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 September 30, 2020 balance sheet date ~~as of September 30, 2019~~ and through the date the financial statements were available to be issued for items that should potentially be recognized or disclosed in these consolidated financial statements.

On 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 quarters ended March 31, 2020, June 30, 2020 and in Item 1A of this Form 10-Q; external market factors such as market interest rates and unemployment ~~rates,~~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;~~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~~net 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 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 $15,075 at September 30, 2020 consisted of $8,231 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~~of: deferred loan fees and costs, accretable yield on acquired loans 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~~accruing troubled debt ~~restructurings~~restructured (“~~TDRs”~~TDR”) ~~or substandard, less than 90 days delinquent,~~loans 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~~loan’s contractual 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~~were deemed impaired at the time of acquisition. 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. 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~~loan 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~~no longer are ~~not~~expected 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~~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~~discount 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~~discount 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~~discount 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. Such gains and losses are included in non-interest income in the consolidated statements of operations. All sales are made without recourse. Interest rate lock commitments on mortgage loans to be funded and sold are valued at fair value, and are included in other assets or liabilities, if material.

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~~consolidated statements of ~~Operations.~~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 September 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 potentially significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on financial statements issued in the near future.

Recent Accounting Pronouncements—Adopted

ASU 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 items 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 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 the first quarter of 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 of 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,~~In November 2019, the FASB ~~proposed delaying~~issued ASU 2019-10, extending the effective date ~~for ASU 2016-13 for smaller reporting companies. This proposal was approved on October 18, 2019, resulting in ASU 2016-13 becoming effective in~~to fiscal years beginning after December 15, 2022, which is the ~~first quarter of 2023 for the Company.~~Company’s fiscal year ending December 31, 2023. 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 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
September 30, 2020
U.S. government agency obligations	$	34,059	$	391	$	71	$	34,379
Obligations of states and political subdivisions	140		0		0		140
Mortgage-backed securities	49,870		1,888		0		51,758

Corporate debt securities	15,211		277		124		15,364
Corporate asset-based securities	36,443		38		938		35,543
Trust preferred securities	13,938		69		283		13,724
Total available for sale securities	$	149,661	$	2,663	$	1,416	$	150,908

December 31, 2019
U.S. government agency obligations	$	52,020	$	132	$	347	$	51,805
Obligations of states and political subdivisions	281		0		0		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		0		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		Held to maturity securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
September 30, 2019
September 30, 2020									September 30, 2020
Obligations of states and political subdivisions	$	980	$	2	$	—	$	982	Obligations of states and political subdivisions	$	300	$	0	$	0	$	300
Mortgage-backed securities	2,685		103		—		2,788		Mortgage-backed securities	16,627		306		0		16,933
Total held to maturity securities	$	3,665	$	105	$	—	$	3,770	Total held to maturity securities	$	16,927	$	306	$	0	$	17,233

December 31, 2018
December 31, 2019									December 31, 2019
Obligations of states and political subdivisions	$	1,701	$	—	$	3	$	1,698	Obligations of states and political subdivisions	$	300	$	2	$	0	$	302
Mortgage-backed securities	3,149		42		17		3,174		Mortgage-backed securities	2,551		104		0		2,655
Total held to maturity securities	$	4,850	$	42	$	20	$	4,872	Total held to maturity securities	$	2,851	$	106	$	0	$	2,957

The estimated fair value of securities at September 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.


	September 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	$	0	$	0	$	141	$	141
Due after one year through five years	3,850		4,064		5,900		5,959
Due after five years through ten years	39,417		39,461		43,269		43,180
Due after ten years	56,524		55,625		60,652		59,508
Total securities with contractual maturities	$	99,791	$	99,150	$	109,962	$	108,788
Mortgage backed securities	49,870		51,758		70,806		71,331
Securities without contractual maturities	0		0		0		0
Total available for sale securities	$	149,661	$	150,908	$	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


	September 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	$	300	$	300	$	302



Total securities with contractual maturities	300		300		300		302
Mortgage backed securities	16,627		16,933		2,551		2,655
Total held to maturity securities	$	16,927	$	17,233	$	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 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
September 30, 2020
U.S. government agency obligations	$	9,596	$	24	$	5,364	$	47	$	14,960	$	71



Corporate debt securities	2,009		17		1,393		107		3,402		124
Corporate asset-based securities	0		0		33,603		938		33,603		938
Trust preferred securities	10,963		283		0		0		10,963		283
Total	$	22,568	$	324	$	40,360	$	1,092	$	62,928	$	1,416
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		0		0		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 September 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.

As of September 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 nine months ended September 30, 2020 or the three or nine months ended September 30, 2019.

During the three and nine months ended September 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 nine months ended September 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.

Less than 12 Months 12 Months or More Total
Available for sale securities
Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

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

Less than 12 Months 12 Months or More Total
Held to maturity securities
Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss
September 30, 2019
Obligations of states and political subdivisions $ —
$ —
$ —
$ —
$ —
$ —
Mortgage-backed securities —
—
—
—
—
—
Total $ —
$ —
$ —
$ —
$ —
$ —
December 31, 2018
Obligations of states and political subdivisions $ 1,290
$ 1
$ 409
$ 2
$ 1,699
$ 3
Mortgage-backed securities 1,238
3
1,319
14
2,557
17
Total $ 2,528
$ 4
$ 1,728
$ 16
$ 4,256
$ 20

NOTE 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 (“C&I”) 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 or other business assets, as considered necessary. Agricultural loans carry significant credit risks as they may involve larger balances concentrated with single borrowers or groups of related borrowers. In addition, repayment of such loans depends on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. Farming operations may be affected by adverse weather conditions such as drought, hail or floods that can severely limit crop yields.

Residential mortgage loans are collateralized by primary and secondary positions on real estate and are underwritten primarily based on borrower’s documented income, credit scores, and collateral values. Under consumer home equity loan guidelines, the borrower will be approved for a loan based on a percentage of their home’s appraised value less the balance owed on the existing first mortgage. Credit risk is minimized within the residential mortgage portfolio due to relatively small loan account balances spread across many individual borrowers. Management evaluates trends in past due loans and current economic factors such as the housing price index on a regular basis.

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

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 isratings are presented below in accordance with the risk rating framework that has been commonly adopted by the federal banking agencies. The definitions of the various risk rating categories are as follows:

1 through 4 - Pass. A “Pass” loan means that the condition of the borrower and the performance of the loan is satisfactory or better.

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

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

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

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

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

2522

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


	1 to 5		6		7		8		9		TOTAL
Originated Loans:
Commercial/Agricultural real estate:
Commercial real estate	$	318,915	$	1,947	$	1,166	$	0	$	0	$	322,028
Agricultural real estate	30,807		454		1,269		0		0		32,530
Multi-family real estate	100,148		0		0		0		0		100,148
Construction and land development	77,514		0		3,478		0		0		80,992
C&I/Agricultural operating:
Commercial and industrial	75,338		802		3,819		0		0		79,959
C&I SBA PPP loans	139,166		0		0		0		0		139,166
Agricultural operating	23,040		28		1,256		0		0		24,324
Residential mortgage:
Residential mortgage	85,922		7		4,171		0		0		90,100
Purchased HELOC loans	6,220		0		327		0		0		6,547
Consumer installment:
Originated indirect paper	28,312		0		223		0		0		28,535

Other consumer	13,135		0		86		0		0		13,221
Total originated loans	$	898,517	$	3,238	$	15,795	$	0	$	0	$	917,550
Acquired Loans:
Commercial/Agricultural real estate:
Commercial real estate	$	168,360	$	4,237	$	6,048	$	0	$	0	$	178,645
Agricultural real estate	33,765		0		6,848		0		0		40,613
Multi-family real estate	9,372		0		148		0		0		9,520
Construction and land development	8,264		0		82		0		0		8,346
C&I/Agricultural operating:
Commercial and industrial	23,572		59		782		0		0		24,413
Agricultural operating	8,688		0		946		0		0		9,634
Residential mortgage:
Residential mortgage	49,243		243		2,268		0		0		51,754
Consumer installment:
Other consumer	1,404		0		5		0		0		1,409
Total acquired loans	$	302,668	$	4,539	$	17,127	$	0	$	0	$	324,334
Total Loans:
Commercial/Agricultural real estate:
Commercial real estate	$	487,275	$	6,184	$	7,214	$	0	$	0	$	500,673
Agricultural real estate	64,572		454		8,117		0		0		73,143
Multi-family real estate	109,520		0		148		0		0		109,668
Construction and land development	85,778		0		3,560		—		0		89,338
Commercial/Agricultural non-real estate:
Commercial and industrial	98,910		861		4,601		0		0		104,372
C&I SBA PPP loans	139,166		0		0		0		0		139,166
Agricultural operating	31,728		28		2,202		0		0		33,958
Residential mortgage:
Residential mortgage	135,165		250		6,439		0		0		141,854
Purchased HELOC loans	6,220		0		327		0		0		6,547
Consumer installment:
Originated indirect paper	28,312		0		223		0		0		28,535

Other Consumer	14,539		0		91		0		0		14,630
Gross loans	$	1,201,185	$	7,777	$	32,922	$	0	$	0	$	1,241,884
Less:
Unearned net deferred fees and costs and loans in process											(5,033)
Unamortized discount on acquired loans											(6,712)
Allowance for loan losses											(14,836)
Loans receivable, net											$	1,215,303

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
Agricultural real estate 32,278
112
2,137
—
—
34,527
Multi-family real estate 69,556
—
—
—
—
69,556
Construction and land development 48,841
—
3,478
—
—
52,319
Consumer non-real estate:
Originated indirect paper 42,623
—
271
—
—
42,894
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
Total originated loans $ 670,466
$ 1,538
$ 15,444
$ —
$ —
$ 687,448
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
Agricultural real estate 46,308
3,010
5,596
—
—
54,914
Multi-family real estate 16,427
—
1,775
—
—
18,202
Construction and land development 12,434
—
797
—
—
13,231
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
Total acquired loans $ 412,756
$ 11,421
$ 23,083
$ —
$ —
$ 447,260
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
Agricultural real estate 78,586
3,122
7,733
—
—
89,441
Multi-family real estate 85,983
—
1,775
—
—
87,758
Construction and land development 61,275
—
4,275
—
—
65,550
Consumer non-real estate:
Originated indirect paper 42,623
—
271
—
—
42,894
Purchased indirect paper —
—
—
—
—
—
Other Consumer 18,695
—
75
—
—
18,770
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
Less:
Unearned net deferred fees and costs and loans in process (158 )
Unamortized discount on acquired loans (10,172 )
Allowance for loan losses (9,177 )
Loans receivable, net $ 1,115,201

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	$	0	$	0	$	302,546
Agricultural real estate	31,129		829		2,068		0		0		34,026
Multi-family real estate	71,877		0		0		0		0		71,877
Construction and land development	67,989		0		3,478		0		0		71,467
C&I/Agricultural operating:
Commercial and industrial	85,248		1,023		3,459		0		0		89,730
Agricultural operating	19,545		402		770		0		0		20,717
Residential mortgage:
Residential mortgage	104,428		0		4,191		0		0		108,619
Purchased HELOC loans	8,407		0		0		0		0		8,407
Consumer installment:					—
Originated indirect paper	39,339		0		246		0		0		39,585

Other Consumer	15,425		0		121		0		0		15,546
Total originated loans	$	744,768	$	2,520	$	15,232	$	0	$	0	$	762,520
Acquired Loans:
Commercial/Agricultural real estate:
Commercial real estate	$	196,692	$	6,084	$	9,137	$	0	$	0	$	211,913
Agricultural real estate	42,381		534		8,422		0		0		51,337
Multi-family real estate	13,533		0		1,598		0		0		15,131
Construction and land development	14,181		0		762		0		0		14,943
C&I/Agricultural operating:
Commercial and industrial	41,587		932		1,485		0		0		44,004
Agricultural operating	15,621		350		1,092		0		0		17,063
Residential mortgage:
Residential mortgage	65,125		436		2,152		0		0		67,713
Consumer installment:
Other Consumer	2,628		0		12		0		0		2,640
Total acquired loans	$	391,748	$	8,336	$	24,660	$	0	$	0	$	424,744
Total Loans:
Commercial/Agricultural real estate:
Commercial real estate	$	498,073	$	6,350	$	10,036	$	0	$	0	514,459
Agricultural real estate	73,510		1,363		10,490		0		0		85,363
Multi-family real estate	85,410		0		1,598		0		0		87,008
Construction and land development	82,170		0		4,240		0		0		86,410
C&I/Agricultural operating:
Commercial and industrial	126,835		1,955		4,944		0		0		133,734
Agricultural operating	35,166		752		1,862		0		0		37,780
Residential mortgage:
Residential mortgage	169,553		436		6,343		0		0		176,332
Purchased HELOC loans	8,407		0		0		0		0		8,407
Consumer installment:
Originated indirect paper	39,339		0		246		0		0		39,585

Other Consumer	18,053		0		133		0		0		18,186
Gross loans	$	1,136,516	$	10,856	$	39,892	$	0	$	0	$	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

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.

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
Nine months ended September 30, 2019
Allowance for Loan Losses:
Beginning balance, January 1, 2019 $ 1,048
$ 4,019
$ 641
$ 1,258
$ 214
$ 7,180
Charge-offs (119 ) (225 ) (142 ) —
—
(486 )
Recoveries —
—
53
—
—
53
Provision 115
1,516
20
315
—
1,966
Allowance allocation adjustment (39 ) (19 ) (75 ) 27
87
(19 )
Total allowance on originated loans 1,005
5,291
497
1,600
301
8,694
Purchased credit impaired loans —
—
—
—
—
—
Other acquired loans:
Beginning balance, January 1, 2019 205
183
65
32
(61 ) 424
Charge-offs (105 ) —
(29 ) —
—
(134 )
Recoveries 2
3
10
—
—
15
Provision 94
30
35
—
—
159
Allowance allocation adjustment (26 ) (45 ) (26 ) 55
61
19
Total allowance on other acquired loans 170
171
55
87
—
483
Total Allowance on acquired loans 170
171
55
87
—
483
Ending balance, September 30, 2019 $ 1,175
$ 5,462
$ 552
$ 1,687
$ 301
$ 9,177
Allowance for Loan Losses at September 30, 2019:
Amount of allowance for loan losses arising from loans individually evaluated for impairment $ 191
$ 205
$ 15
$ 252
$ —
$ 663
Amount of allowance for loan losses arising from loans collectively evaluated for impairment $ 984
$ 5,257
$ 537
$ 1,435
$ 301
$ 8,514
Loans Receivable as of September 30, 2019: —
Ending balance of originated loans $ 124,627
$ 401,211
$ 58,612
$ 102,998
$ —
$ 687,448
Ending balance of purchased credit-impaired loans 2,273
33,840
—
5,320
—
41,433
Ending balance of other acquired loans 71,290
272,744
3,052
58,741
—
405,827
Ending balance of loans $ 198,190
$ 707,795
$ 61,664
$ 167,059
$ —
$ 1,134,708
Ending balance: individually evaluated for impairment $ 8,626
$ 16,458
$ 419
$ 7,215
$ —
$ 32,718
Ending balance: collectively evaluated for impairment $ 189,564
$ 691,337
$ 61,245
$ 159,844
$ —
$ 1,101,990


	Commercial/Agriculture Real Estate		C&I/Agricultural operating		Residential Mortgage		Consumer Installment		Unallocated		Total
Three months ended September 30, 2020
Allowance for Loan Losses:
Beginning balance, July 1, 2020	$	8,297	$	1,778	$	980	$	480	$	574	$	12,109
Charge-offs	0		(103)		(4)		(10)		0		(117)
Recoveries	74		0		2		18		0		94
Provision	430		188		(15)		64		56		723

Total Allowance on originated loans	8,801		1,863		963		552		630		12,809
Purchased credit impaired loans	0		0		0		0		0		0
Other acquired loans:
Beginning balance, July 1, 2020	746		334		112		72		0		1,264
Charge-offs	0		0		(47)		0		0		(47)
Recoveries	1		30		0		2		0		33
Provision	623		(58)		199		13		0		777

Total Allowance on other acquired loans	1,370		306		264		87		0		2,027
Total Allowance on acquired loans	1,370		306		264		87		0		2,027
Ending balance, September 30, 2020	$	10,171	$	2,169	$	1,227	$	639	$	630	$	14,836


	Commercial/Agriculture Real Estate		C&I/Agricultural operating		Residential Mortgage		Consumer Installment		Unallocated		Total
Nine months ended September 30, 2020
Allowance for Loan Losses:
Beginning balance, January 1, 2020	$	6,205	$	1,643	$	879	$	467	$	357	$	9,551
Charge-offs	0		(632)		(4)		(124)		0		(760)
Recoveries	74		0		7		55		0		136
Provision	2,522		852		81		154		273		3,882

Total Allowance on originated loans	8,801		1,863		963		552		630		12,809
Purchased credit impaired loans	0		0		0		0		0		0
Other acquired loans:
Beginning balance, January 1, 2020	526		27		163		53		0		769
Charge-offs	0		(159)		(74)		(2)		0		(235)
Recoveries	77		30		14		4		0		125
Provision	767		408		161		32		0		1,368

Total Allowance on other acquired loans	1,370		306		264		87		0		2,027
Total Allowance on acquired loans	1,370		306		264		87		0		2,027
Ending balance, September 30, 2020	$	10,171	$	2,169	$	1,227	$	639	$	630	$	14,836







Allowance for Loan Losses at September 30, 2020:
Amount of allowance for loan losses arising from loans individually evaluated for impairment	$	772	$	159	$	249	$	1	$	0	$	1,181
Amount of allowance for loan losses arising from loans collectively evaluated for impairment	$	9,399	$	2,010	$	978	$	638	$	630	$	13,655
Loans Receivable as of September 30, 2020:											—
Ending balance of originated loans	$	535,698	$	243,449	$	96,647	$	41,756	$	0	$	917,550
Ending balance of purchased credit-impaired loans	21,453		2,077		1,553		0		0		25,083
Ending balance of other acquired loans	215,671		31,970		50,201		1,409		0		299,251
Ending balance of loans	$	772,822	$	277,496	$	148,401	$	43,165	$	—	$	1,241,884
Ending balance: individually evaluated for impairment	$	13,190	$	6,275	$	8,436	$	367	$	0	$	28,268
Ending balance: collectively evaluated for impairment	$	759,632	$	271,221	$	139,965	$	42,798	$	0	$	1,213,616

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


	Commercial/Agriculture Real Estate		C&I/Agricultural operating		Residential Mortgage		Consumer Installment		Unallocated		Total
Three months ended September 30, 2019
Allowance for Loan Losses:
Beginning balance, July 1, 2019	$	5,010	$	1,470	$	977	$	528	$	299	$	8,284
Charge-offs	0		0		(89)		(36)		0		(125)
Recoveries	0		0		0		17		0		17
Provision	281		130		117		(12)		2		518

Total Allowance on originated loans	5,291		1,600		1,005		497		301		8,694
Purchased credit impaired loans	0		0		0		0		0		0
Other acquired loans:
Beginning balance, July 1, 2019	181		85		153		56		0		475
Charge-offs	0		0		(45)		(9)		0		(54)
Recoveries	0		0		1		4		0		5
Provision	(10)		2		61		4		0		57

Total Allowance on other acquired loans	171		87		170		55		0		483
Total Allowance on acquired loans	171		87		170		55		0		483
Ending balance, September 30, 2019	$	5,462	$	1,687	$	1,175	$	552	$	301	$	9,177


	Commercial/Agriculture Real Estate		C&I/Agricultural operating		Residential Mortgage		Consumer Installment		Unallocated		Total
Nine months ended September 30, 2019
Allowance for Loan Losses:
Beginning balance, January 1, 2019	$	4,019	$	1,258	$	1,048	$	641	$	214	$	7,180
Charge-offs	(225)		0		(119)		(142)		0		(486)
Recoveries	0		0		0		53		0		53
Provision	1,497		342		76		(55)		87		1,947

Total Allowance on originated loans	$	5,291	$	1,600	$	1,005	$	497	$	301	$	8,694
Purchased credit impaired loans	0		0		0		0		0		0
Other acquired loans
Beginning balance, January 1, 2019	183		32		205		65		(61)		424
Charge-offs	0		0		(105)		(29)		0		(134)
Recoveries	3		0		2		10		0		15
Provision	(15)		55		68		9		61		178

Total Allowance on other acquired loans	171		87		170		55		0		483
Total Allowance on acquired loans	171		87		170		55		0		483
Ending balance, September 30, 2019	$	5,462	$	1,687	$	1,175	$	552	$	301	$	9,177
Allowance for Loan Losses at September 30, 2019:
Amount of allowance for loan losses arising from loans individually evaluated for impairment	$	205	$	252	$	191	$	15	$	0	$	663
Amount of allowance for loan losses arising from loans collectively evaluated for impairment	$	5,257	$	1,435	$	984	$	537	$	301	$	8,514
Loans Receivable as of September 30, 2019:
Ending balance of originated loans	$	401,211	$	102,998	$	124,627	$	58,612	$	0	$	687,448
Ending balance of purchased credit-impaired loans	33,840		5,320		2,273		0		0		41,433
Ending balance of other acquired loans	272,744		58,741		71,290		3,052		0		405,827
Ending balance of loans	$	707,795	$	167,059	$	198,190	$	61,664	$	0	$	1,134,708
Ending balance: individually evaluated for impairment	$	16,458	$	7,215	$	8,626	$	419	$	0	$	32,718
Ending balance: collectively evaluated for impairment	$	691,337	$	159,844	$	189,564	$	61,245	$	0	$	1,101,990

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
September 30, 2019 December 31, 2018 September 30, 2019 December 31, 2018 September 30, 2019 December 31, 2018 September 30, 2019 December 31, 2018 September 30, 2019 December 31, 2018
Performing loans
Performing TDR loans $ 2,876
$ 3,319
$ 3,574
$ 2,209
$ 74
$ 99
$ 452
$ 428
$ 6,976
$ 6,055
Performing loans other 191,990
216,636
691,706
531,030
61,369
91,373
162,546
146,249
1,107,611
985,288
Total performing loans 194,866
219,955
695,280
533,239
61,443
91,472
162,998
146,677
1,114,587
991,343

Nonperforming loans (1)
Nonperforming TDR loans 562
785
2,343
577
—
—
1,914
1,305
4,819
2,667
Nonperforming loans other 2,762
2,069
10,172
2,249
221
334
2,147
771
15,302
5,423
Total nonperforming loans 3,324
2,854
12,515
2,826
221
334
4,061
2,076
20,121
8,090
Total loans $ 198,190
$ 222,809
$ 707,795
$ 536,065
$ 61,664
$ 91,806
$ 167,059
$ 148,753
$ 1,134,708
$ 999,433


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


	Commercial/Agriculture Real Estate Loans				C&I/Agricultural Operating				Residential Mortgage				Consumer Installment				Totals
	September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Performing loans
Performing TDR loans	$	5,480	$	1,730	$	3,868	$	366	$	3,178	$	3,206	$	53	$	68	$	12,579	$	5,370
Performing loans other	759,328		758,237		271,124		167,596		141,755		178,415		42,994		57,486		1,215,201		1,161,734
Total performing loans	764,808		759,967		274,992		167,962		144,933		181,621		43,047		57,554		1,227,780		1,167,104

Nonperforming loans (1)
Nonperforming TDR loans	5,037		4,868		1,490		1,973		672		383		0		0		7,199		7,224
Nonperforming loans other	2,977		8,405		1,014		1,579		2,796		2,735		118		217		6,905		12,936
Total nonperforming loans	8,014		13,273		2,504		3,552		3,468		3,118		118		217		14,104		20,160
Total loans	$	772,822	$	773,240	$	277,496	$	171,514	$	148,401	$	184,739	$	43,165	$	57,771	$	1,241,884	$	1,187,264

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

As of September 30, 2020, the Company had $260.8 million in unused commitments, compared to $246.7 million in unused commitments as of December 31, 2019.

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 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
September 30, 2020
Commercial/Agricultural real estate:
Commercial real estate	$	247	$	99	$	0	$	346	$	2,614	$	2,960	$	497,713	$	500,673
Agricultural real estate	179		0		0		179		5,252		5,431		67,712		73,143
Multi-family real estate	0		0		0		0		148		148		109,520		109,668
Construction and land development	224		379		0		603		0		603		88,735		89,338
C&I/Agricultural operating:
Commercial and industrial	163		0		0		163		853		1,016		103,355		104,371
C&I SBA PPP loans	0		0		0		0		0		0		139,166		139,166
Agricultural operating	451		600		0		1,051		1,651		2,702		31,256		33,958
Residential mortgage:
Residential mortgage	2,256		960		838		4,054		2,302		6,356		135,498		141,854
Purchased HELOC loans	0		67		94		161		234		395		6,152		6,547
Consumer installment:
Originated indirect paper	111		41		17		169		74		243		28,293		28,536

Other Consumer	63		15		1		79		26		105		14,525		14,630
Total	$	3,694	$	2,161	$	950	$	6,805	$	13,154	$	19,959	$	1,221,925	$	1,241,884
December 31, 2019
Commercial/Agricultural real estate:
Commercial real estate	$	2,804	$	847	$	0	$	3,651	$	4,214	$	7,865	$	506,594	$	514,459
Agricultural real estate	509		0		0		509		7,568		8,077		77,286		85,363
Multi-family real estate	0		0		0		0		1,449		1,449		85,559		87,008
Construction and land development	436		0		0		436		42		478		85,932		86,410
C&I/Agricultural operating:
Commercial and industrial	1,024		0		0		1,024		1,850		2,874		130,860		133,734
Agricultural operating	73		49		0		122		1,702		1,824		35,956		37,780
Residential mortgage:
Residential mortgage	4,929		1,597		649		7,175		2,063		9,238		167,094		176,332
Purchased HELOC loans	293		378		407		1,078		0		1,078		7,329		8,407
Consumer installment:
Originated indirect paper	168		52		20		240		137		377		39,208		39,585

Other Consumer	204		43		28		275		31		306		17,880		18,186
Total	$	10,440	$	2,966	$	1,104	$	14,510	$	19,056	$	33,566	$	1,153,698	$	1,187,264

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
Commercial/Agricultural real estate:
Commercial real estate 389
68
—
457
4,808
5,265
459,781
465,046
Agricultural real estate 1,853
81
—
1,934
6,191
8,125
81,316
89,441
Multi-family real estate —
—
—
—
1,471
1,471
86,287
87,758
Construction and land development —
—
—
—
45
45
65,505
65,550
Consumer non-real estate:
Originated indirect paper 250
25
16
291
165
456
42,438
42,894
Purchased indirect paper —
—
—
—
—
—
—
—
Other Consumer 75
44
14
133
26
159
18,611
18,770
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
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
Commercial/Agricultural real estate:
Commercial real estate 1,060
872
—
1,932
745
2,677
355,282
357,959
Agricultural real estate 1,360
—
—
1,360
2,019
3,379
82,636
86,015
Multi-family real estate —
—
—
—
—
—
69,400
69,400
Construction and land development 526
175
—
701
63
764
21,927
22,691
Consumer non-real estate:
Originated indirect paper 272
167
45
484
106
590
55,995
56,585
Purchased indirect paper 340
200
157
697
—
697
14,309
15,006
Other Consumer 179
98
12
289
14
303
19,911
20,214
Commercial/Agricultural non-real estate:
Commercial non-real estate 399
70
—
469
1,314
1,783
110,644
112,427
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

At September 30, ~~2019,~~2020, the Company has identified impaired loans of ~~$67,414,~~$51,689, consisting of ~~$11,795~~$19,778 TDR loans, the carrying amount of purchased credit impaired loans of ~~$34,696~~$23,422 and ~~$20,924~~$8,489 of substandard non-TDR loans. The ~~$67,414~~$51,689 total of impaired loans includes ~~$6,976~~$12,579 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 30, 2020, December 31, 2019 and ~~December 31, 2018~~September 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


							Three Months Ended				Nine Months Ended
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
September 30, 2020
With No Related Allowance Recorded:
Commercial/agriculture real estate	$	30,419	$	30,419	$	—	$	30,344	$	454	$	35,467	$	1,374
C&I/Agricultural operating	6,860		6,860		—		7,070		35		8,169		188
Residential mortgage	8,715		8,715		—		8,668		107		8,705		356
Consumer installment	363		363		—		363		6		371		23
Total	$	46,357	$	46,357	$	—	$	46,445	$	602	$	52,712	$	1,941
With An Allowance Recorded:
Commercial/agriculture real estate	$	3,177	$	3,177	$	772	$	3,597	$	48	$	2,660	$	73
C&I/Agricultural operating	1,034		1,034		159		669		0		762		12
Residential mortgage	1,118		1,118		249		970		7		1,275		36
Consumer installment	3		3		1		9		0		35		0
Total	$	5,332	$	5,332	$	1,181	$	5,245	$	55	$	4,732	$	121
September 30, 2020 Totals:
Commercial/agriculture real estate	$	33,596	$	33,596	$	772	$	33,941	$	502	$	38,127	$	1,447
C&I/Agricultural operating	7,894		7,894		159		7,739		35		8,931		200
Residential mortgage	9,833		9,833		249		9,638		114		9,980		392
Consumer installment	366		366		1		372		6		406		23
Total	$	51,689	$	51,689	$	1,181	$	51,690	$	657	$	57,444	$	2,062


	Recorded Investment		Unpaid Principal Balance		Related Allowance
December 31, 2019
With No Related Allowance Recorded:
Commercial/agriculture real estate	$	40,514	$	40,514	$	—
C&I/Agricultural operating	9,477		9,477		—
Residential mortgage	8,695		8,695		—
Consumer installment	379		379		—
Total	$	59,065	$	59,065	$	—
With An Allowance Recorded:
Commercial/agriculture real estate	$	2,143	$	2,143	$	495
C&I/Agricultural operating	490		490		312
Residential mortgage	1,431		1,431		136
Consumer installment	67		67		13
Total	$	4,131	$	4,131	$	956
December 31, 2019 Totals
Commercial/agriculture real estate	$	42,657	$	42,657	$	495
C&I/Agricultural operating	9,967		9,967		312
Residential mortgage	10,126		10,126		136
Consumer installment	446		446		13
Total	$	63,196	$	63,196	$	956


							Three Months Ended				Nine Months Ended
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
September 30, 2019
With No Related Allowance Recorded:
Commercial/agriculture real estate	$	43,907	$	43,907	$	—	$	36,724	$	721	$	36,379	$	2,212
C&I/Agricultural operating	10,298		10,298		—		9,417		166		8,599		543
Residential mortgage	9,016		9,016		—		8,593		141		8,945		370
Consumer installment	358		358		—		300		7		292		24
Total	$	63,579	$	63,579	$	—	$	55,034	$	1,035	$	54,215	$	3,149
With An Allowance Recorded:
Commercial/agriculture real estate	$	1,634	$	1,634	$	205	$	1,384	$	0	$	1,307	$	0
C&I/Agricultural operating	541		541		252		576		0		284		11
Residential mortgage	1,598		1,598		191		1,340		24		1,465		62
Consumer installment	62		62		15		85		0		104		2
Total	$	3,835	$	3,835	$	663	$	3,385	$	24	$	3,160	$	75
September 30, 2019 Totals:
Commercial/agriculture real estate	$	45,541	$	45,541	$	205	$	38,108	$	721	$	37,686	$	2,212
C&I/Agricultural operating	10,839		10,839		252		9,993		166		8,883		554
Residential mortgage	10,614		10,614		191		9,933		165		10,410		432
Consumer installment	420		420		15		385		7		396		26
Total	$	67,414	$	67,414	$	663	$	58,419	$	1,059	$	57,375	$	3,224

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

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~~may include: extension of ~~loan terms,~~the loan’s term, renewals of existing balloon loans, reductions in interest rates and consolidating existing Bank loans at modified terms. A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability. If a TDR is placed on nonaccrual status, it remains there until a sufficient period of performance under the restructured terms has occurred at which time it is returned to accrual status. There were 143 delinquent accruing TDRs greater than 60 days past due with a recorded investment of ~~$3,293~~$310 at September 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 30, ~~2019~~2020 and December 31, ~~2018.~~2019.


	September 30, 2020		December 31, 2019
Troubled debt restructure loans:
Accrual status	$	12,579	$	5,396
Non-accrual status	7,199		7,198
Total	$	19,778	$	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 loan commitment meeting our TDR criteria atas of September 30, 2020 totaling $17 and 0 loan commitments meeting our TDR criteria as of December 31, 2019. There were unused lines of credit totaling ~~$17~~$85 and $12 meeting our TDR criteria as of September 30, ~~2019.~~2020 and December 31, 2019, respectively.

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


	Number of Contracts	Maturity Extension		Modified Payment		Modified Under- writing		Other		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserve
Three months ended September 30, 2020
TDRs:
Commercial/agriculture real estate	3	$	3,550	$	0	$	276	$	0	$	3,826	$	3,826	$	0
C&I/Agricultural operating	2	3,000		0		0		0		3,000		3,000		0
Residential mortgage	8	59		500		32		0		591		591		0
Consumer installment	0	0		0		0		0		0		0		0
Totals	13	$	6,609	$	500	$	308	$	0	$	7,417	$	7,417	$	0


	Number of Contracts	Maturity Extension		Modified Payment		Modified Under- writing		Other		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserve
Nine months ended September 30, 2020
TDRs:
Commercial/agriculture real estate	12	$	4,442	$	198	$	293	$	0	$	4,933	$	4,933	$	0
C&I/Agricultural operating	5	3,295		78		—		0		3,373		3,373		0
Residential mortgage	13	148		858		117		0		1,123		1,123		0
Consumer installment	2	3		0		4		0		7		7		0
Totals	32	$	7,888	$	1,134	$	414	$	0	$	9,436	$	9,436	$	0

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	Maturity Extension		Modified Payment		Modified Under- writing		Other		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserve
Three months ended September 30, 2019
TDRs:
Commercial/agriculture real estate	7	$	1,987	$	0	$	25	$	0	$	2,012	$	2,012	$	0
C&I/Agricultural operating	1	0		0		60		0		60		60		0
Residential mortgage	2	106		0		0		0		106		106		0
Consumer installment	0	0		0		0		0		0		0		0
Totals	10	$	2,093	$	0	$	85	$	0	$	2,178	$	2,178	$	0

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
$ —


	Number of Contracts	Maturity Extension		Modified Payment		Modified Under- writing		Other		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserve
Nine months ended September 30, 2019
TDRs:
Commercial/agriculture real estate	14	$	2,005	$	78	$	1,215	$	0	$	3,298	$	3,298	$	0
C&I/Agricultural operating	7	165		364		469		0		998		998		0
Residential mortgage	9	431		0		171		0		602		602		0
Consumer installment	1	2		0		0		0		2		2		0
Totals	31	$	2,603	$	442	$	1,855	$	0	$	4,900	$	4,900	$	0

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


	September 30, 2020			September 30, 2019
	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Troubled debt restructurings:
Commercial/agriculture real estate	34	$	10,517	27	$	5,917
C&I/Agricultural operating	17	5,358		16	2,366
Residential mortgage	50	3,850		42	3,438
Consumer installment	7	53		8	74
Total troubled debt restructurings	108	$	19,778	93	$	11,795

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

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


	September 30, 2020			September 30, 2019
	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Troubled debt restructurings:
Commercial/agriculture real estate	15	$	5,037	9	$	2,343
C&I/Agricultural operating	12	1,490		12	1,914
Residential mortgage	8	672		3	344

Total troubled debt restructurings	35	$	7,199	24	$	4,601

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~~The following table provides information related to restructured loans that became in default during the three months ended September 30, ~~2019.~~2020 and September 30, 2019:


	September 30, 2020			September 30, 2019
	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Troubled debt restructurings:
Commercial/agriculture real estate	0	$	0	2	$	120

Residential mortgage	2	234		0	0

Total troubled debt restructurings	2	$	234	2	$	120

The following table provides information related to restructured loans that became in default during the nine months ended September 30, 2020 and September 30, 2019:


	September 30, 2020			September 30, 2019
	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Troubled debt restructurings:
Commercial/agriculture real estate	2	$	140	7	$	227
C&I/Agricultural operating	1	78		4	857
Residential mortgage	3	279		0	0

Total troubled debt restructurings	6	$	497	11	$	1,084

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:


	September 30, 2020		December 31, 2019
Accountable for under ASC 310-30 (Purchased Credit Impaired “PCI” loans)
Outstanding balance	$	25,083	$	38,268
Carrying amount	$	23,422	$	31,978
Accountable for under ASC 310-20 (non-PCI loans)
Outstanding balance	$	299,251	$	386,476
Carrying amount	$	294,201	$	383,275
Total acquired loans
Outstanding balance	$	324,334	$	424,744
Carrying amount	$	317,623	$	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:


	September 30, 2020		September 30, 2019
Accretable discount, beginning of period	$	3,201	$	3,163
Additions to accretable discount for acquired performing loans	0		814
Accelerated accretion from payoff of certain PCI loans with transferred non-accretable difference	(99)		0
Transfers from non-accretable difference to accretable discount	2,704		80

Scheduled accretion	(756)		(622)
Accretable discounts, end of period	$	5,050	$	3,435

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 $1,661 and ~~acquired performing loans acquired from F&M~~$6,290 at ~~acquisition:~~September 30, 2020 and December 31, 2019, respectively.

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

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

NOTE 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 30, ~~2019~~2020 and December 31, ~~2018~~2019 were ~~$522,482~~$555,700 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~~$6,753 and ~~$3,182,~~$2,868, at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. Mortgage servicing rights activity for the nine month period ended September 30, ~~2019~~2020 and ~~three~~twelve months ended December 31, ~~2018~~2019 were as follows:


	As of and for the Nine Months Ended			As of and for the Twelve Months Ended
Mortgage servicing rights:	September 30, 2020			December 31, 2019
Mortgage servicing assets, net; beginning of period	$	4,541		$	4,486
MSR asset acquired	0			0
Increase in MSR assets resulting from transfers of financial assets	1,546			904
Amortization during the period	(908)			(849)
	5,179			4,541
Valuation Allowances:
Balance at beginning of period	(259)			0
Additions	(1,422)			(259)
Recoveries	0			0
Write-downs	0			0
Balance at end of period	(1,681)			(259)
Mortgage servicing assets, net; end of period	$	3,498		$	4,282
Fair value of MSR asset; end of period	$	3,509		$	4,309
Residential mortgage loans serviced for others	$	555,700		$	524,715
Net book value of MSR asset to loans serviced for others	0.63		%	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 1~~ranging from approximately 3 months to ~~8.75~~8 years, some of which include options to extend the leases for up to 5 additional years. As of September 30, ~~2019,~~2020, we have no additional lease commitments that have not yet commenced.


					Nine Months Ended
	As of and for the nine months ended September 30, 2019				September 30, 2020			September 30, 2019
Supplemental cash flow information related to leases was as follows:				Supplemental cash flow information related to leases was as follows:

Cash paid for amounts included in the measurement of lease liabilities:				Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	665		Operating cash flows from operating leases	$	477		$	665
Right-of-use assets obtained in exchange for lease obligations:				Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	158		Operating leases	$	0		$	158

					September 30, 2020			December 31, 2019
Supplemental balance sheet information related to leases was as follows:				Supplemental balance sheet information related to leases was as follows:
Operating lease right-of-use assets	$	2,939		Operating lease right-of-use assets	$	2,803		$	2,787
Operating lease liabilities	$	2,994		Operating lease liabilities	$	2,910		$	2,845

Weighted average remaining lease term in years; operating leases	6.95			Weighted average remaining lease term in years; operating leases	6.1			6.63
Weighted average discount rate; operating leases	3.07		%	Weighted average discount rate; operating leases	2.63		%	3.07		%

Cash obligations under lease contracts are as follows:


Fiscal years ending December 31,
2020	$	161
2021	592
2022	558
2023	505
2024	419
Thereafter	1,229
Total	3,464
Less: effects of discounting	(554)
Lease liability recognized	$	2,910

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 September 30, 2020 and December 31, 2019, respectively:


	September 30, 2020		December 31, 2019
Non-interest bearing demand deposits	$	229,217	$	168,157
Interest bearing demand deposits	279,648		223,102
Savings accounts	191,511		156,599
Money market accounts	246,651		246,430
Certificate accounts	323,751		401,414
Total deposits	$	1,270,778	$	1,195,702
Brokered deposits included above:	$	3,250	$	50,377

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


September 30, 2021	$	216,854
September 30, 2022	96,391
September 30, 2023	6,669
September 30, 2024	2,976
September 30, 2025	861
After September 30, 2025	0
Total	$	323,751

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 30, ~~2019~~2020 and December 31, ~~2018~~2019 is as follows:


		September 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		0	%	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	%	0		0	%	0	%
	2024	20,530		0	%	1.45	%	530		0	%	0	%
	2025	5,000		1.45	%	1.45	%	0		0	%	0	%
	2029	42,500		1.00	%	1.13	%	42,500		1.00	%	1.13	%
	2030	12,500		0.52	%	0.86	%	0		0	%	0	%
Subtotal		124,530						131,030
Unamortized discount on acquired notes		(39)						(59)
Federal Home Loan Bank advances, net		$	124,491					$	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	%
	2030	15,000		6.00	%	6.00	%
		$	30,000

Unamortized debt issuance costs		$	(559)					$	(296)
Total other borrowings		$	58,297					$	43,560

Totals		$	182,788					$	174,531

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

~~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 the FHLB overnight borrowings~~$681,951 and $792,909 at September 30, ~~2019. Short-term fixed rate advances of $8,500 mature on various dates through~~2020 and December 31, 2019, respectively. At September 30, ~~2020. These five short-term~~2020, the Bank’s available and unused portion under the FHLB ~~advances~~borrowing arrangement was approximately $105,858 compared to $203,935 as of December 31, 2019.

(2) Maximum month-end borrowed amounts outstanding under this borrowing agreement were $162,530 and $151,530, during the nine months ended September 30, 2020 and the twelve months ended December 31, 2019, respectively.

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

(4) NaN of the FHLB 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 3014 months. ~~The Bank acquired one $11,000 long-term~~

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

(6) Senior notes, entered into by the Company in June 2019 consist of the ~~United Bank acquisition,~~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 ~~2.45%~~floor rate ~~and February 1, 2022 maturity date.~~of 3.50%.

~~During~~

(b) A $5,000 line of credit, maturing in August 2021, that remains undrawn upon.

(7) Subordinated notes resulted from the ~~three months ended June 30, 2019, the Bank entered into a $10,000 FHLB note with a 10-year maturity, callable quarterly, at~~following:

(a) The Company’s private sale in August 2017, which bears 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~~interest rate will reset quarterly thereafter. Interest-only payments are due quarterly.

(b) The Company’s Subordinated Note Purchase Agreement entered into ~~five additional FHLB notes totaling $32,500~~ with ~~a 10-year maturity, callable quarterly, at~~certain purchasers in August 2020, which bears a fixed ~~weighted average~~ interest rate of ~~1.04%. Each~~ 6.00% for five years. In September 2025, the fixed interest rate will be reset quarterly to equal the three-month term Secured Overnight Financing Rate plus 591 basis points. Interest-only payments are due semi-annually each year during the fixed interest period and quarterly during the floating interest period.

Federal Home Loan Bank ~~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~~$180,325 and ~~$87,359~~$147,991 at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

AtFederal Reserve Bank Paycheck Protection Program Liquidity Facility (“FRB PPPLF”) Program

The Bank has originated Small Business Association’s Paycheck 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 September 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 months ended September 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 30, ~~2019,~~2020, the Bank ~~and Company were~~was categorized as “Well Capitalized”, under Prompt Corrective Action Provisions.

The Bank’s Tier 1 (leverage) and risk-based capital ratios at September 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 September 30, 2020															As of September 30, 2020
Total capital (to risk weighted assets)															Total capital (to risk weighted assets)	$	170,610	15.0	%	$	91,021	> =	8.0	%	$	113,776	> =	10.0	%
Tier 1 capital (to risk weighted assets)															Tier 1 capital (to risk weighted assets)	156,388		13.7	%	68,266		> =	6.0	%	91,021		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)															Common equity tier 1 capital (to risk weighted assets)	156,388		13.7	%	51,199		> =	4.5	%	73,955		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)															Tier 1 leverage ratio (to adjusted total assets)	156,388		9.9	%	63,465		> =	4.0	%	79,331		> =	5.0	%
As of December 31, 2019															As of December 31, 2019
Total capital (to risk weighted assets)															Total capital (to risk weighted assets)	$	160,302	13.1	%	$	98,174	> =	8.0	%	$	122,718	> =	10.0	%
Tier 1 capital (to risk weighted assets)															Tier 1 capital (to risk weighted assets)	149,982		12.2	%	73,631		> =	6.0	%	98,174		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)															Common equity tier 1 capital (to risk weighted assets)	149,982		12.2	%	55,223		> =	4.5	%	79,767		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)															Tier 1 leverage ratio (to adjusted total assets)	149,982		10.4	%	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)	$	157,069,000	13.5	%	$	92,966,000	> =	8.0	%	$	116,208,000	> =	10.0	%
Tier 1 capital (to risk weighted assets)	147,892,000		12.7	%	69,725,000		> =	6.0	%	92,966,000		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	147,892,000		12.7	%	52,293,000		> =	4.5	%	75,535,000		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	147,892,000		10.2	%	57,777,000		> =	4.0	%	72,221,000		> =	5.0	%
As of December 31, 2018
Total capital (to risk weighted assets)	$	126,440,000	12.7	%	$	79,651,000	> =	8.0	%	$	99,563,000	> =	10.0	%
Tier 1 capital (to risk weighted assets)	118,836,000		11.9	%	59,738,000		> =	6.0	%	79,651,000		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	118,836,000		11.9	%	44,804,000		> =	4.5	%	64,716,000		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	118,836,000		9.7	%	48,976,000		> =	4.0	%	61,220,000		> =	5.0	%

The Company’s Tier 1 (leverage) and risk-based capital ratios at September 30, ~~2019~~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 September 30, 2020
Total capital (to risk weighted assets)	$	163,250	14.3	%	$	91,021	> =	8.0	%	N/A	N/A
Tier 1 capital (to risk weighted assets)	119,028		10.5	%	68,266		> =	6.0	%	N/A	N/A
Common equity tier 1 capital (to risk weighted assets)	119,028		10.5	%	51,199		> =	4.5	%	N/A	N/A
Tier 1 leverage ratio (to adjusted total assets)	119,028		7.5	%	63,465		> =	4.0	%	N/A	N/A
As of December 31, 2019
Total capital (to risk weighted assets)	$	137,259	11.2	%	$	98,174	> =	8.0	%	N/A	N/A
Tier 1 capital (to risk weighted assets)	111,939		9.1	%	73,631		> =	6.0	%	N/A	N/A
Common equity tier 1 capital (to risk weighted assets)	111,939		9.1	%	55,223		> =	4.5	%	N/A	N/A
Tier 1 leverage ratio (to adjusted total assets)	111,939		7.7	%	57,834		> =	4.0	%	N/A	N/A

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 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~~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~~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 30, ~~2019, 54,068~~2020, 99,575 restricted shares had been granted under this plan. As of September 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 $165 and $462 for the three and nine months ended September 30, 2020, compared to $127 and $370 for the three and nine months ended September 30, ~~2019, compared to $94 and $255 for the three and nine months ended September 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


	September 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	45,507	11.79		12,847	11.50
Vested	(14,545)	12.78		(32,630)	12.89
Forfeited	0	0		(12,167)	13.28
Unvested and outstanding at end of year	74,419	$	12.16	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 month periods ended September 30, ~~2019~~2020 was $5$3 and ~~$14.~~$11, respectively. The compensation cost recognized for stock-based employee compensation related to these plans for the three and nine month periods ended September 30, ~~2018,~~2019 was $6$5 and ~~$6.~~

$14, respectively.

Common Stock Option Awards

Common Stock Option Awards

	Option Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value				Option Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
September 30, 2019
September 30, 2020									September 30, 2020
Outstanding at beginning of year	108,930		$	10.15					Outstanding at beginning of year	78,100	$	11.18
Granted	—		—

Forfeited or expired									Forfeited or expired	(5,000)	12.77
Outstanding at end of year									Outstanding at end of year	73,100	$	11.08	5.75
Exercisable at end of year									Exercisable at end of year	52,900	$	10.76	5.59	$	0
Fully vested and expected to vest									Fully vested and expected to vest	73,100	$	11.08	5.75	$	0
December 31, 2019									December 31, 2019
Outstanding at beginning of year									Outstanding at beginning of year	108,930	$	10.15

Exercised	(28,430	)	7.12						Exercised	(28,430)	7.12
Forfeited or expired	(1,000	)	13.76						Forfeited or expired	(2,400)	12.38
Outstanding at end of year	79,500		$	11.19	6.81				Outstanding at end of year	78,100	$	11.18	6.55
Exercisable at end of year	43,100		$	10.62	6.5	$	19		Exercisable at end of year	44,700	$	10.73	6.30	$	67
Fully vested and expected to vest	79,500		$	11.19	6.81	$	(9	)	Fully vested and expected to vest	78,100	$	11.18	6.55	$	81
December 31, 2018
Outstanding at beginning of year	121,670		$	9.82
Granted	—		—
Exercised	(12,740	)	7.04
Forfeited or expired	—		—
Outstanding at end of year	108,930		$	10.15	5.82
Exercisable at end of year	56,230		$	8.83	4.01	$	116
Fully vested and expected to vest	108,930		$	10.15	5.82	$	82

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


	Nine months ended September 30, 2019		Three months ended December 31, 2018			Nine months ended September 30, 2020		Twelve months ended December 31, 2019
Intrinsic value of options exercised	$	130	$	81	Intrinsic value of options exercised	$	0	$	130
Cash received from options exercised	$	203	$	90	Cash received from options exercised	$	0	$	203
Tax benefit realized from options exercised	$	—	$	—	Tax benefit realized from options exercised	$	0	$	0

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 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)
	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
September 30, 2020									September 30, 2020
Investment securities:									Investment securities:
U.S. government agency obligations	$	53,378	$	—	$	53,378	$	—	U.S. government agency obligations	$	34,379		$	0	$	34,379	$	0
Obligations of states and political subdivisions	27,937		—		27,937		—		Obligations of states and political subdivisions	140			0		140		0
Mortgage-backed securities	55,658		—		55,658		—		Mortgage-backed securities	51,758			0		51,758		0
Agency Securities	—		—		—		—

Corporate debt securities	18,834		—		18,834		—		Corporate debt securities	15,364			0		15,364		0
Corporate asset based securities	27,149		—		27,149		—
Corporate asset-based securities									Corporate asset-based securities	35,543			0		35,543		0
Trust preferred securities									Trust preferred securities	13,724			0		13,724		0
Total	$	182,956	$	—	$	182,956	$	—	Total	$	150,908	150908000	$	0	$	150,908	$	0
December 31, 2018
December 31, 2019									December 31, 2019
Investment securities:									Investment securities:
U.S. government agency obligations	$	45,298	$	—	$	45,298	$	—	U.S. government agency obligations	$	51,805		$	0	$	51,805	$	0
Obligations of states and political subdivisions	34,728		—		34,728		—		Obligations of states and political subdivisions	281			0		281		0
Mortgage-backed securities	41,350		—		41,350		—		Mortgage-backed securities	71,331			0		71,331		0
Agency securities	148		—		148		—

Corporate debt securities	6,305		—		6,305		—		Corporate debt securities	18,725			0		18,725		0
Corporate asset backed securities									Corporate asset backed securities	26,854			0		26,854		0
Trust preferred securities									Trust preferred securities	11,123			0		11,123		0
Total	$	146,725	$	—	$	146,725	$	—	Total	$	180,119		$	0	$	180,119	$	0

Assets Measured on Nonrecurring Basis

The following tables present the financial instruments measured at fair value on a nonrecurring basis as of September 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)
September 30, 2020
Foreclosed and repossessed assets, net	$	812	$	0	$	0	$	812
Impaired loans with allocated allowances	4,151		0		0		4,151
Mortgage servicing rights	3,498		0		0		3,509
Total	$	8,461	$	0	$	0	$	8,472
December 31, 2019
Foreclosed and repossessed assets, net	$	1,460	$	0	$	0	$	1,460
Impaired loans with allocated allowances	3,175		0		0		3,175
Mortgage servicing rights	4,282		0		0		4,309
Total	$	8,917	$	0	$	0	$	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 30, ~~2019.~~2020.

Fair
Value
Valuation Techniques (1) Significant Unobservable Inputs (2) Range
September 30, 2019
Foreclosed and repossessed assets, net $ 1,373
Appraisal value Estimated costs to sell 10 - 15%
Impaired loans with allocated allowances $ 3,835
Appraisal value Estimated costs to sell 10 - 15%
Mortgage servicing rights $ 4,299
Discounted cash flows Discounted rates 9.5% - 12.5%
December 31, 2018
Foreclosed and repossessed assets, net $ 2,570
Appraisal value Estimated costs to sell 10 - 15%
Impaired loans with allocated allowances $ 2,485
Appraisal value Estimated costs to sell 10 - 15%
Mortgage servicing rights $ 5,214
Discounted cash flows Discounted rates 9.5% - 12.5%


	Fair Value		Valuation Techniques (1)	Significant Unobservable Inputs (2)	Range
September 30, 2020
Foreclosed and repossessed assets, net	$	812	Appraisal value	Estimated costs to sell	10 - 15%
Impaired loans with allocated allowances	$	4,151	Appraisal value	Estimated costs to sell	10 - 15%
Mortgage servicing rights	$	3,509	Discounted cash flows	Discounted rates	9 - 12%
December 31, 2019
Foreclosed and repossessed assets, net	$	1,460	Appraisal value	Estimated costs to sell	10 - 15%
Impaired loans with allocated allowances	$	3,175	Appraisal value	Estimated costs to sell	10 - 15%
Mortgage servicing rights	$	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.

4546

~~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:


		September 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)	$	115,474	$	115,474	$	55,840	$	55,840
Other interest-bearing deposits	(Level II)	3,752		3,838		4,744		4,792
Securities available for sale “AFS”	(Level II)	150,908		150,908		180,119		180,119
Securities held to maturity “HTM”	(Level II)	16,927		17,233		2,851		2,957
Equity securities with readily determinable fair value	(Level I)	187		187		246		246
Other investments	(Level II)	15,075		15,075		15,005		15,005
Loans receivable, net	(Level III)	1,215,303		1,204,923		1,167,060		1,161,660
Loans held for sale	(Level II)	4,938		4,938		5,893		5,893
Mortgage servicing rights	(Level III)	3,498		3,509		4,282		4,309
Accrued interest receivable	(Level 1)	5,829		5,829		4,738		4,738
Financial liabilities:
Deposits	(Level III)	$	1,270,778	$	1,275,000	$	1,195,702	$	1,192,777
FHLB advances	(Level II)	124,491		129,798		130,971		131,593
Other borrowings	(Level I)	58,297		58,297		43,560		43,560
Accrued interest payable	(Level I)	517		517		453		453

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 three and

nine months ended September 30, ~~2019~~2020 and ~~2018:~~2019:


	Three months ended
	September 30, 2020						September 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	$	1,220	$	(335)	$	885	$	440	$	(121)	$	319
Reclassification adjustment for gains included in net income	0		0		0		0		0		0




Other comprehensive income	$	1,220	$	(335)	$	885	$	440	$	(121)	$	319

2019 2018

Before-Tax
Amount

Tax
Expense

Net-of-Tax
Amount

Before-Tax
Amount

Tax
Expense

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

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


	Nine months ended
	September 30, 2020						September 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	$	2,052	$	(564)	$	1,488	$	3,003	$	(826)	$	2,177
Reclassification adjustment for gains included in net income	(156)		43		(113)		(26)		7		(19)




Other comprehensive income	$	1,896	$	(521)	$	1,375	$	2,977	$	(819)	$	2,158

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 months ended September 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 income	1,896		1,375
Ending balance, September 30, 2020	$	1,247	$	904

(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 three and nine months ended September 30, 2020 were as follows:


	Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
Details about Accumulated Other Comprehensive Income (Loss) Components	Three months ended September 30, 2020		Nine months ended September 30, 2020		(1)	Affected Line Item on the Statement of Operations
Unrealized gains and losses
Sale of securities	$	0	$	156		Net gains on investment securities
Tax Effect	0		(43)			Provision for income taxes
Total reclassifications for the period	$	0	$	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 nine months ended September 30, 2019 were as follows:


	Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
Details about Accumulated Other Comprehensive Income (Loss) Components	Three months ended September 30, 2019		Nine months ended September 30, 2019		(1)	Affected Line Item on the Statement of Operations
Unrealized gains and losses
Sale of securities	$	0	$	26		Net gains on investment securities
Tax Effect	0		(7)			Provision for income taxes
Total reclassifications for the period	$	0	$	19		Net gain attributable to common shareholders

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
Gain on equity securities $ 151
Gain on investment securities
Tax Effect (42 ) Provision for income taxes
Total reclassifications for the period $ 109
Net income 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.


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

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 quarters ended March 31, 2020, June 30, 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.

GENERAL

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of September 30, ~~2019~~,2020, and our consolidated results of operations for the three and nine months ended September 30, ~~2019~~,2020, compared to the same period in the prior fiscal year for the three and nine months ended September 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 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 September 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 30, ~~2019,~~2020, management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary.

STATEMENT OF OPERATIONS ANALYSIS

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

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

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

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

Interest rate spread and net interest margin are used to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest earning assets and the rate paid for interest-bearing liabilities that fund those assets. Net interest margin is expressed as the percentage of net interest income to average interest earning assets. Net interest margin currently exceeds interest rate spread because non-interest-bearing 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~~nine-month periods ended September 30, ~~2019~~2020 and ~~2018,~~September 30, 2019, respectively.

Net interest income was $11.9 million for the three months ended September 30, 2020 and $36.9 million for the nine months ended September 30, 2020, compared to $11.6 million for the three months ended September 30, 2019 ~~compared to $7.9~~and $31.7 million ~~for~~of the nine months ended September 30, 2019.For the three months ended September 30, ~~2018.~~ 2020, net interest income benefited from the origination of $139 million of SBA Paycheck Protection Program (“PPP”) loans and organic loan growth partially offset by a decrease in net interest margin percentage.

The net interest margin for the three-month period ended September 30, ~~2019~~2020 was ~~3.34%~~3.11%, compared to ~~3.45%~~3.34% for the three-month period ended September, ~~30, 2018 .The~~2019.The decrease in net interest margin was ~~3.35% for~~largely due to: (1) the ~~nine months ended September 30, 2019~~impact of the Federal Reserve actions to offset the impact of the pandemic in March 2020, during which it lowered overnight interest rates by 125 basis points in 12 days and ~~3.42% for~~(2) market reactions to decreasing longer-term interest rates on loans, investments and cash and cash equivalents security yields; partially offset by lower deposit rates due to management action to reduce interest rates.The impact of higher cash and cash equivalents balances decreased the ~~nine months ended September 30, 2018~~ interest margin percentage by two basis points as the rate impact is covered above. Higher non-accretable difference accretion of two basis points offset the negative impact of higher cash balances above.

The net interest margin ~~reduction~~ for ~~both~~ the ~~three and~~nine-months ended September 30, 2020 was 3.36%, compared to 3.35% for the nine-month period ended September 30, 2019. The modest increase in net interest margin was due to the increase in the accretion of purchased credit impaired discounts, which increased net interest margin by 11 basis points. Other factors affecting the net interest margin for the nine month periods ~~ended September 30,~~of 2020 to 2019 ~~from 2018 is largely~~are similar to those discussed above, with a two basis point decrease in net interest margin due to the ~~competitive market for deposits~~impact of higher cash and cash equivalent balances as the ~~replacement funding for the Michigan branch sale being replaced with higher cost wholesale funding.~~rate impact is discussed above.

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~~nine-month periods ended September 30, ~~2019,~~2020, and for the ~~comparable prior year~~ three and ~~nine month periods.~~ nine-month periods ended September 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 30, ~~2019~~2020 compared to the three months ended September 30, ~~2018:~~2019:


	Three months ended September 30, 2019						Three months ended September 30, 2018							Three months ended September 30, 2020						Three months ended September 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:													Average interest earning assets:
Cash and cash equivalents	$	32,376	$	203	2.49	%	$	24,468	$	117	1.90	%	Cash and cash equivalents	$	77,774	$	18	0.09	%	$	32,376	$	203	2.49	%
Loans	1,143,252		14,646		5.08	%	754,442		9,414		4.95	%	Loans	1,258,224		14,154		4.48	%	1,143,252		14,646		5.08	%
Interest-bearing deposits	5,577		34		2.42	%	7,971		42		2.09	%	Interest-bearing deposits	3,752		23		2.44	%	5,577		34		2.42	%
Investment securities (1)	185,921		1,174		2.56	%	124,991		674		2.30	%	Investment securities (1)	166,622		846		2.02	%	185,921		1,174		2.56	%
Other investments	13,072		166		5.04	%	7,581		115		6.02	%	Other investments	15,145		177		4.65	%	13,072		166		5.04	%
Total interest earning assets (1)	$	1,380,198	$	16,223	4.67	%	$	919,453	$	10,362	4.49	%	Total interest earning assets (1)	$	1,521,517	$	15,218	3.98	%	$	1,380,198	$	16,223	4.67	%
Average interest-bearing liabilities:													Average interest-bearing liabilities:
Savings accounts	$	158,967	$	155	0.39	%	$	93,551	$	59	0.25	%	Savings accounts	$	183,381	$	98	0.21	%	$	158,967	$	155	0.39	%
Demand deposits	219,955		550		0.99	%	146,372		142		0.38	%	Demand deposits	285,993		231		0.32	%	219,955		550		0.99	%
Money market	200,647		593		1.17	%	116,597		213		0.72	%	Money market	255,160		280		0.44	%	200,647		593		1.17	%
CD’s	381,331		1,870		1.95	%	277,125		1,145		1.64	%	CD’s	297,691		1,469		1.96	%	381,331		1,870		1.95	%
IRA’s	44,184		203		1.82	%	33,029		100		1.20	%	IRA’s	41,852		177		1.68	%	44,184		203		1.82	%
Total deposits	1,005,084		3,371		1.33	%	666,674		1,659		0.99	%	Total deposits	$	1,064,077	$	2,255	0.84	%	$	1,005,084	$	3,371	1.33	%
FHLB Advances and other borrowings	169,908		1,259		2.94	%	96,448		763		3.14	%	FHLB Advances and other borrowings	173,758		1,054		2.41	%	169,908		1,259		2.94	%
Total interest-bearing liabilities	$	1,174,992	$	4,630	1.56	%	$	763,122	$	2,422	1.26	%	Total interest-bearing liabilities	$	1,237,835	$	3,309	1.06	%	$	1,174,992	$	4,630	1.56	%
Net interest income			$	11,593					$	7,940			Net interest income			$	11,909					$	11,593
Interest rate spread					3.11	%					3.23	%	Interest rate spread					2.92	%					3.11	%
Net interest margin (1)					3.34	%					3.45	%	Net interest margin (1)					3.11	%					3.34	%
Average interest earning assets to average interest-bearing liabilities					1.17						1.20		Average interest earning assets to average interest-bearing liabilities					1.23						1.17

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

NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS

(Dollar amounts in thousands)

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


	Nine months ended September 30, 2019						Nine months ended September 30, 2018							Nine months ended September 30, 2020						Nine months ended September 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:													Average interest earning assets:
Cash and cash equivalents	$	29,489	$	542	2.46	%	$	23,814	$	240	1.35	%	Cash and cash equivalents	$	42,946	$	141	0.44	%	$	29,489	$	542	2.46	%
Loans	1,054,492		40,036		5.08	%	736,478		26,818		4.87	%	Loans	1,232,678		44,300		4.8	%	1,054,492		40,036		5.08	%
Interest-bearing deposits	6,153		107		2.33	%	7,890		117		1.98	%	Interest-bearing deposits	3,967		73		2.46	%	6,153		107		2.33	%
Investment securities (1)	167,023		3,119		2.58	%	121,216		1,996		2.38	%	Investment securities (1)	173,595		2,965		2.28	%	167,023		3,119		2.58	%
Other investments	11,853		473		5.34	%	7,915		313		5.29	%	Other investments	15,104		533		4.71	%	11,853		473		5.34	%
Total interest earning assets (1)	$	1,269,010	$	44,277	4.68	%	$	897,313	$	29,484	4.42	%	Total interest earning assets (1)	$	1,468,290	$	48,012	4.37	%	$	1,269,010	$	44,277	4.68	%
Average interest-bearing liabilities:													Average interest-bearing liabilities:
Savings accounts	$	156,851	$	479	0.41	%	$	94,263	$	140	0.20	%	Savings accounts	$	169,754	$	348	0.27	%	$	156,851	$	479	0.41	%
Demand deposits	200,387		1,288		0.86	%	150,023		385		0.34	%	Demand deposits	262,748		865		0.44	%	200,387		1,288		0.86	%
Money market	172,671		1,423		1.10	%	116,948		570		0.65	%	Money market	244,965		1,240		0.68	%	172,671		1,423		1.10	%
CD’s	348,139		5,163		1.98	%	271,352		2,968		1.46	%	CD’s	326,776		5,021		2.05	%	348,139		5,163		1.98	%
IRA’s	41,576		537		1.73	%	33,202		278		1.12	%	IRA’s	42,221		568		1.80	%	41,576		537		1.73	%
Total deposits	919,624		8,890		1.29	%	665,788		4,341		0.87	%	Total deposits	$	1,046,464	$	8,042	1.03	%	$	919,624	$	8,890	1.29	%
FHLB Advances and other borrowings	153,960		3,649		3.17	%	109,628		2,367		2.89	%	FHLB Advances and other borrowings	185,256		3,087		2.23	%	153,960		3649		3.17	%
Total interest-bearing liabilities	$	1,073,584	$	12,539	1.56	%	$	775,416	$	6,708	1.16	%	Total interest-bearing liabilities	$	1,231,720	$	11,129	1.21	%	$	1,073,584	$	12,539	1.56	%
Net interest income			$	31,738					$	22,776			Net interest income			$	36,883					$	31,738
Interest rate spread					3.12	%					3.26	%	Interest rate spread					3.16	%					3.12	%
Net interest margin (1)					3.35	%					3.42	%	Net interest margin (1)					3.36	%					3.35	%
Average interest earning assets to average interest-bearing liabilities					1.18						1.16		Average interest earning assets to average interest-bearing liabilities					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 nine months ended September 30, ~~2019~~2020 and ~~24.5% for the nine months ended~~ September 30, ~~2018.~~2019. The FTE adjustment to net interest income included in the rate calculations totaled ~~$103~~$1 thousand and ~~$158~~$103 thousand for the nine months ended September 30, ~~2019~~2020 and September 30, ~~2018,~~2019, 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~~Rate changes ~~are largely due to the United Bank acquisition for~~have been discussed previously.For the three ~~and nine~~ months ~~of 2019~~ended September 30, 2020, compared to ~~2018 and to a lesser extent, the F&M acquisition for~~ the three months ended September 30, 2019, the loan volume increase is primarily due to SBA PPP originations, and the impact of organic growth since October 1, 2019.The decrease in certificate volumes is due to planned runoff of brokered CD’s and to a lesser extent, retail CD’s, partially offset by growth in non-maturity deposits.Volume change factors for the nine month period are similar to the three month period, along with the impact of having nine months of F&M balances in 2020 compared to only three months in the ~~same~~comparable 2019 period, ~~in 2018.~~as the F&M acquisition closed July 1, 2019.

RATE / VOLUME ANALYSIS

(Dollar amounts in thousands)

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

2019.


	Increase (decrease) due to										Increase (decrease) due to
	Volume			Rate			Net				Volume		Rate		Net
Interest income:										Interest income:
Cash and cash equivalents	$	43		$	43		$	86		Cash and cash equivalents	$	181	$	(366)	$	(185)
Loans	4,972			260			5,232			Loans	1,393		(1,885)		(492)
Interest-bearing deposits	(14		)	6			(8		)	Interest-bearing deposits	(11)		—		(11)
Investment securities	383			117			500			Investment securities	(115)		(213)		(328)
Other investments	74			(23		)	51			Other investments	25		(14)		11
Total interest earning assets	5,458			403			5,861			Total interest earning assets	1,473		(2,478)		(1,005)
Interest expense:										Interest expense:
Savings accounts	51			45			96			Savings accounts	21		(78)		(57)
Demand deposits	91			317			408			Demand deposits	136		(455)		(319)
Money market accounts	192			188			380			Money market accounts	135		(448)		(313)
CD’s	478			247			725			CD’s	(413)		12		(401)
IRA’s	40			63			103			IRA’s	(10)		(16)		(26)
Total deposits	852			860			1,712			Total deposits	(131)		(985)		(1,116)
FHLB Advances and other borrowings	549			(54		)	495			FHLB Advances and other borrowings	28		(233)		(205)
Total interest bearing liabilities	1,401			806			2,207			Total interest bearing liabilities	(103)		(1,218)		(1,321)
Net interest income	$	4,057		$	(403	)	$	3,654		Net interest income	$	1,576	$	(1,260)	$	316

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


	Increase (decrease) due to
	Volume		Rate		Net
Interest income:
Cash and cash equivalents	$	191	$	(592)	$	(401)
Loans	6,504		(2,240)		4,264
Interest-bearing deposits	(40)		6		(34)
Investment securities	123		(277)		(154)
Other investments	120		(60)		60
Total interest earning assets	6,898		(3,163)		3,735
Interest expense:
Savings accounts	37		(168)		(131)
Demand deposits	337		(760)		(423)
Money market accounts	497		(680)		(183)
CD’s	(324)		182		(142)
IRA’s	8		23		31
Total deposits	555		(1,403)		(848)
FHLB Advances and other borrowings	662		(1,224)		(562)
Total interest bearing liabilities	1,217		(2,627)		(1,410)
Net interest income	$	5,681	$	(536)	$	5,145

Increase (decrease) due to
Volume Rate Net
Interest income:
Cash and cash equivalents $ 66
$ 236
$ 302
Loans 12,013
1,205
13,218
Interest-bearing deposits (29 ) 19
(10 )
Investment securities 867
256
1,123
Other investments 157
3
160
Total interest earning assets 13,074
1,719
$ 14,793
Interest expense:
Savings accounts 120
219
339
Demand deposits 157
746
903
Money market accounts 331
522
853
CD’s 954
1,241
2,195
IRA’s 80
179
259
Total deposits 1,642
2,907
4,549
FHLB Advances and other borrowings 1,027
255
1,282
Total interest bearing liabilities 2,669
3,162
5,831
Net interest income $ 10,405
$ (1,443 ) $ 8,962

Provision for Loan Losses. We determine our provision for loan losses (“provision”) based on our desire to provide an adequate allowance for loan losses (“ALL”) to reflect probable and inherent credit losses in our loan portfolio. 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 months ended September 30, ~~2018, respectively, reflecting primarily organic~~2020 was $1,500 and $5,250, respectively. The provision for loan losses was impacted by loan growth, net loan charge offs, increases in unallocated, increases in specific reserves on impaired loans and continued anticipation of pandemic-related adverse economic impacts, including various “Stay-at-Home Orders” which continued to ~~a lesser extent, net charge-offs.~~result in temporary business closures, reduced operating capacity and uncertainty regarding potential future revenue and cash flows for certain businesses, including bank borrowers.

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 month periods ended September 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 September 30,						Nine months ended September 30,
	2020		2019		% Change		2020		2019		% Change
Non-interest Income:
Service charges on deposit accounts	$	431	$	625	(31.04)	%	$	1,336	$	1,756	(23.92)	%
Interchange income	556		476		16.81	%	1,509		1,267		19.10	%
Loan servicing income	1,144		714		60.22	%	3,144		1,902		65.30	%
Gain on sale of loans	1,987		679		192.64	%	4,585		1,560		193.91	%
Loan fees and service charges	320		471		(32.06)	%	1,041		860		21.05	%
Insurance commission income	0		197		(100.00)	%	475		573		(17.10)	%
Net gains on investment securities	(1)		96		(101.04)	%	97		151		(35.76)	%
Net gain on sale of branch	0		—		N/M		—		2,295		N/M
Net gain on sale of acquired business lines	180		—		N/M		432		—		N/M
Settlement proceeds	0		—		N/M		131		—		N/M
Other	445		363		22.59	%	928		827		12.21	%
Total non-interest income	$	5,062	$	3,621	39.80	%	$	13,678	$	11,191	22.22	%

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

~~The increase in gains on the sale of loans for the three and nine moths ended September 30, 2019 reflects increased mortgage activity from the lower interest rate environment.~~

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

~~The company sold the Rochester Hills, MI branch in the second quarter of 2019 for a $2.3 million gain, recorded in gain on sale of branch~~ for the nine months ended September 30, are due to the impact of the F&M acquisition on July 1, 2019.

~~Included in other non-interest income, is an annual debit card volume incentive totaling $94 thousand~~Service charges on deposit accounts decreased to $431 and ~~$89 thousand~~$1,336 for the ~~quarters~~three and nine months ended September 30, ~~2019~~2020, from $625 and ~~2018, respectively.~~$1,756 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 September 30, 2020.

Loan servicing income increased largely due to increased capitalized mortgage servicing rights due to higher mortgage loan origination fees in both the current three and nine-month periods.

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

The change in loan fees and service charges for the three and nine months ended September 30, 2020, is largely due to changes in commercial loan customer activity, which was significantly higher in the first quarter of 2020

The Company recognized a gain on sale of its Michigan branch of $2,295 in the second quarter of 2019.

In the quarter ended September 30, 2020, the Bank’s acquired wealth management business partner exercised their contractual call originated prior to the acquisition, resulting in the sale of the wealth management business. The sale resulted in a $180 gain, Also, the Company sold the Wells Insurance Agency in June 2020, realizing a net gain of $252.

During the quarter ended June 30, 2020, the Company recognized $131 of non-interest income 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 sold in 2011.

Non-interest Expense. The following table reflects the various components of non-interest expense for the three and nine month periods ended September 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 September 30,								Nine months ended September 30,
	2020			2019			% Change		2020			2019			% Change
Non-interest Expense:
Compensation and related benefits	$	5,538		$	5,295		4.59	%	$	16,881		$	14,605		15.58	%
Occupancy	993			905			9.72	%	2,898			2,725			6.35	%
Office	532			599			(11.19)	%	1,650			1,649			0.06	%
Data processing	1,145			1,092			4.85	%	3,165			2,953			7.18	%
Amortization of intangible assets	399			412			(3.16)	%	1,223			1,085			12.72	%
Mortgage servicing rights expense	603			325			85.54	%	2,330			822			183.45	%
Advertising, marketing and public relations	260			315			(17.46)	%	802			974			(17.66)	%
FDIC premium assessment	188			78			141.03	%	436			318			37.11	%
Professional services	434			561			(22.64)	%	1,391			1,961			(29.07)	%
Gains on repossessed assets, net	(105)			(16)			(556.25)	%	(195)			(143)			(36.36)	%
Other	737			3,409			(78.38)	%	2,266			5,309			(57.32)	%
Total non-interest expense	$	10,724		$	12,975		(17.35)	%	$	32,847		$	32,258		1.83	%

Non-interest expense (annualized) / Average assets	2.62		%	3.54		%	(25.95)	%	2.78		%	3.15		%	(11.88)	%

The growth in most line items ~~year over year, includes~~for the nine months September 30 are due to the impact of the ~~United Bank~~F&M acquisition ~~in October~~on July 1, 2019.

Compensation expense, for the nine-month period ended September 30, 2020 was higher than the comparable prior year period due primarily to the impact of ~~2018 and~~ the F&M acquisition, ~~July1, 2019. The F&M acquisition added approximately $0.9 million~~and to a lesser extent, higher variable mortgage production compensation related to higher mortgage loan origination activity, primarily in ~~ongoing operational expenses~~the second and ~~$2.6 million in one-time merger charges~~third quarter of 2020. Compensation expense for ~~the quarter ending~~three months ended September 30, ~~2019.~~2020 compared to September 30, 2019 was higher largely due to higher variable mortgage production compensation related to higher mortgage loan activity.

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

Mortgage servicing rights expense increased during the ~~quarter~~three and nine months ended September 30, 2020 by $278 and $1,508 respectively, compared to the comparable prior year periods. The Company recognized related impairment charges of $250 and $1,422 respectively in the three and nine-month periods ended September 30, 2020 compared to $100 and $210 for the three and nine months ended September 30, 2019, largely due to ~~$325 thousand compared~~the impact of higher actual and forecasted prepayment rates. The remaining increase is due to ~~$85 thousand~~higher amortization based on the current interest rate environment.

Professional services expenses were lower during the ~~quarter~~three months 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~~2020 compared to the ~~same~~prior period ~~in 2018~~due 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 ofmerger 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~~2019. For the nine months ended September 30, 2020 compared to the comparable prior year periods, professional service expenses were lower primarily due to lower audit costs and third quarter 2019 acquisition costs. Higher 2019 audit costs were ~~$326 thousand higher than the same period in 2018~~ largely due to the ~~costs related~~transition period audit required due to ~~changing~~ the ~~Companies fiscal year-end in 2019.~~

~~Merger related expenses included~~change in the ~~consolidated statement of operations totaled $2.91 million~~Company’s fiscal year-end.

Other expenses for the three and ~~$3.78 million~~nine-month period ended September 30, 2020 decreased compared to September 30, 2019, largely due to lower merger-related expenses.

Income Taxes. Income tax expense was $1,267 and $3,309 for the three and nine months ended September 30, 2020 compared to $430 and $2,252 for the three and nine months ended September 30, 2019. ~~For the three months ended September 30, 2019, merger expenses consisted~~The impact 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 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 decreasehigher non-taxable municipal income in 2019 ~~for both the three and nine month periods year over year, due to a lower federal income tax rate, partially~~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.

BALANCE SHEET ANALYSIS

Cash and Cash Equivalents. Cash and cash equivalents increased to $115.5 million at September 30, 2020 from $55.8 million at December 31, 2019. Deposit levels remain robust, while the Bank experienced loan growth primarily due to SBA PPP loan originations and chose to modestly shrink the investment portfolio due to current low yielding investment options. As such, the Company has chosen to maintain a higher level of liquidity.

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 $150.9 million at September 30, 2020, compared with $180.1 million at December 31, 2019. The reduction in the AFS portfolio is due to maturities and calls of U.S government agency obligations. The maturities and calls in the corporate asset-based securities in 2020 were replaced with bank holding company issued subordinated debt of which the Bank purchased $7.3 million in the third quarter.

Securities held to maturity increased to $16.9 million at September 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 and third 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
September 30, 2020
U.S. government agency obligations	$	34,059	$	34,379
Obligations of states and political subdivisions	140		140
Mortgage-backed securities	49,870		51,758
Corporate debt securities	15,211		15,364
Corporate asset-based securities	36,443		35,543
Trust preferred securities	13,938		13,724
Totals	$	149,661	$	150,908
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
September 30, 2020
Obligations of states and political subdivisions	$	300	$	300
Mortgage-backed securities	16,627		16,933
Totals	$	16,927	$	17,233
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:


	September 30, 2020				December 31, 2019
Available for sale securities	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Agency	$	83,929	$	86,135	$	122,826	$	123,136
AAA	11,185		10,885		4,383		4,245
AA	25,398		24,798		23,475		22,749
A	6,909		7,019		18,776		18,725
BBB	22,240		22,071		11,167		11,123

Non-rated	—		—		141		141
Total available for sale securities	$	149,661	$	150,908	$	180,768	$	180,119

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


	September 30, 2020				December 31, 2019
Securities held to maturity	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. government agency	$	16,627	$	16,933	$	2,551	$	2,655

AA	125		125		125		126



Non-rated	175		175		175		176
Total	$	16,927	$	17,233	$	2,851	$	2,957

At September 30, 2020, securities with a market value of $1.3 million were pledged against a line of credit with the Federal Reserve Bank of Minneapolis. As of September 30, 2020, this line of credit had a zero-outstanding balance. At September 30, 2020, the Bank has pledged mortgage-backed securities with a market value of $3.9 million and U.S. government agency securities with a market value of $0.6 million as collateral against municipal deposits. At September 30, 2020, the Bank also has mortgage-backed securities with a carrying value of $0.5 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~~$53 million, ~~or 13.28%,~~ to ~~$1.124~~$1.23 billion as of September 30, ~~2019~~2020, from ~~$992.6 million~~$1.18 billion at December 31, ~~2018.~~2019. This ~~increase~~growth 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 $139.2 million, partially offset by the ~~Bank sold the~~net remaining ~~unsecured purchased~~deferred origination fees of $4.0 million. This growth was partially offset by a reduction in acquired commercial loans and originated loan portfolio. In addition, 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.~~$36.4 million and $11.0 million, respectively, decreased. The following table reflects the composition, or mix of our loan portfolio at September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

September 30, 2019 December 31, 2018
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
Agricultural real estate 89,441
86,015
Multi-family real estate 87,758
69,400
Construction and land development 65,550
22,691
Total real estate loans 905,985
758,874
Non-real estate loans:
Consumer non-real estate
Originated indirect paper 42,894
56,585
Purchased indirect paper —
15,006
Other Consumer 18,770
20,214
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
Gross loans 1,134,708
999,433
Unearned net deferred fees and costs and loans in process (158 ) 409
Unamortized discount on acquired loans (10,172 ) (7,286 )
Total loans (net of unearned income and deferred expense) 1,124,378
992,556
Allowance for loan losses (9,177 ) (7,604 )
Total loans receivable, net $ 1,115,201
$ 984,952

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

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


	September 30, 2020		December 31, 2019
	Amount		Amount
Real estate loans:
Commercial/agricultural real estate
Commercial real estate	$	500,673	$	514,459
Agricultural real estate	73,143		85,363
Multi-family real estate	109,668		87,008
Construction and land development	89,338		86,410
Residential mortgage
Residential mortgage	141,854		176,332
Purchased HELOC loans	6,547		8,407
Total real estate loans	921,223		957,979
C&I/Agricultural operating and Consumer Installment Loans:
C&I/Agricultural operating
Commercial and industrial (“C&I”)	104,372		133,734
Agricultural operating	33,958		37,780
Consumer installment
Originated indirect paper	28,535		39,585

Other Consumer	14,630		18,186
Total C&I/Agricultural operating and Consumer installment Loans	181,495		229,285
Gross loans before C&I SBA PPP loans	1,102,718		1,187,264
SBA PPP loans	139,166		—
Gross loans	$	1,241,884	$	1,187,264
Unearned net deferred fees and costs and loans in process	(5,033)		(393)
Unamortized discount on acquired loans	(6,712)		(9,491)
Total loans (net of unearned income and deferred expense)	1,230,139		1,177,380
Allowance for loan losses	(14,836)		(10,320)
Total loans receivable, net	$	1,215,303	$	1,167,060

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 $19.8 million TDR loans, the carrying amount of purchased credit impaired loans of $23.4 million and $8.5 million of substandard non-TDR loans. The $51.7 million total of impaired loans includes $12.6 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 September 30, 2020 and December 31, ~~2018,~~2019, we had ~~416, 356, 315~~342 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~~19 individual loans where estimated fair value was less than their book value (i.e. we deemed impairment to exist) totaling ~~$3.8~~$5.3 million for which ~~$663 thousand~~$1.2 million in specific ALL was recorded as of September 30, ~~2019.~~2020.

AtThe allowance for loan and losses increased to $14.8 million at September 30, ~~2019,~~2020 representing 1.21% 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 purchased credit impairments which are not included in the allowance for loan losses. The Allowance for loan 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 receivable. The increase in the ~~third quarter, the previous restricted cash reserve account established by the third party seller of the purchased indirect paper consumer loans, based~~allowance was due to loan growth, increases in unallocated, increases in specific reserves on a percentage of the outstanding loan balances was eliminated. The funds in the reserve account are to be released to compensate the Bank for any nonperforming purchased consumer loans that are not purchased back by the seller or substituted with performing consumerimpaired loans and ~~as a~~continued anticipation of pandemic-related adverse economic impacts, including various “Stay-at-Home Orders” which continued to result ~~the Bank records a charged off loan. The Bank has not drawn on the restricted~~in temporary business closures, reduced operating capacity and uncertainty regarding potential future revenue and cash ~~reserve account as the third party has repurchased all loans presented~~flows for certain businesses, including bank borrowers.

Allowance for Loan Losses to ~~them.~~Loans, net of SBA PPP Loans

(in thousands, except ratios)


	September 30, 2020			June 30, 2020			December 31, 2019			September 30, 2019
Loans, end of period	$	1,230,139		$	1,281,175		$	1,177,380		$	1,134,708
SBA PPP loans, net of deferred fees	(135,177)			(132,800)			—			—
Loans, net of SBA PPP loans and deferred fees	$	1,094,962		$	1,148,375		$	1,177,380		$	1,134,708
Allowance for loan losses	$	14,836		$	13,373		$	10,320		$	9,177
ALL to loans net of SBA PPP loans and deferred fees	1.35		%	1.16		%	0.88		%	0.81		%
ALL to loans, end of period	1.21		%	1.04		%	0.88		%	0.81		%

All of 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. 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~~nonaccrual and problem loans in order to minimize the Bank’s risk of loss. ~~Non-performing~~Nonperforming loans are defined as ~~non-accrual~~nonaccrual loans and restructured loans that were 90 days or more past due at the time of their restructure, or when management determines that such classification is warranted. The accrual of interest income is discontinued on our loans according to the following schedule:

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

•~~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.

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


	September 30, 2020 and Nine Months Then Ended			December 31, 2019 and Twelve Months Then Ended
Nonperforming assets:
Nonaccrual loans
Commercial real estate	$	2,762		$	5,705
Agricultural real estate	5,252			7,568
Commercial and industrial	853			1,850
Agricultural operating	1,651			1,702
Residential mortgage	2,536			2,063
Consumer installment	100			168
Total nonaccrual loans	$	13,154		$	19,056
Accruing loans past due 90 days or more	950			1,104
Total nonperforming loans (“NPLs”)	14,104			20,160
Other real estate owned	756			1,429
Other collateral owned	56			31
Total nonperforming assets (“NPAs”)	$	14,916		$	21,620
Troubled Debt Restructurings (“TDRs”)	$	19,778		$	12,594
Accruing TDR's	$	12,579		$	5,396
Nonaccrual TDRs	$	7,199		$	7,198
Average outstanding loan balance	$	1,232,678		$	1,074,952
Loans, end of period	$	1,230,139		$	1,177,380
Total assets, end of period	$	1,622,593		$	1,531,249
ALL, at beginning of period	$	10,320		$	7,604
Loans charged off:
Commercial/Agricultural real estate	—			(381)
C&I/Agricultural operating	(791)			—
Residential mortgage	(78)			(239)
Consumer installment	(126)			(291)
Total loans charged off	(995)			(911)
Recoveries of loans previously charged off:
Commercial/Agricultural real estate	149			3
C&I/Agricultural operating	33			1
Residential mortgage	20			5
Consumer installment	59			93
Total recoveries of loans previously charged off:	261			102
Net loans charged off (“NCOs”)	(734)			(809)
Additions to ALL via provision for loan losses charged to operations	5,250			3,525
ALL, at end of period	$	14,836		$	10,320
Ratios:
ALL to NCOs (annualized)	1,515.94		%	1,275.65		%
NCOs (annualized) to average loans	0.08		%	0.08		%
ALL to total loans	1.21		%	0.88		%
NPLs to total loans	1.15		%	1.71		%
NPAs to total assets	0.92		%	1.41		%

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

~~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.

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
Nonperforming Originated / Acquired Assets

(in thousands, except ratios)


	September 30, 2020 and Three Months Ended			December 31, 2019 and Three Months Ended			September 30, 2019 and Three Months Ended
Nonperforming assets:
Originated nonperforming assets:
Nonaccrual loans	$	3,255		$	4,285		$	4,816
Accruing loans past due 90 days or more	698			946			842
Total originated nonperforming loans (“NPL”)	3,953			5,231			5,658
Other real estate owned (“OREO”)	352			441			195
Other collateral owned	56			28			25
Total originated nonperforming assets (“NPAs”)	$	4,361		$	5,700		$	5,878
Acquired nonperforming assets:
Nonaccrual loans	$	9,899		$	14,771		$	14,206
Accruing loans past due 90 days or more	252			158			257
Total acquired nonperforming loans (“NPL”)	10,151			14,929			14,463
Other real estate owned (“OREO”)	404			988			1,153
Other collateral owned	—			3			—
Total acquired nonperforming assets (“NPAs”)	$	10,555		$	15,920		$	15,616
Total nonperforming assets (“NPAs”)	$	14,916		$	21,620		$	21,494
Loans, end of period	$	1,230,139		$	1,177,380		$	1,124,378
Total assets, end of period	$	1,622,593		$	1,531,249		$	1,475,364
Ratios:
Originated NPLs to total loans	0.32		%	0.44		%	0.50		%
Acquired NPLs to total loans	0.83		%	1.27		%	1.29		%
Originated NPAs to total assets	0.27		%	0.37		%	0.40		%
Acquired NPAs to total assets	0.65		%	1.04		%	1.06		%

Nonperforming assets ~~delinquencies and troubled debt restructures typically increase in subsequent quarters following a merger, due~~decreased by $6.7 million 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 impaired loans, which included trouble debt restructured loans, purchased credit impaired loans and substandard non-performing loans, was $67.4$14.9 million at September 30, ~~2019, compared to $47.3 million at~~2020 from 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~~This decrease is largely due to reductions in acquired non-performing loans. Part of this reduction, included the return to accrual status of nonaccrual acquired loans ~~from the F&M and United Bank acquisition. In the quarter ended September 30, 2019, the Bank added $5.9~~totaling $1.7 million in ~~non-accrual loans from F&M.~~the second quarter of 2020, based on their current payment status and history and in accordance with the 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~~nonperforming loans.

~~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. The 2019 purchases were approximately 56% variable rate securities. The effective duration of the investment portfolio

Nonaccrual Loans Roll forward:


	Quarter Ended
	September 30, 2020		June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019
Balance, beginning of period	$	14,787	$	16,090	$	19,056	$	19,022	$	13,612
Additions	716		1,907		1,811		2,641		1,493
Acquired nonaccrual loans	—		—		—		—		5,898
Charge offs	(141)		(175)		(452)		(198)		(134)
Transfers to OREO	(172)		—		(1,100)		(425)		(209)
Return to accrual status	(165)		(1,702)		(120)		(14)		(53)
Payments received	(1,744)		(1,292)		(2,887)		(1,957)		(1,539)
Other, net	(127)		(41)		(218)		(13)		(46)
Balance, end of period	$	13,154	$	14,787	$	16,090	$	19,056	$	19,022

Nonaccrual TDR loans remained at $7.2 million at both September 30, ~~2019 was 2.0 years compared to 2.6 years at~~2020 and December 31, ~~2018.~~2019.

~~Securities available for sale, which represent the majority of our investment portfolio, were $183.0~~


	September 30, 2020			December 31, 2019		September 30, 2019
	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	$	5,480		14	$	1,730	14	$	2,202
C&I/Agricultural operating	5	3,868			2	366		4	478
Residential mortgage	42	3,178			40	3,233		39	3,137
Consumer installment	7	53			7	67		11	82
Total loans	73	$	12,579		63	$	5,396	68	$	5,899

Classified assets decreased to $32.9 million at September 30, ~~2019, compared with $146.7~~2020, from $39.9 million at December 31, 2018. There were no impairment charges recorded in the three and nine months ended September 30, 2019. One agency security had an impairment charge of $21 thousand recorded in the three months ended March 31, 2018. This security was sold in the quarter-ended June 30, 2018 and a $4 thousand gain was realized2019 largely due to ~~changes~~the reduction in ~~market prices. Securities held~~nonperforming assets discussed above, with a modest increase in newly classified assets.Nonperforming assets decreased to ~~maturity were $3.7~~$14.9 million or 0.92% of total assets at September 30, ~~2019,~~2020 compared ~~with $4.9~~to $21.6 million or 1.41% of total assets at December 31, ~~2018.~~

2019. Included in nonperforming assets at September 30, 2020 are $10.6 million of nonperforming assets acquired during recent whole-bank acquisitions.

The ~~amortized cost and market values of our available for sale securities by asset categories as~~table below shows a summary 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~~decrease in substandard loans by ~~asset categories as~~quarter since the first impact 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

AtF&M acquisition on September 30, 2019 ~~securities with a market value~~levels. While special mention loans increased in the first quarter of ~~$1.7 million were pledged against a line~~2020 and more modestly in the second quarter of ~~credit with~~2020, 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 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 to the Federal Home Loan Bank of Des Moines.

~~Other Assets and Other Liabilities.~~ ~~Other assets and other liabilities~~balances decreased in the third quarter ~~compared to June 30, 2019,~~of 2020 due to resolution. See Note 3, “Loans, Allowance for Loan Losses and Impaired Loans” for additional information.


	(in thousands)
	September 30, 2020		June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019
Special mention loan balances	$	7,777	$	19,958	$	19,387	$	10,856	$	12,959
Substandard loan balances	32,922		35,911		38,393		39,892		38,527
Criticized loans, end of period	$	40,699	$	55,869	$	57,780	$	50,748	$	51,486

Hotels and restaurants represent our portfolio’s two industry sectors most directly and adversely affected by the ~~purchase~~recent pandemic and related government actions. These sector loans totaled approximately $102 million and $39 million, respectively at September 30, 2020. The weighted-average loan-to-value percentage and debt service coverage ratio on these hotel industry sector loans was 58% and 2.2 times. Approximately $18 million of ~~two previously leased branches. Other assets increased from~~restaurant sector loans are to franchise quick-service restaurants.

As of September 30, 2020, the Bank had $126.7 million of loan modifications remaining due to pandemic-related borrower requests. Approximately $50 million of modifications are scheduled to resume their regular principal and interest payments in the fourth quarter. Hotel industry sector loans represent approximately $70 million of the approved deferrals projected at December 31, ~~2018, primarily~~2020. Of these, $48 million represent a second deferral under the CARES ACT, with the customer making an interest only payment and the Bank generally receives the reserve accounts pledge. While the Company has no indication that any of the modified credits are specifically impaired, additional risk and uncertainty inherent in the current pandemic-affected environment has been considered. See “Allowance for Loan Losses” section above for discussion of pandemic-related qualitative factor, and related provision for loan losses.

The table below shows the changes in the Bank’s non-accretable difference on purchased credit impaired loans. Payoffs of purchased credit impaired loans, including selected nonaccrual loans discussed above resulted in associated non-accretable differences being realized as interest income as shown below. The Bank has transferred non-accretable difference on purchased credit impaired loans to accretable loan discount as collateral coverage improved sufficiently, due to a combination of principal paydowns and/or improving collateral positions. This transferred accretion is accreted over the ~~adoption~~remaining contractual term of ~~new accounting standards requiring~~the loan or until payoff, whichever is shorter.

Non-accretable Difference:


	(in thousands)
	September 30, 2020		June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019
Non-accretable difference, beginning of period	$	3,355	$	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	(130)		(196)		(1,043)		(271)		(50)
Transfers from non-accretable difference to accretable discount.	(1,294)		(741)		(669)		—		—
Non-accretable difference used to reduce loan principal balance	(270)		(35)		—		—		—
Non-accretable difference transferred to OREO due to loan foreclosure	—		—		(251)		(6)		—
Non-accretable difference, end of period	$	1,661	$	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 consolidated statement of operations. The valuation of MSRs and related amortization thereon are based on numerous factors, assumptions and judgments, such as those for: changes in the mix of loans, interest rates, prepayment speeds, and default rates. Changes in these factors, assumptions and judgments may have a material effect on the valuation and amortization of MSRs. Although management believes that the assumptions used to evaluate the MSRs for impairment are reasonable, future adjustment may be necessary if future economic conditions differ substantially from the economic assumptions used to determine the value of MSRs.

The fair market value of the Company’s MSR asset ~~recognition for operating leases which totaled $2.9~~decreased from $4.3 million at December 31, 2019 to $3.5 million at September 30, ~~2019.~~2020, primarily due to $1.4 million of impairment recorded on the MSR asset due to the impact of higher prepayment activity and partially offset by increased capitalized servicing on newly sold mortgage originations. The unpaid balances of one- to four-family residential real estate loans serviced for others as of September 30, 2020 and December 31, 2019 were $555.7 million and $524.7 million, respectively. The fair market value of the Company’s MSR asset as a percentage of its servicing portfolio at September 30, 2020 and December 31, 2019 was 0.63% and 0.82%, respectively.

Deposits. Deposits increased ~~$154.2~~$75.0 million to ~~$1.162~~$1.271 billion at September 30, ~~2019,~~2020, from ~~$1.008~~$1.196 billion at December 31, ~~2018. Deposits increased by $127.5~~2019. 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 reduction to $3.3 million ~~due to F&M account balances~~ at September 30, ~~2019,~~2020 from $50.4 million at December 31, 2019. Additionally, retail certificates of deposit decreased ~~$34.1~~by $28 million ~~due~~as the Company chose not 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 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively:


	September 30, 2020		December 31, 2019
Non-interest bearing demand deposits	$	229,217	$	168,157
Interest bearing demand deposits	279,648		223,102
Savings accounts	191,511		156,599
Money market accounts	246,651		246,430
Certificate accounts	323,751		401,414
Total deposits	$	1,270,778	$	1,195,702

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.

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

Federal Home Loan Bank (FHLB) advances (borrowings) and Other Borrowings.FHLB advances were ~~$113.5~~$124.5 million as of September 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 30, ~~2019,~~2020 is approximately ~~$153.9~~$105.9 million.

In the quarter ended June 30, 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 or at any time during the quarter ending September 30, 2020. The Bank could borrow $139.2 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 September 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 and 2024, and $5 million maturing in the first quarter of 2025. See Note 7, “Federal Home Loan Bank and Federal Reserve Bank Advances and Other Borrowings” for more information.

~~The~~At September 30, 2020, the Bank has pledged ~~$670.9~~$682.0 million of loans to secure the current ~~outstandings,~~FHLB outstanding advances, letters of credit and to provide the unused borrowing ~~capacity.~~capacity compared to $792.9 million of loans pledged at December 31, 2019.

OnIn August ~~10, 2017,~~2020, the Company issued ~~$15.0 million of~~ten-year, 6% fixed to floating 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 and December 31 of each year through the maturity date.

~~On August 1, 2018, the Company entered into a Business Credit Agreement and related $7.5 million revolving loan and Business Note in an initial principal amount of $10.0~~totaling $15 million. The ~~Revolving Loan matured on August 1, 2019. On June 26, 2019, the Company entered into~~notes have 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.five-year non-call feature.

Stockholders’ Equity. Total stockholders’ equity increased to ~~$148.0~~$157.3 million at September 30, ~~2019,~~2020 from ~~$138.2~~$150.6 million at December 31, ~~2018, as~~2019, largely due to net income of $9.2 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. Book value per share increased to $13.13 at~~expire on September 30, ~~2019, from $12.62 per share at December 31, 2018. Tangible book value per share (non-GAAP)~~was $9.60 at September 30, 2019 - an increase of $0.54 from 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 of intangible assets, partially offset by (5) the intangible created in the F&M acquisition.. Tangible book value per share is a non-GAAP measure that management believes enhances investors’ ability to better understand the Company’s financial position.2020.

~~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 30, ~~2019,~~2020, our on-balance sheet liquidity ratio was ~~12.0%~~16.2%. 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~~$216.9 million of our ~~$418.8~~$323.8 million ~~(59.6%~~(67%) CD portfolio as of September 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 30, ~~2019,~~2020, we ~~have~~had approximately ~~$153.9~~$105.9 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. Due to the strong growth in non-maturity deposits discussed above, the Bank had no outstanding borrowing under this facility at June 30, 2020 or at any time during the quarter ended September 30, 2020. The Bank could borrow $139.2 million under this facility at September 30, 2020. As the SBA PPP loans are forgiven, the collateral will reduce and our borrowing capacity under this facility will be reduced.

We maintain a line of credit with the Federal Reserve Bank which has a ~~$1.3~~$1.0 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 30, ~~2019,~~2020, the Company had ~~$232.1~~$260.8 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 30, ~~2019,~~2020, as shown in the table below, ~~our~~the Bank’s 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.~~provisions.

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


	Actual				For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio
As of September 30, 2020 (Unaudited)
Total capital (to risk weighted assets)	$	170,610	15.0	%	$	91,021	> =	8.0	%	$	113,776	> =	10.0	%
Tier 1 capital (to risk weighted assets)	156,388		13.7	%	68,266		> =	6.0	%	91,021		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	156,388		13.7	%	51,199		> =	4.5	%	73,955		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	156,388		9.9	%	63,465		> =	4.0	%	79,331		> =	5.0	%
As of December 31, 2019 (Audited)
Total capital (to risk weighted assets)	$	160,302	13.1	%	$	98,174	> =	8.0	%	$	122,718	> =	10.0	%
Tier 1 capital (to risk weighted assets)	149,982		12.2	%	73,631		> =	6.0	%	98,174		> =	8.0	%
Common equity tier 1 capital (to risk weighted assets)	149,982		12.2	%	55,223		> =	4.5	%	79,767		> =	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	149,982		10.4	%	57,834		> =	4.0	%	72,293		> =	5.0	%

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

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

6970

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
	Amount		Ratio		Amount			Ratio		Amount	Ratio
As of September 30, 2020 (Unaudited)
Total capital (to risk weighted assets)	$	163,250	14.3	%	$	91,021	> =	8.0	%	N/A	N/A
Tier 1 capital (to risk weighted assets)	119,028		10.5	%	68,266		> =	6.0	%	N/A	N/A
Common equity tier 1 capital (to risk weighted assets)	119,028		10.5	%	51,199		> =	4.5	%	N/A	N/A
Tier 1 leverage ratio (to adjusted total assets)	119,028		7.5	%	63,465		> =	4.0	%	N/A	N/A
As of December 31, 2019 (Audited)
Total capital (to risk weighted assets)	$	137,259	11.2	%	$	98,174	> =	8.0	%	N/A	N/A
Tier 1 capital (to risk weighted assets)	111,939		9.1	%	73,631		> =	6.0	%	N/A	N/A
Common equity tier 1 capital (to risk weighted assets)	111,939		9.1	%	55,223		> =	4.5	%	N/A	N/A
Tier 1 leverage ratio (to adjusted total assets)	111,939		7.7	%	57,834		> =	4.0	%	N/A	N/A

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 (Unaudited)
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 (Audited)
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 %

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


~~ITEM 3.~~	~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~

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.

7071

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 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 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)
Change in Interest Rates in Basis Points (“bp”) Rate Shock in Rates (1)	At September 30, 2020		At December 31, 2019

+300 bp	7	%	1	%
+200 bp	4	%	2	%
+100 bp	1	%	1	%
-100 bp	11	%	(2)	%

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

+300 bp — % (3 )%
+200 bp — % (2 )%
+100 bp 1 % (1 )%
-100 bp (2 )% (1 )%
-200 bp 3 % (5 )%
(1)Assumes an immediate and parallel shift in the yield curve at all maturities.


~~(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 30, ~~2019~~2020 and December 31, ~~2018.~~2019.


	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, 2020		At December 31, 2019

+300 bp	4	%	(5)	%
+200 bp	3	%	(4)	%
+100 bp	1	%	(2)	%
-100 bp	—	%	1	%

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

+300 bp (1 )% (6 )%
+200 bp (1 )% (4 )%
+100 bp (1 )% (2 )%
-100 bp (1 )% 1 %
-200 bp (5 )% (1 )%
(1)Assumes an immediate and parallel shift in the yield curve at all maturities.


~~(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~~

ITEM 4.CONTROLS AND PROCEDURES

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

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

Item 1.LEGAL PROCEEDINGS

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


~~Item 1A.~~	~~RISK FACTORS~~

~~A detailed discussion of~~Item 1A.RISK FACTORS

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 Forms 10-Q for the quarters ended March 31, 2020 and June 30, 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 our markets, the United States and globally. Recently, Minnesota and Wisconsin have been experiencing an increase in COVID-19 cases, which could further impact conditions in our markets. 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 September 30, 2020, the Bank had $126.7 million of loan modifications remaining due to pandemic-related borrower requests. 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 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 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. As an SBA-approved lender, we secured more than $139 million in authorized funding for our customers under the Paycheck Protection Program. 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 administration and debt forgiveness process.

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)Not applicable.

~~Item 2.~~

~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

~~(a)~~

~~Not applicable.~~

~~(b)~~

~~Not applicable.~~

~~(c)~~

~~Issuer Purchases of Equity Securities.~~

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

Period Total number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Pans or Programs
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~~

Item 3.DEFAULTS UPON SENIOR SECURITIES

Not applicable.


~~Item 4.~~	~~MINE SAFETY DISCLOSURES~~

Item 4.MINE SAFETY DISCLOSURES

Not applicable.


~~Item 5.~~	~~OTHER INFORMATION~~

Item 5.OTHER INFORMATION

Not applicable.

~~Item 6.~~

Item 6.EXHIBITS

(a) Exhibits


~~Item 7.~~	~~EXHIBITS~~

~~(a) Exhibits~~



4.1		Form of Subordinated Note Purchase Agreement (incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K filed on August 27, 2020 (File No. 001-33003)).
4.2		Form of Subordinated Note (incorporated by reference to Exhibit 4.2 to the Company’s current report on Form 8-K filed on August 27, 2020 (File No. 001-33003)).
10.1		Business Note, dated ~~June 26, 2019,~~October 22, 2020, issued by Citizens Community Bancorp, Inc. to Chippewa Valley Bank ~~(incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on July 1, 2019 (File No. 001-33003))~~(filed herewith).
~~10.2~~31.1		Business Credit Agreement, dated August 1, 2019, by and between Citizens Community Bancorp, Inc. and Chippewa Valley Bank (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on July 1, 2019 (File No. 001-33003)).
~~31.1~~	Rule 13a-14(a) Certification of the Company’s Chief Executive Officer
31.2		Rule 13a-14(a) Certification of the Company’s Chief Financial Officer
32.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
101		The following ~~materials~~financial statements from ~~Citizens Community Bancorp, Inc.’s~~the Company’s Quarterly Report on Form 10-Q for the ~~fiscal~~ quarter ended September 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.

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~~6, 2020

By:

/s/ Stephen M. Bianchi

Stephen M. Bianchi

Chief Executive Officer

Date: November ~~7, 2019~~6, 2020

By:

��

/s/ James S. Broucek

James S. Broucek

Chief Financial Officer

	~~20-5120010~~
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)~~


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



~~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



			Page Number
Part I – FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of September 30, ~~2019~~2020 (Unaudited) and December 31, ~~2018~~2019	5
		Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019	6
		Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019	7
		Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2020 and the year ended December 31, 2019	8
		Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 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	49
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	7071
	Item 4.	Controls and Procedures	7273
Part II – OTHER INFORMATION			7273
	Item 1.	Legal Proceedings	7273
	Item 1A.	Risk Factors	7374
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7375
	Item 3.	Defaults Upon Senior Securities	7375
	Item 4.	Mine Safety Disclosures	7375
	Item 5.	Other Information	7375
	Item 6.	Exhibits	7476
SIGNATURES			7577


	Nine Months Ended
	September 30, 2020		September 30, 2019
Cash flows from operating activities:
Net income attributable to common stockholders	$	9,155	$	6,294
Adjustments to reconcile net income to net cash provided by operating activities:
Premium amortization, net of discount accretion on investment securities	156		762
Depreciation expense	1,436		1,110
Provision for loan losses	5,250		2,125
Net realized loss (gain) on equity securities	59		(125)
Net realized gain on debt securities	(156)		(26)
Increase in MSR assets resulting from transfers of financial assets	(1,546)		(581)
Mortgage servicing rights expense	2,330		822
Amortization of intangible assets	1,223		1,085
Amortization of restricted stock	462		370
Net stock based compensation expense	11		14
Loss (gain) on sale of office properties and equipment	30		(32)
Deferred income taxes	(1,299)		0
Increase in cash surrender value of life insurance	(451)		(384)
Net (gain) loss from disposals of foreclosed and repossessed assets	(195)		(143)


Gain on sale of loans held for sale, net	(4,585)		(1,560)
Net change in loans held for sale	5,540		225
Decrease in accrued interest receivable and other assets	(1,934)		3,009
Increase (decrease) in other liabilities	836		(6,482)
Net gain on sale of insurance agency	(252)		0
Total adjustments	6,915		189
Net cash provided by operating activities	16,070		6,483
Cash flows from investing activities:

Net decrease in other interest-bearing deposits	992		3,207
Purchase of available for sale securities	(20,956)		(23,457)
Purchase of held to maturity securities	(15,147)		0
Proceeds from principal payments and sale of available for sale securities	52,083		26,370
Proceeds from principal payments and maturities of held to maturity securities	1,051		1,185
Net sales of other investments	(70)		1,084
Proceeds from sale of foreclosed and repossessed assets	2,098		2,238
Net increase in loans	(54,748)		(6,710)
Net capital expenditures	(1,975)		(6,149)
Net cash (disbursed) acquired in business combinations	0		(8,137)
Proceeds from disposal of office properties and equipment	8		300
Net proceeds from sale of insurance agency	1,128		0
Net cash used in investing activities	(35,536)		(10,069)



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



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


																																			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
	Common Stock															Shares							Amount
	Shares		Amount
Balance, January 1, 2019	10,953,512		$	109				$	125,512			$				15,264								$	(857	)		$	(1,841	)		$	138,187
Balance, January 1, 2020																							Balance, January 1, 2020		11,266,954						$	113						$	128,856							$	22,517				$	(462)				$	(471)		$	150,553
Net income	—		—					—				953				—						—				953			Net income		—			—						—			2,606					—					—					2,606
Other comprehensive income, net of tax	—		—		—				—					—					1,164			1,164			Other comprehensive income, net of tax		—						—				—					—			—					(1,138)					(1,138)
Forfeiture of unvested shares	(958	)	—		(13		)		—				13				—			—

Surrender of restricted shares of common stock	(798	)	—		(9		)		—				—				—			(9		)	Surrender of restricted shares of common stock		(1,746)						—				(21)					—			—					—					(21)
Common stock awarded under the equity incentive plan	10,847		—		252				—				(252		)		—			—			Common stock awarded under the equity incentive plan		41,507						—				669					—			(669)					—					0
Common stock options exercised	27,430		1		194				—				—				—			195
Common stock fractional share audit adjustment																							Common stock fractional share audit adjustment		(40)						—				—					—			—					—					—
Common stock repurchased																							Common stock repurchased		(155,666)						(1)				(1,776)					(61)			—					—					(1,838)

Stock option expense	—		—		4				—				—				—			4			Stock option expense		—						—				4					—			—					—					4
Amortization of restricted stock	—		—		—				—				140				—			140			Amortization of restricted stock		—						—				—					—			139					—					139
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

Cash dividends ($0.21 per share)																							Cash dividends ($0.21 per share)		—						—				—					(2,372)			—					—					(2,372)
Balance at March 31, 2020																							Balance at March 31, 2020		11,151,009						112				127,732					22,690			(992)					(1,609)					147,933
Net income	—		—		—				4,107				—				—			4,107			Net income		—						—				—					3,069			—					—					3,069
Other comprehensive income, net of tax	—		—		—				—				—				675			675			Other comprehensive income, net of tax		—						—				—					—			—					1,628					1,628
Forfeiture of unvested shares	(7,958	)	—		(118		)		—				118				—			—

Surrender of restricted shares of common stock																							Surrender of restricted shares of common stock		(314)						—				(2)					—			—					—					(2)

Stock option expense																							Stock option expense		—						—				4					—			—					—					4
Amortization of restricted stock																							Amortization of restricted stock		—						—				—					—			158					—					158

Balance at June 30, 2020																							Balance at June 30, 2020		11,150,695						112				127,734					25,759			(834)					19					152,790
Net income																							Net income		—						—				—					3,480			—					—					3,480
Other comprehensive income, net of tax																							Other comprehensive income, net of tax		—						—				—					—			—					885					885

Surrender of restricted shares of common stock	(3,067	)	—		(35		)		—				—				—			(35		)	Surrender of restricted shares of common stock		(50)						—									—			—					—					0
Common stock awarded under the equity incentive plan	2,000		—		22				—				(22		)		—			—			Common stock awarded under the equity incentive plan		4,000						—				41					—			(41)					—					0
Common stock options exercised	1,000		—		8				—				—				—			8

Stock option expense	—		—		5				—				—				—			5			Stock option expense		—						—				3					—			—					—					3
Amortization of restricted stock	—		—		—				—				103				—			103			Amortization of restricted stock		—						—				—					—			165					—					165
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

Balance, September 30, 2020																							Balance, September 30, 2020		11,154,645						$	112			$	127,778				$	29,239		$	(710)				$	904				$	157,323



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


Cash flows from financing activities:

Net (decrease) increase in short-term Federal Home Loan Bank advances	(40,980)		(16,469)
Long-term Federal Home Loan Bank advances	66,500		0
Long-term Federal Home Loan Bank maturities	(32,000)		0
Amortization of debt issuance costs	60		0
Proceeds from other borrowings, net of origination costs	14,677		0
Proceeds from other borrowings to fund business combination, net of origination costs	0		29,889
Principal payment reduction to other borrowings	0		(10,000)
Net increase in deposits	75,076		5,601

Common stock issued in F&M acquisition less capitalized equity costs	0		3,105
Repurchase shares of common stock	(1,838)		0
Surrender of restricted shares of common stock	(23)		(47)
Common stock options exercised	0		203
Cash dividends paid	(2,372)		(2,198)
Net cash provided by financing activities	79,100		10,084
Net (decrease) increase in cash and cash equivalents	59,634		6,498
Cash and cash equivalents at beginning of period	55,840		45,778
Cash and cash equivalents at end of period	$	115,474	$	52,276


Supplemental cash flow information:					Supplemental cash flow information:
Cash paid during the period for:					Cash paid during the period for:
Interest on deposits	$	8,775	$	4,285	Interest on deposits	$	8,066	$	8,775
Interest on borrowings	$	3,966	$	2,366	Interest on borrowings	$	2,999	$	3,966
Income taxes	$	3,847	$	1,160	Income taxes	$	4,820	$	3,847
Supplemental noncash disclosure:					Supplemental noncash disclosure:
Transfers from loans receivable to foreclosed and repossessed assets	$	898	$	1,064	Transfers from loans receivable to foreclosed and repossessed assets	$	1,057	$	898
Fair value of assets acquired, net of cash and cash equivalents	$	177,494	$	—	Fair value of assets acquired, net of cash and cash equivalents	$	0	$	177,494
Fair value of liabilities assumed, net of cash and cash equivalents	$	169,724	$	—	Fair value of liabilities assumed, net of cash and cash equivalents	$	0	$	169,724



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



	Residential Real Estate			Commercial/Agriculture Real Estate			Consumer Non-real Estate			Commercial/Agricultural Non-real Estate		Unallocated			Total
Nine months ended September 30, 2019
Allowance for Loan Losses:
Beginning balance, January 1, 2019	$	1,048		$	4,019		$	641		$	1,258	$	214		$	7,180
Charge-offs	(119		)	(225		)	(142		)	—		—			(486		)
Recoveries	—			—			53			—		—			53
Provision	115			1,516			20			315		—			1,966
Allowance allocation adjustment	(39		)	(19		)	(75		)	27		87			(19		)
Total allowance on originated loans	1,005			5,291			497			1,600		301			8,694
Purchased credit impaired loans	—			—			—			—		—			—
Other acquired loans:
Beginning balance, January 1, 2019	205			183			65			32		(61		)	424
Charge-offs	(105		)	—			(29		)	—		—			(134		)
Recoveries	2			3			10			—		—			15
Provision	94			30			35			—		—			159
Allowance allocation adjustment	(26		)	(45		)	(26		)	55		61			19
Total allowance on other acquired loans	170			171			55			87		—			483
Total Allowance on acquired loans	170			171			55			87		—			483
Ending balance, September 30, 2019	$	1,175		$	5,462		$	552		$	1,687	$	301		$	9,177
Allowance for Loan Losses at September 30, 2019:
Amount of allowance for loan losses arising from loans individually evaluated for impairment	$	191		$	205		$	15		$	252	$	—		$	663
Amount of allowance for loan losses arising from loans collectively evaluated for impairment	$	984		$	5,257		$	537		$	1,435	$	301		$	8,514
Loans Receivable as of September 30, 2019:															—
Ending balance of originated loans	$	124,627		$	401,211		$	58,612		$	102,998	$	—		$	687,448
Ending balance of purchased credit-impaired loans	2,273			33,840			—			5,320		—			41,433
Ending balance of other acquired loans	71,290			272,744			3,052			58,741		—			405,827
Ending balance of loans	$	198,190		$	707,795		$	61,664		$	167,059	$	—		$	1,134,708
Ending balance: individually evaluated for impairment	$	8,626		$	16,458		$	419		$	7,215	$	—		$	32,718
Ending balance: collectively evaluated for impairment	$	189,564		$	691,337		$	61,245		$	159,844	$	—		$	1,101,990



~~Maryland~~


~~ITEM 1.~~	~~FINANCIAL STATEMENTS~~



	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	$	—



	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

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



	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



	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



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



	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



	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



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



	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

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



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	—	—