10-K 1 czwi-20191231x10k.htm 10-K Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to 
Commission file number 001-33003
 
 
CITIZENS COMMUNITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
 
20-5120010
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
2174 EastRidge Center, Eau Claire, WI 54701
(Address of principal executive offices)
715-836-9994
(Registrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value per share
CZWI
NASDAQ Global Market SM

Securities registered pursuant to Section 12(g) of the Act: None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨




Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
 
Accelerated filer
 
x
Non-accelerated filer
 
¨
 
Smaller reporting company  
 
x
Emerging growth company
 
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange
Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ¨ No  x

The aggregate market value of common stock held by non-affiliates of the registrant, computed by reference to the closing price as of June 30, 2019, was approximately $114.0 million.


APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
At March 10, 2020 there were 11,151,009 shares of the registrant’s common stock, par value $0.01 per share, outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2020 Annual Meeting of the Stockholders of the Registrant are incorporated by reference into Part III of this report.
 





CITIZENS COMMUNITY BANCORP, INC.
FORM 10-K
December 31, 2019
TABLE OF CONTENTS
 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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As used in this report, the terms “we,” “us,” “our,” “Citizens Community Bancorp” and the “Company” mean Citizens Community Bancorp, Inc. and its wholly owned subsidiary, Citizens Community Federal N.A., unless the context indicates another meaning. As used in this report, the term “Bank” means our wholly owned subsidiary, Citizens Community Federal N.A.
Forward-Looking Statements
Certain matters discussed in this Annual Report on Form 10-K 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 this report and the following:

conditions in the financial markets and economic conditions generally;
the possibility of a deterioration in the residential real estate markets;
interest rate risk;
lending risk;
the sufficiency of loan allowances;
changes in the fair value or ratings downgrades of our securities;
competitive pressures among depository and other financial institutions;
our ability to 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. Bancorp. of Tomah Inc. (“F&M”) into the Company’s operations;
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.
Transition Period
On September 25, 2018, the Board of Directors of the Company adopted a resolution to change the Company’s fiscal year end from September 30 to December 31, commencing December 31, 2018. In addition, on September 25, 2018, the Board of Directors of the Bank, adopted resolutions to amend the Bank’s bylaws to change the Bank’s fiscal year end from September 30

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to December 31, commencing December 31, 2018. In connection with this change, we previously filed a Transition Report on Form 10-K to report the results of the three month transition period from October 1, 2018 to December 31, 2018.
In this Annual Report, the periods presented are the fiscal year ended December 31, 2019 (which we sometimes refer to in this Annual Report as “fiscal 2019”), the three month transition period from October 1, 2018 to December 31, 2018 (which we sometimes refer to in this Annual Report as the “transition period”) and the year ended September 30, 2018 (which we sometimes refer to in this Annual Report as “fiscal 2018”). For comparison purposes, we have also included unaudited data for the year ended December 31, 2018.

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PART 1
ITEM 1. BUSINESS
General
Citizens Community Bancorp, Inc. (the “Company”) is a Maryland corporation organized in 2004. The Company is a bank holding company and is subject to regulation by the Office of the Comptroller of the Currency (“OCC”) and by the Federal Reserve Bank. Our primary activities consist of holding the stock of our wholly-owned subsidiary bank, Citizens Community Federal N.A. (the “Bank”), and providing commercial, agricultural and consumer banking activities through the Bank. At December 31, 2019, we had approximately $1.53 billion in total assets, $1.20 billion in deposits, and $150.6 million in equity. Unless otherwise noted herein, all monetary amounts in this report, other than share, per share and capital ratio amounts, are stated in thousands.
Citizens Community Federal N.A.
The Bank is a federally chartered National Bank serving customers in Wisconsin and Minnesota through 28 full-service branch 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 operators and consumers, including one-to-four family residential mortgages, as well as expanded services through Wells Insurance Agency, Inc..
Acquisitions
On August 18, 2017, the Company completed its merger with Wells Financial Corporation (“WFC”), pursuant to the merger agreement, dated March 17, 2017. At that time, the separate corporate existence of WFC ceased, and the Company survived the merger. In connection with the merger, the Company caused Wells Federal Bank to merge with and into the Bank, with the Bank surviving the merger. The merger expanded the Bank's market share in Mankato and southern Minnesota, and added seven branch locations along with expanded services through Wells Insurance Agency, Inc.
On October 19, 2018, the Company completed its previously announced acquisition (the “Acquisition”) of United Bank for a total cash consideration of approximately $51.1 million, subject to certain post-closing purchase price adjustments and future indemnity claims. In connection with the acquisition, the Company merged United Bank with and into the Bank, with the Bank surviving the merger. See Note 2, “Acquisition” for additional information.
On December 3, 2018, the Bank entered into a Purchase and Assumption Agreement with Lake Michigan Credit Union providing for the sale of the Bank’s one branch located in Rochester Hills, MI. 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 January 21, 2019, the Company and F&M Merger Sub, Inc., a newly formed Minnesota corporation and wholly-owned subsidiary of the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with F. & M. Bancorp. of Tomah, Inc., a Wisconsin corporation (“F&M”). On July 1, 2019, the Company closed on the acquisition of F&M and completed the related data systems conversion on July 14, 2019. See Note 2, “Acquisitions” for additional information.
Capital Raising Transactions
On June 20, 2018, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with each of a limited number of institutional and other accredited investors, including certain officers and directors of the Company (collectively the “Purchasers”), pursuant to which the Company sold an aggregate of 500,000 shares of the Company’s 8.00% Series A Mandatorily Convertible Non-Cumulative Non-Voting Perpetual Preferred Stock, par value $0.01 per share, (the “Series A Preferred Stock”), in a private placement (the “Private Placement”) at $130.00 per share, for aggregate gross proceeds of $65 million.
On September 28, 2018, each share of Series A Preferred Stock was mandatorily converted into 10 shares of common stock following receipt of stockholder approval of the issuance of the 5,000,000 shares of common stock.
Internet Website
We maintain a website at www.ccf.us. We make available through that website, free of charge, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements for our annual stockholders’ meetings and amendments to those reports or documents, as soon as reasonably practicable after we electronically file those materials with, or furnish them to, the Securities and Exchange Commission (“SEC”). We are not

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including the information contained on or available through our website as a part of, or incorporating such information by reference into, this Transition Report on Form 10-K. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants.
Selected Consolidated Financial Information
This information is included in Item 6; “Selected Financial Data” herein.
Yields Earned and Rates Paid
This information is included in Item 7; “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the heading “Statement of Operations Analysis” herein.
Rate/Volume Analysis
This information is included in Item 7; “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the heading “Statement of Operations Analysis” herein.
Average Balance, Interest and Average Yields and Rates
This information is included in Item 7; “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the heading “Statement of Operations Analysis” herein.
Lending Activities
We offer a variety of loan products including commercial real estate loans, commercial and industrial (C&I) loans, agricultural real estate loans, agricultural non-real estate loans, residential mortgages, home equity lines-of-credit and consumer loans. We make real estate, consumer, commercial and agricultural loans in accordance with the basic lending policies established by Bank management and approved by our Board of Directors. We focus our lending activities on individual consumers and small commercial borrowers within our market areas. Our lending has been historically concentrated primarily within Wisconsin and Minnesota. Competitive and economic pressures exist in our lending markets, and recent and any future developments in (a) the general economy, (b) real estate lending markets, and (c) the banking regulatory environment could have a material adverse effect on our business and operations. These factors may impact the credit quality of our existing loan portfolio, or adversely impact our ability to originate sufficient high quality loans in the future.
Our total gross outstanding loans, before net deferred loan costs and unamortized discounts on acquired loans, as of December 31, 2019, were $1.19 billion, consisting of $773.2 million in commercial agricultural real estate loans, $171.5 million in commercial/agricultural non-real estate loans, $184.7 million in residential real estate loans and $57.8 million in consumer non-real estate loans. See Item 7; “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the heading “Balance Sheet Analysis” for further analysis of our loan portfolio.
Investment Activities
We maintain a portfolio of investments, consisting primarily of mortgage-backed securities, U.S. Government sponsored agency securities, corporate debt securities, corporate asset based securities and trust preferred securities. We attempt to balance our portfolio to manage interest rate risk, regulatory requirements, and liquidity needs while providing an appropriate rate of return commensurate with the risk of the investment. See Item 7; “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the heading “Balance Sheet Analysis Investment Securities” for further analysis of our investment portfolio.
Deposits and Other Sources of Funds
General. The Company’s primary sources of funds are deposits; amortization, prepayments and maturities of outstanding loans; other short- term investments; and funds provided from operations.
Deposits. We offer a broad range of deposit products through our branches, including demand deposits, various savings and money-market accounts and certificates of deposit. Deposits are insured by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”) up to statutory limits. At December 31, 2019, our total deposits were $1.20 billion including interest bearing deposits of $1.03 billion and non-interest bearing deposits of $168.2 million.
Borrowings. In addition to our primary sources of funds, we maintain access to additional sources of funds through borrowing, including FHLB borrowings, lines of credit with the Federal Reserve Bank, our Revolving Loan and our Note. See Item 7; “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the heading “Balance Sheet Analysis Federal Home Loan Bank (FHLB) advances and other borrowings” for further analysis of our borrowings.

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Competition
We compete with other financial institutions and businesses both in attracting and retaining deposits and making loans in all of our principal markets. We believe the primary factors in competing for deposits are interest rates, personalized services, the quality and range of financial services, technology, convenient locations and office hours, and alternative delivery systems. One such delivery system is remote deposit capture for those commercial customers that are not conveniently located near one of our branches or mobile banking for retail customers. Competition for deposit products comes primarily from other banks, credit unions and non-bank competitors, including insurance companies, money market and mutual funds, and other investment alternatives. We believe the primary factors in competing for loans are interest rates, loan origination fees, and the quality and the range of lending services. Successful loan originations tend to depend not only on interest rate and terms of the loan but also on being responsive and flexible to the customer’s needs. Competition for loans comes primarily from other banks, mortgage banking firms, credit unions, finance companies, leasing companies and other financial intermediaries. Some of our competitors are not subject to the same degree of regulation as that imposed on national banks or federally insured institutions, and these other institutions may be able to price loans and deposits more aggressively. We also face direct competition from other banks and their holding companies that have greater assets and resources than ours. However, we have been able to compete effectively with other financial institutions by building customer relationships with a focus on small-business solutions, including internet and mobile banking, electronic bill pay and remote deposit capture.
 
Regulation and Supervision
The banking industry is highly regulated, and the Company and the Bank are subject to numerous laws and regulations. As a bank holding company, the Company is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the “FRB”). The Bank is also subject to regulation, supervision and examination by the OCC. The Bank is a member of the Federal Reserve System and the Federal Home Loan Bank System. In addition, the Bank’s deposit accounts are insured by the FDIC to the maximum extent permitted by law, and the FDIC has certain enforcement powers over the Bank.
The following is a brief summary of material statutes and regulations that affect the Company and the Bank. The following summary is not a complete discussion or analysis and is qualified in its entirety by reference to the statutes and regulations summarized below. Changes in statutes, regulations and policies applicable to the Company or the Bank cannot be predicted with certainty, but they may have a material effect on the business and earnings of the Company.
Securities Regulation and Listing
Our common stock is registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and is listed on the NASDAQ Global Market under the symbol “CZWI.” We are subject to the information, proxy solicitation, insider trading, corporate governance, and other disclosure requirements and restrictions of the Exchange Act, as well as the Securities Act of 1933 (the “Securities Act”), both administered by the SEC. As a company listed on the NASDAQ Global Market, we are subject to NASDAQ standards for listed companies.
The Company is currently a “smaller reporting company” which allows us to provide certain simplified and scaled disclosures in our filings with the SEC. In June 2018, the SEC adopted amendments that raised the thresholds for a company to be eligible to provide scaled disclosures as a smaller reporting company to $250 million of public float. As such, we will remain a smaller reporting company for so long as the market value of the Company’s common stock held by non-affiliates as of the end of its most recently completed second fiscal quarter is less than $250 million. Although we remain a smaller reporting company, we have become an “accelerated filer” because our public float exceeds $75 million.
Sarbanes-Oxley Act.
The Sarbanes-Oxley Act of 2002 (SOX) was enacted to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. SOX and the SEC’s implementing regulations include provisions addressing, among other matters, the duties, functions and qualifications of audit committees for all public companies; certification of financial statements by the chief executive officer and the chief financial officer; the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; disclosure of off-balance sheet transactions; a prohibition on personal loans to directors and officers, except (in the case of banking companies) loans in the normal course of business; expedited filing requirements for reports of beneficial ownership of company stock by insiders; disclosure of a code of ethics for senior officers, and of any change or waiver of such code; the formation of a public accounting oversight board; auditor independence; disclosure of fees paid to the company’s auditors for non-audit services and limitations on the provision of such services; attestation requirements for company management and

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external auditors, relating to internal controls and procedures; and various increased criminal penalties for violations of federal securities laws.
Section 404 of SOX requires management of the Company to undertake a periodic assessment of the adequacy and effectiveness of the Company’s internal control over financial reporting. Since the Company has become an “accelerated filer, “ we have become subject to the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that an independent registered public accounting firm provide an attestation report on the Company’s internal control over financial reporting and the operating effectiveness of these controls, making the public reporting process more costly. The Company has incurred, and expects to continue to incur, costs in connection with its on-going compliance with Section 404.
The Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) significantly changed the regulatory structure for financial institutions and their holding companies, including with respect to lending, deposit, investment, trading and operating activities. Among other provisions, the Dodd-Frank Act:
permanently increased the FDIC’s standard maximum deposit insurance amount to $250,000, changed the FDIC insurance assessment base to assets rather than deposits and increased the reserve ratio for the deposit insurance fund to ensure the future strength of the fund;
repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts;
created and centralized significant aspects of consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (the “CFPB”). Smaller institutions are subject to rules promulgated by the CFPB and are also examined and supervised by their federal banking regulators for consumer compliance purposes;
imposed limits for debit card interchange fees for issuers that have assets greater than $10 billion, which also could affect the amount of interchange fees collected by financial institutions with less than $10 billion in assets;
restricted the preemption of state law by federal law and disallowed subsidiaries and affiliates of national banks from availing themselves of such preemption;
imposed comprehensive regulation of the over-the-counter derivatives market subject to significant rulemaking processes, to include certain provisions that would effectively prohibit insured depository institutions from conducting certain derivatives businesses in the institution itself;
established new requirements related to mortgage lending, including prohibitions against payment of steering incentives and provisions relating to underwriting standards, disclosures, appraisals and escrows;
prohibited banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (the Volcker Rule); and
implemented corporate governance revisions that apply to all public companies, not just financial institutions.
Federal banking regulators and other agencies including, among others, the FRB, the OCC and the CFPB, have been engaged in extensive rule-making efforts under the Dodd-Frank Act.  Some of the rules that have been adopted or proposed to comply with Dodd-Frank Act mandates are discussed in more detail below.
2018 Regulatory Reform
In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “EGRRCPA”), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the EGRRCPA maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes provide a framework that could result in meaningful regulatory relief for community banks such as the Bank. The EGRRCPA provides banks the option to elect whether or not to opt in to the new framework. After analysis, management of the Bank determined to not opt in.
Capital Adequacy
Banks and bank holding companies, as regulated institutions, are required to maintain minimum levels of capital. The FRB and the OCC have adopted minimum risk-based capital requirements (Tier 1 capital, common equity Tier 1 capital (“CET1”) and total capital) and leverage capital requirements, as well as guidelines that define components of the calculation of capital and the level of risk associated with various types of assets. Financial institutions are expected
to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with the guidelines.
In addition to the minimum risk-based capital and leverage ratios, banking organizations must maintain a “capital conservation buffer” consisting of CET1 in an amount equal to 2.5% of risk-weighted assets in order to avoid restrictions on

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their ability to make capital distributions and to pay certain discretionary bonus payments to executive officers. In order to avoid those restrictions, the capital conservation buffer effectively increases the minimum CET1 capital, Tier 1 capital, and
total capital ratios for U.S. banking organizations to 7.0%, 8.5%, and 10.5%, respectively. Banking organizations with capital levels that fall within the buffer will be required to limit dividends, share repurchases or redemptions (unless replaced within the same calendar quarter by capital instruments of equal or higher quality), and discretionary bonus payments. The capital conservation buffer was fully phased in on January 1, 2019.
The Bank’s capital categories are determined solely for the purpose of applying the “prompt corrective action” rules described below and they are not necessarily an accurate representation of its overall financial condition or prospects for other purposes. Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting
brokered deposits, and certain other restrictions on its business. See “Bank Regulation - Prompt Corrective Action” below.
Bank Holding Company Regulation
As a bank holding company, the Company is subject to the Bank Holding Company Act of 1956 (the “BHCA”) and regulation and supervision by the FRB. A bank holding company is required to obtain the approval of the FRB before making certain acquisitions or engaging in certain activities. Bank holding companies and their subsidiaries are also subject to restrictions on transactions with insiders and affiliates.
A bank holding company is required to obtain the approval of the FRB before it may acquire all or substantially all of the assets of any bank, and before it may acquire ownership or control of the voting shares of any bank if, after giving effect to the acquisition, the bank holding company would own or control more than five percent of the voting shares of such bank. The approval of the FRB is also required for the merger or consolidation of bank holding companies.
Pursuant to the BHCA, the FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or ownership constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.
The Company is required to file periodic reports with the FRB and provide any additional information the FRB may require. The FRB also has the authority to examine the Company and its subsidiaries, as well as any arrangements between the Company and its subsidiaries, with the cost of any such examinations to be borne by the Company.  Banking subsidiaries of bank holding companies are also subject to certain restrictions imposed by federal law in dealings with their holding companies and other affiliates.
Federal law restricts the amount of voting stock of a bank holding company or a bank that a person or group may acquire without the prior approval of banking regulators. Under the federal Change in Bank Control Act and the regulations thereunder, a person or group must give advance notice to the Federal Reserve before acquiring control of any bank holding company, such as the Company, and the OCC before acquiring control of any national bank, such as the Bank. Under the BHCA and Federal Reserve guidance thereunder, a person or group will be presumed to control a bank holding company if they acquire a certain percentage of the bank holding company or if one or more other control factors are present. The Federal Reserve recently finalized a new rule, which will go into effect on April 1, 2020, that makes certain modifications and clarifications to the ownership levels and control factors that create the presumption of control.
Bank Regulation
Anti-Money Laundering and OFAC Regulation. The Bank is subject to a number of anti-money laundering laws (“AML”) and regulations. The Bank Secrecy Act of 1970 (“BSA”) and subsequent laws and regulations require the Bank to take steps to prevent the use of the Bank or its systems from facilitating the flow of illegal or illicit money or terrorist funds. Those requirements include ensuring effective board and management oversight, establishing policies and procedures, performing comprehensive risk assessments, developing effective monitoring and reporting capabilities, ensuring adequate training and establishing a comprehensive independent audit of BSA compliance activities.
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“Patriot Act”) significantly expanded the AML and financial transparency laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. Regulations promulgated under the Patriot Act impose various requirements on financial institutions, such as standards for verifying client identification at account opening and maintaining expanded records (including “Know Your Customer” and “Enhanced Due Diligence” practices) and other obligations to maintain appropriate policies, procedures and controls to aid the process of preventing, detecting, and reporting money laundering and terrorist financing. An institution subject to the Patriot Act must provide AML training to employees, designate an AML compliance officer and annually audit the AML program to assess its effectiveness. The FDIC continues to issue regulations and additional guidance with respect to the application and requirements of BSA and AML.

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The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. Based on their administration by the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), these are typically known as the “OFAC” rules. The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “United States persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to United States jurisdiction (including property in the possession or control of United States persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC.
Failure of a financial institution to maintain and implement adequate BSA, AML and OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution and result in material fines and sanctions. The Bank has implemented policies and procedures to comply with the foregoing requirements.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, in which all institutions are placed. The federal banking agencies have also specified by regulation the relevant capital levels for each category.
A “well-capitalized” bank is one that is not required to meet and maintain a specific capital level for any capital measure pursuant to any written agreement, order, capital directive, or prompt corrective action directive, and has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 8%, a CET1 capital ratio of at least 6.5%, and a Tier 1 leverage ratio of at least 5%. Generally, a classification as well capitalized will place a bank outside of the regulatory zone for
purposes of prompt corrective action. However, a well-capitalized bank may be reclassified as “adequately capitalized” based on criteria other than capital, if the federal regulator determines that a bank is in an unsafe or unsound condition, or is engaged in unsafe or unsound practices, which requires certain remedial action.
The FRB may also set higher capital requirements for holding companies whose circumstances warrant it. For example, holding companies experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. At this time, the bank regulatory agencies are more inclined to impose higher capital requirements to meet well-capitalized standards and future regulatory change could impose higher capital standards as a routine matter. The Bank, as a matter of prudent management, targets as its goal the maintenance of capital ratios which exceed these minimum requirements and that are consistent with the Bank’s risk profile.
Deposit Insurance. The deposits of the Bank are insured by the Deposit Insurance Fund (DIF) of the FDIC up to the limits set forth under applicable law and are subject to the deposit insurance premium assessments of the DIF. Under the Dodd-Frank Act, the maximum per depositor FDIC insurance amount increased from $100,000 to $250,000. The FDIC applies a risk-based system for setting deposit insurance assessments, which was amended by the Dodd-Frank Act. Under this system, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC further determines its assessment rate based on certain specified financial ratios or, if applicable, its long-term debt ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. In addition to deposit insurance assessments, the FDIC is authorized to collect assessments from FDIC insured depository institutions to service the outstanding obligations of Financing Corporation (FICO).
     The Dodd-Frank Act changed the assessment formula for determining deposit insurance premiums and modified certain insurance coverage provisions of the FDIA. The FDIC’s implementing rules redefined the base for FDIC insurance assessments from the amount of insured deposits to average consolidated total assets less average tangible equity.
     Federal Home Loan Bank (“FHLB”) System. The Bank is a member of the FHLB of Chicago, which is one of the 11 regional Federal Home Loan Banks. The primary purpose of the FHLBs is to provide funding to their saving association members in support of the home financing credit function of the members. Each FHLB serves as a reserve or central bank for its members within its assigned region. FHLBs are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. FHLBs make loans or advances to members in accordance with policies and procedures established by the board of directors of the FHLB. These policies and procedures are subject to the regulation and oversight of the Federal Housing Financing Board. All advances from a FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. Long-term advances are required to be used for residential home financing and small business and agricultural loans.

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As a member, the Bank is required to purchase and maintain stock in the FHLB of Chicago based on activity and membership requirements. As of December 31, 2019, the Bank had $7 million in FHLB stock, which was in compliance with this requirement. The Bank receives dividends on its FHLB stock.
Community Reinvestment Act. The Community Reinvestment Act (“CRA”) is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities. CRA specifically directs the federal bank regulatory agencies, in examining insured depository institutions, to assess their record of helping to meet the credit needs of their entire community, including low- and moderate-income neighborhoods, consistent with safe and sound banking practices. CRA further requires the agencies to take a financial institution’s record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, consummating mergers or acquisitions or holding company formations.
The federal banking agencies have adopted regulations which measure a bank’s compliance with its CRA obligations on a performance-based evaluation system. This system bases CRA ratings on an institution’s actual lending service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. The ratings range from “outstanding” to a low of “substantial noncompliance.”
The Bank had a CRA rating of “Satisfactory” as of its most recent regulatory examination.
Consumer Compliance and Fair Lending Laws. The Bank is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. These laws include the Patriot Act, BSA, the Foreign Account Tax Compliance Act, CRA, the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National Flood Insurance Act, various state law counterparts, and the Consumer Financial Protection Act of 2010, which constitutes part of the Dodd-Frank Act. The enforcement of fair lending laws has been an increasing area of focus for regulators, including the OCC and CFPB.
Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act of 2017 (“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. The Company anticipates that this tax rate change should reduce its federal income tax liability in future years, but the Company did recognize certain effects of the tax law changes related to the revaluation of the deferred tax assets to both the revaluation of timing differences and the unrealized loss on securities. See Item 7; “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the heading “Critical Accounting Estimates Income Taxes.”
Effects of Government Monetary Policy
 The earnings of the Company are affected by general and local economic conditions and by the policies of various governmental regulatory authorities. In particular, the FRB regulates money supply, credit conditions and interest rates in order to influence general economic conditions, primarily through open market operations in United States Government Securities, varying the discount rate on member bank borrowings, setting reserve requirements against member and nonmember bank deposits, regulating interest rates payable by member banks on time and savings deposits and expanding or contracting the money supply. FRB monetary policies have had a significant effect on the operating results of commercial banks and their holding companies, including the Bank and the Company, in the past and are expected to continue to do so in the future.
Employees
At March 10, 2020, we had 261 full-time employees and 288 total employees, company-wide. We have no unionized employees, and we are not subject to any collective bargaining agreements.
ITEM 1A. RISK FACTORS
The risks described below are not the only risks we face. Additional risks that we do not yet know of or that we currently believe are immaterial may also impair our future business operations. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could be materially adversely affected. In such cases, the trading price of our common stock could decline.
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,

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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.
For example, it was reported in January 2020 that a novel strain of coronavirus, which first surfaced in China, had spread to several other countries, resulting in various uncertainties, including the potential impact to global economies, trade and consumer and corporate clients. To the extent uncertainty regarding the U.S. or global economy negatively impacts general economic conditions, consumer confidence and consumer credit factors, our business, financial condition and results of operations could be significantly and adversely affected.
Deterioration in the markets for residential real estate, including secondary residential mortgage loan markets, could reduce our net income and profitability. During the severe recession that lasted from 2007 to 2009, softened residential housing markets, increased delinquency and default rates, and volatile and constrained secondary credit markets negatively impacted the mortgage industry. Our financial results were adversely affected by these effects including changes in real estate values, primarily in Wisconsin and Minnesota, and our net income declined as a result. Decreases in real estate values adversely affected the value of property used as collateral for loans as well as investments in our portfolio. Continued slow growth in the economy since 2009 resulted in increased competition and lower rates, which has negatively impacted our net income and profits.
The foregoing changes could affect our ability to originate loans and deposits, the fair value of our financial assets and liabilities and the average maturity of our securities portfolio. An increase in the level of interest rates may also adversely affect the ability of certain of our borrowers to repay their obligations. If interest rates paid on deposits or other borrowings were to increase at a faster rate than the interest rates earned on loans and investments, our net income would be adversely affected.
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. Although the United States is currently in a low interest rate environment, there exists current speculation that interest rates may be even further reduced as a result of the economic impacts of the coronavirus. 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.
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) could adversely impact the ability of borrowers to repay outstanding loans, or could substantially weaken the value of collateral securing those loans. Downward pressure on real estate values could increase the potential for problem loans and thus have a direct impact on our consolidated results of operations.
We are subject to higher lending risks with respect to our commercial and agricultural banking activities which could adversely affect our financial condition and results of operations. Our loans include commercial and agricultural loans, which include loans secured by real estate as well as loans secured by personal property. Commercial real estate lending, including agricultural loans, 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. Agricultural non-real estate loans carry significant risks as they may involve larger balances concentrated with a single borrower or group of related borrowers. In addition, repayment of such loans depends on the successful operation or management of the farm property securing the loan for which an operating loan is utilized. Farming operations may be affected by factors outside of the borrower’s control, including adverse weather conditions, such as drought, hail or floods that can severely limit crop yields and declines in market prices for agricultural products. Although the Bank manages lending risks through its underwriting and credit administration policies, no assurance can be given that such risks will not materialize, in which event, our financial condition, results of operations, cash flows and business prospects could be materially adversely affected.
Our allowance for loan losses may be insufficient. To address risks inherent in our loan portfolio, we maintain an allowance for loan losses that represents management’s best estimate of probable losses that exist within our loan portfolio. The level of the allowance reflects management’s continuing evaluation of various factors, including specific credit risks, historical loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions, and unidentified losses inherent in the current loan portfolio. Determining the appropriate level of the allowance for loan losses involves a high

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degree of subjectivity and requires us to make estimates of significant credit risks, which may undergo material changes. In evaluating our impaired loans, we assess repayment expectations and determine collateral values based on all information that is available to us. However, we must often make subjective decisions based on our assumption about the creditworthiness of the borrowers and the values of collateral securing these loans.
Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of our control, may require an increase in our allowance for loan losses. In addition, bank regulatory agencies periodically examine our allowance for loan losses and may require an increase in the allowance or the recognition of further loan charge-offs, based on judgments different from those of our management.
If charge-offs in future periods exceed our allowance for loan losses, we will need to take additional loan loss provisions to increase our allowance for loan losses. Any additional loan loss provision will reduce our net income or increase our net loss, which could have a direct material adverse effect on our financial condition and results of operations.
A new accounting standard may require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.
The Financial Accounting Standards Board (“FASB”) has adopted a new accounting standard that will be effective for the Company for our first fiscal year after December 15, 2022. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This will change the current method of providing allowances for loan losses that are probable, which may require us to increase our allowance for loan losses, and to greatly increase the types of data we will need to collect and review to determine the appropriate level of the allowance for loan losses Banking regulators expect the new accounting standard will increase the allowance for loan losses. Any change in the allowance for loan losses at the time of adoption will be an adjustment to retained earnings and would change the Bank’s capital levels. Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations.
Changes in the fair value or ratings downgrades of our securities may reduce our stockholders’ equity, net earnings, or regulatory capital ratios. At December 31, 2019, $180.1 million of our securities, were classified as available for sale and $2.9 million were classified as held to maturity. The estimated fair value of our available for sale securities portfolio may increase or decrease depending on market conditions. Our available for sale securities portfolio is comprised of fixed-rate, and to a lesser extent, floating rate securities. We increase or decrease stockholders’ equity by the amount of the change in unrealized gain or loss (the difference between the estimated fair value and amortized cost) of our available for sale securities portfolio, net of the related tax benefit or provision, under the category of accumulated other comprehensive income/loss. Therefore, a decline in the estimated fair value of this portfolio will result in a decline in our reported stockholders’ equity, as well as our book value per common share and tangible book value per common share. This decrease will occur even though the securities are not sold. In the case of debt securities, if these securities are never sold, the decrease may be recovered over the life of the securities.
We conduct a periodic review and evaluation of our securities portfolio to determine if the decline in the fair value of any security below its cost basis is other-than-temporary. Factors which we consider in our analysis include, but are not limited to, the severity and duration of the decline in fair value of the security, the financial condition and near-term prospects of the issuer, whether the decline appears to be related to issuer conditions or general market or industry conditions, our intent and ability to retain the security for a period of time sufficient to allow for any anticipated recovery in fair value and the likelihood of any near-term fair value recovery. We generally view changes in fair value caused by changes in interest rates as temporary, which is consistent with our experience. If we deem such decline to be other-than-temporary related to credit losses, the security is written down to a new cost basis and the resulting loss is charged to earnings as a component of non-interest income in the period in which the decline in value occurs.
We have, in the past, recorded other than temporary impairment (“OTTI”) charges, principally arising from investments in non-agency mortgage-backed securities. We do not currently hold any non-agency mortgage backed securities. We continue to monitor our securities portfolio as part of our ongoing OTTI evaluation process. No assurance can be given that we will not need to recognize OTTI charges related to securities in the future. Future OTTI charges would cause decreases to both Tier 1 and Risk-based capital levels which may expose the Company and/or the Bank to additional regulatory restrictions.
The capital that we are required to maintain for regulatory purposes is impacted by, among other factors, the securities ratings on our portfolio. Therefore, ratings downgrades on our securities may also have a material adverse effect on our risk-based regulatory capital levels.
Competition may affect our results. We face strong competition in originating loans, in seeking deposits and in offering other banking services. We compete with commercial banks, trust companies, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms. Our market area is also served by commercial banks and savings associations that are substantially larger than us in terms of deposits and loans and have greater

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human and financial resources. This competitive climate can make it difficult to establish, maintain and retain relationships with new and existing customers and can lower the rate we are able to charge on loans, increase the rates we must offer on deposits, and affect our charges for other services. Those factors can, in turn, adversely affect our results of operations and profitability.
We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.
We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our market area and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business and, therefore, our operating results may be materially adversely affected.
We may not have sufficient pre-tax net income in future periods to fully realize the benefits of our net deferred tax assets. Assessing the need for, or the sufficiency of, a valuation allowance requires management to evaluate all available evidence. Based on future pre-tax net income projections and the planned execution of existing tax planning strategies, we believe that it is more likely than not that we will fully realize the benefits of our net deferred tax assets. However, our current assessment is based on assumptions and judgments that may or may not reflect actual future results. If a valuation allowance becomes necessary, it could have a material adverse effect on our consolidated results of operations and financial condition.
Maintaining or increasing our market share may depend on lowering prices and market acceptance of new products and services. Our success depends, in part, on our ability to adapt our products and services to evolving industry standards and customer demands. We face increasing pressure to provide products and services at lower prices, which can reduce our net interest margin and revenues from our fee-based products and services. In addition, the widespread adoption of new technologies, including internet and mobile banking services, could require us to make substantial expenditures to modify or adapt our existing products and services. Also, these and other capital investments in our business may not produce expected growth in earnings anticipated at the time of the expenditure. We may not be successful in introducing new products and services, achieving market acceptance of our products and services, or developing and maintaining loyal customers, which in turn, could adversely affect our results of operations and profitability.
Acts or threats of terrorism and political or military actions by the United States or other governments could adversely affect general economic industry conditions. Geopolitical conditions may affect our earnings. Acts or threats of terrorism and political actions taken by the United States or other governments in response to terrorism, or similar activity, could adversely affect general or industry conditions and, as a result, our consolidated financial condition and results of operations.
We operate in a highly regulated environment, and are subject to changes, which could increase our cost structure or have other negative impacts on our operations. The banking industry is extensively regulated at the federal and state levels. Insured depository institutions and their holding companies are subject to comprehensive regulation and supervision by financial regulatory authorities covering all aspects of their organization, management and operations. We are also subject to regulation by the SEC. Our compliance with these regulations, including compliance with regulatory commitments, is costly. Regulation includes, among other things, capital and reserve requirements, permissible investments and lines of business, mergers and acquisitions, restrictions on transactions with insiders and affiliates, anti-money laundering regulations, dividend limitations, community reinvestment requirements, limitations on products and services offered, loan limits, geographical limits, and consumer credit regulations. The system of supervision and regulation applicable to us establishes a comprehensive framework for our operations and is intended primarily for the protection of the Deposit Insurance Fund, our depositors and the public, rather than our stockholders. Failure to comply with applicable laws, regulations or policies could result in sanction by regulatory agencies, civil monetary penalties, and/or damage to our reputation, which could have a material adverse effect on our business, consolidated financial condition and results of operations. In addition, any change in government regulation could have a material adverse effect on our business.
Federal law restricts the amount of voting stock of a bank holding company or a bank that a person or group may acquire without the prior approval of banking regulators. Under the federal Change in Bank Control Act and the regulations thereunder, a person or group must give advance notice to the Federal Reserve before acquiring control of any bank holding company, such as the Company, and the OCC before acquiring control of any national bank, such as the Bank. Under the BHCA and Federal Reserve guidance thereunder, a person or group will be presumed to control a bank holding company if they acquire a certain percentage of the bank holding company or if one or more other control factors are present. The Federal Reserve recently finalized a new rule, which will go into effect on April 1, 2020, that makes certain modifications and clarifications to the ownership levels and control factors that create the presumption of control. The overall effect of the BHCA is to make it more difficult to acquire a bank holding company and a bank by tender offer or similar means than it might be to acquire control of

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another type of corporation. Consequently, shareholders of the Company may be less likely to benefit from the rapid increases in stock prices that may result from tender offers or similar efforts to acquire control of other companies. Investors should be aware of these requirements when acquiring shares of our stock.
We have become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or limit our ability to pay dividends or repurchase shares.
The Basel III Rules, which became effective for us on January 1, 2015, included new minimum risk-based capital and leverage ratios and refines the definition of what constitutes “capital” for calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from prior rules); and (iv) a Tier 1 leverage ratio of 4%. The Basel III Rules also establish a “capital conservation buffer” of 2.5%, and, when fully phased in, will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. The capital conservation buffer was fully phased in on January 1, 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the buffer amount. The application of more stringent capital requirements could, among other things, result in lower returns on equity, and result in regulatory actions if we are unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of the Basel III Rules could result in our having to lengthen the term of our funding sources, change our business models or increase our holdings of liquid assets. Specifically, the Bank’s ability to pay dividends will be limited if it does not have the capital conservation buffer required by the new capital rules, which may further limit the Company’s ability to pay dividends to stockholders.
We are subject to increases in FDIC insurance premiums and special assessments by the FDIC, which will adversely affect our earnings. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. For example, during 2008 and 2009, higher levels of bank failures dramatically increased resolution costs of the FDIC and depleted the Deposit Insurance Fund. On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which, in part, permanently raised the current standard maximum deposit insurance amount to $250,000 per customer (up from $100,000). These programs placed additional stress on the Deposit Insurance Fund. In order to maintain a strong funding position and restore reserve ratios of the Deposit Insurance Fund, the FDIC increased assessment rates of the insured institutions. If additional bank or financial institution failures increase, or if the cost of resolving prior failures exceeds expectations, we may be required to pay even higher FDIC premiums than the current levels. Any future increases or required prepayments of FDIC insurance premiums may adversely impact our earnings and financial condition.
Customers may decide not to use banks to complete their financial transactions, which could result in a loss of income to us. Technology and other changes are allowing customers to complete financial transactions that historically have involved banks at one or both ends of the transaction. For example, customers can now pay bills and transfer funds directly without going through a bank. The process of eliminating banks as intermediaries, known as disintermediation, could result in the loss of fee income, as well as the loss of customer deposits.
We could experience an unexpected inability to obtain needed liquidity. Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits, and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds. We seek to ensure our funding needs are met by maintaining an appropriate level of liquidity through asset/liability management. If we become unable to obtain funds when needed, it could have a material adverse effect on our business and, in turn, our consolidated financial condition and results of operations. Moreover, it could limit our ability to take advantage of what we believe to be good market opportunities for expanding our loan portfolio.
The success of the F&M Merger and the ongoing integration of F&M into the Company’s operations will depend on a number of uncertain factors. We completed our acquisition of F&M in July 2019. The success of the F&M Merger, including without limitation the realization of anticipated benefits and cost savings, will depend on a number of factors, including, without limitation:    
the Company’s ability to integrate F&M Bank operations into the Bank’s current operations;
the Company’s ability to limit the outflow of deposits held by its new customers in the acquired branch offices and to successfully retain and manage loans acquired in the F&M Merger;
the Company’s ability to control the incremental non-interest expenses from the acquired branch offices;
the Company’s ability to retain and attract the appropriate personnel to staff the acquired branch offices; and
the Company’s ability to successfully combine and integrate the businesses of the Company and F&M in a manner that permits growth opportunities.

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Integrating the acquired operations continues to be a significant undertaking, and may be affected by general market and economic conditions or government actions affecting the financial industry generally. No assurance can be given that the Company will be able to integrate the acquired operations successfully, and the integration process could result in the loss of key employees, the disruption of ongoing business, the diversion of management attention and resources, or inconsistencies in standards, controls, procedures and policies that adversely affect the Company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the F&M Merger. The Company may also encounter unexpected difficulties or costs during the integration that could adversely affect its earnings and financial condition. Additionally, no assurance can be given that the operation of the acquired branches will not adversely affect the Company’s existing profitability, that the Company will be able to achieve results in the future similar to those achieved by its existing banking business, or that the Company will be able to manage any growth resulting from the F&M Merger effectively.    
If the Company experiences difficulties with the integration process and attendant systems conversion, the anticipated benefits of the F&M Merger may not be realized fully or at all, or may take longer to realize than expected. These integration matters could have an adverse effect on each of the Company and F&M during this transition period and for an undetermined period after completion of the F&M Merger on the combined company. In addition, the actual cost savings of the F&M Merger could be less than anticipated.
Our growth strategy includes selectively acquiring businesses through acquisitions of other banks, and our ability to consummate these acquisitions on economically advantageous terms acceptable to us in the future is unknown. Our growth strategy includes acquisitions of other banks that serve customers or markets we find desirable, including our recent acquisitions of Community Bank of Northern Wisconsin (“CBN”), WFC, United Bank and F&M. The market for acquisitions remains highly competitive, and we may be unable to find satisfactory acquisition candidates in the future that fit our acquisition and growth strategy. This competition could increase prices for potential acquisitions that we believe are attractive. Any such acquisitions could be funded through cash from operations, the issuance of equity and/or the incurrence of additional indebtedness, which amount may be material, or a combination thereof. Any acquisition could be dilutive to our earnings and stockholders’ equity per share of our common stock. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests. Among other things, our regulators consider our capital, liquidity, profitability, regulatory compliance and levels of goodwill and intangibles when considering acquisition and expansion proposals. To the extent that we are unable to find suitable acquisition candidates, an important component of our growth strategy may be lost.
Acquisition and expansion activities may disrupt our business, dilute existing stockholders and adversely affect our operating results. We recently acquired F&M in July 2019. We acquired United Bank in October 2018. We acquired WFC in August 2017 and CBN in May 2016. We intend to continue to evaluate potential acquisitions and expansion opportunities in the normal course of our business. Although the integration of WFC and CBN have been successfully completed and the integration of United Bank into our operations is proceeding well, we cannot assure you that we will be able to adequately or profitably manage the ongoing integration of F&M or any such future acquisitions. Acquiring other banks or financial service companies, such as F&M, as well as other geographic and product expansion activities, involve various risks including:
risks of unknown or contingent liabilities;
unanticipated costs and delays;
risks that acquired new businesses do not perform consistent with our growth and profitability
expectations;
risks of entering new markets or product areas where we have limited experience;
risks that growth will strain our infrastructure, staff, internal controls and management, which may
require additional personnel, time and expenditures;
exposure to potential asset quality issues with acquired institutions;
difficulties, expenses and delays of integrating the operations and personnel of acquired institutions, and
start-up delays and costs of other expansion activities;
potential disruptions to our business;
possible loss of key employees and customers of acquired institutions;
potential short-term decreases in profitability; and
diversion of our management’s time and attention from our existing operations and business.
Our failure to execute our acquisition strategy could adversely affect our business, results of operations, financial condition and future prospects.

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Future growth, operating results or regulatory requirements may require us to raise additional capital but that capital may not be available. We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. To the extent our future operating results erode capital or we elect to expand through loan growth or acquisition, we may be required to raise additional capital.
Our ability to raise capital will depend on conditions in the capital markets, which are outside of our control, and on our financial performance. Accordingly, we cannot be assured of our ability to raise capital when needed or on favorable terms. If we cannot raise additional capital when needed or if we are subject to material unfavorable terms for such capital, we may be subject to increased regulatory supervision and the imposition of restrictions on our growth and business. These actions could negatively impact our ability to operate or further expand our operations and may result in increases in operating expenses and reductions in revenues that could have a material adverse effect on our consolidated financial condition and results of operations.
Our internal controls and procedures may fail or be circumvented. Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well-designed and operated, is based in part on certain assumptions and can provide only reasonable assurances that the objectives of the system are met. Any (a) failure or circumvention of our controls and procedures, (b) failure to adequately address any internal control deficiencies, or (c) failure to comply with regulations related to controls and procedures could have a material effect on our business, consolidated financial condition and results of operations. See Item 9A “Controls and Procedures” for further discussion of our internal controls.
Our reporting obligations as a public company are costly. Reporting requirements of a public company change depending on the reporting classification in which the Company falls as of the end of its second quarter of each fiscal year. The Company is currently a “smaller reporting company” which allows us to provide certain simplified and scaled disclosures in our filings. We will remain a smaller reporting company for so long as the market value of the Company’s common stock held by non-affiliates as of the end of its most recently completed second fiscal quarter is less than $250 million. Although we remain a smaller reporting company, we have become an “accelerated filer” because our public float exceeds $75 million. As such we have become subject to the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that an independent registered public accounting firm provide an attestation report on the effectiveness of internal control over financial reporting, making the public reporting process more costly.
We may not be able to attract or retain key people. Our success depends, in part, on our ability to attract and retain key people. We depend on the talents and leadership of our executive team, including Stephen M. Bianchi, our Chief Executive Officer, and James S. Broucek, our Chief Financial Officer. Competition for the best people in most activities engaged in by us can be intense, and we may not be able to hire people or retain them. Although Mr. Bianchi and Mr. Broucek are under employment agreements expiring in 2022, unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our local markets, years of industry experience and the difficulty of promptly finding qualified replacement personnel.
We continually encounter technological change. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology driven by new or modified products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.
We rely on network and information systems and other technologies, and, as a result, we are subject to various Cybersecurity risks. Cybersecurity refers to the combination of technologies, processes and procedures established to protect information technology systems and data from unauthorized access, attack, or damage. Our business involves the storage and transmission of customers’ personal information. While we have internal policies and procedures designed to prevent or limit the effect of a failure, interruption or security breach of our information systems, as well as contracts and service agreements with applicable outside vendors, we cannot be assured that any such failures, interruptions or security breaches will not occur or, if they do, that they will be addressed adequately. Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of our computer systems or otherwise, could severely harm our business. Although we have implemented measures to prevent security breaches, cyber incidents and other security threats, our facilities and systems, and those of third party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human error, or other similar events that could have a material adverse effect on our business. Furthermore, the storage and transmission of such data is regulated at the federal and state level. Privacy information security laws and regulation changes, and compliance therewith, may result in cost increases due to system

18



changes and the development of new administrative processes. If we fail to comply with applicable laws and regulations or experience a data security breach involving the misappropriation, loss or other unauthorized disclosure of confidential information, whether by us or our vendors, our reputation could be damaged, possibly resulting in lost future business, and we could be subject to fines, penalties, administrative orders and other legal risks as a result of a breach or non-compliance.
Changes in federal or state tax laws could adversely affect our business, financial condition and results of operations. Our business, financial condition and results of operations are impacted by tax policy implemented at the federal and state level. The Tax Act was enacted in December 2017. Among other things, the Tax Act reduces the corporate federal income tax rate for the Company from 34 percent to 24.5 percent for 2018, and 21 percent for 2019, which would result in changes in the valuation of deferred tax asset and liabilities, and includes a number of provisions that will have an impact on the banking industry, borrowers and the market for single-family residential real estate. We revalued our net deferred tax assets to account for the future impact of the lower corporate tax rates. The recent changes in the tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand for such loans in the future, and could make it harder for borrowers to make their loan payments. In addition, these recent changes may also have a disproportionate effect on taxpayers in states with high residential home prices and high state and local taxes. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could reduce our profitability and materially adversely affect our business, financial condition and results of operations.
We cannot predict whether any other tax legislation will be enacted in the future or whether any such changes to existing federal or state tax law would have a material adverse effect on our business, financial condition and results of operations. We continue to evaluate the impact the Tax Act and other enacted tax reform may have on our business, financial conduction and results of operations.
We are subject to changes in accounting principles, policies or guidelines. Our financial performance is impacted by accounting principles, policies and guidelines. Some of these policies require the use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Some of our accounting policies are critical because they require management to make subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or assumptions underlying our financial statements are incorrect, we may experience material losses.
From time to time, the FASB and the SEC change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our financial statements. These changes are beyond our control, can be difficult to predict and could materially impact how we report our financial condition and results of operations. Changes in these standards are continuously occurring, and given recent economic conditions, more drastic changes may occur. The implementation of such changes could have a material adverse effect on our financial condition and results of operations.
Our ability to pay dividends depends primarily on dividends from our banking subsidiary, the Bank, which is subject to regulatory and other limitations. We are a bank holding company and our operations are conducted primarily by our banking subsidiary, the Bank. Since we receive substantially all of our revenue from dividends from the Bank, our ability to pay dividends on our common stock depends on our receipt of dividends from the Bank.
The Company is a legal entity separate and distinct from its banking subsidiary. As a bank holding company, the Company is subject to certain restrictions on its ability to pay dividends under applicable banking laws and regulations. Federal bank regulators are authorized to determine under certain circumstances relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. In particular, federal bank regulators have stated that paying dividends that deplete a banking organization’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings. In addition, in the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.
The ability of the Bank to pay dividends to us is also subject to its profitability, financial condition, capital expenditures and other cash flow requirements. The Bank may not be able to generate adequate cash flow to pay us dividends in the future. The Company’s ability to pay dividends is also subject to the terms of its Business Note Agreement dated August 1, 2018, which prohibits the Company from making dividend payments while an event of default has occurred and is continuing under the loan agreement or from allowing payment of a dividend which would create an event of default. The Company has pledged 100% of Bank stock as collateral for the loan and credit facilities. The inability to receive dividends from the Bank could have an adverse effect on our business and financial condition.
Furthermore, holders of our common stock are only entitled to receive the dividends as our Board of Directors may declare out of funds legally available for such payments. Although we have historically paid cash dividends on our common stock, we are not required to do so and our Board of Directors could reduce or eliminate our common stock dividend in the

19



future. This could adversely affect the market price of our common stock.
Our shares of common stock are thinly traded and our stock price may be more volatile. Because our common stock is thinly traded, its market price may fluctuate significantly more than the stock market in general or the stock prices of similar companies, which are exchanged, listed or quoted on the NASDAQ Stock Market. We believe there are 10,667,886 shares of our common stock held by nonaffiliates as of March 10, 2020. Thus, our common stock will be less liquid than the stock of companies with broader public ownership, and as a result, the trading prices for our shares of common stock may be more volatile. Among other things, trading of a relatively small volume of our common stock may have a greater impact on the trading price of our stock than would be the case if our public float were larger.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

20



ITEM 2. PROPERTIES
The Company leases its main administrative offices located at 2174 EastRidge Center, Eau Claire, WI 54701. At December 31, 2019, the Bank had a total of 28 full-service branch offices located in the Wisconsin cities of Altoona, Barron, Eau Claire (2), Eleva, Ellsworth, Ettrick, Ladysmith, Lake Hallie, Mondovi, Osseo, Rice Lake (2), Spooner, Strum and
Tomah (2); and the Minnesota cities of Albert Lea, Blue Earth, Fairmont, Faribault, Mankato, Minnesota Lake, Oakdale, Red Wing, St. James, St. Peter and Wells. Of these, the Bank owns 22 and leases the remaining 6 branch offices. Management believes that our current facilities are adequate to meet our present and immediately foreseeable needs. For more information on our properties and equipment, see Note 6, Office Properties and Equipment of Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K. For more information on our leases, see Note 8, Leases of Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.

ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company and/or the Bank occasionally become involved in various legal proceedings. While the outcome of any such proceeding cannot be predicted with certainty, 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 4. MINE SAFETY DISCLOSURES
None
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Historically, trading in shares of our common stock has been limited. Citizens Community Bancorp, Inc. common stock is traded on the NASDAQ Global Market under the symbol “CZWI”.
We had approximately 622 stockholders of record at March 10, 2020. The number of stockholders does not separately reflect persons or entities that hold their stock in nominee or “street” name through various brokerage firms. We believe that the number of beneficial owners of our common stock on that date was substantially greater.
Dividends
The holders of our common stock are entitled to receive such dividends when and as declared by our Board of Directors and approved by our regulators. In determining the payment of cash dividends, our Board of Directors considers our earnings, capital and debt servicing requirements, the financial ratio guidelines of our regulators, our financial condition and other relevant factors.
The Company’s ability to pay dividends on its common stock is dependent on the dividend payments it receives from the Bank, since the Company receives substantially all of its revenue in the form of dividends from the Bank. Future dividends are not guaranteed and will depend on the Company’s ability to pay them. For more information on dividends, see Note 11, Capital Matters of Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.

21




Purchases of Equity Securities by the Issuer
On October 24, 2019, the Board of Directors approved a stock repurchase program. Under this program the Company may repurchase up to approximately 5% of the outstanding shares of its common stock as of October 24, 2019, or 563,504 shares, from time to time through October 1, 2020. From February 3, 2020 through March 6, 2020, the Company repurchased 155,666 shares at an average price of $11.75, for a total investment of $1.84 million, in accordance with Rule 10b5-1 of the Securities and Exchange commission. The table below shows information about our repurchases of our common stock during the period beginning on October 24, 2019 (the date on which the plan was adopted) and ending on December 31, 2019.
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
October 24, 2019 - October 31, 2019
 
 
$

 
 
563,504
November 1, 2019 - November 30, 2019
 
 
$

 
 
563,504
December 1, 2019 - December 31, 2019
 
 
$

 
 
563,504
Total
 
 
$

 
 

This table does not include shares of common stock withheld from employees to satisfy tax withholding obligations associated with the vesting of restricted stock awards. During the three months ended December 31, 2019, the Company withheld an aggregate of 505 shares of common stock, with an average price of $11.13, from employees to satisfy such tax withholding obligations.

22




ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected historical financial and other data of the Company for the years and at the dates indicated. The information at December 31, 2019 and December 31, 2018, and for the twelve months ended December 31, 2019, the three months ended December 31, 2018, and the year ended September 30, 2018 is derived in part from, and should be read together with, the audited consolidated financial statements and notes thereto of the Company that appear in this Transition Report on Form 10-K. The information at September 30, 2018, 2017 and 2016 and the years ended September 30, 2017 and 2016 is derived in part from audited financial statements that do not appear in this Annual Report on Form 10-K. The information below is qualified in its entirety by the detailed information included elsewhere herein and should be read along with Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8., “Financial Statements and Supplementary Data” included in this Form 10-K. See discussion of the Company’s acquisitions in Item 1., “Business”, in Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and in Note 2. “Acquisition” in the consolidated financial statements.

 
 
Year ended December 31,
 
Three month transition period ended December 31,
 
 
2,019
 
2018
Selected Results of Operations Data:
 
 
 
 
Interest income
 
$
60,423

 
$
13,047

Interest expense
 
16,910

 
3,007

Net interest income
 
43,513

 
10,040

Provision for loan losses
 
3,525

 
950

Net interest income after provision for loan losses
 
39,988

 
9,090

Fees and service charges
 
8,649

 
1,790

Other non-interest income
 
6,326

 
736

Non-interest income
 
14,975

 
2,526

Non-interest expense
 
42,686

 
9,794

Income before provision for income taxes
 
12,277

 
1,822

Income tax provision
 
2,814

 
561

Net income
 
$
9,463

 
$
1,261

Per Share Data: (1)
 
 
 
 
Net income per share (basic) (1)
 
$
0.85

 
$
0.12

Net income per share (diluted) (1)
 
$
0.85

 
$
0.12

Cash dividends per common share
 
$
0.20

 
$

Book value per share at end of period
 
$
13.36

 
$
12.62

Tangible book value per share at end of period
 
$
9.89

 
$
9.03



23




CITIZENS COMMUNITY BANCORP, INC.
 
 
 
 
FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
 
 
Year ended December 31,
 
Three month transition period ended December 31,
 
 
2019
 
2018
Selected Financial Condition Data:
 
 
 
 
Total assets
 
1,531,249

 
1,287,924

Investment securities
 
182,970

 
151,575

Total loans, net of deferred costs (fees)
 
1,177,380

 
992,556

Total deposits
 
1,195,702

 
1,007,512

Short-term FHLB borrowings
 
73,471

 
98,813

Other FHLB borrowings
 
57,500

 
11,000

Other borrowings
 
43,560

 
24,647

Total shareholders’ equity
 
150,553

 
138,187

Weighted average basic common shares outstanding
 
11,114,328

 
10,942,920

Weighted average diluted common shares outstanding
 
11,121,435

 
10,967,386

Performance Ratios:
 
 
 
 
Return on average assets
 
0.68
%
 
0.42
%
Return on average total shareholders’ equity
 
6.59
%
 
3.65
%
Net interest margin (2)
 
3.37
%
 
3.56
%
Net interest spread (2)
 
 
 
 
Average during period
 
3.13
%
 
3.32
%
End of period
 
3.46
%
 
3.68
%
Net overhead ratio (3)
 
1.98
%
 
2.44
%
Average loan-to-average deposit ratio
 
98.55
%
 
94.99
%
Average interest bearing assets to average interest bearing liabilities
 
118.35
%
 
122.68
%
Efficiency ratio (4)
 
72.98
%
 
77.94
%
Asset Quality Ratios:
 
 
 
 
Non-performing loans to total loans (5)
 
1.71
%
 
0.82
%
Allowance for loan losses to:
 
 
 
 
Total loans (net of unearned income)
 
0.88
%
 
0.77
%
Non-performing loans
 
51.19
%
 
93.99
%
Net charge-offs to average loans
 
0.08
%
 
0.04
%
Non-performing assets to total assets
 
1.41
%
 
0.83
%
Capital Ratios:
 
 
 
 
Shareholders’ equity to assets (6)
 
9.83
%
 
10.73
%
Average equity to average assets (6)
 
10.26
%
 
11.52
%
Tier 1 capital (leverage ratio) (7)
 
10.4
%
 
9.7
%
Total risk-based capital (7)
 
13.1
%
 
12.7
%


24




CITIZENS COMMUNITY BANCORP, INC.
 
 
 
 
 
 
FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
 
 
Years ended September 30, (dollars in thousands, except per share data)
 
 
2018
 
2017
 
2016
Selected Results of Operations Data:
 
 
 
 
 
 
Interest income
 
38,896

 
$
27,878

 
$
25,084

Interest expense
 
8,593

 
5,610

 
5,007

Net interest income
 
30,303

 
22,268

 
20,077

Provision for loan losses
 
1,300

 
319

 
75

Net interest income after provision for loan losses
 
29,003

 
21,949

 
20,002

Fees and service charges
 
4,635

 
2,937

 
2,923

Net (loss) gain on sale of available for sale securities
 
(17
)
 
111

 
63

Other non-interest income
 
2,752

 
1,703

 
929

Non-interest income
 
7,370

 
4,751

 
3,915

Non-interest expense
 
29,764

 
22,878

 
20,058

Income before provision for income taxes
 
6,609

 
3,822

 
3,859

Income tax provision
 
2,326

 
1,323

 
1,286

Net income
 
$
4,283

 
$
2,499

 
$
2,573

Per Share Data: (1)
 
 
 
 
 
 
Net income per share (basic) (1)
 
$
0.72

 
$
0.47

 
$
0.49

Net income per share (diluted) (1)
 
$
0.58

 
$
0.46

 
$
0.49

Cash dividends per common share
 
$
0.20

 
$
0.16

 
$
0.12

Book value per share at end of period
 
$
12.45

 
$
12.48

 
$
12.27

Tangible book value per share at end of period
 
$
11.05

 
$
9.78

 
$
11.22



25




CITIZENS COMMUNITY BANCORP, INC.
 
 
 
 
 
 
FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
 
 
Years ended September 30, (dollars in thousands, except per share data)
 
 
2018
 
2017
 
2016
Selected Financial Condition Data:
 
 
 
 
 
 
Total assets
 
975,409

 
940,664

 
695,865

Investment securities
 
123,101

 
101,336

 
86,792

Total loans, net of deferred costs (fees)
 
759,247

 
732,995

 
574,439

Total deposits
 
746,529

 
742,504

 
557,677

Short-term FHLB borrowings
 
63,000

 
90,000

 
45,461

Other FHLB borrowings
 

 

 
13,830

Other borrowings
 
24,619

 
30,319

 
11,000

Total shareholders’ equity
 
135,847

 
73,483

 
64,544

Weighted average basic common shares outstanding
 
5,943,891

 
5,361,843

 
5,241,458

Weighted average diluted common shares outstanding
 
7,335,247

 
5,378,360

 
5,257,304

Performance Ratios:
 
 
 
 
 
 
Return on average assets
 
0.45
%
 
0.34
%
 
0.40
%
Return on average total shareholders’ equity
 
4.35
%
 
3.76
%
 
4.08
%
Net interest margin (2)
 
3.42
%
 
3.31
%
 
3.27
%
Net interest spread (2)
 
 
 
 
 
 
Average during period
 
3.27
%
 
3.19
%
 
3.15
%
End of period
 
3.37
%
 
3.47
%
 
3.31
%
Net overhead ratio (3)
 
2.35
%
 
2.48
%
 
2.39
%
Average loan-to-average deposit ratio
 
99.52
%
 
100.87
%
 
101.08
%
Average interest bearing assets to average interest bearing liabilities
 
114.92
%
 
114.96
%
 
114.38
%
Efficiency ratio (4)
 
79.01
%
 
84.67
%
 
83.60
%
Asset Quality Ratios:
 
 
 
 
 
 
Non-performing loans to total loans (5)
 
1.10
%
 
1.10
%
 
0.62
%
Allowance for loan losses to:
 
 
 
 
 
 
Total loans (net of unearned income)
 
0.89
%
 
0.81
%
 
1.06
%
Non-performing loans
 
81.04
%
 
73.90
%
 
169.92
%
Net charge-offs to average loans
 
0.07
%
 
0.07
%
 
0.10
%
Non-performing assets to total assets
 
1.14
%
 
1.49
%
 
0.62
%
Capital Ratios:
 
 
 
 
 
 
Shareholders’ equity to assets (6)
 
13.93
%
 
7.81
%
 
9.28
%
Average equity to average assets (6)
 
10.32
%
 
9.09
%
 
9.87
%
Tier 1 capital (leverage ratio) (7)
 
9.2
%
 
9.2
%
 
9.3
%
Total risk-based capital (7)
 
13.1
%
 
13.2
%
 
14.1
%






26




(1)
Earnings per share are based on the weighted average number of shares outstanding for the period.
(2)
Net interest margin represents net interest income as a percentage of average interest earning assets, and net interest rate spread represents the difference between the weighted average yield on interest earning assets and the weighted average cost of interest bearing liabilities.
(3)
Net overhead ratio represents the difference between non-interest expense and non-interest income, divided by average assets.
(4)
Efficiency ratio represents non-interest expense, divided by the sum of net interest income and non-interest income, excluding impairment losses from OTTI.
(5)
Non-performing loans are either 90+ days past due or nonaccrual. Non-performing assets consist of non-performing loans plus other real estate owned plus other collateral owned.
(6)
Company ratios
(7)
Bank regulatory ratios


27




ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion sets forth management’s discussion and analysis of our results of operations for the year ended December 31, 2019 and the comparable unaudited twelve month period ended December 31, 2018, the three month transition period from October 1, 2018 to December 31, 2018 and the comparable unaudited three-month period ended December 31, 2017, and our financial position as of December 31, 2019 and December 31, 2018 , respectively. The MD&A should be read in conjunction with our consolidated financial statements, related notes, the selected financial data and the statistical information presented elsewhere in this Annual Report on Form 10-K for a more complete understanding of the following discussion and analysis. Unless otherwise noted, years refer to the Company’s fiscal years ended December 31, 2019 and September 30, 2018.
Historically, our fiscal years ended on September 30. On September 25, 2018, the Board of Directors of the Company adopted a resolution to change the Company’s fiscal year end from September 30 to December 31. The transition period began October 1, 2018 and ended December 31, 2018. In addition, on September 25, 2018, the Board of Directors of the Bank also adopted resolutions to amend the Bank’s bylaws to change the Bank’s fiscal year end from September 30 to December 31, commencing December 31, 2018. In connection with this change, we previously filed a Transition Report on Form 10-K to report the results of the three month transition period from October 1, 2018 to December 31, 2018.
PERFORMANCE SUMMARY
The following is a brief summary of some of the significant factors that affected our operating results for the twelve months ended December 31, 2019. These items include the impact of the United Bank and F&M acquisitions, merger charges related to the acquisitions, the sale of the Bank’s only branch in Michigan during the second quarter of 2019 and the impact of higher professional service charges due to the change in our fiscal year end. In October 2018, we closed on the United Bank acquisition. As such, the transition period ended December 31, 2018, included approximately two and one half months impact of United Bank performance results offset by the impact of merger charges. The year ended December 31, 2019 included a full year of United Bank results and significantly lower merger charges. On July 1, 2019, we closed on the F&M acquisition. As a result, fiscal 2019 was positively impacted by six months of F&M income, which was more than offset by merger charges. Total related merger and acquisition charges were $3.9 million in fiscal 2019. Fiscal 2019 operating results were positively impacted by the net gain on sale of the Michigan branch totaling $2.3 million. Fiscal 2019 also included $0.4 million of professional fees related to the change in our fiscal year end.
When comparing, year over year results, changes in net interest income, non-interest income and non-interest expense are primarily due to the items discussed above. See the remainder of this section for a more thorough discussion. 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.
On July 1, 2019, the Company completed its previously announced acquisition (the “Acquisition”) of F. & M. Bancorp. of Tomah Inc. (“F&M”), which enhanced the composition of core community banking loans and increased our market presence in Wisconsin. In connection with the acquisition, the Company merged F&M with and into the Bank, with the Bank surviving the merger. See Note 2, “Acquisition” for additional information.
We reported net income of $9.46 million for the twelve months ended December 31, 2019, compared to net income of $4.20 million for the twelve months ended December 31, 2018. Diluted earnings per share were $0.85 for the twelve months ended December 31, 2019 compared to $0.49 for the twelve months ended December 31, 2018. Return on average assets for the twelve months ended December 31, 2019 was 0.68%, compared to 0.46% for the twelve months ended December 31, 2018. The return on average equity was 6.59% for the twelve months ended December 31, 2019 and 3.92% for the comparable period in 2018.
Management continues to execute its strategy to grow its commercial banking loan portfolios. In addition, the growth has allowed us to reduce concentrations in certain other loan portfolio segments, primarily those with longer-term fixed rates. We view our loan portfolio as follows: the Community Banking loan portfolio reflects management’s strategy to grow its commercial banking business and consumer lending. The Legacy loan portfolio reflects management’s planned reduction strategy to sell substantially all newly originated fixed rate one to four family residential real estate loans in the secondary market, and the discontinuation of originated and purchased indirect paper loans.




28




CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements have been prepared in conformity with U.S. Generally Accepted Accounting Principles (“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 the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. Some of these estimates are more critical than others. Below is a discussion of our critical accounting estimates.
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 and Other Intangible Assets.
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, but reviews goodwill for impairment at a reporting unit level on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired. A reporting unit is defined as any distinct, separately identifiable component of the Company’s one operating segment for which complete, discrete financial information is available and reviewed regularly by the segment’s management. The Company has one reporting unit as of December 31, 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, 2019.    
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.

29




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, 6, 7, 14 and 15 of 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 December 31, 2019, management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary.
Business Combinations.
Business combinations are accounted for by applying the acquisition method of accounting. As of acquisition date, the identifiable assets acquired and liabilities assumed are measured at fair value, and recognized separately from goodwill. Results of operations of the acquired entities are included in the consolidated statement of operations from the date of acquisition. The calculation of intangible assets, including core deposit intangibles, and the fair value of loans are based on significant judgments. Core deposit intangibles are calculated using a discounted cash flow model, based on various factors including, among others, discount rate, attrition rate, interest rate and cost of alternative funds.
Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value with no carryover of related allowance for credit losses. Any allowance for loan loss on these pools reflects only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be collected). Determining the fair value of the acquired loans involves estimating the cash flows expected to be collected from both principal and interest on acquired 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, among others, the remaining life of the loans, delinquency status, estimated prepayments, internal risk ratings, estimated value of underlying collateral and interest rate environment.
STATEMENT OF OPERATIONS ANALYSIS
Twelve months ended December 31, 2019 vs. Twelve months ended December 31, 2018
Only as limited to the following sub-section of “Management’s Discussion and Analysis of Results of Operations” for the comparative twelve-month periods ended December 31, 2019 and December 31, 2018 (unaudited); (“2019”) and (“2018”) shall refer to the twelve-month periods ended December 31, 2019 and 2018, respectively.
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 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 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.

30




Net interest income was $43.5 million for 2019 compared to $32.8 million for 2018. This increase was largely due to the increase in loan interest income resulting from the United Bank and F&M acquisitions and to a lesser extent, organic growth, partially offset higher deposit expense due to the increase in deposits from the United Bank and F&M acquisitions, and organic growth. In addition, scheduled loan accretion increased $0.3 million to $0.9 million for 2019 from $0.6 million for 2018. To fund the F&M acquisition, the Company increased debt resulting in interest expense of $0.3 million in 2019, which offset the benefit of increased scheduled accretion. Accretion due to the payoffs of purchased credit loans increased to $0.4 million for 2019 from $0.2 million for 2018.
The net interest margin for 2019 was 3.37% compared to 3.46% for 2018. The decrease in net interest margin is due to higher deposit costs, partially offset by higher loan yields.
Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following table shows 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. Also presented is the weighted average yield on interest earning assets on a tax-equivalent basis, rates paid on interest bearing liabilities and the resultant spread at December 31, 2019 and December 31, 2018. Non-accruing loans average balances are included in the table with the loans carrying a zero yield.

 
 
 
Twelve months ended December 31, 2019
 
Twelve months ended December 31, 2018
 
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield/
Rate
Average interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
29,948

 
$
672

 
2.24
%
 
$
28,044

 
$
435

 
1.55
%
Loans
 
1,074,952

 
54,647

 
5.08
%
 
782,846

 
38,658

 
4.94
%
Interest-bearing deposits
 
5,841

 
137

 
2.35
%
 
7,735

 
157

 
2.03
%
Investment securities (1)
 
171,747

 
4,332

 
2.60
%
 
127,191

 
2,856

 
2.40
%
Other investments
 
12,442

 
635

 
5.10
%
 
7,930

 
425

 
5.36
%
Total interest earning assets (1)
 
$
1,294,930

 
$
60,423

 
4.68
%
 
$
953,746

 
$
42,531

 
4.48
%
Average interest-bearing liabilities:
 
 
 


 

 


 


 

Savings accounts
 
$
155,848

 
$
651

 
0.42
%
 
$
112,056

 
$
285

 
0.25
%
Demand deposits
 
204,296

 
1,677

 
0.82
%
 
153,234

 
551

 
0.36
%
Money market
 
182,103

 
1,988

 
1.09
%
 
122,791

 
937

 
0.76
%
CD’s
 
352,924

 
7,114

 
2.02
%
 
280,871

 
4,297

 
1.53
%
IRA’s
 
42,134

 
744

 
1.77
%
 
34,349

 
402

 
1.17
%
Total deposits
 
$
937,305

 
$
12,174

 
1.30
%
 
$
703,301

 
$
6,472

 
0.92
%
FHLB Advances and other borrowings
 
156,885

 
4,736

 
3.02
%
 
107,120

 
3,243

 
3.03
%
Total interest-bearing liabilities
 
$
1,094,190

 
$
16,910

 
1.55
%
 
$
810,421

 
$
9,715

 
1.20
%
Net interest income
 


 
$
43,513

 

 


 
$
32,816

 

Interest rate spread
 

 

 
3.13
%
 

 

 
3.28
%
Net interest margin (1)
 

 

 
3.37
%
 

 

 
3.46
%
Average interest earning assets to average interest-bearing liabilities
 

 

 
1.18
%
 

 

 
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% 2019 and the three months ended December 31, 2018 and 24.5% for the nine months ended September 30, 2018. The FTE adjustment to net interest income included in the rate calculations totaled $120 and $201 for the twelve month periods ended December 31, 2019 and 2018, respectively.


31




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).
 
 
 
Twelve months ended December 31, 2019 v. 2018 Increase (decrease) due to
 
 
Volume (1)
 
Rate (1)
 
Total
Increase /
(Decrease)
Interest income:
 
 
 
 
 
 
Cash and cash equivalents
 
$
31

 
$
206

 
$
237

Loans
 
14,808

 
1,181

 
15,989

Interest-bearing deposits
 
(42
)
 
22

 
(20
)
Investment securities
 
1,137

 
339

 
1,476

Other investments
 
232

 
(22
)
 
210

Total interest earning assets
 
$
16,166

 
$
1,726

 
$
17,892

Interest expense:
 

 

 

Savings accounts
 
$
133

 
$
233

 
$
366

Demand deposits
 
222

 
904

 
1,126

Money market accounts
 
537

 
514

 
1,051

CD’s
 
1,239

 
1,578

 
2,817

IRA’s
 
103

 
239

 
342

Total deposits
 
2,234

 
3,468

 
5,702

FHLB Advances and other borrowings
 
1,502

 
(9
)
 
1,493

Total interest bearing liabilities
 
3,736

 
3,459

 
7,195

Net interest income
 
$
12,430

 
$
(1,733
)
 
$
10,697

 
(1)
the change in interest due to both rate and volume has been allocated in proportion to the relationship to the dollar amounts of the change in each.
Provision for Loan Losses. We determine our provision for loan losses (“provision”, or “PLL”) to provide an adequate allowance for loan losses (“ALL”) to reflect probable and inherent credit losses in our loan portfolio.
We recorded provisions for loan losses of $3.5 million for 2019 compared to $2.2 million for 2018. For 2019, approximately $2.0 million of provision related to growth in the originated loan portfolio, $0.43 million related to net charge-offs in the legacy portfolios and approximately $1.0 million of provision growth was attributed to specific reserves. In 2018, the provision was approximately $1.75 million primarily related to originated loan growth, and also, due to modest growth in the specific reserve and charge-offs of $0.4 million. The increase in specific reserves largely relates to the $10.4 million increase in classified assets in the originated loan portfolio. In 2019, the Bank provided $0.4 million specific reserves that were also charged off in 2019. The specific reserve increase relates largely to $0.7 million specific reserve attributed to two commercial credits, with the remaining increase in specific reserves related to one- to four-family residential loans and smaller commercial relationships.
Also contributing to higher provision for loan losses was the impact of the remix of the loan portfolio to commercial lending and runoff of one to four residential and indirect loans, which will increase the allowance due to higher provision levels on commercial lending utilized by the Bank. Management believes that the provision taken for the year ended December 31, 2019 is adequate in view of the present condition of the Bank’s loan portfolio and the sufficiency of collateral supporting non-performing loans. We are continually monitoring non-performing loan relationships and will make provisions, as necessary, if the facts and circumstances change. 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 other factors could all affect the adequacy of our ALL.

32




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 PLL in the future. See Note 1, “Nature of Business and Summary of Significant Accounting Policies - Allowance for Loan Losses” of “Notes to Consolidated Financial Statements and Supplementary Data” to this Form 10-K, for further analysis of the provision for loan losses.
Non-Interest Income. The following table reflects the various components of non-interest income for 2019 and 2018, respectively.
 
 
 
Twelve months ended December 31,
 
Change from prior year
 
 
2019
 
2018
 
2019 over 2018
Non-interest Income:
 
 
 
 
 
 
Service charges on deposit accounts
 
$
2,368

 
$
1,951

 
21.37%
Interchange income
 
1,735

 
1,314

 
32.04%
Loan servicing income
 
2,674

 
1,561

 
71.30%
Gain on sale of loans
 
2,462

 
1,037

 
137.42%
Loan fees and service charges
 
1,145

 
640

 
78.91%
Insurance commission income
 
734

 
716

 
2.51%
Gains (losses) on available for sale securities
 
271

 
(17
)
 
(1,694.12)%
Gain on sale of branch
 
2,295

 

 
N/M
Other
 
1,291

 
755

 
70.99%
Total non-interest income
 
$
14,975

 
$
7,957

 
88.20%
N/M means not meaningful
The higher level of non-interest income primarily relates to the impact of twelve months of United Bank and six months of F&M activity in 2019 compared to two and one half months of United Bank activity in 2018.
The increase in gains on sale of loans in 2019 reflects the impact of the merger discussed above, increased mortgage activity from the lower interest rate environment and $0.4 million of gain on sale of government guarantees of certain agricultural loans. In addition to the merger activity, loan fees and service charges increase also reflected higher commercial customer activity. Gain (losses) on available for sale securities reflects the municipal bond sale disclosed in more detail in the balance sheet analysis section. The Company sold the Rochester Hills, Michigan branch in the second quarter of 2019 for a $2.3 million gain, recorded in the gain on sale of branch line item above. In addition to the merger activity increases in other non-interest income, we recorded the receipt of a one-time payment of approximately $0.2 million on a loan charged-off prior to the Company’s acquisition.

33




Non-Interest Expense. The following table reflects the various components of non-interest expense for 2019 and 2018.
 
 
 
Twelve months ended December 31,
 
% Change From prior year
 
 
2019
 
2018
 
2019 over 2018
Non-interest Expense:
 
 
 
 
 
 
Compensation and related benefits
 
$
20,325

 
$
16,370

 
24.16%
Occupancy
 
3,697

 
3,078

 
20.11%
Office
 
2,188

 
1,775

 
23.27%
Data processing
 
3,938

 
3,217

 
22.41%
Amortization of intangible assets
 
1,497

 
808

 
85.27%
Amortization of mortgage servicing rights
 
1,108

 
420

 
163.81%
Advertising, marketing and public relations
 
1,214

 
822

 
47.69%
FDIC premium assessment
 
258

 
474

 
(45.57)%
Professional services
 
2,457

 
2,753

 
(10.75)%
(Gains) losses on repossessed assets, net
 
(125
)
 
491

 
(125.46)%
Other
 
6,129

 
2,207

 
177.71%
Total non-interest expense
 
$
42,686

 
$
32,415

 
31.69%
Non-interest expense (annualized) / Average assets
 
3.05
%
 
3.54
%
 
 
The higher level of non-interest income primarily relates to the impact of twelve months of United Bank and six months of F&M activity in 2019 compared to two and one half months of United Bank activity in 2018.
Amortization of mortgage servicing rights increase in 2019 from 2018 is due (1) a larger servicing portfolio primarily from the United Bank acquisition and lower interest rates which resulted in recording $0.3 million of MSR impairment which is included in amortization of mortgage servicing rights on the consolidated statement of operations and in the preceding table.
Advertising, marketing and public relations increase in expense in 2019 from 2018, reflects the 2019 Company branding of merged bank operations with two bank conversions in less than six months. Fiscal 2020 advertising, marketing and public relations expense is expected to decrease to the run rates previously experienced by the Company when including the run rates of the acquired companies.
FDIC premium assessment decreased due to two quarters of FDIC application of the Small Bank Assessment Credits. The Bank has approximately $0.05 million of remaining potential credits, whose application will be determined by the FDIC.
Professional fees related to merger expenses decreased $0.4 million to $0.5 million for 2019 compared to $0.9 million in 2018.
Other non-interest expense was largely due to an increase in merger expenses of $3.1 million to $3.3 million in 2019 from $0.2 million in 2018.
Income Taxes. Income tax provision was $2.8 million for 2019 compared to $2.0 million for 2018. Tax expense was favorably impacted by a Department of Treasury ruling in the fourth quarter of 2019 related to the continued non-taxable nature of certain acquired bank owned life insurance. This resulted in a $0.3 million reduction in tax expense related to certain United Bank acquired bank owned life insurance contracts due to the elimination of previously established deferred tax liability on these contracts.
In addition, the federal income tax rate was 21% in 2019 compared to 24.5% for 2018 due to the impact of the Tax Cuts and Jobs Act of 2017, enacted on December 22, 2017. Applying the new accounting guidance for the Tax Act, resulted in additional income tax provision of $0.06 million for the year ended December 31, 2018.
See Note 1, “Nature of Business and Summary of Significant Accounting Policies” and Note 14, “Income Taxes” in the accompanying Notes to Consolidated Financial Statements for a further discussion of income tax accounting, and the impact of the Tax Cuts and Jobs Act of 2017. Income tax expense recorded in the accompanying Consolidated Statements of Operations involves interpretation and application of certain accounting pronouncements and federal and state tax codes and is, therefore, considered a critical accounting policy. We undergo examination by various taxing authorities. Such taxing authorities may require that changes in the amount of tax expense or the amount of the valuation allowance be recognized when their interpretations differ from those of management, based on their judgments about information available to them at the time of their examinations.

34




Transition period ended December 31, 2018 vs. three months ended December 31, 2017 (Unaudited)
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 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 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.
Net interest income on a tax-equivalent basis was $10,083 for the transition period ended December 31, 2018, compared to $7,580 for the transition period ended December 31, 2017. Interest income on tax exempt securities is computed on a tax equivalent basis. The net interest margin for the transition period ended December 31, 2018 was 3.56% compared to 3.42% for the transition period ended December 31, 2017. The 14 basis point increase includes the favorable impact of payoffs of acquired credit impaired loans of 8 basis points, increased accretion of 2 basis points due to United Bank and the favorable impact of United Bank, partially offset by higher borrowing costs.
Besides the additional net interest income provided from the United Bank acquisition, the Company's net interest margin benefited from $235,000 of interest income realized on the payoff of classified loans. These classified loans were related to loans acquired in a prior acquisition.
As shown in the rate/volume analysis table below, positive volume changes resulted in a $2,560 increase in net interest income for the transition period ended December 31, 2018. Average loan volume increases primarily result in the 73 day impact of the United Bank acquisition. Additionally, commercial real estate and non-real estate loan growth in the current three month period over the prior year three month period, resulted from management's strategy to continue to grow its Community Banking portfolio and allow runoff of its Legacy loan portfolio as discussed previously. The increase and changes in the composition of interest earning assets resulted in a $2,674 increase in interest income for the transition period ended December 31, 2018, and a $114 increase in interest expense due partially to acquisition of United Bank assets and liabilities. Rate changes on interest earning assets caused an increase in interest income by $961 and increased interest expense by $1,007, for a net impact of a $46 decrease in net interest income between the transition period ended December 31, 2018 and 2017.
Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following table shows 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. Also presented is the weighted average yield on interest earning assets on a tax-equivalent basis, rates paid on interest bearing liabilities and the resultant spread at December 31, 2018 and December 31, 2017. Non-accruing loans have been included in the table as loans carrying a zero yield.
Average interest earning assets were $1,123,040 for the transition period ended December 31, 2018 compared to $879,838 for the quarter ended December 31, 2017. Average loans outstanding increased to $921,951 for the quarter ended December 31, 2018 from $733,203 for the transition period ended December 31, 2017. Interest income on loans increased $3,118, of which $2,374 related to the increase in average outstanding balances, combined with an increase in interest income due to higher yields on such loans in the amount of $744.
Average interest bearing liabilities increased $134,126 for the transition period ended December 31, 2018 from their December 31, 2017 levels. Average interest bearing deposits increased $150,890, or 22.7% to $815,838 for the transition period ended December 31, 2018. Interest expense on interest bearing deposits increased $225 during the transition period ended December 31, 2018 from the volume and mix changes and increased $704 from the impact of the rate environment, resulting in an aggregate increase of $929 in interest expense on interest bearing deposits.
 

35




 
 
Three months ended December 31, 2018
 
Three months ended December 31, 2017
 
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield/
Rate
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield/
Rate
Average interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
40,733

 
$
195

 
1.90
%
 
$
30,848

 
$
67

 
0.86
%
Loans
 
921,951

 
11,839

 
5.09
%
 
733,203

 
8,721

 
4.72
%
Interest-bearing deposits
 
7,268

 
40

 
2.18
%
 
7,714

 
32

 
1.65
%
Investment securities (1)
 
145,114

 
861

 
2.47
%
 
100,737

 
513

 
2.23
%
Non-marketable equity securities, at cost
 
7,974

 
112

 
5.57
%
 
7,336

 
79

 
4.27
%
Total interest earning assets (1)
 
$
1,123,040

 
$
13,047

 
4.62
%
 
$
879,838

 
$
9,412

 
4.27
%
Average interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Savings accounts
 
$
165,434

 
$
145

 
0.35
%
 
$
96,230

 
$
22

 
0.09
%
Demand deposits
 
162,866

 
166

 
0.40
%
 
146,838

 
90

 
0.24
%
Money market
 
140,321

 
367

 
1.04
%
 
123,459

 
167

 
0.54
%
CD’s
 
309,428

 
1,329

 
1.70
%
 
263,429

 
839

 
1.26
%
IRA’s
 
37,789

 
124

 
1.30
%
 
34,992

 
84

 
0.95
%
Total deposits
 
$
815,838

 
$
2,131

 
1.04
%
 
$
664,948

 
$
1,202

 
0.72
%
FHLB Advances and other borrowings
 
99,595

 
876

 
3.49
%
 
116,359

 
683

 
2.33
%
Total interest-bearing liabilities
 
$
915,433

 
$
3,007

 
1.30
%
 
$
781,307

 
$
1,885

 
0.96
%
Net interest income
 
 
 
$
10,040

 
 
 
 
 
$
7,527

 
 
Interest rate spread
 
 
 
 
 
3.32
%
 
 
 
 
 
3.31
%
Net interest margin (1)
 
 
 
 
 
3.56
%
 
 
 
 
 
3.42
%
Average interest earning assets to average interest-bearing liabilities
 
 
 
 
 
1.23

 
 
 
 
 
1.13

 
(1) Fully taxable equivalent (FTE). The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21% and 24.5% for the three months ended December 31, 2018 and December 31, 2017, respectively. The FTE adjustment to net interest income included in the rate calculations totaled $43 and $53 for the three months ended December 31, 2018 and 2017, 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).
 

36




 
 
Three months ended December 31, 2018 v. 2017 Increase (decrease) due to
 
 
Volume (1)
 
Rate (1)
 
Total
Increase /
(Decrease)
Interest income:
 
 
 
 
 
 
Cash and cash equivalents
 
$
26

 
$
102

 
$
128

Loans
 
2,374

 
744

 
3,118

Interest-bearing deposits
 
(2
)
 
10

 
8

Investment securities
 
269

 
79

 
348

Non-marketable equity securities, at cost
 
7

 
26

 
33

Total interest earning assets
 
$
2,674

 
$
961

 
$
3,635

Interest expense:
 
 
 
 
 
 
Savings accounts
 
$
21

 
$
102

 
$
123

Demand deposits
 
11

 
65

 
76

Money market accounts
 
25

 
175

 
200

CD’s
 
161

 
329

 
490

IRA’s
 
7

 
33

 
40

Total deposits
 
225

 
704

 
929

FHLB Advances and other borrowings
 
(111
)
 
303

 
192

Total interest bearing liabilities
 
114

 
1,007

 
1,121

Net interest income
 
$
2,560

 
$
(46
)
 
$
2,514

 
(1)
the change in interest due to both rate and volume has been allocated in proportion to the relationship to the dollar amounts of the change in each.
Provision for Loan Losses. We determine our provision for loan losses (“provision”, or “PLL”) 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 recorded provisions for loan losses of $950 for the transition period ended December 31, 2018 and $100 for the quarter ended December 31, 2017, respectively, largely impacted by reflecting strong organic loan growth charge-offs, and the remix of the loan portfolio discussed earlier. Commercial lending, under our ALL methodology commercial loans have, has a higher ALLL percentage and therefore higher provision than those association with the runoff Legacy portfolio. Management believes that the provision taken for the transition period ended December 31, 2018 is adequate in view of the present condition of the Bank's loan portfolio and the sufficiency of collateral supporting non-performing loans. We are continually monitoring non-performing loan relationships and will make provisions, as necessary, if the facts and circumstances change. 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 other factors 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 PLL in the future. See Note 1, “Nature of Business and Summary of Significant Accounting Policies - Allowance for Loan Losses” of "Notes to Consolidated Financial Statements and Supplementary Data" to this Form 10-K, for further analysis of the provision for loan losses.
Net loan charge-offs for the three months ended December 31, 2018 and 2017 were $94 and $183, respectively. Net charge-offs to average loans were 0.04% for the transition period ended December 31, 2018 and 0.10% for the transition period ended December 31, 2017.
Non-Interest Income. The following table reflects the various components of non-interest income for the transition periods ended December 31, 2018 and 2017, respectively.
 

37




 
 
Three months ended December 31,
 
% Change from prior year
 
 
2018
 
2017 (unaudited)
 
2018 over 2017 (unaudited)
Non-interest Income:
 
 
 
 
 
 
Service charges on deposit accounts
 
$
619

 
$
460

 
34.57%
Interchange income
 
336

 
306

 
9.80%
Loan servicing income
 
510

 
328

 
55.49%
Gain on sale of mortgage loans
 
388

 
294

 
31.97%
Loan fees and service charges
 
273

 
154

 
77.27%
Insurance commission income
 
162

 
166

 
(2.41)%
Other
 
238

 
231

 
3.03%
Total non-interest income
 
$
2,526

 
$
1,939

 
30.27%
N/M means not meaningful
The higher level of non-interest income primarily relates to the United Bank acquisition.
Non-Interest Expense. The following table reflects the various components of non-interest expense for the transition periods ended December 31, 2018 and 2017, respectively.
 
 
 
Three months ended December 31,
 
% Change From prior year
 
 
2018
 
2017 (unaudited)
 
2018 over 2017 (unaudited)
Non-interest Expense:
 
 
 
 
 
 
Compensation and related benefits
 
$
4,946

 
$
3,555

 
39.13%
Occupancy
 
808

 
705

 
14.61%
Office
 
464

 
438

 
5.94%
Data processing
 
993

 
704

 
41.05%
Amortization of intangible assets
 
325

 
162

 
100.62%
Amortization of mortgage servicing rights
 
175

 
90

 
94.44%
Advertising, marketing and public relations
 
226

 
149

 
51.68%
FDIC premium assessment
 
144

 
142

 
1.41%
Professional services
 
1,118

 
688

 
62.50%
Losses on repossessed assets, net
 
(30
)
 
13

 
N/M
Other
 
625

 
497

 
25.75%
Total non-interest expense
 
$
9,794

 
$
7,143

 
37.11%
Non-interest expense (annualized) / Average assets
 
3.29
%
 
3.10
%
 
 
N/M means not meaningful
The higher level of non-interest expense primarily relates to the United Bank acquisition and the impact of merger activity. Merger related expenses incurred this quarter and included in the non-interest expense in the consolidated statement of operations consisted of the following: (1) $352,000 recorded in compensation and benefits, (2) $580,000 recorded in professional services and (3) $215,000 recorded in other non-interest expense. Branch closure costs incurred this quarter consisted of $9,000 recorded in professional services and $3,000 recorded in other non-interest expense in the consolidated statement of operations. Audit and financial reporting expensed, related to our year end change, consisted of $135,000 recorded in professional services in the consolidated statement of operations during the quarter ended December 31,2018.
Professional fees increased over the quarter due to engaging third-party contractors associated with the United Bank acquisition, the F. & M. Bancorp acquisition, the sale of the Michigan branch office and expenses associated

38




with changing the fiscal year end to December 31 from September 30. The Company recognized approximately $490,000 in professional fees related to the United Bank acquisition, approximately $90,000 in professional fees for the F. & M. Bancorp acquisition, approximately $9,000 in professional fees related to the Michigan branch sale and approximately $135,000 in professional fees associated with changing the fiscal year end.
Income Taxes. Income tax provision was $561 for the transition period ended December 31, 2018, compared to $883 for the quarter ended December 31, 2017. Our effective tax rate decreased from 39.7% for the three months ended December 31, 2017 to 30.8% for the three months ended December 31, 2018. The Tax Cuts and Jobs Act of 2017 ("the Tax Act"), enacted on December 22, 2017, reduced the corporate Federal income tax rate for the Company from 24.5% for the quarter ended December 31, 2017, to 21% for the transition period ended December 31, 2018. GAAP required the impact of the provisions of the Tax Act be accounted for in the period of enactment. At December 31, 2017, 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. See Income Taxes 2018 compare, to 2017 results of operations for more detail.
See Note 1, “Nature of Business and Summary of Significant Accounting Policies” and Note 14, “Income Taxes” in the accompanying Notes to Consolidated Financial Statements for a further discussion of income tax accounting, and the impact of the Tax Cuts and Jobs Act of 2017. Income tax expense recorded in the accompanying Consolidated Statements of Operations involves interpretation and application of certain accounting pronouncements and federal and state tax codes and is, therefore, considered a critical accounting policy. We undergo examination by various taxing authorities. Such taxing authorities may require that changes in the amount of tax expense or the amount of the valuation allowance be recognized when their interpretations differ from those of management, based on their judgments about information available to them at the time of their examinations.
BALANCE SHEET ANALYSIS
Total assets increased $243.3 million to $1.53 billion at December 31, 2019 from $1.29 billion at December 31, 2018. The December 31, 2019 asset growth from December 31, 2018 included the impact of the F&M acquisition of $193.6 million and net organic loan growth of approximately $57 million.
Cash and Cash Equivalents. Cash and cash equivalents increased from $45.8 million at December 31, 2018 to $55.8 million at December 31, 2019. The increase is largely due to the impact of customer activity, primarily wires received later in the day at year-end.
Investment Securities. We manage our securities portfolio to provide liquidity, in an effort to improve interest rate risk, enhance income. Our investment portfolio is comprised of securities available for sale (AFS) and securities held to maturity (HTM) We have not purchased any securities for our HTM portfolio in in the past year and as such, the HTM portfolio balances have decreased.
Securities AFS (recorded at fair value), which represent the majority of our investment portfolio, grew to $180.1 million at December 31, 2019 compared with $146.7 million at December 31, 2018. The growth in the AFS portfolio was largely due to maintaining on-balance liquidity above the Company’s 10% target. Part of this growth is due to impact of the F&M acquisition, as noted above, which increased total assets.
Additionally, during the year, we sold the vast majority of our obligations of state and local government agency (municipal) portfolio. The proceeds from the sale, along with the growth in available for sale securities balances, were largely reinvested in mortgage-backed securities, corporate debt securities and investments in trust preferred securities, resulting in their respective increases. The trust preferred securities reprice based on LIBOR plus a spread, and current issuers of these securities are bank holding companies with assets of $50 billion or more.
The amortized cost and market values of our investment securities by asset categories as of the dates indicated below were as follows:

39




Available for sale securities
 
Amortized
Cost
 
Fair
Value
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

Total available for sale securities
 
$
180,768

 
$
180,119

 
 
 
 
 
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

Total available for sale securities
 
$
149,265

 
$
146,725

Held to maturity securities
 
Amortized
Cost
 
Fair
Value
December 31, 2019
 
 
 
 
Obligations of states and political subdivisions
 
$
300

 
$
302

Mortgage-backed securities
 
2,551

 
2,655

Total held to maturity securities
 
$
2,851

 
$
2,957

 
 
 
 
 
December 31, 2018
 
 
 
 
Obligations of states and political subdivisions
 
$
1,701

 
$
1,698

Mortgage-backed securities
 
3,149

 
3,174

Total held to maturity securities
 
$
4,850

 
$
4,872

The amortized cost and fair values of our investment securities by maturity, as of December 31, 2019 were as follows:
Available for sale securities
 
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
 
$
141

 
$
141

Due after one year through five years
 
5,900

 
5,959

Due after five years through ten years
 
43,269

 
43,180

Due after ten years
 
60,652

 
59,508

Total securities with contractual maturities
 
109,962

 
108,788

Mortgage backed securities
 
70,806

 
71,331

Total available for sale securities
 
$
180,768

 
$
180,119

Held to maturity securities
 
Amortized
Cost
 
Estimated
Fair Value
Due after one year through five years
 
$
300

 
$
302

Mortgage backed securities
 
2,551

 
2,655

Total held to maturity securities
 
$
2,851

 
$
2,957



40




The amortized cost and fair values of our investment securities by maturity, as of December 31, 2018 were as follows:
Available for sale securities
 
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
 
$
2,177

 
$
2,172

Due after one year through five years
 
22,296

 
22,043

Due after five years through ten years
 
43,014

 
42,081

Due after ten years
 
39,395

 
38,931

Total securities with contractual maturities
 
106,882

 
105,227

Mortgage backed securities
 
42,279

 
41,350

Securities without contractual maturities
 
104

 
148

Total available for sale securities
 
$
149,265

 
$
146,725

Held to maturity securities
 
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
 
$
680

 
$
678

Due after one year through five years
 
1,021

 
1,020

Total securities with contractual maturities
 
1,701

 
1,698

Mortgage backed securities
 
3,149

 
3,174

Total held to maturity securities
 
$
4,850

 
$
4,872






41




The following tables show the fair value and gross unrealized losses of securities with unrealized losses, as of the dates indicated below, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position: 
 
 
Less than 12 Months
 
12 Months or More
 
Total
Available for sale securities
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency obligations
 
$
14,593

 
$
156

 
$
10,540

 
$
191

 
$
25,133

 
$
347

Obligations of states and political subdivisions
 

 

 

 

 

 

Mortgage-backed securities
 
22,537

 
62

 
5,883

 
48

 
28,420

 
110

Agency securities
 

 

 

 

 

 

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