate	15	$	5,255	6	$	1,736
Commercial/agricultural non-real estate	12	1,382		12	1,990
Residential real estate	4	355		4	374
Total troubled debt restructurings	31	$	6,992	22	$	4,100

September 30, 2019 December 31, 2018

Number of
Modifications

Recorded
Investment

Number of
Modifications

Recorded
Investment
Troubled debt restructurings:
Residential real estate 3
$ 344
7
$ 785
Commercial/Agricultural real estate 9
2,343
4
577
Consumer non-real estate —
—
—
—
Commercial/Agricultural non-real estate 12
1,914
8
1,305
Total troubled debt restructurings 24
$ 4,601
19
$ 2,667

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

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



	June 30, 2020		December 31, 2019
Accountable for under ASC 310-30 (Purchased Credit Impaired “PCI” loans)
Outstanding balance	$	26,799	$	38,268
Carrying amount	$	23,444	$	31,978
Accountable for under ASC 310-20 (non-PCI loans)
Outstanding balance	$	339,888	$	386,476
Carrying amount	$	335,856	$	383,275
Total acquired loans
Outstanding balance	$	366,687	$	424,744
Carrying amount	$	359,300	$	415,253

September 30, 2019
Accountable for under ASC 310-30 (Purchased Credit Impaired “PCI” loans)
Outstanding balance $ 41,433
Carrying amount $ 34,696
Accountable for under ASC 310-20 (non-PCI loans)
Outstanding balance $ 405,827
Carrying amount $ 402,392
Total acquired loans
Outstanding balance $ 447,260
Carrying amount $ 437,088

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



	June 30, 2020			June 30, 2019
Accretable discounts, beginning of period	$	3,201		$	3,163
Additions to accretable discount for acquired performing loans	—			—
Accelerated accretion from payoff of certain PCI loans with transferred non-accretable differences	(99		)	—
Transfers from non-accretable difference to accretable discount	1,410			80
Scheduled accretion	(480		)	(388		)
Accretable discounts, end of period	$	4,032		$	2,855

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

~~The following table reflects amounts for all acquired~~Non-accretable difference on purchase credit impaired loans was $3,355 and ~~acquired performing loans acquired from F&M~~$6,290 at ~~acquisition:~~

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

~~Our analysis of the acquired impaired~~June 30, 2020 and ~~non-impaired F&M loan portfolio is ongoing and will be finalized at December31, 2019.~~December 31, 2019, respectively.

NOTE 54 – MORTGAGE SERVICING RIGHTS

Mortgage servicing rights--Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid balances of these loans as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 were ~~$522,482~~$538,347 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 ~~$6,353~~$4,889 and ~~$3,182,~~$2,868, at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. Mortgage servicing rights activity for the ~~nine~~six month period ended ~~September~~June 30, ~~2019~~2020 and ~~three~~twelve months ended December 31, ~~2018~~2019 were as follows:



	As of and for the Six Months Ended			As of and for the Twelve Months Ended
Mortgage servicing rights:	June 30, 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	955			904
Amortization during the period	(556		)	(849		)
	4,940			4,541
Valuation Allowances:
Balance at beginning of period	(259		)	—
Additions	(1,172		)	(259		)
Recoveries	—			—
Write-downs	—			—
Balance at end of period	(1,431		)	(259		)
Mortgage servicing assets, net; end of period	$	3,509		$	4,282
Fair value of MSR asset; end of period	$	3,509		$	4,309
Residential mortgage loans serviced for others	$	538,347		$	524,715
Net book value of MSR asset to loans serviced for others	0.65		%	0.82		%

As of and for the Nine Months Ended As of and for the Three Months Ended
September 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 581
100
Amortization during the period (612 ) (175 )
Valuation allowance at end of period (210 ) —
Net book value at end of period $ 4,245
$ 4,486
Fair value of MSR asset at end of period $ 4,299
$ 5,214
Residential mortgage loans serviced for others $ 522,482
$ 518,476
Net book value of MSR asset to loans serviced for others 0.81 % 0.87 %

NOTE 65 – LEASES

We have operating leases for our corporate offices (1), bank branch offices (6), other production offices (1) and certain office equipment. In May 2019, the bank acquired the previously leased Mankato, MN branch office and in August 2019, the bank acquired the previously leased Rice Lake, WI and Lake Hallie, WI branch offices, which are now included in Office properties and equipment on the consolidated balance sheet. Our leases have remaining lease terms of 13 months to ~~8.75~~8 years, some of which include options to extend the leases for up to 5 years. As of ~~September~~June 30, ~~2019,~~2020, we have no additional lease commitments that have not yet commenced.



	Six Months Ended
	June 30, 2020			June 30, 2019
Supplemental cash flow information related to leases was as follows:

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	318		$	470
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	—		$	158

	June 30, 2020			December 31, 2019
Supplemental balance sheet information related to leases was as follows:
Operating lease right-of-use assets	$	2,435		$	2,787
Operating lease liabilities	$	2,549		$	2,845

Weighted average remaining lease term in years; operating leases	6.14			6.63
Weighted average discount rate; operating leases	3.07		%	3.07		%

As of and for the nine months ended September 30, 2019
Supplemental cash flow information related to leases was as follows:

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 665
Right-of-use assets obtained in exchange for lease obligations:
Operating leases $ 158

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

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

Cash obligations under lease contracts are as follows:



Fiscal years ending December 31,
2020	$	294
2021	473
2022	437
2023	391
2024	338
Thereafter	1,168
Total	3,101
Less: effects of discounting	(552		)
Lease liability recognized	$	2,549

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

NOTE 6 – DEPOSITS

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



	June 30, 2020		December 31, 2019
Non-interest bearing demand deposits	$	223,536	$	168,157
Interest bearing demand deposits	270,116		223,102
Savings accounts	185,816		156,599
Money market accounts	242,536		246,430
Certificate accounts	350,193		401,414
Total deposits	$	1,272,197	$	1,195,702
Brokered deposits included above:	$	19,564	$	50,377

At June 30, 2020, the scheduled maturities of time deposits were as follows:



June 30, 2021	$	227,486
June 30, 2022	102,326
June 30, 2023	16,673
June 30, 2024	2,533
June 30, 2025	1,175
After June 30, 2025	—
Total	$	350,193

3837

NOTE 7 – FEDERAL HOME LOAN BANK AND FEDERAL RESERVE BANK ADVANCES AND OTHER BORROWINGS

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

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

Other borrowings:
Senior notes:
Variable rate due in 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 (311 ) (353 )
Total other borrowings $ 44,545
$ 24,647

Totals $ 158,011
$ 134,460



		June 30, 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	$	1,000		1.76	%	1.76	%	$	69,000		1.67	%	2.05	%
	2021	8,000			—	%	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		124,530							131,030
Unamortized discount on acquired notes		(46		)					(59		)
Federal Home Loan Bank advances, net		$	124,484						$	130,971

Senior Notes (6)	2031	$	28,856		3.50	%	3.50	%	$	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		$	(261	)					$	(296	)
Total other borrowings		$	43,595						$	43,560

Totals		$	168,079						$	174,531

~~Federal Home Loan Bank Advances~~(1) The FHLB advances bear fixed rates, require interest-only monthly payments, and ~~Irrevocable Standby Letters of Credit~~

~~The bank~~are collateralized by a blanket lien on pre-qualifying first mortgages, home equity lines, multi-family loans and certain other loans which had ~~an outstanding~~a pledged balance of ~~$42,000 with a rate of 2.04% on~~$816,721 and $792,909 at June 30, 2020 and December 31, 2019, respectively. At June 30, 2020, the Bank’s available and unused portion under the FHLB ~~overnight~~borrowing arrangement was approximately $189,242 compared to $203,935 as of December 31, 2019.

(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $162,480 and $151,130, during the six months ended June 30, 2020 and the twelve months ended December 31, 2019, respectively.

(3) The weighted-average interest rates on FHLB borrowings ~~at September~~maturing within twelve months as of June 30, ~~2019. Short-term fixed rate advances~~2020 and December 31, 2019 were 0.82% and 1.74%, respectively.

(4) NaN of ~~$8,500 mature on various dates through September 30, 2020. These five short-term~~the FHLB ~~advances~~notes with remaining balances totaling $9,530 were acquired as a result of the F&M ~~acquisition, at a weighted average rate 2.21% and a weighted average maturity of 5 months.~~

~~The Bank acquired six additional FHLB~~acquisition. These notes ~~totaling $9,530 as a result of the F&M acquisition that~~ mature on various dates through 2024 with a weighted average rate of 2.02% and weighted average maturity of 3017 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%.

(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%. During~~6.75% for five years. In August 2022, they convert to a three-month LIBOR plus 4.90% rate, and the ~~three months ended September 30, 2019, the Bank entered into five additional FHLB notes totaling $32,500 with a 10-year maturity, callable quarterly, at a fixed weighted average~~ interest rate ~~of 1.04%. Each~~ 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 $670,863 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”) 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 ~~$145,464~~$182,324 and ~~$87,359~~$147,991 at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

~~At September~~Federal Reserve Bank Paycheck Protection Program Liquidity Facility (“FRB PPPLF”) Program

The Bank has originated Small Business Association’s Payment Protection Program (“SBA PPP”) loans and has complied with the requirements to pledge these loans to the FRB PPPLF program which provides 100% funding for SBA PPP loans upon request. The Bank has 0 outstanding loan balances under this facility at June 30, ~~2019, the Bank’s available~~2020 and ~~unused portion of this borrowing arrangement was approximately $153,949 compared to $178,620 as of~~ December 31, ~~2018.~~

2019. Maximum month-end borrowed amounts outstanding under this ~~borrowing~~ agreement were ~~$150,839~~$25,136 and ~~$109,813~~$0, during the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and the ~~three~~twelve months ended December 31, ~~2018,~~2019, 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 became effective on August 1, 2019, at which time it replaced the Company’s existing revolving loan arrangement, and it matures on August 1, 2020. These credit agreements bear interest at variable interest rates based on the U.S. Prime Rate, and are payable in accordance with the terms of the credit agreement. The contractual interest rate for the term note ranged from 4.25% to 4.75% during the three and nine months ended September 30, 2019. At September 30, 2019, there were no borrowings outstanding on the revolving note.

~~Subordinated Notes~~

On August 10, 2017, the Company issued $15,000 of subordinated notes maturing on August 10, 2027. The subordinated notes are unsecured 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 on March 31, June 30, September 30 and December 31 of each year through the maturity date.

~~Debt Issuance Costs~~

The unamortized amount of debt issuance costs was $311 and $353 at September 30, 2019 and December 31, 2018, respectively. These debt issuance costs are included in other borrowings on the consolidated balance sheet.

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

Fiscal years ending December 31,
2019 $ 46,000
2020 5,500
2021 4,000
2022 14,936
2023 —
Thereafter 87,575
$ 158,011

NOTE 8—8 - CAPITAL MATTERS

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

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Although these terms are not used to represent overall financial condition, if adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At ~~September~~June 30, ~~2019,~~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 ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, are presented below:


	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 September 30, 2019
As of June 30, 2020
Total capital (to risk weighted assets)	$	157,069,000	13.5	%	$	92,966,000	> =	8.0	%	$	116,208,000	> =	10.0	%	$	166,781	14.0	%	$	95,059	> =	8.0	%	$	118,824	> =	10.0	%
Tier 1 capital (to risk weighted assets)	147,892,000		12.7	%	69,725,000		> =	6.0	%	92,966,000		> =	8.0	%	153,408		12.9	%	71,295		> =	6.0	%	95,059		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	147,892,000		12.7	%	52,293,000		> =	4.5	%	75,535,000		> =	6.5	%	153,408		12.9	%	53,471		> =	4.5	%	77,236		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	147,892,000		10.2	%	57,777,000		> =	4.0	%	72,221,000		> =	5.0	%	153,408		9.9	%	61,942		> =	4.0	%	77,427		> =	5.0	%
As of December 31, 2018
As of December 31, 2019
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	%

The Company’s Tier 1 (leverage) and risk-based capital ratios at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~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 June 30, 2020
Total capital (to risk weighted assets)	$	143,353	12.1	%	$	95,059	> =	8.0	%	$	118,824	> =	10.0	%
Tier 1 capital (to risk weighted assets)	114,980		9.7	%	71,295		> =	6.0	%	95,059		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	114,980		9.7	%	53,471		> =	4.5	%	77,236		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	114,980		7.4	%	61,942		> =	4.0	%	77,427		> =	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	%

Actual For Capital Adequacy
Purposes To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of September 30, 2019
Total capital (to risk weighted assets) $ 132,094,000
11.4 % $ 92,966,000
> = 8.0 % $ 116,208,000
> = 10.0 %
Tier 1 capital (to risk weighted assets) 107,917,000
9.3 % 69,725,000
> = 6.0 % 92,966,000
> = 8.0 %
Common equity tier 1 capital (to risk weighted assets) 107,917,000
9.3 % 52,293,000
> = 4.5 % 75,535,000
> = 6.5 %
Tier 1 leverage ratio (to adjusted total assets) 107,917,000
7.5 % 57,777,000
> = 4.0 % 72,221,000
> = 5.0 %
As of December 31, 2018
Total capital (to risk weighted assets) $ 123,657,000
12.4 % $ 79,651,000
> = 8.0 % $ 99,563,000
> = 10.0 %
Tier 1 capital (to risk weighted assets) 101,053,000
10.2 % 59,738,000
> = 6.0 % 79,651,000
> = 8.0 %
Common equity tier 1 capital (to risk weighted assets) 101,053,000
10.2 % 44,804,000
> = 4.5 % 64,716,000
> = 6.5 %
Tier 1 leverage ratio (to adjusted total assets) 101,053,000
8.3 % 48,976,000
> = 4.0 % 61,220,000
> = 5.0 %

NOTE 9 – 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~~ ~~September 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~~ ~~September 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 ~~September~~June 30, ~~2019~~,2020, 89,183 restricted shares ~~under this plan were granted. As of~~ ~~September 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. 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 ~~September~~June 30, ~~2019, 54,068~~2020, 95,575 restricted shares had been granted under this plan. As of ~~September~~June 30, ~~2019, no~~2020, 0 stock options had been granted under this plan.

~~Compensation~~Net compensation expense related to restricted stock awards from these plans was ~~$127~~$158 and ~~$370~~$297 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$94~~$103 and ~~$255~~$243 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019.

Restricted Common Stock Award
September 30, 2019 December 31, 2018
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
Granted 12,847
11.50
27,514
13.15
Vested (14,979 ) 12.69
(4,279 ) 13.30
Forfeited (8,916 ) 13.41
—
—
Unvested and outstanding at end of year 64,359
$ 12.85
75,407
$ 13.24

Restricted Common Stock Award

	June 30, 2020				December 31, 2019
	Number of Shares		Weighted Average Grant Price		Number of Shares		Weighted Average Grant Price
Restricted Shares
Unvested and outstanding at beginning of year	43,457		$	12.76	75,407		$	13.24
Granted	41,507		11.93		12,847		11.50
Vested	(13,645	)	12.83		(32,630	)	12.89
Forfeited	—		—		(12,167	)	13.28
Unvested and outstanding at end of year	71,319		$	12.27	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 and ~~nine~~six month periods ended ~~September~~June 30, ~~2019~~2020 was $5$4 and ~~$14.~~$8, respectively. The compensation cost recognized for stock-based employee compensation related to these plans for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2018,~~2019 was $6$5 and ~~$6.~~

$9, respectively.

Common Stock Option Awards

	Option Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
June 30, 2020
Outstanding at beginning of year	78,100		$	11.18
Forfeited or expired	(3,200	)	12.21
Outstanding at end of year	74,900		$	11.14	6.03
Exercisable at end of year	51,300		$	10.66	5.80	$	(195	)
Fully vested and expected to vest	74,900		$	11.14	6.03	$	(321	)
December 31, 2019
Outstanding at beginning of year	108,930		$	10.15
Exercised	(28,430	)	7.12
Forfeited or expired	(2,400	)	12.38
Outstanding at end of year	78,100		$	11.18	6.55
Exercisable at end of year	44,700		$	10.73	6.30	$	67
Fully vested and expected to vest	78,100		$	11.18	6.55	$	81

Common Stock Option Awards

Option Shares
Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term

Aggregate
Intrinsic
Value
September 30, 2019
Outstanding at beginning of year 108,930
$ 10.15

Granted —
—

Exercised (28,430 ) 7.12

Forfeited or expired (1,000 ) 13.76

Outstanding at end of year 79,500
$ 11.19
6.81

Exercisable at end of year 43,100
$ 10.62
6.5 $ 19
Fully vested and expected to vest 79,500
$ 11.19
6.81 $ (9 )
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 respective periods follows:


	Nine months ended September 30, 2019		Three months ended December 31, 2018		Six months ended June 30, 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 10 – FAIR VALUE ACCOUNTING

ASC Topic 820-10, “Fair Value Measurements and Disclosures” establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The ~~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 ~~September~~June 30, ~~2019~~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)
June 30, 2020
Investment securities:
U.S. government agency obligations	$	35,353	$	—	$	35,353	$	—
Obligations of states and political subdivisions	140		—		140		—
Mortgage-backed securities	59,372		—		59,372		—
Corporate debt securities	20,079		—		20,079		—
Corporate asset based securities	34,822		—		34,822		—
Trust preferred securities	12,950		—		12,950		—
Total	$	162,716	$	—	$	162,716	$	—
December 31, 2019
Investment securities:
U.S. government agency obligations	$	51,805	$	—	$	51,805	$	—
Obligations of states and political subdivisions	281		—		281		—
Mortgage-backed securities	71,331		—		71,331		—
Corporate debt securities	18,725		—		18,725		—
Corporate asset backed securities	26,854		—		26,854		—
Trust preferred securities	11,123		—		11,123		—
Total	$	180,119	$	—	$	180,119	$	—

Fair
Value

Quoted Prices in
Active Markets
for Identical
Instruments
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
September 30, 2019
Investment securities:
U.S. government agency obligations $ 53,378
$ —
$ 53,378
$ —
Obligations of states and political subdivisions 27,937
—
27,937
—
Mortgage-backed securities 55,658
—
55,658
—
Agency Securities —
—
—
—
Corporate debt securities 18,834
—
18,834
—
Corporate asset based securities 27,149
—
27,149
—
Total $ 182,956
$ —
$ 182,956
$ —
December 31, 2018
Investment securities:
U.S. government agency obligations $ 45,298
$ —
$ 45,298
$ —
Obligations of states and political subdivisions 34,728
—
34,728
—
Mortgage-backed securities 41,350
—
41,350
—
Agency securities 148
—
148
—
Corporate debt securities 6,305
—
6,305
—
Total $ 146,725
$ —
$ 146,725
$ —

Assets Measured on Nonrecurring Basis

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



	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, 2020
Foreclosed and repossessed assets, net	$	734	$	—	$	—	$	734
Impaired loans with allocated allowances	4,058		—		—		4,058
Mortgage servicing rights	3,509		—		—		3,509
Total	$	8,301	$	—	$	—	$	8,301
December 31, 2019
Foreclosed and repossessed assets, net	$	1,460	$	—	$	—	$	1,460
Impaired loans with allocated allowances	3,175		—		—		3,175
Mortgage servicing rights	4,282		—		—		4,309
Total	$	8,917	$	—	$	—	$	8,944

Fair
Value

Quoted Prices in
Active Markets
for Identical
Instruments
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
September 30, 2019
Foreclosed and repossessed assets, net $ 1,373
$ —
$ —
$ 1,373
Impaired loans with allocated allowances 3,835
—
—
3,835
Mortgage servicing rights 4,299
—
—
4,299
Total $ 9,507
$ —
$ —
$ 9,507
December 31, 2018
Foreclosed and repossessed assets, net $ 2,570
$ —
$ —
$ 2,570
Impaired loans with allocated allowances 2,485
—
—
2,485
Mortgage servicing rights 5,214
—
—
5,214
Total $ 10,269
$ —
$ —
$ 10,269

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

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

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

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

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

~~September~~June 30, ~~2019.~~2020.


	Fair Value		Valuation Techniques (1)	Significant Unobservable Inputs (2)	Range	Fair Value		Valuation Techniques (1)	Significant Unobservable Inputs (2)	Range
September 30, 2019
June 30, 2020
Foreclosed and repossessed assets, net	$	1,373	Appraisal value	Estimated costs to sell	10 - 15%	$	734	Appraisal value	Estimated costs to sell	10 - 15%
Impaired loans with allocated allowances	$	3,835	Appraisal value	Estimated costs to sell	10 - 15%	$	4,058	Appraisal value	Estimated costs to sell	10 - 15%
Mortgage servicing rights	$	4,299	Discounted cash flows	Discounted rates	9.5% - 12.5%	$	3,509	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%	$	3,175	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.

~~Other Investments~~

The carrying amount of Federal Reserve Bank, Bankers Bank, Federal Agricultural Mortgage Corporation, and FHLB stock is a reasonably accepted fair value estimate given their restricted nature. Fair value is the redeemable (carrying) value based on the redemption provisions of the instruments which is considered a level 2 measurement.

~~Loans Receivable, net~~

Fair value is estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as real estate, C&I and consumer. The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity date using market discount rates reflecting the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Bank’s repayment schedules for each loan classification. The fair value of variable rate loans approximates carrying value. The net carrying value of the loans acquired through the CBN, WFC, United Bank and F&M acquisitions approximates the fair value of the loans at September 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 September 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 financial instruments as of the dates indicated below were as follows:



		June 30, 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)	$	39,581	$	39,581	$	55,840	$	55,840
Other interest-bearing deposits	(Level II)	3,752		3,855		4,744		4,792
Securities available for sale “AFS”	(Level II)	162,716		162,716		180,119		180,119
Securities held to maturity “HTM”	(Level II)	10,541		10,922		2,851		2,957
Equity securities with readily determinable fair value	(Level I)	188		188		246		246
Other investments	(Level II)	15,193		15,193		15,005		15,005
Loans receivable, net	(Level III)	1,267,802		1,292,278		1,167,060		1,161,660
Loans held for sale	(Level II)	8,876		8,876		5,893		5,893
Mortgage servicing rights	(Level III)	3,509		3,509		4,282		4,309
Accrued interest receivable	(Level 1)	5,855		5,855		4,738		4,738
Financial liabilities:
Deposits	(Level III)	$	1,272,197	$	1,273,191	$	1,195,702	$	1,192,777
FHLB advances	(Level II)	124,484		129,689		130,971		131,593
Other borrowings	(Level I)	43,595		43,595		43,560		43,560
Accrued interest payable	(Level I)	373		373		453		453

4644

September 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) $ 52,276
$ 52,276
$ 45,778
$ 45,778
Other interest-bearing deposits (Level II) 5,245
5,290
7,460
6,704
Securities available for sale “AFS” See above 182,956
182,956
146,725
146,725
Securities held to maturity “HTM” (Level II) 3,665
3,770
4,850
4,872
Other investments (Level II) 12,863
12,863
11,261
11,261
Loans receivable, net (Level III) 1,115,201
1,112,305
984,952
988,072
Loans held for sale (Level II) 3,262
3,262
1,927
1,927
Mortgage servicing rights (Level III) 4,245
4,299
4,486
5,214
Accrued interest receivable (Level 1) 4,993
4,993
4,307
4,307
Financial liabilities:
Deposits (Level III) $ 1,161,750
$ 1,158,415
$ 1,007,512
$ 1,005,488
FHLB advances (Level II) 113,466
114,226
109,813
109,665
Other borrowings (Level I) 44,545
44,545
24,647
24,647
Other liabilities (Level I) 7,112
7,112
7,359
7,359
Accrued interest payable (Level II) 462
462
406
406

NOTE 11 – OTHER COMPREHENSIVE INCOME (LOSS)

The following ~~table shows~~tables show the tax effects allocated to each component of other comprehensive income for the ~~nine~~three and

six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018:~~2019:



	Three months ended
	June 30, 2020							June 30, 2019
	Before-Tax Amount		Tax Expense			Net-of-Tax Amount		Before-Tax Amount			Tax Expense			Net-of-Tax Amount
Unrealized gains on securities:
Net unrealized gains arising during the period	$	2,245	$	(617	)	$	1,628	$	956		$	(262	)	$	694
Reclassification adjustment for gains included in net income	—		—			—		(26		)	7			(19		)
Other comprehensive income	$	2,245	$	(617	)	$	1,628	$	930		$	(255	)	$	675

2019 2018

Before-Tax
Amount

Tax
Expense

Net-of-Tax
Amount

Before-Tax
Amount

Tax
Expense

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



	Six months ended
	June 30, 2020									June 30, 2019
	Before-Tax Amount			Tax Expense			Net-of-Tax Amount			Before-Tax Amount			Tax Expense			Net-of-Tax Amount
Unrealized gains on securities:
Net unrealized gains arising during the period	$	832		$	(229	)	$	603		$	2,563		$	(705	)	$	1,858
Reclassification adjustment for gains included in net income	(156		)	43			(113		)	(26		)	7			(19		)
Other comprehensive income	$	676		$	(186	)	$	490		$	2,537		$	(698	)	$	1,839

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

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



	Unrealized Gains (Losses) on Securities			Other Accumulated Comprehensive Income (Loss), net of tax
Beginning Balance, January 1, 2019	$	(2,540	)	$	(1,841	)
Current year-to-date other comprehensive income	1,953			1,415
Adoption of ASU 2016-01; Equity securities (1)	(62		)	(45		)
Ending balance, December 31, 2019	$	(649	)	$	(471	)
Current year-to-date other comprehensive loss	676			490
Ending balance, June 30, 2020	$	27		$	19

(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”.

Unrealized
Gains (Losses)
on
Securities

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

Reclassifications out of accumulated other comprehensive income (loss) for the ~~nine~~three and six months ended ~~September~~June 30, 2020 were as follows:



	Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
Details about Accumulated Other Comprehensive Income (Loss) Components	Three months ended June 30, 2020		Six months ended June 30, 2020			(1)	Affected Line Item on the Statement of Operations
Unrealized gains and losses
Sale of securities	$	—	$	156			Net gains on investment securities
Tax Effect	—		(43		)		Provision for income taxes
Total reclassifications for the period	$	—	$	113			Net gain attributable to common shareholders

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

Reclassifications out of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2019 were as follows:


Details about Accumulated Other Comprehensive Income Components	Amounts Reclassified from Accumulated Other Comprehensive Income			(1)	Affected Line Item on the Statement of Operations
						Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
Details about Accumulated Other Comprehensive Income (Loss) Components						Three months ended June 30, 2019			Six months ended June 30, 2019			(1)	Affected Line Item on the Statement of Operations
Unrealized gains and losses
Gain on equity securities	$	151			Gain on investment securities
Sale of securities						$	26		$	26			Net gains on investment securities
Tax Effect	(42		)		Provision for income taxes	(7		)	(7		)		Provision for income taxes
Total reclassifications for the period	$	109			Net income attributable to common shareholders	$	19		$	19			Net gain attributable to common shareholders

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

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

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

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

~~NOTE 12 – SUBSEQUENT EVENT~~

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

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

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

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

4946


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 our Form 10-Q for the quarter ended March 31, 2020 and in Item 1A of this Form 10-Q, and the following:

conditions in the financial markets and economic conditions generally;

adverse impacts to 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.

5047

GENERAL

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of ~~September~~June 30, ~~2019~~2020, and our consolidated results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020, compared to the same period in the prior fiscal year for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018.~~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.

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 ~~September~~June 30, ~~2019~~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 June 30, 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 5 and 910 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 ~~September~~June 30, ~~2019,~~2020, management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary.

5249

STATEMENT OF OPERATIONS ANALYSIS

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

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

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

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

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

Net interest income was ~~$11.6~~$12.3 million for the three months ended ~~September~~June 30, ~~2019,~~2020 and $25.0 million for the six months ended June 30, 2020, compared to ~~$7.9~~$10.1 million for the three months ended ~~September~~June 30, ~~2018.~~ 2019 and $20.1 million of the six months ended June 30, 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. In addition, the three months ended June 30, 2020 benefited from the margin related to the Bank’s origination of $137 million of SBA PPP loans.

The net interest margin for the three-month period ended ~~September~~June 30, ~~2019~~2020 was 3.34%, compared to ~~3.45%~~3.30% for the three-month period ended ~~September~~June 30, ~~2018 .The~~2019. The increase in net interest margin was ~~3.35% for~~due to the ~~nine months ended September 30, 2019 and 3.42% for~~increase in the ~~nine months ended September 30, 2018~~accretion of purchased credit impaired discounts. The net interest margin, ~~reduction for both~~after subtracting the ~~three~~positive 8 basis point impact of accretion due to the payoff of purchased credit impaired loans and ~~nine month periods~~scheduled accretion of 7 basis points, was 3.19%. In addition, the impact of SBA PPP loans originated in the second quarter of 2020 was 4 basis points. For the quarter ended ~~September~~June 30, 2019, ~~from 2018~~the net interest margin of 3.30%, after subtracting the positive two basis point impact of accretion of purchased credit impaired loans and scheduled accretion of seven basis points was 3.21%. .

The net interest margin for the six-months ended June 30, 2020 was 3.48%, compared to 3.36% for the six-month period ended June 30, 2019. The increase in net interest margin was due to the increase in the accretion of purchased credit impaired discounts. The net interest margin for the six-month period ending June 30, 2020, after subtracting the positive 18 basis point impact of accretion due to the payoff of purchased credit impaired loans and scheduled accretion of 7 basis points, was 3.23%. For the six months ended June 30, 2019, the net interest margin of 3.36%, after subtracting the positive one basis point impact of accretion of purchased credit impaired loans and scheduled accretion of seven basis points was 3.28%. This decrease is largely due to lower interest rate spreads between loans and deposits in 2019 due to the competitive market for deposits and ~~the replacement funding for the Michigan branch sale being replaced with~~ higher cost wholesale ~~funding.~~funding required to replace deposits lost due to the May 2019 branch sale and to a lesser extent, the impact of 2020 second quarter SBA PPP originations.

For the quarter ended September 30, 2019, the Company’s net interest margin benefited from $50 thousand of purchased loan accretion, or two basis points compared to $54 thousand, or two basis points in the prior quarter and $15 thousand for the first quarter of 2019 or one basis point. There was no such income recognized in 2018. Scheduled accretion for acquired loans, was $234 thousand, $194 thousand and $194 thousand for the quarters ended September 30, 2019, June 30, 2019 and March 31, 2019, respectively. For 2018, the scheduled accretion was $142 thousand for the quarter ended September 30, 2018 and $426 thousand for the nine months ended September 30, 2018.

Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following net interest income analysis table presents interest income from average interest earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates on a tax equivalent basis. Shown below is the weighted average tax equivalent yield on interest earning assets, rates paid on interest-bearing liabilities and the resultant spread at or during the three

and ~~nine month~~six-month periods ended ~~September~~June 30, ~~2019,~~2020, and for the ~~comparable prior year~~ three and ~~nine month periods.~~six-month periods ended June 30, 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 resulting from the United Bank and F&M acquisitions and to a lesser extent, strong organic growth and the positive impact of rising short-term interest rates. The increase in deposit interest expense was due to the United Bank and F&M 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 ~~September~~June 30, ~~2019~~2020 compared to the three months ended ~~September~~June 30, ~~2018:~~2019:


	Three months ended September 30, 2019						Three months ended September 30, 2018						Three months ended June 30, 2020						Three months ended June 30, 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	$	32,376	$	203	2.49	%	$	24,468	$	117	1.90	%	$	19,995	$	5	0.10	%	$	30,076	$	171	2.28	%
Loans	1,143,252		14,646		5.08	%	754,442		9,414		4.95	%	1,266,273		14,687		4.66	%	1,023,447		12,976		5.09	%
Interest-bearing deposits	5,577		34		2.42	%	7,971		42		2.09	%	3,788		23		2.44	%	5,967		35		2.35	%
Investment securities (1)	185,921		1,174		2.56	%	124,991		674		2.30	%	174,875		988		2.27	%	158,991		996		2.60	%
Other investments	13,072		166		5.04	%	7,581		115		6.02	%	15,160		183		4.86	%	12,114		158		5.23	%
Total interest earning assets (1)	$	1,380,198	$	16,223	4.67	%	$	919,453	$	10,362	4.49	%	$	1,480,091	$	15,886	4.32	%	$	1,230,595	$	14,336	4.68	%
Average interest-bearing liabilities:
Savings accounts	$	158,967	$	155	0.39	%	$	93,551	$	59	0.25	%	$	171,285	$	99	0.23	%	$	147,456	$	149	0.41	%
Demand deposits	219,955		550		0.99	%	146,372		142		0.38	%	267,429		260		0.39	%	191,858		383		0.80	%
Money market	200,647		593		1.17	%	116,597		213		0.72	%	243,264		350		0.58	%	164,402		448		1.09	%
CD’s	381,331		1,870		1.95	%	277,125		1,145		1.64	%	328,543		1,706		2.09	%	336,253		1,765		2.11	%
IRA’s	44,184		203		1.82	%	33,029		100		1.20	%	42,117		192		1.83	%	40,688		181		1.78	%
Total deposits	1,005,084		3,371		1.33	%	666,674		1,659		0.99	%	$	1,052,638	$	2,607	1.00	%	$	880,657	$	2,926	1.33	%
FHLB Advances and other borrowings	169,908		1,259		2.94	%	96,448		763		3.14	%	186,191		976		2.11	%	165,733		1,327		3.21	%
Total interest-bearing liabilities	$	1,174,992	$	4,630	1.56	%	$	763,122	$	2,422	1.26	%	$	1,238,829	$	3,583	1.16	%	$	1,046,390	$	4,253	1.63	%
Net interest income			$	11,593					$	7,940					$	12,303					$	10,083
Interest rate spread					3.11	%					3.23	%					3.16	%					3.05	%
Net interest margin (1)					3.34	%					3.45	%					3.34	%					3.30	%
Average interest earning assets to average interest-bearing liabilities					1.17						1.20						1.19						1.18

(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 ~~September~~June 30, ~~2019~~2020 and ~~24.5% for the quarter ended September~~June 30, ~~2018.~~2019. The FTE adjustment to net interest income included in the rate calculations totaled ~~$27 thousand~~$0 and ~~$51~~$35 thousand for the three months ended ~~September~~June 30, 2020 and June 30, 2019, ~~and September 30, 2018,~~ respectively.

5451

NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS

(Dollar amounts in thousands)

~~Nine~~Six months ended ~~September~~June 30, ~~2019~~2020 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018:~~

2019:


	Nine months ended September 30, 2019						Nine months ended September 30, 2018						Six months ended June 30, 2020						Six months ended June 30, 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	$	29,489	$	542	2.46	%	$	23,814	$	240	1.35	%	$	25,532	$	123	0.97	%	$	28,045	$	339	2.44	%
Loans	1,054,492		40,036		5.08	%	736,478		26,818		4.87	%	1,219,905		30,146		4.97	%	1,010,113		25,390		5.07	%
Interest-bearing deposits	6,153		107		2.33	%	7,890		117		1.98	%	4,075		50		2.47	%	6,440		74		2.32	%
Investment securities (1)	167,023		3,119		2.58	%	121,216		1,996		2.38	%	177,081		2,119		2.41	%	157,574		1,943		2.59	%
Other investments	11,853		473		5.34	%	7,915		313		5.29	%	15,083		356		4.75	%	11,244		308		5.52	%
Total interest earning assets (1)	$	1,269,010	$	44,277	4.68	%	$	897,313	$	29,484	4.42	%	$	1,441,676	$	32,794	4.57	%	$	1,213,416	$	28,054	4.68	%
Average interest-bearing liabilities:
Savings accounts	$	156,851	$	479	0.41	%	$	94,263	$	140	0.20	%	$	162,941	$	250	0.31	%	$	155,792	$	324	0.42	%
Demand deposits	200,387		1,288		0.86	%	150,023		385		0.34	%	251,125		635		0.51	%	190,603		737		0.78	%
Money market	172,671		1,423		1.10	%	116,948		570		0.65	%	239,867		959		0.80	%	158,683		831		1.06	%
CD’s	348,139		5,163		1.98	%	271,352		2,968		1.46	%	341,319		3,552		2.09	%	331,543		3,293		2.00	%
IRA’s	41,576		537		1.73	%	33,202		278		1.12	%	42,406		391		1.85	%	40,272		334		1.67	%
Total deposits	919,624		8,890		1.29	%	665,788		4,341		0.87	%	1,037,658		5,787		1.12	%	876,893		5,519		1.27	%
FHLB Advances and other borrowings	153,960		3,649		3.17	%	109,628		2,367		2.89	%	180,927		2,033		2.26	%	145,986		2,390		3.30	%
Total interest-bearing liabilities	$	1,073,584	$	12,539	1.56	%	$	775,416	$	6,708	1.16	%	$	1,218,585	$	7,820	1.29	%	$	1,022,879	$	7,909	1.56	%
Net interest income			$	31,738					$	22,776					$	24,974					$	20,145
Interest rate spread					3.12	%					3.26	%					3.28	%					3.12	%
Net interest margin (1)					3.35	%					3.42	%					3.48	%					3.36	%
Average interest earning assets to average interest-bearing liabilities					1.18						1.16						1.18						1.19

(1) Fully taxable equivalent (FTE). The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21.0% for the ~~nine months~~quarters ended ~~September~~June 30, ~~2019~~2020 and ~~24.5% for the nine months ended September~~June 30, ~~2018.~~2019. The FTE adjustment to net interest income included in the rate calculations totaled ~~$103~~$1 thousand and ~~$158~~$77 thousand for the ~~nine~~six months ended ~~September~~June 30, 2020 and June 30, 2019, ~~and September 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). Volume changes are largely due to the ~~United Bank~~F&M acquisition for the three and ~~nine~~six months ~~of 2019~~ended June 30, 2020 compared to ~~2018~~the three and six months ended June 30, 2019 and to a lesser extent, the ~~F&M acquisition for the three months ended September 30, 2019 compared to the same period in 2018.~~impact of organic loan growth.

5552

RATE / VOLUME ANALYSIS

(Dollar amounts in thousands)

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


	Increase (decrease) due to									Increase (decrease) due to
	Volume			Rate			Net			Volume			Rate			Net
Interest income:
Cash and cash equivalents	$	43		$	43		$	86		$	(38	)	$	(128	)	$	(166	)
Loans	4,972			260			5,232			2,893			(1,182		)	1,711
Interest-bearing deposits	(14		)	6			(8		)	(13		)	1			(12		)
Investment securities	383			117			500			97			(104		)	(7		)
Other investments	74			(23		)	51			38			(13		)	25
Total interest earning assets	5,458			403			5,861			2,977			(1,426		)	1,551
Interest expense:
Savings accounts	51			45			96			21			(71		)	(50		)
Demand deposits	91			317			408			123			(246		)	(123		)
Money market accounts	192			188			380			173			(271		)	(98		)
CD’s	478			247			725			(40		)	(19		)	(59		)
IRA’s	40			63			103			6			5			11
Total deposits	852			860			1,712			283			(602		)	(319		)
FHLB Advances and other borrowings	549			(54		)	495			150			(500		)	(350		)
Total interest bearing liabilities	1,401			806			2,207			433			(1,102		)	(669		)
Net interest income	$	4,057		$	(403	)	$	3,654		$	2,544		$	(324	)	$	2,220

~~Nine~~Six months ended ~~September~~June 30, ~~2019~~2020 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019.


	Increase (decrease) due to									Increase (decrease) due to
	Volume			Rate			Net			Volume			Rate			Net
Interest income:
Cash and cash equivalents	$	66		$	236		$	302		$	(28	)	$	(188	)	$	(216	)
Loans	12,013			1,205			13,218			5,195			(439		)	4,756
Interest-bearing deposits	(29		)	19			(10		)	(29		)	5			(24		)
Investment securities	867			256			1,123			240			(64		)	176
Other investments	157			3			160			96			(48		)	48
Total interest earning assets	13,074			1,719			$	14,793		5,474			(734		)	$	4,740
Interest expense:
Savings accounts	120			219			339			14			(88		)	(74		)
Demand deposits	157			746			903			201			(303		)	(102		)
Money market accounts	331			522			853			367			(239		)	128
CD’s	954			1,241			2,195			99			160			259
IRA’s	80			179			259			18			39			57
Total deposits	1,642			2,907			4,549			699			(431		)	268
FHLB Advances and other borrowings	1,027			255			1,282			505			(862		)	(357		)
Total interest bearing liabilities	2,669			3,162			5,831			1,204			(1,293		)	(89		)
Net interest income	$	10,405		$	(1,443	)	$	8,962		$	4,270		$	559		$	4,829

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

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

~~The Bank recorded a provision of $450 thousand and $1.2 million~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2020 was $1,750 and $3,750, respectively. In continued anticipation of COVID-19 related adverse economic impacts, management recorded provision for loan losses of $1,250 and $2,000 for the three and six months ended June 30, 2020, respectively, ~~reflecting primarily organic~~related to COVID-19. Various

“Stay-at-Home Orders” continued to result in temporary business closures, reduced operating capacity and uncertainty regarding potential future revenue and cash flows for certain business, including bank borrowers. Approximately $100 and $700 of the provision was related to loan growth in the three and six months ended June 30, 2020 The remaining provision was related to ~~a lesser extent,~~ net ~~charge-offs.~~loan charge-offs of $212 and $697 for the three and six months ended June 30, 2020, and necessary increases in unallocated and specific allowance for loan losses.

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

Three months ended September 30, Nine months ended September 30,
2019 2018 % Change 2019 2018 % Change
Non-interest Income:
Service charges on deposit accounts $ 625
$ 489
27.81 % $ 1,756
$ 1,332
31.83 %
Interchange income 476
338
40.83 % 1,267
978
29.55 %
Loan servicing income 714
368
94.02 % 1,902
1,051
80.97 %
Gain on sale of loans 679
234
190.17 % 1,560
649
140.37 %
Loan fees and service charges 471
164
187.20 % 860
367
134.33 %
Insurance commission income 197
180
9.44 % 573
554
3.43 %
Gains (losses) on investment securities 96
—
N/M
151
(17 ) 988.24 %
Gain on sale of branch —
—
N/M
2,295
—
N/M
Other 363
216
68.06 % 827
517
59.96 %
Total non-interest income $ 3,621
$ 1,989
82.05 % $ 11,191
$ 5,431
106.06 %

~~N/M means not meaningful~~



	Three months ended June 30,						Six months ended June 30,
	2020		2019		% Change		2020		2019		% Change
Non-interest Income:
Service charges on deposit accounts	$	345	$	581	(40.62	)%	$	905	$	1,131	(19.98	)%
Interchange income	489		453		7.95	%	953		791		20.48	%
Loan servicing income	1,315		634		107.41	%	2,000		1,188		68.35	%
Gain on sale of loans	1,818		573		217.28	%	2,598		881		194.89	%
Loan fees and service charges	244		261		(6.51	)%	721		389		85.35	%
Insurance commission income	195		192		1.56	%	474		376		26.06	%
Net gains on investment securities	25		21		19.05	%	98		55		78.18	%
Net gain on sale of branch	—		2,295		N/M		—		2,295		N/M
Net gain on sale of insurance agency	252		—		N/M		252		—		N/M
Settlement proceeds	131		—		N/M		131		—		N/M
Other	199		228		(12.72	)%	484		464		4.31	%
Total non-interest income	$	5,013	$	5,238	(4.30	)%	$	8,616	$	7,570	13.82	%

The growth in most line items, year over year, ~~includes~~are due to the impact of the ~~United Bank~~F&M acquisition ~~in October of 2018~~on July 1, 2019.

Service charges on deposit accounts decreased to $345 and ~~in the third quarter of 2019, the F&M acquisition.~~

~~The increase in gains on the sale of loans~~$905 for the three and ~~nine moths~~six months ended ~~September~~June 30, ~~2019 reflects~~2020, from $581 and $1,131 in the comparable prior year periods. This decrease was due to lower retail customer activity and due to higher balances of retail checking accounts primarily in the three months ended June 30, 2020.

Loan servicing income increased largely due to increased capitalized mortgage ~~activity from~~servicing rights due to higher mortgage loan origination fees in both the ~~lower interest rate environment.~~current three and six-month periods.

Gain on sale of loans increased in both the current three and six-month periods due to higher mortgage loan origination sold volumes.

The increase in loan fees and service charges for the ~~quarter~~six months ended ~~September~~June 30, ~~2019 compared to the same three month period in 2018~~2020, is largely due to higher commercial loan customer ~~activity.~~

activity, which occurred primarily in the first quarter of 2020

The ~~company sold the Rochester Hills, MI~~Company recognized a gain on sale of its Michigan branch of $2,295 in the second quarter of ~~2019 for~~2019.

The Company sold the Wells Insurance Agency in June 2020, realizing a ~~$2.3 million~~net gain ~~recorded in gain on sale~~ of ~~branch for~~$252.

During the ~~nine months~~quarter ended ~~September~~June 30, ~~2019.~~

~~Included in other~~2020, the Company recognized $131 of non-interest income ~~is an annual debit card volume incentive totaling $94 thousand~~related to a private mortgage-backed security claim. This distribution represents a supplement to the proceeds received in March 2017 from this private mortgage-backed security, previously owned by the Bank, and ~~$89 thousand for the quarters ended September 30, 2019 and 2018, respectively.~~sold in 2011.

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

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

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

~~N/M means not meaningful~~



	Three months ended June 30,								Six months ended June 30,
	2020			2019			% Change		2020			2019			% Change
Non-interest Expense:
Compensation and related benefits	$	5,908		$	4,604		28.32	%	$	11,343		$	9,310		21.84	%
Occupancy	899			866			3.81	%	1,905			1,820			4.67	%
Office	575			528			8.90	%	1,118			1,050			6.48	%
Data processing	1,024			868			17.97	%	2,020			1,855			8.89	%
Amortization of intangible assets	412			346			19.08	%	824			673			22.44	%
Mortgage servicing rights expense	991			306			223.86	%	1,727			497			247.48	%
Advertising, marketing and public relations	303			456			(33.55	)%	542			659			(17.75	)%
FDIC premium assessment	180			146			23.29	%	248			240			3.33	%
Professional services	353			575			(38.61	)%	957			1,400			(31.64	)%
Gains on repossessed assets, net	(22		)	(90		)	75.56	%	(90		)	(127		)	29.13	%
Other	769			784			(1.91	)%	1,529			1,906			(19.78	)%
Total non-interest expense	$	11,392		$	9,389		21.33	%	$	22,123		$	19,283		14.73	%

Non-interest expense (annualized) / Average assets	2.89		%	2.82		%	2.44	%	2.86		%	3.21		%	(3.32	)%

The growth in most line items, year over year, ~~includes~~are due to the impact of the ~~United Bank acquisition in October of 2018 and the~~ F&M acquisition ~~July1, 2019. The F&M acquisition added approximately $0.9 million in ongoing operational expenses and $2.6 million in one-time merger charges for the quarter ending September 30,~~on July 1, 2019.

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

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

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

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

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

Merger related expenses included in the consolidated statement of operations totaled $2.91 million and $3.78 million for the three and nine months ended September 30, 2019. For the three months ended September 30, 2019, merger expenses consisted of the following: (1) $200 thousand recorded in professional services and (2) $2.71 million recorded in other non-interest expense. Merger related expenses incurred in the nine months ended September 30, 2019, consisted of the following: (1) $530 thousand recorded in professional services, (2) $70 thousand recorded in compensation and benefits and (3) $3.2 million recorded in other non-interest expense. Merger related expenses incurred in the consolidated statement of operation totaled $131 thousand and $369 thousand during the three and nine months ended September 30, 2018 respectively. For the nine months ended September 30, 2018, merger expenses consisted of the following: (1) $356 thousand recorded in professional services and (2) $13 thousand recorded in other non-interest expense.

~~Income Taxes.~~ ~~Income tax~~Compensation expense, was $430 thousand and $2.3 million for the three and nine months ended September 30, 2019, compared to $736 thousand and $1.4 million for the three and nine months ended September 30, 2018, respectively. The effective tax rate decrease in 2019 for both the three and ~~nine month~~six-month periods ended June 30, 2020 was higher than the comparable prior year ~~over~~period due primarily to the impact of the F&M acquisition, and to a lesser extent, higher variable mortgage production compensation related to all-time high mortgage loan origination activity, primarily in the second quarter of 2020.

Data processing expense increases were due primarily to higher loan origination activity and larger deposit balances.

Mortgage servicing rights expense increased during the three and six months ended June 30, 2020 by $685 and $1,230, respectively, compared to the comparable prior year periods. The Company recognized related impairment charges of $650 and $1,130, respectively in 2020 compared to $110 for the three and six-months ended June 30, 2019, largely due to athe impact of higher actual and forecasted prepayment rates. The remaining increase is due to higher amortization based on the interest rate environment.

Professional services expenses were lower ~~federal~~during the three and six months ended June 30, 2020 compared to the comparable prior year periods, primarily due to lower audit costs. Higher 2019 audit costs were largely due to the transition period audit required due to the change in the Company’s fiscal year-end.

Other expenses for the six-month period ended June 30, 2020 decreased compared to June 30, 2019 largely due to lower merger-related expenses, partially offset by higher commercial loan and deposit costs.

Income Taxes. Income tax expense was $1,105 and $2,042 for the three and six months ended June 30, 2020 compared to $1,500 and $1,822 for the three and six months ended June 30, 2019. The impact of higher non-taxable municipal income ~~tax rate, partially~~in 2019 was offset by higher non-deductible merger costs, ~~and an overall smaller tax-exempt investment security and loan portfolio as a percent of total interest earning assets.~~netting to approximately the same effective tax rates in both periods.

5955

BALANCE SHEET ANALYSIS

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 $162.7 million at June 30, 2020, compared with $180.1 million at December 31, 2019.

Securities held to maturity increased to $10.5 million at June 30, 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
June 30, 2020
U.S. government agency obligations	$	35,109	$	35,354
Obligations of states and political subdivisions	140		140
Mortgage-backed securities	57,057		59,372
Corporate debt securities	19,942		20,079
Corporate asset based securities	36,542		34,822
Trust preferred securities	13,899		12,949
Totals	$	162,689	$	162,716
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
June 30, 2020
Obligations of states and political subdivisions	$	300	$	301
Mortgage-backed securities	10,241		10,621
Totals	$	10,541	$	10,922
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:



	June 30, 2020				December 31, 2019
Available for sale securities	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Agency	$	94,004	$	96,147	$	122,826	$	123,136
AAA	13,085		12,808		4,383		4,245
AA	25,447		24,177		23,475		22,749
A	15,426		15,534		18,776		18,725
Non-rated	3,121		2,978		141		141
Total available for sale securities	$	162,689	$	162,716	$	180,768	$	180,119

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



	June 30, 2020				December 31, 2019
Securities held to maturity	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. government agency	$	10,241	$	10,621	$	2,551	$	2,655
AA	125		125		125		126
A	—		—		—		—
Non-rated	175		176		175		176
Total	$	10,541	$	10,922	$	2,851	$	2,957

At June 30, 2020, securities with a market value of $1.4 million were pledged against a line of credit with the Federal Reserve Bank of Minneapolis. As of June 30, 2020, this line of credit had a zero-outstanding balance. At June 30, 2020, the Bank has pledged mortgage-backed securities with a market value of $4.0 million and U.S. Government Agency securities with a market value of $0.6 million as collateral against municipal deposits. At June 30, 2020, the Bank also has mortgage-backed securities with a carrying value of $0.6 million pledged as collateral to the Federal Home Loan Bank of Des Moines.

Loans. Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, increased by ~~$131.8~~$103.8 million, ~~or 13.28%,~~ to ~~$1.124~~$1.28 billion as of ~~September~~June 30, ~~2019~~2020, from ~~$992.6 million~~$1.18 billion at December 31, ~~2018.~~2019. This ~~increase~~ was ~~largely~~ due to the ~~F&M acquisition, which added approximately $126 million in net loans. Additionally,~~impact of the growth in the ~~quarter ended September 30, 2019,~~SBA PPP origination of $137.3 million, partially offset by the ~~Bank sold the~~net remaining ~~unsecured purchased~~deferred origination fees of $4.7 million. This growth was partially offset by a reduction in acquired commercial loans and originated loan portfolio reductions in residential mortgage loans and indirect ~~portfolio with an approximate yield to the Bank~~consumer loans of ~~4.25% at par. Due to the contractual repurchase arrangement with the servicer, who originated the loans, the Bank has no associated allowance for loan losses on this portfolio.~~$13.0 million and $7.5 million, respectively. The following table reflects the composition, or mix of our loan portfolio at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


	September 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
	Amount			Amount			Amount			Amount
Real estate loans:
Residential real estate
One to four family	$	188,070		209,926
Purchased HELOC loans	10,120			12,883
Commercial/agricultural real estate
Commercial real estate	465,046			357,959			$	509,725		$	514,459
Agricultural real estate	89,441			86,015			78,192			85,363
Multi-family real estate	87,758			69,400			103,639			87,008
Construction and land development	65,550			22,691			110,132			86,410
Residential mortgage
Residential mortgage							152,424			176,332
Purchased HELOC loans							6,861			8,407
Total real estate loans	905,985			758,874			960,973			957,979
Non-real estate loans:
Consumer non-real estate
C&I/Agricultural operating and Consumer Installment Loans:
C&I/Agricultural operating
Commercial and industrial (“C&I”)							109,846			133,734
Agricultural operating							37,937			37,780
Consumer installment
Originated indirect paper	42,894			56,585			32,031			39,585
Purchased indirect paper	—			15,006
Other Consumer	18,770			20,214			15,814			18,186
Commercial/agricultural loans
Commercial non-real estate	127,232			112,427
Agricultural non-real estate	39,827			36,327
Total non-real estate loans	228,723			240,559
Total C&I/Agricultural operating and Consumer installment Loans							195,628			229,285
Gross loans before C&I SBA PPP loans							1,156,601			1,187,264
C&I SBA PPP loans							137,330			—
Gross loans	1,134,708			999,433			$	1,293,931		$	1,187,264
Unearned net deferred fees and costs and loans in process	(158		)	409			(5,369		)	(393		)
Unamortized discount on acquired loans	(10,172		)	(7,286		)	(7,387		)	(9,491		)
Total loans (net of unearned income and deferred expense)	1,124,378			992,556			1,281,175			1,177,380
Allowance for loan losses	(9,177		)	(7,604		)	(13,373		)	(10,320		)
Total loans receivable, net	$	1,115,201		$	984,952		$	1,267,802		$	1,167,060

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.

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

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

The Community Banking loan portfolios reflect the Bank’s strategy to grow its commercial banking and consumer lending portfolios. 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 September 30, 2019, the community banking portfolio grew by $185.8 million compared to December 31, 2018, largely due to the acquisition of F&M which increased the portfolio $123.7 million at September 30, 2019. In addition, there was strong organic growth in all real estate categories. The growth in construction loans reflects the funding on projects that moved closer to completion.

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

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

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

refine our ALL methodology by introducing a greater level of granularity to our loan portfolio. We currently segregate loans into pools based on common risk characteristics for purposes of determining the ALL. The additional segmentation of the portfolio is intended to provide a more effective basis for the determination of qualitative factors affecting our ALL. In addition, management continually evaluates our ALL methodology to assess whether modifications in our methodology are appropriate in light of underwriting practices, market conditions, identifiable trends, regulatory pronouncements or other factors. We believe that any modifications or changes to the ALL methodology would be to enhance the ALL. However, any such modifications could result in materially different ALL levels in future periods.

The specific credit allocation for the ALL is based on a regular analysis of all loans that are considered impaired. In compliance with ASC 310-10, the fair value of the loan is determined based on either the present value of expected cash flows discounted at the loan’s effective interest rate, the market price of the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral less the expected cost of sale for such collateral. At ~~September 30, 2019,~~ June 30, ~~2019, March~~2020, the Company had identified impaired loans of $51.7 million, consisting of $13.1 million TDR loans, the carrying amount of purchased credit impaired loans of $23.4 million and $15.1 million of substandard non-TDR loans. The $51.7 million total of impaired loans includes $5.7 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 June 30, 2020 and December 31, ~~2018,~~2019, we had ~~416, 356, 315~~343 and ~~209~~389 such impaired loans, respectively, all secured by real estate or personal ~~property with an aggregate recorded investment of $32.7 million, $28.0 million $27.3 million and $22.5 million respectively.~~property. Of the impaired loans, ~~respectively,~~ there were ~~34 such~~22 individual loans where estimated fair value was less than their book value (i.e. we deemed impairment to exist) totaling ~~$3.8~~$5.2 million for which ~~$663 thousand~~$1.1 million in specific ALL was recorded as of ~~September~~June 30, ~~2019.~~2020.

~~At September~~The allowance for loan and lease losses increased to $13.4 million at June 30, ~~2019,~~2020 representing 1.04% of loans receivable or 1.16% of loans receivable, less the ~~ALL was $9.2 million, or 0.82%~~100% SBA guaranteed PPP loans. A significant portion of ~~our total~~the current loan portfolio ~~compared to ALL of $7.6~~includes loans purchased through whole bank acquisitions in recent years resulting in purchase credit impairments which are not included in the allowance for loan losses. The allowance for loan and lease losses was $10.3 million ~~or 0.77% of the total loan portfolio~~ at December 31, ~~2018. This level was based on our analysis~~2019, representing 0.88% of ~~the loan portfolio risk at September 30, 2019, considering the factors discussed above. Due to the sale of the purchased indirect loans~~total loans. The increase in the ~~third quarter,~~allowance was primarily due to loan loss provisions largely associated with anticipated COVID-19 related adverse economic impact of $2.0 million. In addition, the ~~previous restricted cash reserve account established by~~allowance grew due to approximately $0.8 million of provision for loan growth, with the ~~third party seller~~remaining growth largely due to growth in unallocated.

Allowance for Loan Losses to Loans, net of ~~the purchased indirect paper consumer loans, based on a percentage of the outstanding loan balances was eliminated. The funds~~ C&I SBA PPP Loans

(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.thousands, except ratios)



	June 30, 2020			March 31, 2020			December 31, 2019			June 30, 2019
Loans, end of period	$	1,281,175		$	1,180,951		$	1,177,380		$	1,019,957
C&I SBA PPP loans, net of deferred fees	(132,800		)	—			—			—
Loans, net of C&I SBA PPP loans and deferred fees	$	1,148,375		$	1,180,951		$	1,177,380		$	1,019,957
Allowance for loan losses	$	13,373		$	11,835		$	10,320		$	8,759
ALL to loans net of C&I SBA PPP loans and deferred fees	1.16		%	1.00		%	0.88		%	0.86		%
ALL to loans, end of period	1.04		%	1.00		%	0.88		%	0.86		%

All the nine factors identified in the 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 quarters ended March 31, 2020 and June 30, 2020 and increased the ALL by $750,000 and $1.25 million, respectively, 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 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~~C&I/Agricultural operating loans, past due 90 days or more;

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

•Residential ~~real estate~~mortgage loans and open-ended consumer ~~non-real estate~~installment loans past due 180 days or more.

When interest accruals are discontinued, interest credited to income is reversed. If collection is in doubt, cash receipts on non-accrual loans are used to reduce principal rather than being recorded as interest income. 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.

6260

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:


	September 30, 2019 and Nine Months Then Ended			December 31, 2018 and Three Months Then Ended			June 30, 2020 and Six Months Then Ended			December 31, 2019 and Twelve Months Then Ended
Nonperforming assets:
Nonaccrual loans
One to four family	$	2,255		$	2,331
Commercial real estate	6,324			808			$	3,221		$	5,705
Agricultural real estate	6,191			2,019			5,979			7,568
Consumer non-real estate	191			120
Commercial non-real estate	2,072			1,314
Agricultural non-real estate	1,989			762
Commercial and industrial							1,306			1,850
Agricultural operating							1,496			1,702
Residential mortgage							2,666			2,063
Consumer installment							119			168
Total nonaccrual loans	$	19,022		$	7,354		$	14,787		$	19,056
Accruing loans past due 90 days or more	1,099			736			1,880			1,104
Total nonperforming loans (“NPLs”)	20,121			8,090			16,667			20,160
Other real estate owned	1,348			2,522			692			1,429
Other collateral owned	25			48			42			31
Total nonperforming assets (“NPAs”)	$	21,494		$	10,660		$	17,401		$	21,620
Troubled Debt Restructurings (“TDRs”)	$	11,795		$	8,722		$	13,119		$	12,594
Accruing TDR's	$	7,194		$	6,055		$	6,127		$	5,396
Nonaccrual TDRs	$	4,601		$	2,667		$	6,992		$	7,198
Average outstanding loan balance	$	1,054,492		$	921,951		$	1,219,905		$	1,074,952
Loans, end of period	$	1,124,378		$	992,556		$	1,281,175		$	1,177,380
Total assets, end of period	$	1,475,364		$	1,287,924		$	1,607,514		$	1,531,249
ALL, at beginning of period	$	7,604		$	6,748		$	10,320		$	7,604
Loans charged off:
Residential real estate	(224		)	(43		)
Commercial/Agricultural real estate	(225		)	—			—			(381		)
Consumer non-real estate	(171		)	(79		)
Commercial/Agricultural non-real estate	—			—
C&I/Agricultural operating							(688		)	—
Residential mortgage							(27		)	(239		)
Consumer installment							(116		)	(291		)
Total loans charged off	(620		)	(122		)	(831		)	(911		)
Recoveries of loans previously charged off:
Residential real estate	2			4
Commercial/Agricultural real estate	3			—			76			3
Consumer non-real estate	63			24
Commercial/Agricultural non-real estate	—			—
C&I/Agricultural operating							—			1
Residential mortgage							19			5
Consumer installment							39			93
Total recoveries of loans previously charged off:	68			28			134			102
Net loans charged off (“NCOs”)	(552		)	(94		)	(697		)	(809		)
Additions to ALL via provision for loan losses charged to operations	2,125			950			3,750			3,525
ALL, at end of period	$	9,177		$	7,604		$	13,373		$	10,320
Ratios:
ALL to NCOs (annualized)	1,246.88		%	2,022.34		%	959.33		%	1,275.65		%
NCOs (annualized) to average loans	0.07		%	0.04		%	0.11		%	0.08		%
ALL to total loans	0.82		%	0.77		%	1.04		%	0.88		%
NPLs to total loans	1.79		%	0.82		%	1.30		%	1.71		%
NPAs to total assets	1.46		%	0.83		%	1.08		%	1.41		%

6361

~~An aging analysis~~The following table shows the detail of ~~the Company’s~~non-performing assets by originated and acquired ~~loans as of September 30, 2019 and December 31, 2018, respectively, was as follows:~~portfolios.

Nonperforming Originated / Acquired Assets

(in thousands, except ratios)

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
September 30, 2019
Originated loans $ 5,576
$ 1,082
$ 842
$ 7,500
$ 4,816
$ 12,316
Acquired loans 3,678
711
257
4,646
14,206
18,852
Total $ 9,254
$ 1,793
$ 1,099
$ 12,146
$ 19,022
$ 31,168
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



	June 30, 2020 and Three Months Ended			March 31, 2020 and Three Months Ended			December 31, 2019 and Three Months Ended			June 30, 2019 and Three Months Ended
Nonperforming assets:
Originated nonperforming assets:
Nonaccrual loans	$	3,951		$	4,017		$	4,285		$	4,220
Accruing loans past due 90 days or more	1,455			1,174			946			617
Total originated nonperforming loans (“NPL”)	5,406			5,191			5,231			4,837
Other real estate owned (“OREO”)	270			337			441			70
Other collateral owned	42			20			28			33
Total originated nonperforming assets (“NPAs”)	$	5,718		$	5,548		$	5,700		$	4,940
Acquired nonperforming assets:
Nonaccrual loans	$	10,836		$	12,073		$	14,771		$	9,392
Accruing loans past due 90 days or more	425			496			158			263
Total acquired nonperforming loans (“NPL”)	11,261			12,569			14,929			9,655
Other real estate owned (“OREO”)	422			1,075			988			1,284
Other collateral owned	—			—			3			—
Total acquired nonperforming assets (“NPAs”)	$	11,683		$	13,644		$	15,920		$	10,939
Total nonperforming assets (“NPAs”)	$	17,401		$	19,192		$	21,620		$	15,879
Loans, end of period	$	1,281,175		$	1,180,951		$	1,177,380		$	1,019,957
Total assets, end of period	$	1,607,514		$	1,505,164		$	1,531,249		$	1,348,420
Ratios:
Originated NPLs to total loans	0.42		%	0.44		%	0.44		%	0.47		%
Acquired NPLs to total loans	0.88		%	1.06		%	1.27		%	0.95		%
Originated NPAs to total assets	0.36		%	0.37		%	0.37		%	0.37		%
Acquired NPAs to total assets	0.73		%	0.91		%	1.04		%	0.81		%

Nonperforming assets ~~delinquencies and troubled debt restructures typically increase in subsequent quarters following a merger,~~decreased by $4.2 million to $17.4 million at June 30, 2020 from December 31, 2019, largely due to updated reporting and risk rating of the loan portfolio to the Bank’s standards. We experienced this again as nonperforming assets increased to 1.46% of total assets at September 30, 2019, from 0.83% of total assets at December 31, 2018. Total impaireddecreases in nonaccrual loans which included trouble debt restructured loans, purchased credit impaired loans and substandard non-performing loans, was $67.4 million at September 30, 2019, compared to $47.3 million at December 31, 2018. $17.7 million of this increase in impaired loans was due to the F&M acquisition.

Non-performing assets included non-performing loans of $20.1 million at September 30, 2019, compared to $8.1 million at December 31, 2018. Of this increase in non-performing assets, $5.9 million was due to the F&M acquisition and $4.3 million were acquired in the ~~United acquisition. Classified assets increased to $39.9 million at September 30, 2019. Classified assets increased $7.5 million due to the~~ F&M ~~acquisition in the third quarter. Classified assets at December 31, 2018 totaled $22.7 million.~~

~~Nonaccrual Loans Rollforward:~~

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

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

~~Other Real Estate Owned Rollforward:~~

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

~~Nonaccrual TDR loans increased $1.9 million to $4.6 million at September 30, 2019 from $2.7 million at December 31, 2018, primarily due to restructuring of nonaccrual loans.~~

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

Nonperforming assets increased to 1.46% of total assets at September 30, 2019, compared to 1.18% at June 30,2019, 1.03% at March 31, 2019 and 0.83% of total assets at December 31, 2018. Nonperforming assets, delinquencies and troubled debt restructures typically increase in the quarters immediately following a merger due to updated reporting and risk rating of the loan portfolio to CCFBank standards and the Company experienced this increase in all three quarters of fiscal 2019.

Non-accrual loans were $19.0 million at September 30 2019, compared to $7.4 million at December 31, 2018. The increase in non-accrual-loans was largely due to acquired loans from the F&M and United Bank acquisition. In the quarter ended ~~September~~June 30, ~~2019,~~2020, nonaccrual acquired loans of $1.7 million were returned to accrual status based on their current payment status and history, and in accordance with the ~~Bank added $5.9 million in non-accrual loans from F&M.~~Bank’s policy. 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~~

Nonaccrual Loans Rollforward:



	Quarter Ended
	June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019
Balance, beginning of period	$	16,090		$	19,056		$	19,022		$	13,612		$	9,871
Additions	1,907			1,811			2,641			1,493			7,405
Acquired nonaccrual loans	—			—			—			5,898			—
Charge offs	(175		)	(452		)	(198		)	(134		)	(262		)
Transfers to OREO	—			(1,100		)	(425		)	(209		)	(236		)
Return to accrual status	(1,702		)	(120		)	(14		)	(53		)	(149		)
Payments received	(760		)	(2,824		)	(1,957		)	(1,539		)	(2,612		)
Other, net	(573		)	(281		)	(13		)	(46		)	(405		)
Balance, end of period	$	14,787		$	16,090		$	19,056		$	19,022		$	13,612

Nonaccrual TDR loans decreased $206,000 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 56% variable rate securities. The effective duration of the investment portfolio at September 30, 2019 was 2.0 years compared to 2.6 years at December 31, 2018.

~~Securities available for sale, which represent the majority of our investment portfolio, were $183.0~~$7.0 million at ~~September~~June 30, ~~2019, compared with $146.7~~2020 from $7.2 million at December 31, ~~2018. There~~2019.



	June 30, 2020			March 31, 2020			December 31, 2019			September 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	19	$	1,885	13	$	1,125	14	$	1,730	14	$	2,202
C&I/Agricultural operating	5	1,199		1	9		2	366		4	478
Residential mortgage	39	2,981		38	3,174		40	3,233		39	3,137
Consumer installment	8	62		8	69		7	67		11	82
Total loans	71	$	6,127	60	$	4,377	63	$	5,396	68	$	5,899

Classified assets decreased to $35.9 million at June 30, 2020, from $39.9 million at December 31, 2019 largely due to the reduction in nonperforming assets discussed above, with a modest increase in newly classified assets The table below shows a summary of the decrease in substandard loans by quarter since the first impact of the F&M acquisition on September 30, 2019 levels. While special mention loans increased in the first quarter of 2020, the growth moderated in the second quarter of 2020. See Note 3, “Loans, Allowance for Loan Losses and Impaired Loans” for additional information.



	(in thousands)
	June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019
Special mention loan balances	$	19,958	$	19,387	$	10,856	$	12,959
Substandard loan balances	35,911		38,393		39,892		38,527
Balances, end of period	$	55,869	$	57,780	$	50,748	$	51,486

Total impaired loans, which included trouble debt restructured loans, purchased credit impaired loans and substandard non-performing loans, was $51.7 million at June 30, 2020 compared to $63.2 million at December 31, 2019. This decrease was largely due to payoff and reduction in acquired purchased credit impaired loans due to the decrease in classified assets and certain other acquired loan decreases, largely from the F&M acquisition.

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 $109 million and $42 million, respectively at June 30, 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 June 30, 2020, the Bank had completed $197.3 million of loan modifications due to COVID-19-related borrower requests, all of which were done in the second quarter of 2020. Approximately 55% of the deferrals were full payment deferrals. The remaining 45% of deferrals require interest only payments. Hotel and restaurant industry sectors represent approximately $784 million and $25 million, respectively of the approved deferrals. While the Company has no ~~impairment charges~~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.

Acquired loans represent much of the reduction in non-performing loans and classified loans. The table below shows the changes in the Bank’s non-accretable differences on purchased credit impaired loans. The Bank has transferred non-accretable difference on purchased credit impaired loans to accretable loan discounts as collateral coverage improved sufficiently, due to a combination of principal paydowns and/or improving collateral positions. This transferred accretion is accreted over the remaining maturity of the loan or until payoff, whichever is shorter.

Non-accretable Differences:



	(in thousands)
	June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019
Non-accretable difference, beginning of period	$	4,327		$	6,290		$	6,737		$	3,889
Additions to non-accretable difference for acquired purchased credit impaired loans	—			—			(170		)	2,898
Non-accretable difference realized as interest from payoffs of purchased credit impaired loans	(196		)	(1,043		)	(271		)	(50		)
Transfers from non-accretable difference to accretable discount.	(741		)	(669		)	—			—
Non-accretable difference used to reduce loan principal balance	(35		)	—			—			—
Non-accretable difference transferred to OREO due to loan foreclosure	—			(251		)	(6		)	—
Non-accretable difference, end of period	$	3,355		$	4,327		$	6,290		$	6,737

Mortgage Servicing Rights. Mortgage servicing rights (“MSR”) assets are initially measured at fair value; assessed at least quarterly for impairment; carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value. MSR assets are amortized in proportion to and over the period of estimated net servicing income, with the amortization recorded in non-interest expense in the ~~three~~consolidated statement of operations. The valuation of MSRs and ~~nine months ended September~~related amortization thereon are based on numerous factors, assumptions and judgments, such as those for: changes in the mix of loans, interest rates, prepayment speeds, and default rates. Changes in these factors, assumptions and judgments may have a material effect on the valuation and amortization of MSRs. Although management believes that the assumptions used to evaluate the MSRs for impairment are reasonable, future adjustment may be necessary if future economic conditions differ substantially from the economic assumptions used to determine the value of MSRs.

The fair market value of the Company’s MSR asset decreased from $4.3 million at December 31, 2019 to $3.5 million at June 30, 2020, primarily due to $41.2 million of impairment recorded on the MSR asset due to the impact of higher prepayment activity, increased amortization and $1.2 million of impairment partially offset by capitalized servicing on newly sold mortgage originations. The unpaid balances of one- to four-family residential real estate loans serviced for others as of June 30, 2020 and December 31, 2019 were $538.3 million and $524.7 million, respectively. The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at June 30, 2020 and December 31, 2019 was 0.65% and 0.82%, respectively.

Deposits. Deposits increased $76.5 million to $1.272 billion at June 30, 2020, from $1.196 billion at December 31, 2019. ~~One agency security had an impairment charge~~Approximately $12.7 million of ~~$21 thousand recorded~~December 31, 2019 deposits represented draws on lines of credit by a single customer, taken on December 31, 2019, with the proceeds deposited into the customer’s money market accounts and subsequently repaid on January 2, 2020. Retail non-maturity deposits increased $35 million, and commercial non-maturity deposits increased $91 million in the three months ended ~~March 31, 2018. This security was sold in the quarter-ended~~ June 30, ~~2018~~2020. Approximately $16 million of the commercial non-maturity deposits related to growth from customers who borrowed under the SBA PPP loan program and were depositors of the Bank. Approximately $3 million of the commercial non-maturity deposit growth was growth in deposit accounts from SBA PPP loan customers with no previous lending or deposit relationship with the Bank prior to the pandemic. The strong non-maturity deposit growth allowed

the Company to reduce reliance on higher cost brokered and institutional deposits. This planned reduction in brokered and institutional deposits resulted in a ~~$4 thousand gain was realized due~~reduction to ~~changes in market prices. Securities held to maturity were $3.7~~$20 million at ~~September~~June 30, ~~2019, compared with $4.9~~2020 from $54 million at December 31, ~~2018.~~

~~The amortized cost and market values~~2019. Additionally, retail certificates of ~~our available for sale securities~~deposit decreased by ~~asset categories as of the dates indicated below were as follows:~~

Securities available for sale
Amortized
Cost

Fair
Value
September 30, 2019
U.S. government agency obligations $ 53,405
$ 53,378
Obligations of states and political subdivisions 27,648
27,937
Mortgage backed securities 54,979
55,658
Corporate debt securities 18,793
18,834
Corporate asset based securities 27,756
27,149
Totals $ 182,581
$ 182,956
December 31, 2018
U.S. government agency obligations $ 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

~~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
September 30, 2019
Obligations of states and political subdivisions $ 980
$ 982
Mortgage-backed securities 2,685
2,788
Totals $ 3,665
$ 3,770
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:~~

September 30, 2019 December 31, 2018
Available for sale securities Amortized
Cost Fair
Value Amortized
Cost Fair
Value
Agency $ 108,384
$ 109,036
$ 88,494
$ 86,648
AAA 6,196
6,144
3,566
3,535
AA 43,524
43,225
42,608
42,305
A 23,145
23,222
12,991
12,662
Non-rated 1,332
1,329
1,606
1,575
Total available for sale securities $ 182,581
$ 182,956
$ 149,265
$ 146,725

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

September 30, 2019 December 31, 2018
Securities held to maturity Amortized
Cost Fair
Value Amortized
Cost Fair
Value
U.S. government agency $ 2,685
$ 2,788
$ 3,149
$ 3,173
AA 395
396
395
395
A 235
235
956
955
Non-rated 350
351
350
349
Total $ 3,665
$ 3,770
$ 4,850
$ 4,872

At September 30, 2019, securities with a market value of $1.7 million were pledged against a line of credit with the Federal Reserve Bank of Minneapolis. As of September 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 $6.0 million, mortgage-backed securities with a market value of $13.7$11 million as ~~collateral against specific municipal deposits. As of September 30, 2019,~~ the ~~Bank also has mortgage backed securities with a market value of $760 thousand pledged as collateral~~Company chose not to ~~the Federal Home Loan Bank of Des Moines.~~

~~Other Assets and Other Liabilities.~~ Other assets and other liabilities decreased in the third quarter compared to June 30, 2019, due to the purchase of two previously leased branches. Other assets increased from December 31, 2018, primarily due to the adoption of new accounting standards requiring asset recognition for operating leases which totaled $2.9 million at September 30, 2019.

~~Deposits.~~ Deposits increased $154.2 million to $1.162 billion at September 30, 2019, from $1.008 billion at December 31, 2018. Deposits increased by $127.5 million due to F&M account balances at September 30, 2019, decreased $34.1 million due to the sale of Rochester Hills deposits on May 17, 2019 as discussed above and increased $60.8 million due to organic growth.match higher rate local retail certificate competition.

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

September 30, 2019 December 31, 2018
Non-interest bearing demand deposits $ 174,202
$ 155,405
Interest bearing demand deposits 209,644
169,310
Savings accounts 165,419
192,310
Money market accounts 193,654
126,021
Certificate accounts 418,831
364,466
Total deposits $ 1,161,750
$ 1,007,512

Deposits from closed branches, in markets that the Bank no longer competes in, decreased by $7.5 million during the nine months ended September 30, 2019, and total $27.9 million as of September 30, 2019. Brokered and listing services deposits were $63.0 million and $4.6 million, respectively, at September 30, 2019, compared to $55.3 million and $9.5 million, respectively, at December 31, 2018.



	June 30, 2020		December 31, 2019
Non-interest bearing demand deposits	$	223,536	$	168,157
Interest bearing demand deposits	270,116		223,102
Savings accounts	185,816		156,599
Money market accounts	242,536		246,430
Certificate accounts	350,193		401,414
Total deposits	$	1,272,197	$	1,195,702

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 established branch delivery systems ~~that have already been established~~ and electronic banking.

Federal Home Loan Bank (FHLB) advances (borrowings) and Other Borrowings. FHLB advances were ~~$113.5~~$124.5 million as of ~~September~~June 30, ~~2019~~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 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”) is supported by loan collateral as an alternative to directly pledging investment securities on behalf of a municipal customer as collateral for their interest-bearing deposit balances. The Bank’s current unused borrowing capacity, supported by loan collateral as of ~~September~~June 30, ~~2019,~~2020 is approximately ~~$153.9~~$189.2 million.

In the quarter ended June 30, 2020, the Bank’s origination of SBA PPP loans allowed the Bank to gain access to the Federal Reserve Bank Paycheck Protection Program Liquidity Facility (“PPPLF”), whereby the Bank can pledged SBA PPP loans, by day of origination, up to the contractual maturity of the Bank’s SBA PPP loans with no collateral haircut. The Bank borrowed twice under this facility in the second quarter of 2020. Due to the strong growth in non-maturity deposits discussed above, the Bank had no outstanding borrowings under this facility at June 30, 2020. The Bank could borrow $137.3 million under this facility in 2020.

67During 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 June 30, 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.

~~The~~At June 30, 2020, the Bank has pledged ~~$670.9~~$816.7 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 is 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 matured on August 1, 2019. On June 26, 2019, the Company entered into a credit agreement consisting of a $29.9 million term note and a $5.0 million revolving note. This term note included the refinancing of $10.1 million in existing debt and matures on June 26, 2031. This revolving note became effective on August 1, 2019, at which time it replaced the Company’s existing revolving loan arrangement, and it matures on August 1, 2020. The Revolving Loans and the Note each bear interest at a variable rate based on the U.S. Prime Rate as published in the Wall Street Journal less 75 basis points and are payable in accordance with the terms of the Loan Agreement and the Note, respectively. The proceeds from the Business Note were used to refinance the existing senior note, pay transaction fees and expenses and for financing the acquisition, by merger, of F. & M. Bancorp. of Tomah Inc.. At September 30, 2019 and December 31, 2018, there were no borrowings outstanding on this revolving loan.

Stockholders’ Equity. Total stockholders’ equity increased to ~~$148.0~~$152.8 million at ~~September~~June 30, ~~2019,~~2020 from ~~$138.2~~$150.6 million at December 31, ~~2018, as~~2019, largely due to net income of $5.7 million. This increase was offset by the annual cash dividend paid to common stockholders of $2.4 million during the first quarter of 2020. Additionally, during the first quarter, the Company ~~benefitted from~~repurchased 156,000 shares of its common stock at a cost of $1.8 million under the ~~addition~~Company’s stock buyback authorization. On March 20, 2020, the Company announced the Board of ~~earnings,~~Directors had suspended this stock buyback authorization and on July 27, 2020, the ~~issuance~~Board of Directors terminated the stock ~~in the F&M acquisition and a reduction in accumulated other comprehensive loss, mainly due~~buyback authorization, which was previously scheduled to ~~lower long-term interest rates.~~expire on September 30, 2020. Book value per share increased to ~~$13.13~~$13.70 at ~~September~~June 30, ~~2019,~~2020, from ~~$12.62~~$13.36 per share at December 31, ~~2018.~~2019. Tangible book value per share (non-GAAP)was ~~$9.60~~$10.31 at ~~September~~June 30, ~~2019 - an increase of $0.54 from~~2020, compared to $9.89 December 31, 2018. The components of this increase included (1) current year-to-date earnings, (2) the issuance of stock in the F&M acquisitions, (3)reduction in accumulated other comprehensive loss, due to the modest gain in the Securities Available for Sale portfolio (4) the amortization of2019. Tangible book value (non-GAAP) is calculated as total stockholders’ equity less goodwill and intangible assets ~~partially offset~~divided by ~~(5) the~~common shares outstanding. As of June 30, 2020 and December 31, 2019, (1) stockholders’ equity was $152.8 million and $150.6 million, respectively, (2) goodwill was $31.5 million for both periods, (3) intangible ~~created in the F&M acquisition..~~assets were $6.3 million and $7.6 million, respectively and (4) common shares outstanding were 11,150,695 and 11,266,954, respectively. Tangible book value per share

is a non-GAAP financial measure that management believes enhances investors’ ability to better understand the Company’s financial position.

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

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

Liquidity and Asset / Liability Management. Our primary sources of funds are deposits; amortization, prepayments and maturities of outstanding loans; short-term investments; and 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 ~~September~~June 30, ~~2019,~~2020, our on-balance sheet liquidity ratio was ~~12.0%~~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 control, including general interest rates, economic conditions and competition. Although ~~$249.4~~$227.5 million of our ~~$418.8~~$350.2 million ~~(59.6%~~(65%) CD portfolio as of ~~September~~June 30, ~~2019~~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 ~~September~~June 30, ~~2019,~~2020, we ~~have~~had approximately ~~$153.9~~$189.2 million available under this arrangement, supported by loan collateral, as compared to ~~$178.6~~$203.9 million at December 31, ~~2018.~~ 2019. In the quarter ended June 30, 2020, the Bank’s origination of SBA PPP loans allowed the Bank to gain access to the Federal Reserve’s PPPLF facility, whereby the Bank can pledge SBA PPP loans, by day of origination, up to the contractual maturity of the Bank’s SBA PPP loans with no collateral haircut. The Bank borrowed twice under this facility in the second quarter of 2020. Due to the strong growth in non-maturity deposits discussed above, the Bank had no outstanding borrowing under this facility at June 30, 2020. The Bank could borrow $137.3 million under this facility in 2020.

We maintain a line of credit with the Federal Reserve Bank which has a ~~$1.3~~$1.2 million capacity, based on our current pledged collateral position. Additionally, we have ~~$15.0~~$25.0 million of uncommitted federal funds purchased lines of credit, as well as a $5.0 million revolving line of credit which is available as needed for general liquidity purposes.

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

Off-Balance Sheet Liabilities. Some of our financial instruments have off-balance sheet risk. These instruments include unused commitments for lines of credit, overdraft protection lines of credit and home equity lines of credit, as well as commitments to extend credit. As of ~~September~~June 30, ~~2019,~~2020, the Company had ~~$232.1~~$213.9 million in unused commitments, compared to ~~$207.8~~$246.7 million in unused commitments as of December 31, ~~2018.~~2019.

Capital Resources. As of ~~September~~June 30, ~~2019,~~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 September 30, 2019 (Unaudited)
As of June 30, 2020 (Unaudited)
Total capital (to risk weighted assets)	$	157,069,000	13.5	%	$	92,966,000	>=	8.0	%	$	116,208,000	>=	10.0	%	$	166,781	14.0	%	$	95,059	> =	8.0	%	$	118,824	> =	10.0	%
Tier 1 capital (to risk weighted assets)	147,892,000		12.7	%	69,725,000		>=	6.0	%	92,966,000		>=	8.0	%	153,408		12.9	%	71,295		> =	6.0	%	95,059		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	147,892,000		12.7	%	52,293,000		>=	4.5	%	75,535,000		>=	6.5	%	153,408		12.9	%	53,471		> =	4.5	%	77,236		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	147,892,000		10.2	%	57,777,000		>=	4.0	%	72,221,000		>=	5.0	%	153,408		9.9	%	61,942		> =	4.0	%	77,427		> =	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 ~~September~~June 30, ~~2019,~~2020, the Bank was categorized as “Well Capitalized” under Prompt Corrective Action Provisions, as determined by the OCC, our primary regulator.

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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 September 30, 2019 (Unaudited)
As of June 30, 2020 (Unaudited)
Total capital (to risk weighted assets)	$	132,094,000	11.4	%	$	92,966,000	>=	8.0	%	$	116,208,000	>=	10.0	%	$	143,353	12.1	%	$	95,059	> =	8.0	%	$	118,824	> =	10.0	%
Tier 1 capital (to risk weighted assets)	107,917,000		9.3	%	69,725,000		>=	6.0	%	92,966,000		>=	8.0	%	114,980		9.7	%	71,295		> =	6.0	%	95,059		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	107,917,000		9.3	%	52,293,000		>=	4.5	%	75,535,000		>=	6.5	%	114,980		9.7	%	53,471		> =	4.5	%	77,236		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	107,917,000		7.5	%	57,777,000		>=	4.0	%	72,221,000		>=	5.0	%	114,980		7.4	%	61,942		> =	4.0	%	77,427		> =	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 ~~September~~June 30, ~~2019,~~2020, the Company was categorized as “Well Capitalized” under Prompt Corrective Action Provisions.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

In order to manage the potential for adverse effects of material and prolonged increases in interest rates on our results of operations, we adopted asset and liability management policies to better align the maturities and re-pricing terms of our interest earning assets and interest bearing liabilities. These policies are implemented by our Asset and Liability Management Committee (ALCO). The ALCO is comprised of members of the Bank’s 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.

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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~~agricultural and consumer loan maturities;

originating variable rate commercial and ~~agriculture~~agricultural 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 ~~September~~June 30, ~~2019~~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”) resulting from an immediate and permanent shift in the yield curve (up 300 basis points and down 100 basis points). As of ~~September~~June 30, ~~2019~~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 September 30, 2019		At December 31, 2018		At June 30, 2020		At December 31, 2019

+300 bp	—	%	(3	)%	6	%	1	%
+200 bp	—	%	(2	)%	5	%	2	%
+100 bp	1	%	(1	)%	2	%	1	%
-100 bp	(2	)%	(1	)%	11	%	(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 ~~September~~June 30, ~~2019~~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 September 30, 2019		At December 31, 2018		At June 30, 2020		At December 31, 2019

+300 bp	(1	)%	(6	)%	1	%	(5	)%
+200 bp	(1	)%	(4	)%	1	%	(4	)%
+100 bp	(1	)%	(2	)%	1	%	(2	)%
-100 bp	(1	)%	1	%	(1	)%	1	%
-200 bp	(5	)%	(1	)%


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

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

The assumptions used to measure and assess interest rate risk include interest rates, loan prepayment rates, deposit decay (runoff) rates, and the market values of certain assets under differing interest rate scenarios. Actual values may differ from those projections set forth above should market conditions vary from the assumptions used in preparing the analysis. Further, the computations do not contemplate any actions we may undertake in response to changes in interest rates.


ITEM 4.	CONTROLS AND PROCEDURES

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

In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have designed our disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired control objectives. We carried out an evaluation as of ~~September~~June 30, ~~2019,~~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 ~~September~~June 30, ~~2019~~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.

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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 and Item 1A of our Form 10-Q for the quarter ended March 31, 2020 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, has and could further adversely impact the ability of borrowers to repay outstanding loans, or could substantially weaken the value of collateral securing those loans. As of June 30, the Bank had completed $197.3 million of loan modifications due to COVID-19-related borrower requests, all of which were done in the second quarter of 2020. See “Allowance for Loan Losses” for discussion of COVID-19 qualitative factors, and related provision for loan losses. 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 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 $137 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.

~~The table below shows~~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 ~~withheld~~of its common stock as of October 24, 2019, or 563,504 shares, from ~~employees~~time to ~~satisfy tax withholding obligations during~~time through October 1, 2020. From February 3, 2020 through March 6, 2020, the ~~three months ended~~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. On July 27, 2020, the Board of Directors of the Company terminated the stock buyback authorization, which was previously scheduled to expire on September 30, ~~2019.~~

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
July 1, 2019 - July 31, 2019 — NA — —
August 1, 2019 - August 31, 2019 64 $11.00 — —
September 1, 2019 - September 30, 2019 233 $11.00 — —
Total 297 $11.00 — —

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


Item 3.	DEFAULTS UPON SENIOR SECURITIES

Not applicable.


Item 4.	MINE SAFETY DISCLOSURES

Not applicable.


Item 5.	OTHER INFORMATION

Not applicable.

7372

~~Item 6.~~


Item 7.6.	EXHIBITS

(a) Exhibits



~~10.1~~3.1		~~Business Note, dated June 26, 2019, issued by~~Amendment to the Bylaws of Citizens Community Bancorp, Inc. dated April 23, 2020 (incorporated by reference to ~~Chippewa Valley Bank~~Exhibit 3.1 to the Company’s current report on Form 8-K filed on April 28, 2020 (File No. 001-33003)).
10.1		Addendum No. 1 to the Second Amended and Restated Executive Employment Agreement with Stephen Bianchi, dated April 23, 2020 (incorporated by reference to Exhibit 10.1 to the ~~Company's Current Report~~Company’s current report on Form 8-K filed on ~~July 1, 2019~~April 28, 2020 (File No. 001-33003)).
10.2		~~Business Credit~~Addendum No. 1 to the Amended and Restated Executive Employment Agreement with James Broucek, dated ~~August 1, 2019, by and between Citizens Community Bancorp, Inc. and Chippewa Valley Bank~~April 23, 2020 (incorporated by reference to Exhibit 10.2 to the ~~Company's Current Report~~Company’s current report on Form 8-K filed on ~~July 1, 2019~~April 28, 2020 (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~~financial statements from ~~Citizens Community Bancorp, Inc.’s~~the Company’s Quarterly Report on Form 10-Q for the ~~fiscal~~ quarter ended ~~September~~June 30, ~~2019~~2020 formatted in ~~XBRL (eXtensible Business Reporting Language) and furnished electronically herewith:~~Inline XBRL: (i) Consolidated Balance ~~Sheets;~~Sheets, (ii) Consolidated Statements of ~~Operations;~~Operations, (iii) Consolidated Statements of Comprehensive Income, ~~(Loss);~~ (iv) Consolidated ~~Statement~~Statements of Changes in Stockholders’ ~~Equity;~~Equity, (v) Consolidated Statements of Cash ~~Flows;~~Flows, and (vi) ~~Condensed~~ Notes to Consolidated Financial ~~Statements.~~Statements, tagged as blocks of text and including detailed tags.
104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)



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

7473

SIGNATURES

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



	CITIZENS COMMUNITY BANCORP, INC.

Date: ~~November 7, 2019~~August 6, 2020	By:		/s/ Stephen M. Bianchi
			Stephen M. Bianchi
			Chief Executive Officer

Date: ~~November 7, 2019~~August 6, 2020	By:	��	/s/ James S. Broucek
			James S. Broucek
			Chief Financial Officer

7574



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



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



	F&M

Fair value of consideration paid	$	23,894

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

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



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



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



	As of and for the Nine Months Ended			As of and for the Three Months Ended
	September 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	581			100
Amortization during the period	(612		)	(175		)
Valuation allowance at end of period	(210		)	—
Net book value at end of period	$	4,245		$	4,486
Fair value of MSR asset at end of period	$	4,299		$	5,214
Residential mortgage loans serviced for others	$	522,482		$	518,476
Net book value of MSR asset to loans serviced for others	0.81		%	0.87		%



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

Other borrowings:
Senior notes:
Variable rate due in 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	(311		)	(353		)
Total other borrowings	$	44,545		$	24,647

Totals	$	158,011		$	134,460



Fiscal years ending December 31,
2019	$	46,000
2020	5,500
2021	4,000
2022	14,936
2023	—
Thereafter	87,575
	$	158,011



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



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



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



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

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



	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
September 30, 2019
Originated loans	$	5,576	$	1,082	$	842	$	7,500	$	4,816	$	12,316
Acquired loans	3,678		711		257		4,646		14,206		18,852
Total	$	9,254	$	1,793	$	1,099	$	12,146	$	19,022	$	31,168
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	September 30, 2019			December 31, 2018
Total stockholders’ equity	$	148,029		$	138,187
Less: Preferred stock	—			—
Less: Goodwill	(31,841		)	(31,474		)
Less: Intangible assets	(7,999		)	(7,501		)
Tangible common equity (non-GAAP)	$	108,189		$	99,212
Ending common shares outstanding	11,270,710			10,953,512
Book value per share	$	13.13		$	12.62
Tangible book value per share (non-GAAP)	$	9.60		$	9.06



Period	Total number of Shares Purchased (1)	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Pans or Programs
July 1, 2019 - July 31, 2019	—	NA	—	—
August 1, 2019 - August 31, 2019	64	$11.00	—	—
September 1, 2019 - September 30, 2019	233	$11.00	—	—
Total	297	$11.00	—	—

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company