Citizens Community Bancorp (CZWI) 10-Q 2019 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 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, including zip code)

715-836-9994

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of "large 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 Exchange Act).    Yes  ¨ No  x

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

At May 9, 2019 there were 10,989,159 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

CITIZENS COMMUNITY BANCORP, INC.

FORM 10-Q

March 31, 2019

INDEX

			Page Number
Part I – FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of March 31, 2019 (Unaudited) and December 31, 2018	5
		Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2019 and 2018	6
		Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 31, 2019 and 2018	7
		Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the three months ended March 31, 2019	8
		Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2019 and 2018	9
		Condensed Notes to Consolidated Financial Statements (Unaudited)	11
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	66
	Item 4.	Controls and Procedures	68
Part II – OTHER INFORMATION			68
	Item 1.	Legal Proceedings	68
	Item 1A.	Risk Factors	69
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
	Item 3.	Defaults Upon Senior Securities	69
	Item 4.	Mine Safety Disclosures	69
	Item 5.	Other Information	69
	Item 6.	Exhibits	70
SIGNATURES			71

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PART 1 – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

4

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Balance Sheets

March 31, 2019 (unaudited) and December 31, 2018

(derived from audited financial statements)

(in thousands, except share and per share data)

	March 31, 2019			December 31, 2018
Assets
Cash and cash equivalents	$	41,358		$	45,778
Other interest-bearing deposits	6,235			7,460
Securities available for sale "AFS"	160,201			146,725
Securities held to maturity "HTM"	4,711			4,850
Equity securities with readily determinable fair value	182			—
Non-marketable equity securities, at cost	11,206			11,261
Loans receivable	1,019,678			992,556
Allowance for loan losses	(8,707		)	(7,604		)
Loans receivable, net	1,010,971			984,952
Loans held for sale	1,231			1,927
Mortgage servicing rights	4,424			4,486
Office properties and equipment, net	13,487			13,513
Accrued interest receivable	4,369			4,307
Intangible assets	7,174			7,501
Goodwill	31,474			31,474
Foreclosed and repossessed assets, net	2,100			2,570
Bank owned life insurance ("BOLI")	17,905			17,792
Other assets	9,562			3,328
TOTAL ASSETS	$	1,326,590		$	1,287,924
Liabilities and Stockholders’ Equity
Liabilities:
Deposits	$	1,030,649		$	1,007,512
Federal Home Loan Bank advances	122,828			109,813
Other borrowings	24,675			24,647
Other liabilities	10,058			7,765
Total liabilities	1,188,210			1,149,737
Stockholders’ Equity:
Common stock— $0.01 par value, authorized 30,000,000; 10,990,033 and 10,953,512 shares issued and outstanding, respectively	110			109
Additional paid-in capital	125,940			125,512
Retained earnings	14,008			15,264
Unearned deferred compensation	(956		)	(857		)
Accumulated other comprehensive loss	(722		)	(1,841		)
Total stockholders’ equity	138,380			138,187
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,326,590		$	1,287,924

See accompanying condensed notes to unaudited consolidated financial statements.

5

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Operations (unaudited)

Three Months Ended March 31, 2019 and 2018

(in thousands, except per share data)

	Three Months Ended
	March 31, 2019			March 31, 2018
Interest and dividend income:
Interest and fees on loans	$	12,414		$	8,539
Interest on investments	1,304			813
Total interest and dividend income	13,718			9,352
Interest expense:
Interest on deposits	2,593			1,250
Interest on FHLB borrowed funds	661			314
Interest on other borrowed funds	402			432
Total interest expense	3,656			1,996
Net interest income before provision for loan losses	10,062			7,356
Provision for loan losses	1,225			100
Net interest income after provision for loan losses	8,837			7,256
Non-interest income:
Service charges on deposit accounts	550			430
Interchange income	338			302
Loan servicing income	554			346
Gain on sale of loans	308			189
Loan fees and service charges	128			87
Insurance commission income	184			187
Gains (losses) on investment securities	34			(21		)
Other	236			155
Total non-interest income	2,332			1,675
Non-interest expense:
Compensation and related benefits	4,706			3,806
Occupancy	954			761
Office	522			426
Data processing	987			733
Amortization of intangible assets	327			161
Amortization of mortgage servicing rights	191			76
Advertising, marketing and public relations	203			146
FDIC premium assessment	94			115
Professional services	825			323
Loss (gain) on repossessed assets, net	(37		)	—
Other	1,122			556
Total non-interest expense	9,894			7,103
Income before provision for income tax	1,275			1,828
Provision for income taxes	322			487
Net income attributable to common stockholders	$	953		$	1,341
Per share information:
Basic earnings	$	0.09		$	0.23
Diluted earnings	$	0.09		$	0.23
Cash dividends paid	$	0.20		$	0.20

See accompanying condensed notes to unaudited consolidated financial statements.

6

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Comprehensive Income (unaudited)

Three months ended March 31, 2019 and 2018

(in thousands)

	Three Months Ended
	March 31, 2019		March 31, 2018
Net income attributable to common stockholders	$	953	$	1,341
Other comprehensive income (loss), net of tax:
Securities available for sale
Net unrealized gains (losses) arising during period	1,137		(1,055		)
Reclassification adjustment for gains (losses) included in net income	27		(16		)
Other comprehensive income (loss)	1,164		(1,071		)
Comprehensive income	$	2,117	$	270

See accompanying condensed notes to unaudited consolidated financial statements.

7

CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statement of Changes in Stockholders’ Equity (unaudited)

Three Months Ended March 31, 2019

(in thousands, except shares and per share data)

					Additional Paid-In Capital			Retained Earnings			Unearned Deferred Compensation			Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity
	Common Stock
	Shares		Amount
Balance, January 1, 2019	10,953,512		$	109	$	125,512		$	15,264		$	(857	)	$	(1,841	)	$	138,187
Net income	—		—		—			953			—			—			953
Other comprehensive income, net of tax	—		—		—			—			—			1,164			1,164
Forfeiture of unvested shares	(958	)	—		(13		)	—			13			—			—
Surrender of restricted shares of common stock	(798	)	—		(9		)	—			—			—			(9		)
Common stock awarded under the equity incentive plan	10,847		—		252			—			(252		)	—			—
Common stock options exercised	27,430		1		194			—			—			—			195
Stock option expense	—		—		4			—			—			—			4
Amortization of restricted stock	—		—		—			—			140			—			140
Adoption of ASU 2016-01; Equity securities	—		—		—			45			—			(45		)	—
Adoption of ASU 2016-02; Leases	—		—		—			(56		)	—			—			(56		)
Cash dividends ($0.20 per share)	—		—		—			(2,198		)	—			—			(2,198		)
Balance, March 31, 2019	10,990,033		$	110	$	125,940		$	14,008		$	(956	)	$	(722	)	$	138,380

See accompanying condensed notes to unaudited consolidated financial statements.

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CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Cash Flows (unaudited)

Three Months Ended March 31, 2019 and 2018

(in thousands)

	Three Months Ended
	March 31, 2019			March 31, 2018
Cash flows from operating activities:
Net income attributable to common stockholders	$	953		$	1,341
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premium/accretion discount on investment securities	287			249
Provision for depreciation	351			256
Provision for loan losses	1,225			100
Net realized loss on sale of securities	—			21
Increase in MSR assets resulting from transfers of financial assets	(129		)	—
Amortization of MSR assets	191			—
Amortization of intangible assets	327			161
Amortization of restricted stock	140			67
Net stock based compensation expense	4			(5		)
Loss on sale of office properties and equipment	27			—
Provision for deferred income taxes	—			137
Increase in cash surrender value of life insurance	(113		)	—
Net loss from disposals of foreclosed and repossessed assets	1			1
Fair value adjustment on equity securities	(78		)	—
Gain on sale of loans held for sale, net	(308		)	(483		)
Net change in loans held for sale	1,004			1,297
(Increase) decrease in accrued interest receivable and other assets	(1,397		)	951
Decrease in other liabilities	(3,014		)	(1,013		)
Total adjustments	(1,482		)	1,739
Net cash (used in) provided by operating activities	(529		)	3,080
Cash flows from investing activities:
Purchase of investment securities	(17,425		)	(25,708		)
Net decrease (increase) in interest-bearing deposits	1,225			(1,244		)
Principal payments on investment securities	5,241			2,211
Net (purchases)/sales of non-marketable equity securities	55			444
Proceeds from sale of foreclosed and repossessed assets	862			373
Net (increase) decrease in loans	(27,637		)	9,001
Net capital expenditures	(352		)	(890		)
Net cash used in investing activities	(38,031		)	(15,813		)
Cash flows from financing activities:
Net increase (decrease) in Federal Home Loan Bank advances	13,015			(9,000		)
Principal payment reduction to other borrowings	—			(420		)
Net increase in deposits	23,137			7,546
Surrender of restricted shares of common stock	(9		)	—
Exercise of common stock options	195			41
Cash dividends paid	(2,198		)	(1,181		)
Net cash provided by (used in) financing activities	34,140			(3,014		)
Net decrease in cash and cash equivalents	(4,420		)	(15,747		)
Cash and cash equivalents at beginning of period	45,778			47,215
Cash and cash equivalents at end of period	$	41,358		$	31,468

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Supplemental cash flow information:
Cash paid during the period for:
Interest on deposits	$	2,504	$	1,254
Interest on borrowings	$	1,122	$	722
Income taxes	$	1,632	$	618
Supplemental noncash disclosure:
Transfers from loans receivable to foreclosed and repossessed assets	$	393	$	423

See accompanying condensed notes to unaudited consolidated financial statements.

10

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

(UNAUDITED)

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

The Bank is a national banking association (a "National Bank") and operates under the title of Citizens Community Federal National Association ("Citizens Community Federal N.A." or "Bank" or "CCFBank"). The Company is a bank holding company, supervised by the Federal Reserve Bank of Minneapolis (the "FRB"), and operates under the title of Citizens Community Bancorp, Inc. The U.S. Office of the Comptroller of the Currency (the "OCC"), is the primary federal regulator for the Bank.

The consolidated income of the Company is principally derived from the income of the Bank, the Company’s wholly owned subsidiary, serving customers in Wisconsin and Minnesota through 26 branch locations, along with one branch in Michigan which the Company has a signed agreement to sell. 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.

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

In preparing these consolidated financial statements, we evaluated the events and transactions that occurred subsequent to the balance sheet date as of March 31, 2019 and through the date the financial statements were available to be issued for items that should potentially be recognized or disclosed in these consolidated financial statements.

On 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 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. The purchase of the branch is subject to regulatory approval and satisfaction of customary closing conditions and is expected to be completed in the second quarter of 2019.

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

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

Use of Estimates – Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, fair value of financial instruments, the allowance for loan losses, mortgage servicing rights, foreclosed and repossessed assets, valuation of acquired intangible assets, useful lives for depreciation and amortization, indefinite-lived intangible assets, stock-based compensation and long-lived assets, deferred tax assets, uncertain income tax positions and contingencies. Management does not anticipate any material changes to estimates made herein in the near term. Factors that may cause sensitivity to the aforementioned estimates include, but are not limited to: those items described under the caption, "Risk Factors" in Item 1A in our transition report on Form 10-K for the transition period from October 1, 2018 to December 31, 2018, filed with the SEC on March 8, 2019, external market factors such as market interest rates and

11

unemployment rates, changes to operating policies and procedures, and changes in applicable banking regulations. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period.

Investment Securities; Held to Maturity and Available for Sale – Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of the date of each balance sheet. Securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Held to maturity securities are stated at amortized cost. Investment securities not classified as held to maturity are classified as available for sale. Available for sale securities are stated at fair value, with unrealized holding gains and losses being reported in other comprehensive income (loss), net of tax. Unrealized losses deemed other-than-temporary due to credit issues are reported in the Company’s net income in the period in which the losses arise. Interest income includes amortization of purchase premium or accretion of purchase discount. Amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the estimated lives of the securities.

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

Equity Securities With Readily Determinable Fair Value - Equity investment securities are carried at their fair market value, based on an “exit price” notion. Changes in the fair value of equity investment securities are recognized as Gains (losses) on investment securities in the consolidated Statement of Operations.

Non-marketable Equity Securities — Non-marketable equity securities are comprised of Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank (FRB) stock, and are carried at cost.

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

FHLB stock is evaluated quarterly for impairment. Quarterly cash dividends are paid on FHLB stock owned by members as a condition for required membership and also paid on stock owned by members based on activity.

Based on management’s quarterly evaluation, no impairment has been recorded on these securities.

As a National Banking Association, the Bank must be a member of the Federal Reserve system. Each member bank is required to subscribe to Federal Reserve Stock in an amount equal to 6 percent of its capital and surplus. Although the par value of the stock is $100 per share, banks (including the Bank) pay only $50 per share at the time of purchase, with the understanding that the other half of the subscription amount is subject to call at any time. Dividends are paid at the statutory rate of 6 percent per annum, or $1.50 per share semi-annually on the last business day of June and December.

Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, and net of deferred loan fees and costs, and non-accretable discount on purchased of credit impaired loans. Interest income is accrued on the unpaid principal balance of these loans. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the interest method without anticipating prepayments. Late charge fees are recognized into income when collected.

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

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

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

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

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

Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for a loan placed on nonaccrual status is reversed against interest income. Interest received on such loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual status. Loans are returned to accrual status when payments are made that bring the loan account current with the contractual term of the loan and a six month payment history has been established. Interest on impaired loans considered troubled debt restructurings (“TDRs”) or substandard, less than 90 days delinquent, is recognized as income as it accrues based on the revised terms of the loan over an established period of continued payment. Substandard loans, as defined by the OCC, our primary banking regulator, are loans that are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Residential real estate loans and open ended consumer non-real estate loans are charged off to estimated net realizable value less estimated selling costs at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 180 days or more. Closed ended consumer non-real estate loans are charged off to net realizable value at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 120 days or more. Commercial/agricultural real estate and non-real estate loans are charged off to net realizable value at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 90 days or more.

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

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

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

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

13

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

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

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

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

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

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

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

Mortgage Servicing Rights- Mortgage servicing rights ("MSR") assets result as the Company sells loans to investors in the secondary market and retains the rights to service mortgage loans sold to others. MSR assets are initially measured at fair value; assessed at least annually for impairment; carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value. MSR assets are amortized in proportion to and over the period of estimated net servicing income, with the amortization recorded in non-interest expense in the consolidated statement of operations.

The valuation of MSRs and related amortization thereon are based on numerous factors, assumptions and judgments, such as those for: changes in the mix of loans, interest rates, prepayment speeds, and default rates. Changes in these factors, assumptions and judgments may have a material effect on the valuation and amortization of MSRs. Although management believes that the assumptions used to evaluate the MSRs for impairment are reasonable, future adjustment may be necessary if future economic conditions differ substantially from the economic assumptions used to determine the value of MSRs.

Foreclosed and Repossessed Assets, net –Assets acquired through foreclosure or repossession are initially recorded at fair value, less estimated costs to sell, which establishes a new cost basis. If the fair value declines subsequent to foreclosure or repossession, a write-down is recorded through expense. Costs incurred after acquisition are expensed and are included in non-interest expense, other in the Consolidated Statements of Operations.

Transfers of financial assets—Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the entity, (2) the transferee obtains the right, free of conditions that constrain it from taking advantage of that right, to pledge or

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exchange the transferred assets, and (3) the entity does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.

Goodwill and other intangible assets-The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350, "Intangibles - Goodwill and Other."  The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, as goodwill.  The Company amortizes acquired intangible assets with definite useful economic lives over their useful economic lives utilizing the straight-line method.  On a periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amounts of the intangible assets may be impaired.  The Company does not amortize goodwill and any acquired intangible asset with an indefinite useful economic life, but reviews them for impairment at a reporting unit level on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired.  A reporting unit is defined as any distinct, separately identifiable component of the Company’s one operating segment for which complete, discrete financial information is available and reviewed regularly by the segment’s management.  The Company has one reporting unit as of December 31, 2018 which is related to its banking activities. The Company has performed the required goodwill impairment test and has determined that goodwill was not impaired as of December 31, 2018.

Leases - We determine if an arrangement is a lease at inception. All of our existing leases have been determined to be operating leases under ASC 842. Right-of-use (“ROU”) assets are included in other assets in our consolidated balance sheets. Operating lease liabilities are included in other liabilities in our consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date, based on the present value of lease payments over the lease term. As none of our existing leases provide an implicit rate, we use our incremental borrowing rate, based on information available at commencement date, in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease, when it is reasonably certain that we will exercise that option. Lease expense is recognized based on the total contractually required lease payments, over the term of the lease, on a straight-line basis.

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

The Tax Cuts and Jobs Act of 2017 ("the Tax Act"), enacted on December 22, 2017, reduces corporate Federal income tax rates for the Company from 34% to 24.5% for 2018, and 21% for 2019. GAAP requires the impact of the provisions of the Tax Act be accounted for in the period of enactment. At December 31, 2017, we had not completed our accounting for the tax effects of enactment of the Tax Act; however, in certain cases, as described below, we made a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. The Company revalued its net deferred tax assets to account for the future impact of lower corporate taxes. For the items for which we were able to determine a reasonable estimate, we recorded an increased provisional amount of income tax expense of $275 in December 2017, related to the revaluation of the deferred tax assets to both the revaluation of timing differences and the unrealized loss on securities. In the fourth quarter of fiscal 2018, based on updated information obtained in connection with the filing of our tax return and analysis of our net deferred tax asset both from the return and 2018 tax provisions, we finalized the tax analysis and recorded an additional $63 of expense, or a net increase in our tax provision for the year of $338 related to the Tax Act.

The Company regularly reviews the carrying amount of its net deferred tax assets to determine if the establishment of a valuation allowance is necessary. If based on the available evidence, it is more likely than not that all or a portion of the Company’s net deferred tax assets will not be realized in future periods, a deferred tax valuation allowance would be established. Consideration is given to various positive and negative factors that could affect the realization of the deferred tax assets. In evaluating this available evidence, management considers, among other things, historical performance, expectations of future earnings, the ability to carry back losses to recoup taxes previously paid, the length of statutory carry forward periods, any experience with utilization of operating loss and tax credit carry forwards not expiring, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. Accordingly, the Company’s evaluation is based on current tax laws as well as management’s expectations of future performance.

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Revenue Recognition - The Company recognizes revenue in the consolidated statements of operations as performance obligations are met and when collectability is reasonably assured. The primary source of revenue is interest income from interest earning assets, which is recognized on the accrual basis of accounting using the effective interest method. The recognition of revenues from interest earning assets is based upon formulas from underlying loan agreements, securities contracts or other similar contracts. Non-interest income is recognized on the accrual basis of accounting as performance obligations are met or as transactions occur. Non-interest income includes fees from brokerage and advisory service, deposit accounts, merchant services, ATM and debit card fees, mortgage banking activities, and other miscellaneous services and transactions. Commission revenue is recognized as of the effective date of the insurance policy or the date the customer is billed, whichever is later.  The Company also receives contingent commissions from insurance companies which are based on the overall profitability of their relationship based primarily on the loss experience of the insurance placed by the Company.  Contingent commissions from insurance companies are recognized when determinable. Commission revenue is included in other non-interest income in the consolidated statement of operations.

Earnings Per Share – Basic earnings per common share is net income or loss divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable during the period, consisting of stock options outstanding under the Company’s stock incentive plans that have an exercise price that is less than the Company's stock price on the reporting date.

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

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

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

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

Recent Accounting Pronouncements—Adopted

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

ASU 2016-02; Leases (Topic 842)—The ASU changed current GAAP by requiring that lease assets and liabilities arising from operating leases be recognized on the balance sheet. In July 2018, the FASB issued ASU 2018-10 and ASU 2018-11, Codification Improvements to Topic 842, Leases, amending various aspects of Topic 842. Topic 842 does not significantly change the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee from current U.S. GAAP. For leases with a term of 12 months or less, a lessee would be permitted to make an accounting policy election, by class of underlying asset, not to recognize lease assets and liabilities. Topic 842 became effective for the Company for annual and interim periods beginning in the first quarter 2019.

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The Company leases (1) 10 branch locations, (2) its corporate offices (3) 1 production office and (4) office equipment under operating leases that resulted in the recognition of right-of-use assets and corresponding lease liabilities of approximately $5,000 on the consolidated balance sheet under Topic 842. Adoption of Topic 842 did not have a material impact on the Company’s consolidated statement of operations. Management adopted the guidance on January 1, 2019, and elected certain practical expedients offered by the FASB, including foregoing the restatement of comparative periods upon adoption. Management also excluded short-term leases from the recognition of right-of-use asset and lease liabilities. Additionally, the Company elected the transition relief allowed by FASB in foregoing reassessment of the following: whether any existing contracts were or contained leases, the classification of existing leases, and the determination of initial direct costs for existing leases. See Note 5 for additional detail.

ASU 2014-09; Revenue from Contracts with Customers (Topic 606)—Under the ASU, as modified by subsequent ASUs, revenue is recognized when a customer obtains control of promised services in an amount that reflects the consideration the entity expects to receive in exchange for those services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company applied the five-step method outlined in the ASU to all revenue streams scoped-in by the ASU and elected the modified retrospective implementation method. Substantially all of the Company’s interest income and certain noninterest income were not impacted by the adoption of this ASU because the revenue from those contracts with customers is covered by other guidance in U.S. GAAP. The Company’s largest sources of noninterest revenue which are subject to the guidance include fees and service charges on loan and deposit accounts and interchange revenue from debit card transactions. ASU 2014-08, as amended, became effective for the Company’s annual and interim periods beginning in the first quarter 2019. Adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements as the change in the timing and pattern of the Company’s revenue recognition related to scoped-in noninterest income recognized under the newly issued ASU is consistent with the current applicable accounting guidance. The Company has made all required additional disclosures related to non-interest income in the consolidated financial statements, primarily in Note 1-Nature of Business and Summary of Significant Accounting Policies.

Recently Issued, But Not Yet Effective Accounting Pronouncements

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

ASU 2016-13; Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments--The ASU changes accounting for credit losses on loans receivable and debt securities from an incurred loss methodology to an expected credit loss methodology. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, ASU 2016-13 requires the use of forward-looking information to form credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, though the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The amendments in ASU 2016-13 will be effective for the Company beginning in the first quarter 2020. Earlier adoption is permitted; however, the Company does not currently plan to adopt the ASU early. Management is assessing alternative loss estimation methodologies and the Company’s data and system needs in order to evaluate the impact that adoption of this standard will have on the Company’s financial condition and results of operations. The Company will record the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which the ASU is effective, which will be March 31, 2020.

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NOTE 2 – INVESTMENT SECURITIES

The amortized cost, estimated fair value and related unrealized gains and losses on securities available for sale and held to maturity as of March 31, 2019 and December 31, 2018, respectively, were as follows:

Available for sale securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
March 31, 2019
U.S. government agency obligations	$	52,567	$	21	$	522	$	52,066
Obligations of states and political subdivisions	33,400		141		126		33,415
Mortgage-backed securities	44,670		253		359		44,564
Corporate debt securities	6,560		—		185		6,375
Corporate asset based securities	23,999		—		218		23,781
Total available for sale securities	$	161,196	$	415	$	1,410	$	160,201
December 31, 2018
U.S. government agency obligations	$	46,215	$	13	$	930	$	45,298
Obligations of states and political subdivisions	35,162		22		456		34,728
Mortgage-backed securities	42,279		10		939		41,350
Agency Securities	104		49		5		148
Corporate debt securities	6,577		—		272		6,305
Corporate asset based securities	18,928		8		40		18,896
Total available for sale securities	$	149,265	$	102	$	2,642	$	146,725

Held to maturity securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
March 31, 2019
Obligations of states and political subdivisions	$	1,700	$	2	$	—	$	1,702
Mortgage-backed securities	3,011		73		1		3,083
Total held to maturity securities	$	4,711	$	75	$	1	$	4,785
December 31, 2018
Obligations of states and political subdivisions	$	1,701	$	—	$	3	$	1,698
Mortgage-backed securities	3,149		42		17		3,174
Total held to maturity securities	$	4,850	$	42	$	20	$	4,872

As of March 31, 2019, the Bank has pledged U.S. Government Agency securities with a market value of $5,576 and mortgage-backed securities with a market value of $22,969 as collateral against specific municipal deposits. At March 31, 2019, the Bank has pledged U.S. Government Agency securities with a market value of $1,903 as collateral against a borrowing line of credit with the Federal Reserve Bank. However, as of March 31, 2019, there were no borrowings outstanding on this Federal Reserve Bank line of credit. As of March 31, 2019, the Bank also has mortgage backed securities with a carrying value of $881 pledged as collateral to the Federal Home Loan Bank of Des Moines.

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The estimated fair value of securities at March 31, 2019 and December 31, 2018, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities on mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Expected maturities may differ from contractual maturities on certain agency and municipal securities due to the call feature.

	March 31, 2019				December 31, 2018
Available for sale securities	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	2,487	$	2,481	$	2,177	$	2,172
Due after one year through five years	24,618		24,525		22,296		22,043
Due after five years through ten years	37,520		37,252		43,014		42,081
Due after ten years	51,901		51,379		39,395		38,931
Total securities with contractual maturities	$	116,526	$	115,637	$	106,882	$	105,227
Mortgage backed securities	44,670		44,564		42,279		41,350
Securities without contractual maturities	—		—		104		148
Total available for sale securities	$	161,196	$	160,201	$	149,265	$	146,725

	March 31, 2019				December 31, 2018
Held to maturity securities	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	680	$	680	$	680	$	679
Due after one year through five years	1,020		1,022		1,021		1,020
Total securities with contractual maturities	$	1,700	$	1,702	$	1,701	$	1,699
Mortgage backed securities	3,011		3,083		3,149		3,173
Total held to maturity securities	$	4,711	$	4,785	$	4,850	$	4,872

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

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	Less than 12 Months				12 Months or More				Total
Available for sale securities	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
March 31, 2019
U.S. government agency obligations	$	19,087	$	79	$	32,491	$	444	$	51,578	$	523
Obligations of states and political subdivisions	794		3		15,645		122		16,439		125
Mortgage backed securities	—		—		26,141		360		26,141		360
Corporate debt securities	1,246		4		5,129		180		6,375		184
Corporate asset based securities	23,780		218		—		—		23,780		218
Total	$	44,907	$	304	$	79,406	$	1,106	$	124,313	$	1,410
December 31, 2018
U.S. government agency obligations	$	25,061	$	165	$	19,755	$	765	$	44,816	$	930
Obligations of states and political subdivisions	5,807		28		24,124		428		29,931		456
Mortgage backed securities	3,518		9		31,040		930		34,558		939
Agency securities	28		5		—		—		28		5
Corporate debt securities	1,233		17		5,071		255		6,304		272
Corporate asset based securities	10,142		40		—		—		10,142		40
Total	$	45,789	$	264	$	79,990	$	2,378	$	125,779	$	2,642

	Less than 12 Months				12 Months or More				Total
Held to maturity securities	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
March 31, 2019
Obligations of states and political subdivisions	$	—	$	—	$	693	$	1	$	693	$	1
Mortgage-backed securities	—		—		—		—		—		—
Total	$	—	$	—	$	693	$	1	$	693	$	1
December 31, 2018
Obligations of states and political subdivisions	$	1,290	$	1	$	409	$	2	$	1,699	$	3
Mortgage-backed securities	1,238		3		1,319		14		2,557		17
Total	$	2,528	$	4	$	1,728	$	16	$	4,256	$	20

NOTE 3 – LOANS, ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS

Portfolio Segments:

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

Commercial and agricultural real estate loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and prudently expand its business. Management examines current and projected cash flows to determine the ability of the borrower to repay its obligations as agreed. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The level of owner-occupied property versus non-owner-occupied property are tracked and

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monitored on a regular basis. Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Loan-to-value ratios on loans secured by farmland generally do not exceed 75%.

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

Commercial non-real estate loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. These cash flows, however, may not be as expected and the value of collateral securing the loans may fluctuate. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. Agricultural non-real estate loans are generally comprised of term loans to fund the purchase of equipment, livestock and seasonal operating lines. Operating lines are typically written for one year and secured by the crop and other farm assets as considered necessary. Agricultural loans carry significant credit risks as they may involve larger balances concentrated with single borrowers or groups of related borrowers. In addition, repayment of such loans depends on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. Farming operations may be affected by adverse weather conditions such as drought, hail or floods that can severely limit crop yields.

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Credit Quality/Risk Ratings:

Management utilizes a numeric risk rating system to identify and quantify the Bank’s risk of loss within its loan portfolio. Ratings are initially assigned prior to funding the loan, and may be changed at any time as circumstances warrant.

Ratings range from the highest to lowest quality based on factors that include measurements of ability to pay, collateral type and value, borrower stability and management experience. The Bank’s loan portfolio is presented below in accordance with the risk rating framework that has been commonly adopted by the federal banking agencies. The definitions of the various risk rating categories are as follows:

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

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

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

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

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

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

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

	1 to 5		6		7		8		9		TOTAL
Originated Loans:
Residential real estate:
One to four family	$	116,724	$	80	$	2,673	$	—	$	—	$	119,477
Purchased HELOC loans	12,346		—		—		—		—		12,346
Commercial/Agricultural real estate:
Commercial real estate	223,809		995		589		—		—		225,393
Agricultural real estate	31,103		160		2,048		—		—		33,311
Multi-family real estate	75,534		—		—		—		—		75,534
Construction and land development	27,414		—		—		—		—		27,414
Consumer non-real estate:
Originated indirect paper	52,173		—		249		—		—		52,422
Purchased indirect paper	12,910		—		—		—		—		12,910
Other Consumer	15,091		—		32		—		—		15,123
Commercial/Agricultural non-real estate:
Commercial non-real estate	64,782		1,612		6,495		—		—		72,889
Agricultural non-real estate	19,724		270		667		—		—		20,661
Total originated loans	$	651,610	$	3,117	$	12,753	$	—	$	—	$	667,480
Acquired Loans:
Residential real estate:
One to four family	$	78,774	$	1,290	$	2,255	$	—	$	—	$	82,319
Commercial/Agricultural real estate:
Commercial real estate	131,502		5,928		5,707		—		—		143,137
Agricultural real estate	51,139		103		6,367		—		—		57,609
Multi-family real estate	8,263		—		164		—		—		8,427
Construction and land development	14,588		38		406		—		—		15,032
Consumer non-real estate:
Other Consumer	3,906		—		19		—		—		3,925
Commercial/Agricultural non-real estate:
Commercial non-real estate	29,926		1,340		1,648		—		—		32,914
Agricultural non-real estate	13,244		89		2,260		—		—		15,593
Total acquired loans	$	331,342	$	8,788	$	18,826	$	—	$	—	$	358,956
Total Loans:
Residential real estate:
One to four family	$	195,498	$	1,370	$	4,928	$	—	$	—	$	201,796
Purchased HELOC loans	12,346		—		—		—		—		12,346
Commercial/Agricultural real estate:
Commercial real estate	355,311		6,923		6,296		—		—		368,530
Agricultural real estate	82,242		263		8,415		—		—		90,920
Multi-family real estate	83,797		—		164		—		—		83,961
Construction and land development	42,002		38		406		—		—		42,446
Consumer non-real estate:
Originated indirect paper	52,173		—		249		—		—		52,422
Purchased indirect paper	12,910		—		—		—		—		12,910
Other Consumer	18,997		—		51		—		—		19,048
Commercial/Agricultural non-real estate:
Commercial non-real estate	94,708		2,952		8,143		—		—		105,803
Agricultural non-real estate	32,968		359		2,927		—		—		36,254
Gross loans	$	982,952	$	11,905	$	31,579	$	—	$	—	$	1,026,436
Less:
Unearned net deferred fees and costs and loans in process											318
Unamortized discount on acquired loans											(7,076		)
Allowance for loan losses											(8,707		)
Loans receivable, net											$	1,010,971

23

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

	1 to 5		6		7		8		9		TOTAL
Originated Loans:
Residential real estate:
One to four family	$	118,461	$	165	$	2,427	$	—	$	—	$	121,053
Purchased HELOC loans	12,883		—		—		—		—		12,883
Commercial/Agricultural real estate:
Commercial real estate	200,226		197		452		—		—		200,875
Agricultural real estate	27,581		987		1,021		—		—		29,589
Multi-family real estate	61,574		—		—		—		—		61,574
Construction and land development	15,812		—		—		—		—		15,812
Consumer non-real estate:
Originated indirect paper	56,371		—		214		—		—		56,585
Purchased indirect paper	15,006		—		—		—		—		15,006
Other Consumer	15,515		—		38		—		—		15,553
Commercial/Agricultural non-real estate:
Commercial non-real estate	73,412		106		—		—		—		73,518
Agricultural non-real estate	16,494		205		642		—		—		17,341
Total originated loans	$	613,335	$	1,660	$	4,794	$	—	$	—	$	619,789
Acquired Loans:
Residential real estate:
One to four family	$	84,281	$	2,657	$	1,935	$	—	$	—	$	88,873
Commercial/Agricultural real estate:
Commercial real estate	145,674		5,808		5,602		—		—		157,084
Agricultural real estate	50,215		—		6,211		—		—		56,426
Multi-family real estate	7,661		—		165		—		—		7,826
Construction and land development	6,288		183		408		—		—		6,879
Consumer non-real estate:
Other Consumer	4,639		—		22		—		—		4,661
Commercial/Agricultural non-real estate:
Commercial non-real estate	35,221		1,338		2,350		—		—		38,909
Agricultural non-real estate	16,644		50		2,292		—		—		18,986
Total acquired loans	$	350,623	$	10,036	$	18,985	$	—	$	—	$	379,644
Total Loans:
Residential real estate:
One to four family	$	202,742	$	2,822	$	4,362	$	—	$	—	$	209,926
Purchased HELOC loans	12,883		—		—		—		—		12,883
Commercial/Agricultural real estate:							—		—
Commercial real estate	345,900		6,005		6,054		—		—		357,959
Agricultural real estate	77,796		987		7,232		—		—		86,015
Multi-family real estate	69,235		—		165		—		—		69,400
Construction and land development	22,100		183		408		—		—		22,691
Consumer non-real estate:							—		—
Originated indirect paper	56,371		—		214		—		—		56,585
Purchased indirect paper	15,006		—		—		—		—		15,006
Other Consumer	20,154		—		60		—		—		20,214
Commercial/Agricultural non-real estate:							—		—
Commercial non-real estate	108,633		1,444		2,350		—		—		112,427
Agricultural non-real estate	33,138		255		2,934		—		—		36,327
Gross loans	$	963,958	$	11,696	$	23,779	$	—	$	—	$	999,433
Less:
Unearned net deferred fees and costs and loans in process											409
Unamortized discount on acquired loans											(7,286		)
Allowance for loan losses											(7,604		)
Loans receivable, net											$	984,952

24

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

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

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

25

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

	Residential Real Estate			Commercial/Agriculture Real Estate			Consumer Non-real Estate			Commercial/Agricultural Non-real Estate			Unallocated			Total
Three months ended March 31, 2019:
Allowance for Loan Losses:
Beginning balance, January 1, 2019	$	1,048		$	4,019		$	641		$	1,258		$	214		$	7,180
Charge-offs	(10		)	—			(63		)	—			—			(73		)
Recoveries	1			—			18			—			—			19
Provision	15			1,016			20			15			—			1,066
Allowance allocation adjustment	—			(46		)	(62		)	(1		)	63			(46		)
Total allowance on originated loans	1,054			4,989			554			1,272			277			8,146
Purchased credit impaired loans	—			—			—			—			—			—
Other acquired loans:	—			—			—			—			—			—
Beginning balance, January 1, 2019	205			183			65			32			(61		)	424
Charge-offs	(57		)	—			(15		)	—			—			(72		)
Recoveries	—			—			4			—			—			4
Provision	94			30			35			—			—			159
Allowance allocation adjustment	—			(13		)	(8		)	5			62			46
Total allowance on other acquired loans	242			200			81			37			1			561
Total Allowance on acquired loans	242			200			81			37			1			561
Ending balance, March 31, 2019	$	1,296		$	5,189		$	635		$	1,309		$	278		$	8,707
Allowance for Loan Losses at March 31, 2019:
Amount of allowance for loan losses arising from loans individually evaluated for impairment	$	268		$	403		$	36		$	32		$	—		$	739
Amount of allowance for loan losses arising from loans collectively evaluated for impairment	$	1,028		$	4,786		$	599		$	1,277		$	278		$	7,968
Loans Receivable as of March 31, 2019:																—
Ending balance of originated loans	$	131,823		$	361,652		$	80,455		$	93,550		$	—		$	667,480
Ending balance of purchased credit-impaired loans	2,375			19,674			—			4,875			—			26,924
Ending balance of other acquired loans	79,944			204,531			3,925			43,632			—			332,032
Ending balance of loans	$	214,142		$	585,857		$	84,380		$	142,057		$	—		$	1,026,436
Ending balance: individually evaluated for impairment	$	7,998		$	8,952		$	391		$	9,971		$	—		$	27,312
Ending balance: collectively evaluated for impairment	$	206,144		$	576,905		$	83,989		$	132,086		$	—		$	999,124

26

	Residential Real Estate			Commercial/Agriculture Real Estate			Consumer Non-real Estate			Commercial/Agricultural Non-real Estate			Unallocated			Total
Three months ended March 31, 2018:
Allowance for Loan Losses:
Beginning balance, January 1, 2018	$	1,439		$	2,604		$	910		$	880		$	26		$	5,859
Charge-offs	(15		)	—			(48		)	—			—			(63		)
Recoveries	1			—			48			1			—			50
Provision	—			30			—			—			—			30
Allowance allocation adjustment	(115		)	8			(81		)	(42		)	(76		)	(306		)
Total Allowance on originated loans	$	1,310		$	2,642		$	829		$	839		$	(50	)	$	5,570
Purchased credit impaired loans	—			—			—			—			—			—
Other acquired loans
Beginning balance, January 1, 2018	—			—			—			—			—			—
Charge-offs	(34		)	(8		)	(20		)	—			—			(62		)
Recoveries	3			—			—			—			—			3
Provision	35			10			25			—			—			70
Allowance allocation adjustment	122			85			79			20			—			306
Total Allowance on other acquired loans	126			87			84			20			—			317
Total Allowance on acquired loans	126			87			84			20			—			317
Ending balance, March 31, 2018	1,436			2,729			913			859			(50		)	5,887
Allowance for Loan Losses at March 31, 2018:
Amount of allowance for loan losses arising from loans individually evaluated for impairment	$	232		$	—		$	38		$	27		$	—		$	297
Amount of allowance for loan losses arising from loans collectively evaluated for impairment	$	1,204		$	2,729		$	875		$	832		$	(50	)	$	5,590
Loans Receivable as of March 31, 2018:
Ending balance of originated loans	$	139,412		$	189,127		$	111,301		$	54,205		$	—		$	494,045
Ending balance of purchased credit-impaired loans	169			5,494			327			2,405			—			8,395
Ending balance of other acquired loans	84,364			106,710			3,208			24,406			—			218,688
Ending balance of loans	$	223,945		$	301,331		$	114,836		$	81,016		$	—		$	721,128
Ending balance: individually evaluated for impairment	$	7,925		$	13,123		$	1,409		$	3,577		$	—		$	26,034
Ending balance: collectively evaluated for impairment	$	216,020		$	288,208		$	113,427		$	77,439		$	—		$	695,094

During October 2012, the Bank entered into an agreement to purchase short term consumer loans from a third party. The third party seller agreed to purchase or substitute performing consumer loans for all contracts that become 120 days past due. A restricted reserve account was established at 3% of the outstanding consumer loan balances purchased, with such percentage amount of the loans being deposited into a segregated reserve account. The funds in the reserve account are to be released to compensate the Bank for any loans that are not purchased back by the seller or substituted with performing loans and are ultimately charged off by the Bank. As of March 31, 2019, the balance of these purchased consumer loans was $12,910 compared to $15,006 as of December 31, 2018. New purchases from this third party ceased in fiscal 2017. The balance in the cash reserve account at March 31, 2019 was $408, which is included in Deposits on the accompanying Consolidated Balance Sheet. To date, none of the purchased loans have been charged off by the Bank.

The weighted average rate earned on these purchased consumer loans was 4.05% as of March 31, 2019.

27

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

	Residential Real Estate				Commercial/Agriculture Real Estate Loans				Consumer non-Real Estate				Commercial/Agriculture non-Real Estate				Totals
	March 31, 2019		December 31, 2018		March 31, 2019		December 31, 2018		March 31, 2019		December 31, 2018		March 31, 2019		December 31, 2018		March 31, 2019		December 31, 2018
Performing loans
Performing TDR loans	$	3,454	$	3,319	$	3,454	$	2,209	$	90	$	99	$	485	$	428	$	7,483	$	6,055
Performing loans other	207,064		216,636		577,880		531,030		83,960		91,373		138,465		146,249		1,007,369		985,288
Total performing loans	210,518		219,955		581,334		533,239		84,050		91,472		138,950		146,677		1,014,852		991,343
Nonperforming loans (1)
Nonperforming TDR loans	439		785		464		577		—		—		1,598		1,305		2,501		2,667
Nonperforming loans other	3,185		2,069		4,059		2,249		330		334		1,509		771		9,083		5,423
Total nonperforming loans	3,624		2,854		4,523		2,826		330		334		3,107		2,076		11,584		8,090
Total loans	$	214,142	$	222,809	$	585,857	$	536,065	$	84,380	$	91,806	$	142,057	$	148,753	$	1,026,436	$	999,433

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

28

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

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days		Total Past Due		Current		Total Loans		Nonaccrual Loans		Recorded Investment > 89 Days and Accruing
March 31, 2019
Residential real estate:
One to four family	$	4,929	$	449	$	2,365	$	7,743	$	194,053	$	201,796	$	2,041	$	1,245
Purchased HELOC loans	—		—		338		338		12,008		12,346		—		338
Commercial/Agricultural real estate:
Commercial real estate	277		1,319		621		2,217		366,313		368,530		1,281		—
Agricultural real estate	735		1,180		3,121		5,036		85,884		90,920		3,182		—
Multi-family real estate	—		—		—		—		83,961		83,961		—		—
Construction and land development	247		—		60		307		42,139		42,446		60		—
Consumer non-real estate:
Originated indirect paper	378		38		148		564		51,858		52,422		191		2
Purchased indirect paper	322		116		119		557		12,353		12,910		—		119
Other Consumer	223		14		15		252		18,796		19,048		9		9
Commercial/Agricultural non-real estate:
Commercial non-real estate	270		389		607		1,266		104,537		105,803		1,566		—
Agricultural non-real estate	850		647		973		2,470		33,784		36,254		1,541		—
Total	$	8,231	$	4,152	$	8,367	$	20,750	$	1,005,686	$	1,026,436	$	9,871	$	1,713
December 31, 2018
Residential real estate:
One to four family	$	3,060	$	861	$	2,122	$	6,043	$	203,883	$	209,926	$	2,331	$	471
Purchased HELOC loans	820		572		51		1,443		11,440		12,883		—		51
Commercial/Agricultural real estate:
Commercial real estate	1,060		872		93		2,025		355,934		357,959		745		—
Agricultural real estate	1,360		—		2,113		3,473		82,542		86,015		2,019		—
Multi-family real estate	—		—		—		—		69,400		69,400		—		—
Construction and land development	526		175		15		716		21,975		22,691		63		—
Consumer non-real estate:
Originated indirect paper	285		167		130		582		56,003		56,585		106		45
Purchased indirect paper	340		200		157		697		14,309		15,006		—		157
Other Consumer	179		98		26		303		19,911		20,214		14		12
Commercial/Agricultural non-real estate:
Commercial non-real estate	399		70		288		757		111,670		112,427		1,314		—
Agricultural non-real estate	530		67		510		1,107		35,220		36,327		762		—
Total	$	8,559	$	3,082	$	5,505	$	17,146	$	982,287	$	999,433	$	7,354	$	736

29

At March 31, 2019, the Company has identified impaired loans of $50,129, consisting of $9,984 TDR loans, the carrying amount of purchased credit impaired loans of $22,817 and $17,328 of substandard non-TDR loans. The $50,129 total of impaired loans includes $7,483 of performing TDR loans. At December 31, 2018, the Company has identified impaired loans of $47,334, consisting of $8,722 TDR loans, the carrying amount of purchased credit impaired loans of $24,816 and $13,796 of substandard non-TDR loans. The $47,334 total of impaired loans includes $6,055 of performing TDR loans. A loan is identified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Performing TDRs consist of loans that have been modified and are performing in accordance with the modified terms for a sufficient length of time, generally six months, or loans that were modified on a proactive basis. A summary of the Company’s impaired loans as of March 31, 2019 and December 31, 2018 was as follows:

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

30

	Recorded Investment			Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2018
With No Related Allowance Recorded:
Residential real estate	$	8,873		$	8,873	$	—	$	7,915	$	88
Commercial/agriculture real estate	28,850			28,850		—		19,673		304
Consumer non-real estate	226			226		—		226		4
Commercial/agricultural non-real estate	6,900			6,900		—		4,522		105
Total	$	44,849	��	$	44,849	$	—	$	32,336	$	501
With An Allowance Recorded:
Residential real estate	$	1,332		$	1,332	$	156	$	1,280	$	17
Commercial/agriculture real estate	979			979		25		820		—
Consumer non-real estate	147			147		37		154		1
Commercial/agricultural non-real estate	27			27		9		73		1
Total	$	2,485		$	2,485	$	227	$	2,327	$	19
December 31, 2018 Totals:
Residential real estate	$	10,205		$	10,205	$	156	$	9,195	$	105
Commercial/agriculture real estate	29,829			29,829		25		20,493		304
Consumer non-real estate	373			373		37		380		5
Commercial/agricultural non-real estate	6,927			6,927		9		4,595		106
Total	$	47,334		$	47,334	$	227	$	34,663	$	520

Troubled Debt Restructuring – A TDR includes a loan modification where a borrower is experiencing financial difficulty and the Bank grants a concession to that borrower that the Bank would not otherwise consider except for the borrower’s financial difficulties. Concessions include an extension of loan terms, renewals of existing balloon loans, reductions in interest rates and consolidating existing Bank loans at modified terms. A TDR may be either on accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability. If a TDR is placed on nonaccrual status, it remains there until a sufficient period of performance under the restructured terms has occurred at which time it is returned to accrual status. There were 5 delinquent TDRs greater than 60 days past due with a recorded investment of $572 at March 31, 2019, compared to 7 such loans with a recorded investment of $1,211 at December 31, 2018.

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

	March 31, 2019		December 31, 2018
Troubled debt restructure loans:
Accrual status	$	7,483	$	6,055
Non-accrual status	2,501		2,667
Total	$	9,984	$	8,722

There were no TDR commitments or unused lines of credit meeting our TDR criteria as of March 31, 2019.

31

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

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

	Number of Contracts	Modified Rate		Modified Payment		Modified Under- writing		Other		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserve
Three months ended December 31, 2018
TDRs:
Residential real estate	4	$	240	$	—	$	—	$	—	$	240	$	240	$	—
Commercial/Agricultural real estate	2	—		581		—		21		602		602		—
Consumer non-real estate	—	—		—		—		—		—		—		—
Commercial/Agricultural non-real estate	1	24		—		—		—		24		24		—
Totals	7	$	264	$	581	$	—	$	21	$	866	$	866	$	—

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

	March 31, 2019			December 31, 2018
	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Troubled debt restructurings:
Residential real estate	37	$	3,454	41	$	4,103
Commercial/Agricultural real estate	17	3,454		19	2,787
Consumer non-real estate	11	90		13	99
Commercial/Agricultural non-real estate	3	485		10	1,733
Total troubled debt restructurings	68	$	7,483	83	$	8,722

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

	March 31, 2019			December 31, 2018
	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Troubled debt restructurings:
Residential real estate	6	$	439	7	$	785
Commercial/Agricultural real estate	3	464		4	577
Consumer non-real estate	—	—		—	—
Commercial/Agricultural non-real estate	9	1,598		8	1,305
Total troubled debt restructurings	18	$	2,501	19	$	2,667

Included above are eight TDR loans that became in default during the three months ended March 31, 2019.

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

	March 31, 2019
Accountable for under ASC 310-30 (Purchased Credit Impaired "PCI" loans)
Outstanding balance	$	26,924
Carrying amount	$	22,800
Accountable for under ASC 310-20 (non-PCI loans)
Outstanding balance	$	332,032
Carrying amount	$	329,080
Total acquired loans
Outstanding balance	$	358,956
Carrying amount	$	351,880

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

	March 31, 2019
Balance at beginning of period	$	3,163
Acquisitions	—
Reduction due to unexpected early payoffs	—
Reclass from non-accretable difference	—
Disposals/transfers	—
Accretion	(194		)
Balance at end of period	$	2,969

NOTE 4 – MORTGAGE SERVICING RIGHTS

Mortgage servicing rights--Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid balances of these loans as of March 31, 2019 and December 31, 2018 were $517,746 and $518,476, respectively, and consisted of one to four family residential real estate loans. These loans are serviced primarily for the Federal Home Loan Mortgage Corporation, Federal Home Loan Bank and the Federal National Mortgage Association.

Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in deposits were $5,030 and $3,182, at March 31, 2019 and December 31, 2018, respectively. Mortgage servicing rights activity for the periods ended March 31, 2019 and December 31, 2018 were as follows:

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	Three Months Ended			Three Months Ended
	March 31, 2019			December 31, 2018
Balance at beginning of period	$	4,486		$	1,840
MSR asset acquired	—			2,721
Increase in MSR assets resulting from transfers of financial assets	129			100
Amortization during the period	(191		)	(175		)
Valuation allowance at end of period	—			—
Net book value at end of period	$	4,424		$	4,486
Fair value of MSR asset at end of period	$	4,705		$	5,214
Residential mortgage loans serviced for others	$	517,746		$	518,476
Net book value of MSR asset to loans serviced for others	0.86		%	0.87		%

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NOTE 5 – LEASES

We have operating leases for our corporate offices (1), bank branch offices (9), other production offices (1) and certain office equipment. Our leases have remaining lease terms of 1.75 to 9.5 years, some of which include options to extend the leases for up to 5 years. As of March 31, 2019, we have no additional lease commitments that have not yet commenced.

	As of and for the three months ended March 31, 2019
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	239
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	158
Supplemental balance sheet information related to leases was as follows:
Operating lease right-of-use assets	$	5,043
Operating lease liabilities	$	5,104
Weighted average remaining lease term in years; operating leases	7.02
Weighted average discount rate; operating leases	3.05		%

Cash obligations under lease contracts are as follows:

Fiscal years ending December 31,
2019	$	684
2020	871
2021	721
2022	669
2023	589
Thereafter	2,159
Total	$	5,693

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NOTE 6 – FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

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

	March 31, 2019			December 31, 2018
Advances from FHLB:
Fixed rates	$	86,000		$	43,000
Overnight borrowings	37,000			67,000
Total FHLB advances	123,000			110,000
Less: unamortized discount on acquired borrowings	$	(172	)	(187		)
Net FHLB advances	122,828			$	109,813
Other borrowings:
Senior notes:
Variable rate due in August 2030	$	10,000		10,000
Subordinated notes:
6.75% due August 2027, variable rate commencing August 2022	15,000			15,000
Less: unamortized debt issuance costs	(325		)	(353		)
Total other borrowings	$	24,675		$	24,647
Totals	$	147,503		$	134,460

Federal Home Loan Bank Advances and Irrevocable Standby Letters of Credit

The Bank had an outstanding balance of $37,000 with a rate of 2.64% on the FHLB variable rate overnight borrowings at March 31, 2019. Short-term fixed rate FHLB advances of $75,000 mature on various dates through 2019. The Bank acquired one $11,000 long-term FHLB note as a result of the United Bank acquisition, with a 2.45% rate and February 1, 2022 maturity date. Each Federal Home Loan Bank advance is payable at the maturity date, with a prepayment penalty for fixed rate advances. The FHLB variable rate open line of credit and fixed rate advances are secured by $842,603 of real estate and commercial and industrial loans.

The Bank has an irrevocable Standby Letter of Credit Master Reimbursement Agreement with the Federal Home Loan Bank. This irrevocable standby letter of credit ("LOC") is supported by loan collateral as an alternative to directly pledging investment securities on behalf of a municipal customer as collateral for their interest bearing deposit balances. These balances were $117,339 and $87,359 at March 31, 2019 and December 31, 2018, respectively.

At March 31, 2019, the Bank’s available and unused portion of this borrowing arrangement was approximately $275,922 compared to $178,620 as of December 31, 2018.

Maximum month-end amounts outstanding under this borrowing agreement were $122,828 and $109,813 during the three months ended March 31, 2019 and December 31, 2018, respectively.    

Senior Notes and Revolving Line of Credit

On August 1, 2018, the Company entered into a credit agreement, consisting of a $10,000 term note and a $7,500 revolving note. The term note matures on August 1, 2030, and bears interest at variable interest rates based on the U.S. Prime Rate, and are payable in accordance with the terms of the credit agreement. The contractual interest rate for the term note was 4.75% during the three-months ended March 31, 2019. At March 31, 2019, there were no borrowings outstanding on the revolving note.

Subordinated Notes

On August 10, 2017, the Company entered into subordinated note agreements totaling $15,000, maturing on August 10, 2027. The subordinated notes are unsecured and are subordinate to the claims of other creditors of the Company. The subordinated notes mature in August 2027, and convert to variable interest rate notes in August 2022. These notes provide for an annual fixed interest rate for the first five years of 6.75%. After the fixed interest period and through maturity, the interest

36

rate will be reset quarterly to equal the three-month LIBOR rate, plus 4.90%. Interest on the Notes will be payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year through the maturity date.

Debt Issuance Costs

The unamortized amount of debt issuance costs was $325 and $353 at March 31, 2019 and December 31, 2018, respectively. These debt issuance costs are included in other borrowings on the consolidated balance sheet.

Maturities of FHLB advances and other borrowings are as follows:

Fiscal years ending December 31,
2019	$	112,000
2020	—
2021	—
2022	10,828
2023	—
Thereafter	24,675
	$	147,503

NOTE 7 – STOCK-BASED COMPENSATION

In February 2005, the Company’s stockholders approved the Company’s 2004 Recognition and Retention Plan. This plan provides for the grant of up to 113,910 shares of the Company’s common stock to eligible participants under this plan. As of March 31, 2019, 113,910 restricted shares under this plan were granted. In February 2005, the Company’s stockholders also approved the Company’s 2004 Stock Option and Incentive Plan. This plan provides for the grant of nonqualified and incentive stock options and stock appreciation rights to eligible participants under the plan. The plan provides for the grant of awards for up to 284,778 shares of the Company’s common stock. At March 31, 2019, 284,778 options had been granted under this plan to eligible participants. This plan was terminated on January 18, 2018.

In February 2008, the Company’s stockholders approved the Company’s 2008 Equity Incentive Plan. The aggregate number of shares of common stock reserved and available for issuance under the 2008 Equity Incentive Plan is 597,605 shares. Under this Plan, the Compensation Committee may grant stock options and stock appreciation rights that, upon exercise, result in the issuance of 426,860 shares of the Company’s common stock. The Committee may also grant shares of restricted stock and restricted stock units for an aggregate of 170,745 shares of Company common stock under this plan. As of March 31, 2019, 89,183 restricted shares under this plan were granted. As of March 31, 2019, 181,000 options had been granted to eligible participants. As of January 18, 2018, no new awards will be granted under the 2008 Equity Incentive Plan.

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

On March 27, 2018, the stockholders of Citizens Community Bancorp, Inc. approved the 2018 Equity Incentive Plan at the 2018 Annual Meeting of Stockholders. The aggregate number of shares of common stock reserved and available for issuance under the 2018 Equity Incentive Plan is 350,000 shares. As of March 31, 2019, 52,068 restricted shares had been granted under this plan. As of March 31, 2019, no stock options had been granted under this plan.

Compensation expense related to restricted stock awards from these plans was $140 for the three months ended March 31, 2019, compared to $67 for the three months ended March 31, 2018.

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Restricted Common Stock Award
	March 31, 2019				December 31, 2018
	Number of Shares		Weighted Average Grant Price		Number of Shares		Weighted Average Grant Price
Restricted Shares
Unvested and outstanding at beginning of year	75,407		$	13.24	52,172		$	13.29
Granted	10,847		11.60		27,514		13.15
Vested	(4,185	)	11.32		(4,279	)	13.30
Forfeited	(958	)	13.92		—		—
Unvested and outstanding at end of year	81,111		$	13.00	75,407		$	13.24

The Company accounts for stock-based employee compensation related to the Company’s 2004 Stock Option and Incentive Plan and the 2008 Equity Incentive Plan using the fair-value-based method. Accordingly, management records compensation expense based on the value of the award as measured on the grant date and then the Company recognizes that cost over the vesting period for the award. The compensation cost recognized for stock-based employee compensation related to these plans for the three month period ended March 31, 2019 was $4. The compensation cost recognized for stock-based employee compensation related to these plans for the three month period ended March 31, 2018, was $(5).

Common Stock Option Awards
	Option Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
March 31, 2019
Outstanding at beginning of year	108,930		$	10.15
Granted	—		—
Exercised	(27,430	)	7.09
Forfeited or expired	(800	)	13.76
Outstanding at end of year	80,700		$	11.15	7.28
Exercisable at end of year	33,900		$	10.24	6.76	$	57
Fully vested and expected to vest	80,700		$	11.15	7.28	$	63
December 31, 2018
Outstanding at beginning of year	121,670		$	9.82
Granted	—		—
Exercised	(12,740	)	7.04
Forfeited or expired	—		—
Outstanding at end of year	108,930		$	10.15	5.82
Exercisable at end of year	56,230		$	8.83	4.01	$	116
Fully vested and expected to vest	108,930		$	10.15	5.82	$	82

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

	March 31, 2019		December 31, 2018
Intrinsic value of options exercised	$	126	$	81
Cash received from options exercised	$	195	$	90
Tax benefit realized from options exercised	$	—	$	—

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

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	2019	2018
Dividend yield	NA	NA
Risk-free interest rate	NA	NA
Weighted average expected life (years)	NA	NA
Expected volatility	NA	NA

NOTE 8 – FAIR VALUE ACCOUNTING

ASC Topic 820-10, “Fair Value Measurements and Disclosures” establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The statement describes three levels of inputs that may be used to measure fair value:

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

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

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

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

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

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Assets Measured on a Recurring Basis

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

	Fair Value		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2019
Investment securities:
U.S. government agency obligations	$	52,066	$	—	$	52,066	$	—
Obligations of states and political subdivisions	33,415		—		33,415		—
Mortgage-backed securities	44,564		—		44,564		—
Agency Securities	—		—		—		—
Corporate debt securities	6,375		—		6,375		—
Corporate asset based securities	23,781		—		23,781		—
Total	$	160,201	$	—	$	160,201	$	—
December 31, 2018
Investment securities:
U.S. government agency obligations	$	45,298	$	—	$	45,298	$	—
Obligations of states and political subdivisions	34,728		—		34,728		—
Mortgage-backed securities	41,350		—		41,350		—
Agency securities	148		—		148		—
Corporate debt securities	6,305		—		6,305		—
Total	$	146,725	$	—	$	146,725	$	—

Assets Measured on Nonrecurring Basis

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

	Fair Value		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2019
Foreclosed and repossessed assets, net	$	2,100	$	—	$	—	$	2,100
Impaired loans with allocated allowances	4,479		—		—		4,479
Mortgage servicing rights	4,705		—		—		4,705
Total	$	11,284	$	—	$	—	$	11,284
December 31, 2018
Foreclosed and repossessed assets, net	$	2,570	$	—	$	—	$	2,570
Impaired loans with allocated allowances	2,485		—		—		2,485
Mortgage servicing rights	5,214		—		—		5,214
Total	$	10,269	$	—	$	—	$	10,269

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

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

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

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

March 31, 2019.

	Fair Value		Valuation Techniques (1)	Significant Unobservable Inputs (2)	Range
March 31, 2019
Foreclosed and repossessed assets, net	$	2,100	Appraisal value	Estimated costs to sell	10 - 15%
Impaired loans with allocated allowances	$	4,479	Appraisal value	Estimated costs to sell	10 - 15%
Mortgage servicing rights	$	4,705	Discounted cash flows	Discounted rates	9.5% - 12.5%
December 31, 2018
Foreclosed and repossessed assets, net	$	2,570	Appraisal value	Estimated costs to sell	10 - 15%
Impaired loans with allocated allowances	$	2,485	Appraisal value	Estimated costs to sell	10 - 15%
Mortgage servicing rights	$	5,214	Discounted cash flows	Discounted rates	9.5% - 12.5%

(1)     Fair value is generally determined through independent third-party appraisals of the underlying

collateral, which generally includes various level 3 inputs which are not observable.

(2)     The fair value basis of impaired loans and real estate owned may be adjusted to reflect management

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

and delinquent property taxes.

Fair Values of Financial Instruments

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

Cash and Cash Equivalents

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

Other Interest-Bearing Deposits

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

Equity securities with readily determinable fair value

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

Non-marketable Equity Securities, at cost

Non-marketable equity securities are comprised of Federal Home Loan Bank stock and Federal Reserve Bank stock carried at cost, which are their redeemable fair values since the market for each category of this stock is restricted and represents a level 1 measurement.

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Loans Receivable, net

Fair value is estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as real estate, C&I and consumer. The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity date using market discount rates reflecting the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Bank’s repayment schedules for each loan classification. The fair value of variable rate loans approximates carrying value. The net carrying value of the loans acquired through the CBN, WFC and United Bank acquisition approximates the fair value of the loans at March 31, 2019. The fair value of loans is considered to be a level 3 measurement.

Loans Held for Sale

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

Mortgage Servicing Rights

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

Impaired Loans (carried at fair value)    

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

Foreclosed Assets (carried at fair value)

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

Accrued Interest Receivable and Payable

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

Deposits

The fair value of deposits with no stated maturity, such as demand deposits, savings accounts, and money market accounts, is the amount payable on demand at the reporting date and represents a level 1 measurement. The fair value of fixed rate certificate accounts is calculated by using discounted cash flows applying interest rates currently being offered on similar certificates and represents a level 3 measurement. The net carrying value of fixed rate certificate accounts acquired through the CBN acquisition approximates the fair value of the certificates at March 31, 2019 and represents a level 3 measurement.

Federal Home Loan Bank ("FHLB") Advances

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

Off-Balance Sheet Instruments

The fair value of off-balance sheet commitments would be estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the customers. Since this amount is immaterial to the Company’s consolidated financial statements, no amount for fair value is presented. The table below represents what we would receive to sell an asset or what we would have to pay to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying amount and estimated fair value of the Company's financial instruments as of the dates indicated below were as follows:

42

		March 31, 2019				December 31, 2018
	Valuation Method Used	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	(Level I)	$	41,358	$	41,358	$	45,778	$	45,778
Other interest-bearing deposits	(Level II)	6,235		6,204		7,460		6,704
Securities available for sale "AFS"	See above	160,201		160,201		146,725		146,725
Securities held to maturity "HTM"	(Level II)	4,711		4,785		4,850		4,872
Equity securities with readily determinable fair value	(Level I)	182		182		—		—
Non-marketable equity securities, at cost	(Level I)	11,206		11,206		11,261		11,261
Loans receivable, net	(Level III)	1,010,971		1,010,326		984,952		988,072
Loans held for sale	(Level II)	1,231		1,231		1,927		1,927
Mortgage servicing rights	(Level III)	4,424		4,705		4,486		5,214
Accrued interest receivable	(Level 1)	4,369		4,369		4,307		4,307
Financial liabilities:
Deposits	(Level III)	$	1,030,649	$	1,029,906	$	1,007,512	$	1,005,488
FHLB advances	(Level II)	122,828		122,838		109,813		109,665
Other borrowings	(Level I)	24,675		24,675		24,647		24,647
Other liabilities	(Level I)	9,473		9,473		7,359		7,359
Accrued interest payable	(Level II)	585		585		406		406

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NOTE 9 – OTHER COMPREHENSIVE INCOME (LOSS)

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

	2019									2018
	Before-Tax Amount			Tax Expense			Net-of-Tax Amount			Before-Tax Amount			Tax Expense		Net-of-Tax Amount
Unrealized gains (losses) on securities:
Net unrealized gains (losses) arising during the period	$	1,570		$	(432	)	$	1,137		$	(1,445	)	$	390	$	(1,055	)
Reclassification adjustment for gains (losses) included in net income	37			(10		)	27			(21		)	5		(16		)
Reclassification of certain deferred tax effects (1)	—			—			—			(137		)	—		(137		)
Adoption of ASU 2016-01; Equity securities	(62		)	17			(45		)	—			—		—
Other comprehensive income (loss)	$	1,545		$	(425	)	$	1,119		$	(1,603	)	$	395	$	(1,208	)

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

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

	Unrealized Gains (Losses) on Securities			Other Accumulated Comprehensive Income (Loss)
Balance, October 1, 2018	$	(2,706	)	$	(2,706	)
Current year-to-date other comprehensive loss, net of tax	865			865
Ending balance, three months ended December 31, 2018	$	(1,841	)	$	(1,841	)
Current year-to-date other comprehensive loss, net of tax	1,119			1,119
Ending balance, March 31, 2019	$	(722	)	$	(722	)

Reclassifications out of accumulated other comprehensive income (loss) for the three months ended March 31, 2019 were as follows:

Details about Accumulated Other Comprehensive Income Components	Amounts Reclassified from Accumulated Other Comprehensive Income			(1)	Affected Line Item on the Statement of Operations
Unrealized gains and losses
Gain on equity securities	$	37			Gain on investment securities
Tax Effect	(10		)		Provision for income taxes
Total reclassifications for the period	$	27			Net income attributable to common shareholders

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

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Reclassifications out of accumulated other comprehensive income for the three months ended March 31, 2018 were as follows:

Details about Accumulated Other Comprehensive Income Components	Amounts Reclassified from Accumulated Other Comprehensive Income			(1)	Affected Line Item on the Statement of Operations
Unrealized gains and losses
Sale of securities	$	(21	)		Net loss on investment securities
Tax Effect	5				Benefit for income taxes
Total reclassifications for the period	$	(16	)		Net loss attributable to common shareholders

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

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

FORWARD-LOOKING STATEMENTS

Certain matters discussed in this report contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and the Company intends that these forward-looking statements be covered by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as “anticipate,” “believe,” “could,” “expect,” “intend,” “may,” “planned,” “potential,” “should,” “will,” “would,” or the negative of those terms or other words of similar meaning.  Similarly, statements that describe the Company’s future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are inherently subject to many uncertainties in the Company’s operations and business environment.

Factors that could affect actual results or outcomes include the matters described under the caption “Risk Factors” in Item 1A of our transition report on Form 10-K for the transition period from October 1, 2018 to December 31, 2018, filed with the SEC on March 8, 2019 and the following:

• conditions in the financial markets and economic conditions generally;

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

• interest rate risk;

• lending risk;

• the sufficiency of loan allowances;

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

• competitive pressures among depository and other financial institutions;

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

• our ability to maintain or increase our market share;

• 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 success of the F&M Merger and integration of F&M into the Company’s operations;

• the risk that the F&M Merger may be more difficult, costly or time consuming or that the expected benefits are not realized;

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

• the risk that regulatory approvals needed effect the F&M Merger may not be received, may take longer than expected or may impose unanticipated conditions;

• the possibility that the F&M Merger Agreement may be terminated in accordance with its terms and may not be completed in the anticipated timeframe or at all;

• the risk that if the F&M Merger were not completed it could negatively impact the stock price and the future business and financial results of the Company;

• the transaction and merger-related costs in connection with the F&M Merger;

• litigation relating to the F&M Merger, which could require the Company and F&M to incur significant costs and suffer management distraction, as well as delay and/or enjoin the F&M Merger;

• 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.

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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.

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GENERAL

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of March 31, 2019, and our consolidated results of operations for the three months ended March 31, 2019, compared to the same period in the prior fiscal year for the three months ended March 31, 2018. This discussion should be read in conjunction with the interim consolidated financial statements and the condensed notes thereto included with this report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes related thereto included in the Company’s transition report on Form 10-K for the transition period from October 1, 2018 to December 31, 2018 filed with the Securities and Exchange Commission on March 8, 2019. Unless otherwise stated, all monetary amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than share, per share and capital ratio amounts, are stated in thousands.

PERFORMANCE SUMMARY

The following table sets forth our results of operations and related summary information for the three month period ended March 31, 2019 and 2018, respectively:

	Three Months Ended March 31,
	2019			2018
Net income as reported	$	953		$	1,341
EPS - basic, as reported	$	0.09		$	0.23
EPS - diluted, as reported	$	0.09		$	0.23
Cash dividends paid	$	0.20		$	0.20
Return on average assets (annualized)	0.30		%	0.58		%
Return on average equity (annualized)	2.81		%	7.39		%

Key factors behind these results were:

• Net income totaled $953 thousand, or $0.09 per diluted share for the quarter ended March 31, 2019, compared to $1.341 million or $0.23 per diluted share for the quarter ended March 31, 2018. The current quarter’s operations reflected merger related costs, financial reporting expenses associated with changing our year end and higher loan loss provisions related to a growing loan portfolio and specific reserves related to a dairy loan and modest increases to specific reserves due to methodology enhancements. The Change from a quarter a year ago reflects a full quarter of United Bank, higher provision for loans losses and the costs discussed above.

• Net interest margin (NIM) was at 3.43% for the current quarter, compared to 3.41% a year earlier. The increase in funding costs were offset by higher asset yields, primarily from loans. The margin declined from the 3.56% for the three months ended December 31, 2018 primarily due to lower accretion from payoffs and compression caused by liability costs increasing more than asset yields.

• Loan loss provision was $1.225 million for the quarter ended March 31, 2019 compared to $100 thousand for the comparable prior year quarter and $950 thousand for the quarter ended December 31, 2018. From December 31, 2018, the increase is largely due to an increase in specific reserves. From March 31, 2018, the increase is due to both organic growth and an increase in specific reserves.

• Total non-interest expense for the first quarter of 2019 of $9.894 million was higher than the comparable prior year quarter of $7.103 million, due to the acquisition of United Bank and approximately $1 million increase of merger related costs, branch closure costs and the costs of changing our year-end. Non-interest expense in the first quarter of 2019 decreased $100 thousand from the three months ended December 2018, due to $172 thousand lower merger related, branch closure and audit and financial costs, partially offset by a full quarter of expenses from the acquired United Bank operations.

• Net loans increased to $1.01 billion, or an increase of $26 million at March 31, 2019, compared to $0.98 billion at December 31, 2018 and $0.75 billion at March 31, 2018. Strong organic loan and deposit growth largely supported the increase in assets in the current quarter. The asset growth from March 31, 2018 was due to the acquisition of United Bank as well as organic loan growth.

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• The Tax Cuts and Jobs Act of 2017 ("the Tax Act"), enacted on December 22, 2017, reduced the corporate Federal income tax rates for the Company from 34% to 24.5% for 2018, and 21% for 2019.

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amount of assets, liabilities, revenue, expenses and their related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that our management believes to be relevant at the time our consolidated financial statements are prepared. Some of these estimates are more critical than others. In addition to the policies included in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included as an exhibit in our transition report on Form 10-K for the transition period from October 1, 2018 to December 31, 2018, our critical accounting estimates are as follows:

Allowance for Loan Losses.

We maintain an allowance for loan losses to absorb probable and inherent losses in our loan portfolio. The allowance is based on ongoing, quarterly assessments of the estimated probable incurred losses in our loan portfolio. In evaluating the level of the allowance for loan loss, we consider the types of loans and the amount of loans in our loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, prevailing economic conditions and other relevant factors determined by management. We follow all applicable regulatory guidance, including the “Interagency Policy Statement on the Allowance for Loan and Lease Losses,” issued by the Federal Financial Institutions Examination Council (FFIEC). We believe that the Bank’s Allowance for Loan Losses Policy conforms to all applicable regulatory requirements. However, based on periodic examinations by regulators, the amount of the allowance for loan losses recorded during a particular period may be adjusted.

Our determination of the allowance for loan losses is based on (1) specific allowances for specifically identified and evaluated impaired loans and their corresponding estimated loss based on likelihood of default, payment history, and net realizable value of underlying collateral. Specific allocations for collateral dependent loans are based on fair value of the underlying collateral relative to the unpaid principal balance of individually impaired loans. For loans that are not collateral dependent, the specific allocation is based on the present value of expected future cash flows discounted at the loan’s original effective interest rate through the repayment period; and (2) a general allowance on loans not specifically identified in (1) above, based on historical loss ratios, which are adjusted for qualitative and general economic factors. We continue to refine our allowance for loan losses methodology, with an increased emphasis on historical performance adjusted for applicable economic and qualitative factors.

Assessing the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans, any of which estimates may be susceptible to significant change. In our opinion, the allowance, when taken as a whole, reflects estimated probable loan losses in our loan portfolio.

Goodwill.

We account for goodwill and other intangible assets in accordance with ASC Topic 350, “Intangibles - Goodwill and Other.” The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, as goodwill. The Company amortizes acquired intangible assets with definite useful economic lives over their useful economic lives utilizing the straight-line method. On a periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amounts of the intangible assets may be impaired. The Company does not amortize goodwill and any acquired intangible asset with an indefinite useful economic life, but reviews them for impairment at a reporting unit level on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired. A reporting unit is defined as any distinct, separately identifiable component of the Company’s one operating segment for which complete, discrete financial information is available and reviewed regularly by the segment’s management. The Company has one reporting unit as of March 31, 2019 which is related to its banking activities. The Company performed the required goodwill impairment test and determined that goodwill was not impaired as of December 31, 2018.

Fair Value Measurements and Valuation Methodologies.

We apply various valuation methodologies to assets and liabilities which often involve a significant degree of judgment, particularly when liquid markets do not exist for the particular items being valued. Quoted market prices are referred to when estimating fair values for certain assets, such as most investment securities. However, for those items for which an observable

49

liquid market does not exist, management utilizes significant estimates and assumptions to value such items. Examples of these items include loans, deposits, borrowings, goodwill, core deposit intangible assets, other assets and liabilities obtained or assumed in business combinations, and certain other financial instruments. These valuations require the use of various assumptions, including, among others, discount rates, rates of return on assets, repayment rates, cash flows, default rates, and liquidation values. The use of different assumptions could produce significantly different results, which could have material positive or negative effects on the Company’s results of operations, financial condition or disclosures of fair value information.

In addition to valuation, the Company must assess whether there are any declines in value below the carrying value of assets that should be considered other than temporary or otherwise require an adjustment in carrying value and recognition of a loss in the consolidated statement of income. Examples include but are not limited to; loans, investment securities, goodwill, core deposit intangible assets and deferred tax assets, among others. Specific assumptions, estimates and judgments utilized by management are discussed in detail herein in management’s discussion and analysis of financial condition and results of operations and in notes 1, 2, 3, 4 and 7 of Condensed Notes to Consolidated Financial Statements.

Income Taxes.

Amounts provided for income tax expenses are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities, which arise principally from temporary differences between the amounts reported in the financial statements and the tax basis of certain assets and liabilities, are included in the amounts provided for income taxes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and tax planning strategies which will create taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and if necessary, tax planning strategies in making this assessment.

The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and application of specific provisions of federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be material to our consolidated results of our operations and reported earnings. We believe that the deferred tax assets and liabilities are adequate and properly recorded in the accompanying consolidated financial statements. As of March 31, 2019, management does not believe a valuation allowance related to the realizability of its deferred tax assets is necessary.

STATEMENT OF OPERATIONS ANALYSIS

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

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

Net interest income was $10.06 million for the three months ended March 31, 2019, compared to $7.36 million for the three months ended March 31, 2018 and $10.04 million for the three months ended December 31, 2018, respectively. The net interest margin for the three-month period ended March 31, 2019 was 3.43%, compared to 3.40% for the three-month period ended March 31, 2018 and 3.56% for the three months ended December 31, 2018.

For the preceding quarter, the Company’s net interest margin benefited from $0.235 million, or 8 bp, of interest income realized on the payoff of classified loans, compared to $0.015 million, or 1 bp, in the current quarter. Scheduled accretion for acquired loans, was $0.194 million, $0.182 million, and $0.142 million, for the quarters ended March 31, 2019, December 31, 2018 and March 31, 2018, respectively. The impact on margin was 1 bp at March 31, 2019 and 8 bp at December 31, 2018. Increased deposit costs more than offset higher asset yields, which resulted in the remainder of the decline in NIM.

As shown in the rate/volume analysis in the following pages, volume changes resulted in an increase of $3.222 million in net interest income for the three month period ended March 31, 2019, compared to the comparable prior year period primarily

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due to the acquisition of United Bank, which resulted in larger average balances of loans, deposits and borrowings. The changes in the composition of interest earning assets resulted in an increase of $3.634 million for the three-month period ended March 31, 2019, compared to the same period in the prior year, primarily due to the acquisition of United. Rate changes on interest earning assets increased net interest income by $0.732 million for the three-month period ended March 31, 2019, compared to the same period in the prior year. Rate changes on interest-bearing liabilities increased interest expense by $0.986 million over the same period in the prior year, resulting in a net decrease of $0.515 million in net interest income as a result of changes in interest rates due to competitive pricing during the three-month period ended March 31, 2019. Rate changes on investment securities are reflective of growth of and changes in the composition of the investment portfolio.

Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following net interest income analysis table presents interest income from average interest earning assets, expressed in dollars and yields, and interest expense on average interest-bearing liabilities, expressed in dollars and rates on a tax equivalent basis. Shown below is the weighted average tax equivalent yield on interest earning assets, rates paid on interest-bearing liabilities and the resultant spread at or during the three-month period ended March 31, 2019, and for the comparable prior year three-month period. Non-accruing loans have been included in the table as loans carrying a zero yield.

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

NET INTEREST INCOME ANALYSIS ON A TAX EQUIVALENT BASIS

(Dollar amounts in thousands)

Three months ended March 31, 2019 compared to the three months ended March 31, 2018:

	Three months ended March 31, 2019						Three months ended March 31, 2018
	Average Balance		Interest Income/ Expense		Average Yield/ Rate (1)		Average Balance		Interest Income/ Expense		Average Yield/ Rate (1)
Average interest earning assets:
Cash and cash equivalents	$	26,014	$	168	2.62	%	$	27,772	$	62	0.91	%
Loans	996,778		12,414		5.05	%	725,601		8,540		4.77	%
Interest-bearing deposits	6,913		39		2.29	%	7,281		31		1.73	%
Investment securities (1)	156,157		947		2.57	%	113,943		620		2.39	%
Non-marketable equity securities, at cost	10,375		150		5.86	%	8,005		99		5.02	%
Total interest earning assets (1)	$	1,196,237	$	13,718	4.66	%	$	882,602	$	9,352	4.32	%
Average interest-bearing liabilities:
Savings accounts	$	164,129	$	175	0.43	%	$	94,497	$	28	0.12	%
Demand deposits	189,348		354		0.76	%	153,032		114		0.30	%
Money market	152,963		382		1.01	%	118,622		161		0.55	%
CD’s	326,834		1,529		1.90	%	265,621		863		1.32	%
IRA’s	39,857		153		1.56	%	33,688		84		1.01	%
Total deposits	873,131		2,593		1.20	%	665,460		1,250		0.76	%
FHLB Advances and other borrowings	126,239		1,063		3.41	%	117,939		746		2.57	%
Total interest-bearing liabilities	$	999,370	$	3,656	1.48	%	$	783,399	$	1,996	1.03	%
Net interest income			$	10,062					$	7,356
Interest rate spread					3.18	%					3.29	%
Net interest margin (1)					3.43	%					3.40	%
Average interest earning assets to average interest-bearing liabilities					1.20						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% for the quarter ended March 31, 2019 and 24.5% for the quarter ended March 31, 2018. The FTE adjustment to net interest income included in the rate calculations totaled $42 and $52 for the three months ended March 31, 2019 and March 31, 2018, respectively.

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Rate/Volume Analysis. The following table presents the dollar amount of changes in interest income and interest expense for the components of interest earning assets and interest-bearing liabilities that are presented in the preceding table. For each category of interest earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in volume, which are changes in the average outstanding balances multiplied by the prior period rate (i.e. holding the initial rate constant); and (2) changes in rate, which are changes in average interest rates multiplied by the prior period volume (i.e. holding the initial balance constant). Changes due to both rate and volume which cannot be segregated have been allocated in proportion to the relationship of the dollar amounts of the change in each category.

RATE / VOLUME ANALYSIS

(Dollar amounts in thousands)

Three months ended March 31, 2019 compared to the three months ended March 31, 2018.

	Increase (decrease) due to
	Volume			Rate			Net
Interest income:
Cash and cash equivalents	$	(4	)	$	110		$	106
Loans	3,345			529			3,874
Interest-bearing deposits	(2		)	10			8
Investment securities	263			64			327
Non-marketable equity securities, at cost	32			19			51
Total interest earning assets	3,634			732			4,366
Interest expense:
Savings accounts	28			119			147
Demand deposits	32			208			240
Money market accounts	55			166			221
CD’s	225			441			666
IRA’s	17			52			69
Total deposits	357			986			1,343
FHLB Advances and other borrowings	55			261			316
Total interest bearing liabilities	412			1,247			1,659
Net interest income	$	3,222		$	(515	)	$	2,707

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

Provision expense for the quarter of approximately $1.225 million was due to (1) $0.600 million was due to newly originated loan growth reflecting strong organic loan growth, (2) $0.122 million was due to net charge offs for the quarter and (3) $0.500 million was due to increases in specific reserves on impaired credits. Provision expense was higher mainly due to increasing specific reserves. The largest specific reserve was established on a single dairy relationship of approximately $0.350 million or $0.02 per share, whose status changed to nonaccrual status during the March 31, 2019 quarter. While this sector is experiencing difficult operating conditions, the issues related to this credit relationship were isolated. Management believes its agricultural lending processes remain prudent and there is no evidence to suggest systemic problems. The bank has initiated foreclosure and has also filed a civil complaint in Eau Claire County Circuit Court regarding borrower representations in the loan application and approval process. Additionally, approximately half of the remaining specific reserves increase was due to enhancements on various impaired.

The Bank recorded a provision of $0.950 million for the quarter ended December 31, 2018 and $0.100 million for the quarter ended March 31, 2018. From December 31, 2018, the increase is largely due an increase in specific reserves. From March 31, 2018, the increase is due to both organic growth and an increase in specific reserves.

Net loan charge-offs for the three-month period ended March 31, 2019 were $0.122 million, compared to $0.721 million, for the comparable prior year period and $0.094 million for the quarter ended December 31, 2018. Annualized net charge-offs to average loans were 0.05% for the three-month ended March 31, 2019, compared to 0.04% for the comparable period in the

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prior year. Non-accrual loans were $9.9 million at March 31, 2019, compared to $7.4 million at December 31, 2018 and $6.6 million at March 31, 2018. Refer to the “Allowance for Loan Losses” and “Nonperforming Loans, Potential Problem Loans and Foreclosed Properties” sections below for more information related to non-performing loans.

Management believes that the provision taken for the current year three-month period is adequate in view of the present condition of our loan portfolio and the sufficiency of collateral supporting our non-performing loans. We continually monitor non-performing loan relationships and will adjust our provision, as necessary, if changing facts and circumstances require a change in the ALL. In addition, a decline in the quality of our loan portfolio as a result of general economic conditions, factors affecting particular borrowers or our market areas, or otherwise, could all affect the adequacy of our ALL. If there are significant charge-offs against the ALL, or we otherwise determine that the ALL is inadequate, we will need to record an additional provision in the future. See the section below captioned “Allowance for Loan Losses” in this discussion for further analysis of our provision for loan losses.

Non-interest Income (Loss). The following table reflects the various components of non-interest income for the three month periods ended March 31, 2019 and 2018, respectively.

	Three months ended March 31,
	2019		2018			% Change
Non-interest Income:
Service charges on deposit accounts	$	550	$	430		27.91	%
Interchange income	338		302			11.92	%
Loan servicing income	554		346			60.12	%
Gain on sale of loans	308		189			62.96	%
Loan fees and service charges	128		87			47.13	%
Insurance commission income	184		187			(1.60	)%
Gains (losses) on investment securities	34		(21		)	N/M
Other	236		155			52.26	%
Total non-interest income	$	2,332	$	1,675		39.22	%

N/M means not meaningful

The increase in service charges on deposit accounts, interchange income, loan servicing income, gain on sale of loans, loans fees and other income is primarily due to the acquisition of United Bank and to a lesser extent growth in the Bank’s business.

Gain on sale of investment securities in the first quarter was due to the adoption of ASU 2016-01, affecting the Bank's one required holding of an exchange listed stock. ASU 2016-01 requires equity securities to be carried at fair value, with periodic adjustments to fair value recorded as income or expense in the consolidated statement of operations. The loss recorded in the first quarter a year ago was to the impairment of another investment security, which was subsequently sold in the quarter ending June 30, 2018 at a gain of $0.004 million.

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Non-interest Expense. The following table reflects the various components of non-interest expense for the three month period ended March 31, 2019 and 2018, respectively.

	Three months ended March 31,
	2019			2018			% Change
Non-interest Expense:
Compensation and benefits	$	4,706		$	3,806		23.65	%
Occupancy - net	954			761			25.36	%
Office	522			426			22.54	%
Data processing	987			733			34.65	%
Amortization of intangible assets	327			161			103.11	%
Amortization of mortgage servicing rights	191			76			151.32	%
Advertising, marketing and public relations	203			146			39.04	%
FDIC premium assessment	94			115			(18.26	)%
Professional services	825			323			155.42	%
Losses on repossessed assets, net	(37		)	—			N/M
Other	1,122			556			101.80	%
Total non-interest expense	$	9,894		$	7,103		39.29	%
Non-interest expense (annualized) / Average assets	3.09		%	3.07		%	0.41	%

N/M means not meaningful

During the three months ended March 31, 2019, the increase in nearly all expense categories increased due to additional costs associated with the full quarter impact of the acquisition of United Bank, completed on October 19, 2018, and costs to support the organic growth in loan and deposit portfolios.

In addition, the increase in other expense includes a one-time charge of approximately $0.160 million related to Wisconsin domicile taxes associated with the Bank's initial public offering in 2006 and an additional one-time charge of approximately $0.140 million related to Wisconsin domicile taxes arising from our 2018 United Bank Acquisition.

Merger related expenses incurred this quarter and included in the consolidated statement of operations consisted of the following: (1) $0.074 million recorded in compensation and benefits, (2) $0.204 million recorded in professional services and (3) $0.381 million recorded in other non-interest expense. Branch closure costs incurred this quarter consisted of $0.004 million recorded in professional services and $0.011 million recorded in other non-interest expense in the consolidated statement of operations. Audit and financial reporting expenses, related to our year end change, consisted of $0.358 million recorded in professional services in the consolidated statement of operations during the quarter ended March 31, 2019.

Income Taxes. Income tax expense was $0.322 million for the three months ended March 31, 2019, compared to $0.487 million for the three months ended March 31, 2018, respectively. The effective tax rate decreased from 26.6% to 25.3% for the three-month periods ended March 31, 2018 and March 31, 2019, respectively.

BALANCE SHEET ANALYSIS

Loans. Total loans outstanding, net of deferred loan fees and costs and unamortized discount on acquired loans, increased by $27,122, or 2.73%, to $1,019,678 as of March 31, 2019 from $992,556 at December 31, 2018. The following table reflects the composition, or mix of our loan portfolio at March 31, 2019 and December 31, 2018:

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	March 31, 2019			December 31, 2018
	Amount			Amount
Real estate loans:
Residential real estate
One to four family	$	201,796		209,926
Purchased HELOC loans	12,346			12,883
Commercial/agricultural real estate
Commercial real estate	368,530			357,959
Agricultural real estate	90,920			86,015
Multi-family real estate	83,961			69,400
Construction and land development	42,446			22,691
Total real estate loans	799,999			758,874
Non-real estate loans:
Consumer non-real estate
Originated indirect paper	52,422			56,585
Purchased indirect paper	12,910			15,006
Other Consumer	19,048			20,214
Commercial/agricultural loans
Commercial non-real estate	105,803			112,427
Agricultural non-real estate	36,254			36,327
Total non-real estate loans	226,437			240,559
Gross loans	1,026,436			999,433
Unearned net deferred fees and costs and loans in process	318			409
Unamortized discount on acquired loans	(7,076		)	(7,286		)
Total loans (net of unearned income and deferred expense)	1,019,678			992,556
Allowance for loan losses	(8,707		)	(7,604		)
Total loans receivable, net	$	1,010,971		$	984,952

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

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	March 31, 2019		December 31, 2018		Change FTD
Community Banking Loan Portfolios:
Commercial/Agricultural real estate:
Commercial real estate	$	368,530	$	357,959	$	10,571
Agricultural real estate	90,920		86,015		4,905
Multi-family real estate	83,961		69,400		14,561
Construction and land development	42,446		22,691		19,755
Commercial/Agricultural non-real estate:
Commercial non-real estate	105,803		112,427		(6,624		)
Agricultural non-real estate	36,254		36,327		(73		)
Residential real estate:
Purchased HELOC loans	12,346		12,883		(537		)
Consumer non-real estate:
Other consumer	19,048		20,214		(1,166		)
Total Community Banking Loan Portfolios	759,308		717,916		41,392
Legacy Loan Portfolios:
Residential real estate:
One to four family	201,796		209,926		(8,130		)
Consumer non-real estate:
Originated indirect paper	52,422		56,585		(4,163		)
Purchased indirect paper	12,910		15,006		(2,096		)
Total Legacy Loan Portfolios	267,128		281,517		(14,389		)
Gross loans	$	1,026,436	$	999,433	$	27,003

The Community Banking loan portfolios reflect the Bank's strategy to grow its commercial banking business and consumer lending. The Legacy loan portfolios reflect the Bank's strategy to sell substantially all newly originated one to four family loans in the secondary market and the discontinuation of originated and purchased indirect paper loans, effective in the quarter ending December 31, 2016.

At March 31, 2019, the community banking portfolio grew by $41.4 million compared to December 31, 2018 with strong growth in all real estate categories. The growth in construction loans reflects the funding on projects that moved closer to completion.

As expected, the legacy portfolio continues to decrease. One to four family residential real estate loans, decreased $8.1 million or 4% from the December 31, 2018 balances as repayments, including payoffs, outpaced one to four family portfolio originations. Consumer indirect paper loans decreased $6.3 million or 9% from December 31, 2018 balances. While the portfolio decrease percentage this quarter remains in the historical range of shrinkage, the absolute dollar shrinkage of the legacy portfolio is expected to slow over time as the portfolio decreases in size.

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

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

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

The specific credit allocation for the ALL is based on a regular analysis of all loans that are considered impaired. In compliance with ASC 310-10, the fair value of the loan is determined based on either the present value of expected cash flows discounted at the loan’s effective interest rate, the market price of the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral less the expected cost of sale for such collateral. At March 31, 2019 and December 31, 2018, we had 315 and 209 such impaired loans, all secured by real estate or personal property with an aggregate recorded investment of $27.3 million and $22.5 million respectively. Of the impaired loans, respectively, there were 35 such individual loans where estimated fair value was less than their book value (i.e. we deemed impairment to exist) totaling $4.4 million for which $0.739 million in specific ALL was recorded as of March 31, 2019.

At March 31, 2019, the ALL was $8,707, or 0.85% of our total loan portfolio, compared to ALL of $7,604, or 0.77% of the total loan portfolio at December 31, 2018. This level was based on our analysis of the loan portfolio risk at March 31, 2019, considering the factors discussed above. A restricted cash reserve account was established by the third party seller of the purchased indirect paper consumer loans, based on a percentage of the outstanding loan balances. The funds in the reserve account are to be released to compensate the Bank for any nonperforming purchased consumer loans that are not purchased back by the seller or substituted with performing consumer loans and as a result, the Bank records a charged off loan. The Bank has not drawn on the restricted cash reserve account as the third party has repurchased all loans presented to them.

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

Nonperforming Loans, Potential Problem Loans and Foreclosed Properties. We practice early identification of non-accrual and problem loans in order to minimize the Bank's risk of loss. Non-performing loans are defined as non-accrual loans and restructured loans that were 90 days or more past due at the time of their restructure, or when management determines that such classification is warranted. The accrual of interest income is discontinued on our loans according to the following schedule:

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

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

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

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

When interest accruals are discontinued, interest credited to income is reversed. If collection is in doubt, cash receipts on non-accrual loans are used to reduce principal rather than being recorded as interest income. A TDR typically involves the granting of some concession to the borrower involving a loan modification, such as modifying the payment schedule or making interest rate changes. TDR loans may involve loans that have had a charge-off taken against the loan to reduce the carrying amount of the loan to fair market value as determined pursuant to ASC 310-10.

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

	March 31, 2019 and Three Months Then Ended			December 31, 2018 and Three Months Then Ended
Nonperforming assets:
Nonaccrual loans	$	9,871		$	7,354
Accruing loans past due 90 days or more	1,713			736
Total nonperforming loans (“NPLs”)	11,584			8,090
Other real estate owned	2,071			2,522
Other collateral owned	29			48
Total nonperforming assets (“NPAs”)	$	13,684		$	10,660
Troubled Debt Restructurings (“TDRs”)	$	9,984		$	8,722
Accruing TDR's	$	7,483		$	6,055
Nonaccrual TDRs	$	2,501		$	2,667
Average outstanding loan balance	$	996,778		$	921,951
Loans, end of period	$	1,019,678		$	992,556
Total assets, end of period	$	1,326,590		$	1,287,924
ALL, at beginning of period	$	7,604		$	6,748
Loans charged off:
Residential real estate	(67		)	(43		)
Commercial/Agricultural real estate	—			—
Consumer non-real estate	(78		)	(79		)
Commercial/Agricultural non-real estate	—			—
Total loans charged off	(145		)	(122		)
Recoveries of loans previously charged off:
Residential real estate	1			4
Commercial/Agricultural real estate	—			—
Consumer non-real estate	22			24
Commercial/Agricultural non-real estate	—			—
Total recoveries of loans previously charged off:	23			28
Net loans charged off (“NCOs”)	(122		)	(94		)
Additions to ALL via provision for loan losses charged to operations	1,225			950
ALL, at end of period	$	8,707		$	7,604
Ratios:
ALL to NCOs (annualized)	1,784.22		%	2,022.34		%
NCOs (annualized) to average loans	0.05		%	0.04		%
ALL to total loans	0.85		%	0.77		%
NPLs to total loans	1.14		%	0.82		%
NPAs to total assets	1.03		%	0.83		%

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

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days		Total Past Due		Nonaccrual Loans		Recorded Investment > 89 Days and Accruing
March 31, 2019
Originated loans	$	3,545	$	2,494	$	5,304	$	11,343	$	2,742	$	1,245
Acquired loans	4,686		1,658		3,063		9,407		7,129		468
Total	$	8,231	$	4,152	$	8,367	$	20,750	$	9,871	$	1,713
December 31, 2018
Originated loans	$	4,888	$	2,164	$	1,766	$	8,818	$	1,770	$	279
Acquired loans	3,671		918		3,739		8,328		5,584		457
Total	$	8,559	$	3,082	$	5,505	$	17,146	$	7,354	$	736

Nonperforming assets, delinquencies and troubled debt restructures typically increase in subsequent quarters following a merger due to updated reporting and risk rating of the loan portfolio to CCFBank standards. We experienced this again as nonperforming assets increased to 1.03% of total assets at March 31, 2019, from 0.83% of total assets at December 31, 2018. Total impaired loans, which included trouble debt restructured loans, purchased credit impaired loans and substandard non-performing loans, was $50 million at March 31, 2019, compared to $47 million at December 31, 2018.

Non-performing loans of $11.6 million at March 31, 2019, included $2.5 million of non-accrual troubled debt restructured originated loans, which was an increase of $3.1 million from the non-performing loans balance at December 31, 2018. The increase primarily relates to the dairy credit discussed above and increases in loan relationships aggregating $0.550 million or less partially offset by the reduction in foreclosed assets.

Nonaccrual Loans Rollforward:

	Quarter Ended
	March 31, 2019			December 31, 2018			September 30, 2018			March 31, 2018
Balance, beginning of period	$	7,354		$	7,210		$	6,627		$	6,388
Additions	3,428			906			2,030			901
Acquired nonaccrual loans	—			941			—			—
Charge offs	(31		)	(40		)	(68		)	(34		)
Transfers to OREO	(362		)	(201		)	(400		)	(334		)
Return to accrual status	(175		)	—			(93		)	—
Payments received	(282		)	(1,429		)	(676		)	(257		)
Other, net	(61		)	(33		)	(210		)	(22		)
Balance, end of period	$	9,871		$	7,354		$	7,210		$	6,642

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Other real estate owned ("OREO") decreased by $0.4 million from $2.5 million at December 31, 2018 to $2.1million at March 31, 2019 as sales exceeded properties transferred from loans.

Other Real Estate Owned Rollforward:

	Quarter Ended
	March 31, 2019			December 31, 2018			September 30, 2018			March 31, 2018
Balance, beginning of period	$	2,522		$	2,749		$	5,328		$	6,996
Loans transferred in	362			201			400			334
Branch properties sales	—			—			(1,245		)	—
Sales	(808		)	(210		)	(1,762		)	(256		)
Write-downs	(6		)	—			(127		)	(27		)
Other, net	1			(218		)	155			(32		)
Balance, end of period	$	2,071		$	2,522		$	2,749		$	7,015

Accruing TDR loans increased $1.4 million to $7.5 million at March 31, 2019 from $6.1 million at December 31, 2018 primarily due to two properties secured by commercial real estate.

Troubled Debt Restructurings in Accrual Status:

	March 31, 2019			December 31, 2018			September 30, 2018			March 31, 2018
	Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment		Number of Modifications	Recorded Investment
Troubled debt restructurings: Accrual Status
Residential real estate	37	$	3,454	34	$	3,319	34	$	3,495	28	$	3,015
Commercial/Agricultural real estate	17	3,454		15	2,209		14	1,646		12	2,414
Consumer non-real estate	11	90		13	99		14	109		16	146
Commercial/Agricultural non-real estate	3	485		2	428		3	481		3	517
Total loans	68	$	7,483	64	$	6,055	65	$	5,731	59	$	6,092

Net charge offs for the three month period ended March 31, 2019 were $0.122 million compared to $0.072 million for the same prior year period and $0.094 million for the quarter ended December 31, 2018. The ratio of annualized net charge-offs to average loans receivable was 0.05% for the three-month period ended March 31, 2019, compared to 0.04% for both the three months ended December 31, 2018 and March 31, 2018.

Investment Securities. We manage our securities portfolio to provide liquidity and enhance income. Our investment portfolio is comprised of securities available for sale and securities held to maturity. The 2019 purchases were approximately 77% variable rate securities. The effective duration of the investment portfolio at March 31, 2019 was 3.4 years compared to 4.1 years at December 31, 2018.

Securities available for sale, which represent the majority of our investment portfolio, were $160.2 million at March 31, 2019, compared with $146.7 million at December 31, 2018. There were no impairment charges recorded in the three months ended March 31, 2019. One agency security had an impairment charge of $0.017 million recorded in the three months ended March 31, 2018. This security was sold in the quarter-ended June 30, 2018 and a $0.004 million gain was realized due to changes in market prices. Securities held to maturity were $4,7million at March 31, 2019, compared with $4.9 million at December 31, 2018.

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

Securities available for sale	Amortized Cost		Fair Value
March 31, 2019
U.S. government agency obligations	$	52,567	$	52,066
Obligations of states and political subdivisions	33,400		33,415
Mortgage backed securities	44,670		44,564
Corporate debt securities	6,560		6,375
Corporate asset based securities	23,999		23,781
Totals	$	161,196	$	160,201
December 31, 2018
U.S. government agency obligations	$	46,215	$	45,298
Obligations of states and political subdivisions	35,162		34,728
Mortgage backed securities	42,279		41,350
Agency securities	104		148
Corporate debt securities	6,577		6,305
Corporate asset based securities	18,928		18,896
Totals	$	149,265	$	146,725

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

Securities held to maturity	Amortized Cost		Fair Value
March 31, 2019
Obligations of states and political subdivisions	$	1,700	$	1,702
Mortgage-backed securities	3,011		3,083
Totals	$	4,711	$	4,785
December 31, 2018
Obligations of states and political subdivisions	$	1,701	$	1,698
Mortgage-backed securities	3,149		3,174
Totals	$	4,850	$	4,872

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

	March 31, 2019				December 31, 2018
Available for sale securities	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Agency	$	97,238	$	96,630	$	88,494	$	86,648
AAA	7,052		7,023		3,566		3,535
AA	42,390		42,228		42,608		42,305
A	12,860		12,680		12,991		12,662
Non-rated	1,656		1,640		1,606		1,575
Total available for sale securities	$	161,196	$	160,201	$	149,265	$	146,725

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

	March 31, 2019				December 31, 2018
Securities held to maturity	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. government agency	$	3,011	$	3,083	$	3,149	$	3,173
AA	395		396		395		395
A	955		955		956		955
Non-rated	350		351		350		349
Total	$	4,711	$	4,785	$	4,850	$	4,872

At March 31, 2019, securities with a market value of $1.9 million were pledged against a line of credit with the Federal Reserve Bank of Minneapolis. As of March 31, 2019, this line of credit had a zero outstanding balance. The Bank has pledged U.S. Government Agency securities with a market value of $5.6 million, mortgage-backed securities with a market value of $23.0 million as collateral against specific municipal deposits. As of March 31, 2019, the Bank also has mortgage backed securities with a market value of $0.881million pledged as collateral to the Federal Home Loan Bank of Des Moines.

Other Assets. Other assets increased to $10 million at March 31, 2019, from $3 million at December 31, 2018, due primarily to the adoption of new accounting standards requiring asset recognition for operating leases which totaled $5 million at March 31, 2019.

Deposits. Deposits increased $23 million to $1.03 billion at March 31, 2019. The deposit growth was primarily from our commercial area in money market accounts, along with retail certificate of deposit growth, which helped offset the reduction in brokered and listing service deposits of $16 million and $2 million, respectively, at March 31, 2019 compared to December 31, 2018. As of March 31, 2019, our brokered and listing service deposits were $39 million and $7 million, respectively.

Non-maturity deposits increased to $668 million or 65% of total deposits compared to $643 million at December 31, 2018, or 64% of total deposits, primarily due to growth in our commercial deposits.

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

	March 31, 2019		December 31, 2018
Non-interest bearing demand deposits	$	138,280	$	155,405
Interest bearing demand deposits	195,741		169,310
Savings accounts	159,325		192,310
Money market accounts	174,508		126,021
Certificate accounts	362,795		364,466
Total deposits	$	1,030,649	$	1,007,512

Deposits from closed branches, in markets that the Bank no longer competes in, decreased by $2.1 million during the three months ended March 31, 2019, and total $39.3 million as of March 31, 2019.

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

Federal Home Loan Bank (FHLB) advances (borrowings) and Other Borrowings. FHLB advances were $123 million as of March 31, 2019 and $110 million as of December 31, 2018, as we continue to utilize these advances, as necessary, to supplement core deposits to meet our funding and liquidity needs, and as we evaluate all options to manage the Bank's cost of funds. The Bank has an irrevocable Standby Letter of Credit Master Reimbursement Agreement with the Federal Home Loan Bank. This irrevocable standby letter of credit ("LOC") is supported by loan collateral as an alternative to directly pledging investment securities on behalf of a municipal customer as collateral for their interest-bearing deposit balances. The Bank’s current unused borrowing capacity, supported by loan collateral as of March 31, 2019, is approximately $275 million.

The Bank has pledged $843 million of loans to secure the current outstandings, letters of credit and to provide the unused borrowing capacity.

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

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

On August 1, 2018, the Company entered into a Business Credit Agreement evidencing a $7.5 million revolving loan and Business Note in an initial principal amount of $10 million. The Revolving Loan matures on August 1, 2019 and the Note matures on August 1, 2030. The Revolving Loan and the Note each bear interest at a variable rate based on the U.S. Prime Rate as published in the Wall Street Journal less 75 basis points and are payable in accordance with the terms of the Loan Agreement and the Note, respectively. The proceeds from the Business Note were used to refinance existing senior notes, pay transaction fees and expenses and for general corporate purposes. The proceeds from the Revolving Loan will be used for general corporate purposes. At March 31, 2019 and December 31, 2018, there were no borrowings outstanding on this revolving loan.

Other Liabilities. Other liabilities increased by $2 million to $10 million, at March 31, 2019, due primarily to the new accounting standard related to liability recognition of operating leases which totaled $5 million at March 31, 2019.

Stockholders’ Equity. Total stockholders’ equity increased to $138.4 million at March 31, 2019, from $138.2 million one quarter earlier, as the Company benefitted from the addition of earnings and a reduction in accumulated other comprehensive loss, mainly due to lower long-term interest rates, offset by the annual common stock dividend payment. Tangible book value per share (non-GAAP)² was $9.07 at March 31, 2019, compared to $9.06 at December 31, 2018. Tangible common equity (non-GAAP)² as a percent of tangible assets (non-GAAP) was 7.74% at March 31, 2019, compared to 7.94% at December 31, 2018 and 6.26% one year earlier.

The increase in equity was due to net income, the decrease in unrealized loss on AFS securities, partially offset by the payment of the Company’s annual dividend in the quarter.

Liquidity and Asset / Liability Management. Our primary sources of funds are deposits; amortization, prepayments and maturities of outstanding loans; short-term investments; and borrowings. We use our sources of funds primarily to meet ongoing commitments, to pay nonrenewing, maturing certificates of deposit and savings withdrawals, and to fund loan commitments. We have enhanced our liquidity monitoring and updated what we consider to be sources of on-balance sheet cash. We consider our interest-bearing cash and unpledged investment securities to be our sources of on-balance sheet liquidity. At March 31, 2019, our on-balance sheet liquidity ratio was 11.07%. While scheduled payments from the amortization of loans and maturing short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are influenced by factors partially outside of the Bank's control, including general interest rates, economic conditions and competition. Although $181.0 million of our $1.031 billion (49.9%) CD portfolio as of March 31, 2019 will mature within the next 12 months, we have historically retained a majority of our maturing CD’s. However, due to strategic pricing decisions regarding rate matching and branch closures, our retention rate may decrease in the future. Through new deposit product offerings to our branch and commercial customers, we are currently attempting to strengthen customer relationships to attract additional non-rate sensitive deposits. In our present interest rate environment, and based on maturing yields, this is intended to also reduce our cost of funds.

We maintain access to additional sources of funds including FHLB borrowings and lines of credit with the Federal Reserve Bank and correspondent banks We utilize FHLB borrowings to leverage our capital base, to provide funds for our lending and investment activities, and to manage our interest rate risk. Our borrowing arrangement with the FHLB calls for pledging certain qualified real estate loans and borrowing up to 75% of the value of those loans, not to exceed 35% of the Bank’s total assets. As of March 31, 2019, we have approximately $275 million available under this arrangement, supported by loan collateral, as compared to $208 million one year earlier. This increase was due to the Bank pledging additional loans, primarily from the United Bank acquisition. We also maintain lines of credit of $1.5 million with the Federal Reserve Bank and have $18.5 million of uncommitted federal funds purchased lines of credit, as well as a $7.5 million revolving line of credit which is available as needed for general liquidity purposes.    

In reviewing our adequacy of liquidity, we review and evaluate historical financial information, including information regarding general economic conditions, current ratios, management goals and the resources available to meet our anticipated

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liquidity needs. Management believes that our liquidity is adequate and, to management’s knowledge, there are no known events or uncertainties that will result or are likely to reasonably result in a material increase or decrease in our liquidity.

Off-Balance Sheet Liabilities. Some of our financial instruments have off-balance sheet risk. These instruments include unused commitments for lines of credit, overdraft protection lines of credit and home equity lines of credit, as well as commitments to extend credit. As of March 31, 2019, the Company had $209.5 million in unused commitments, compared to $207.8 million in unused commitments as of December 31, 2018.

Capital Resources. As of March 31, 2019, as shown in the table below, our Tier 1 and Risk-based capital levels exceeded levels necessary to be considered “Well Capitalized” under Prompt Corrective Action provisions for both the Bank and at the Company level.

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

	Actual				For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio
As of March 31, 2019 (Unaudited)
Total capital (to risk weighted assets)	$	130,055,000	12.7	%	$	81,720,000	>=	8.0	%	$	102,150,000	>=	10.0	%
Tier 1 capital (to risk weighted assets)	121,348,000		11.9	%	61,290,000		>=	6.0	%	81,720,000		>=	8.0	%
Common equity tier 1 capital (to risk weighted assets)	121,348,000		11.9	%	45,967,000		>=	4.5	%	66,397,000		>=	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	121,348,000		9.6	%	50,655,000		>=	4.0	%	63,318,000		>=	5.0	%
As of December 31, 2018 (Audited)
Total capital (to risk weighted assets)	$	126,440,000	12.7	%	$	79,651,000	>=	8.0	%	$	99,563,000	>=	10.0	%
Tier 1 capital (to risk weighted assets)	118,836,000		11.9	%	59,738,000		>=	6.0	%	79,651,000		>=	8.0	%
Common equity tier 1 capital (to risk weighted assets)	118,836,000		11.9	%	44,804,000		>=	4.5	%	64,716,000		>=	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	118,836,000		9.7	%	48,976,000		>=	4.0	%	61,220,000		>=	5.0	%

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

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

	Actual				For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount			Ratio		Amount			Ratio
As of March 31, 2019 (Unaudited)
Total capital (to risk weighted assets)	$	124,161,000	12.2	%	$	81,720,000	>=	8.0	%	$	102,150,000	>=	10.0	%
Tier 1 capital (to risk weighted assets)	100,454,000		9.8	%	61,290,000		>=	6.0	%	81,720,000		>=	8.0	%
Common equity tier 1 capital (to risk weighted assets)	100,454,000		9.8	%	45,967,000		>=	4.5	%	66,397,000		>=	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	100,454,000		7.9	%	50,655,000		>=	4.0	%	63,318,000		>=	5.0	%
As of December 31, 2018 (Audited)
Total capital (to risk weighted assets)	$	123,657,000	12.4	%	$	79,651,000	>=	8.0	%	$	99,563,000	>=	10.0	%
Tier 1 capital (to risk weighted assets)	101,053,000		10.2	%	59,738,000		>=	6.0	%	79,651,000		>=	8.0	%
Common equity tier 1 capital (to risk weighted assets)	101,053,000		10.2	%	44,804,000		>=	4.5	%	64,716,000		>=	6.5	%
Tier 1 leverage ratio (to adjusted total assets)	101,053,000		8.3	%	48,976,000		>=	4.0	%	61,220,000		>=	5.0	%

At March 31, 2019, the Company was categorized as "Well Capitalized" under Prompt Corrective Action Provisions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

In order to manage the potential for adverse effects of material and prolonged increases in interest rates on our results of operations, we adopted asset and liability management policies to better align the maturities and re-pricing terms of our interest earning assets and interest bearing liabilities. These policies are implemented by our Asset and Liability Management Committee (ALCO). The ALCO is comprised of members of the Bank's senior management and Board of Directors. The ALCO establishes guidelines for and monitors the volume and mix of our assets and funding sources, taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The Committee’s objectives are to manage assets and funding sources to produce results that are consistent with liquidity, cash flow, capital adequacy, growth, risk and profitability goals for the Bank. The ALCO meets on a regularly scheduled basis to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate risk exposure limits versus current projections pursuant to net present value of portfolio equity analysis. At each meeting, the Committee recommends strategy changes, as appropriate, based on this review. The Committee is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the Bank’s Board of Directors on a regularly scheduled basis.

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In order to manage our assets and liabilities and achieve desired levels of liquidity, credit quality, cash flow, interest rate risk, profitability and capital targets, we have focused our strategies on:

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

• originating variable rate commercial and agriculture loans;

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

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

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

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

• entering into selling loans on the secondary market with retained servicing; and

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

At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the ALCO may determine to increase the Bank’s interest rate risk position somewhat in order to maintain or improve its net interest margin.

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

	Percent Change in Economic Value of Equity (EVE)
Change in Interest Rates in Basis Points (“bp”) Rate Shock in Rates (1)	At March 31, 2019		At December 31, 2018
+300 bp	(4	)%	(3	)%
+200 bp	(2	)%	(2	)%
+100 bp	(1	)%	(1	)%
-100 bp	—	%	(1	)%
-200 bp	(2	)%	(5	)%

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

Our overall interest rate sensitivity is demonstrated by net interest income shock analysis which measures the change in net interest income in the event of hypothetical changes in interest rates. This analysis assesses the risk of change in our net interest income over the next 12 months in the event of an immediate and parallel shift in the yield curve (up 300 basis points and down 100 basis points). The table below presents our projected change in net interest income for the various rate shock levels at March 31, 2019 and December 31, 2018.

	Percent Change in Net Interest Income Over One Year Horizon
Change in Interest Rates in Basis Points (“bp”) Rate Shock in Rates (1)	At March 31, 2019		At December 31, 2018
+300 bp	(5	)%	(6	)%
+200 bp	(3	)%	(4	)%
+100 bp	(1	)%	(2	)%
-100 bp	1	%	1	%
-200 bp	—	%	(1	)%

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

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

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

ITEM 4. CONTROLS AND PROCEDURES

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

In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have designed our disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired control objectives. We carried out an evaluation as of March 31, 2019, under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2019 at reaching a level of reasonable assurance.

There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. On October 19, 2018, we completed our acquisition of United Bank. In accordance with our integration efforts, we are in the process of integrating United Bank operations into our internal control over financial reporting structure within the time frame provided by applicable SEC rules and regulations.

PART II – OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

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Item 1A. RISK FACTORS

A detailed discussion of the Company's risk factors is disclosed in Part I, Item 1A, “Risk Factors,” of the Company’s transition report on Form 10-K for the transition period from October 1, 2018 to December 31, 2018. Please refer to that section for disclosures regarding the risks and uncertainties relating to our business. There have been no material changes to the risk factors disclosed in our Form 10-K.

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

(a) Not applicable.

(b) Not applicable.

(c) Issuer Purchases of Equity Securities.

The table below shows the shares withheld from employees to satisfy tax withholding obligations during the three months ended March 31, 2019.

Period	Total number of Shares Purchased (1)	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Pans or Programs
January 1, 2019 - January 31, 2019	798	$11.32	—	—
February 1, 2019 - February 28, 2019	—	—	—	—
March 1, 2019- March 31, 2019	—	—	—	—
Total	798	$11.32	—	—

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

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

Item 5. OTHER INFORMATION

Not applicable.

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Item 6.

Item 7. EXHIBITS

(a) Exhibits

2.1	Agreement and Plan of Merger Between Citizens Community Bancorp, Inc., F&M Merger Sub, Inc. and F. & M. Bancorp. of Tomah, Inc., dated January 21, 2019. (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on January 22, 2019 (File No. 001-33003)).
10.1	Form of Citizens Community Bancorp, Inc. 2019 Long Term Incentive Plan Award Agreement. (incorporated by reference to Exhibit 10.19 to the Company's Transition Report on Form 10-K filed on March 8, 2019 (File No. 001-33003)).
31.1	Rule 13a-14(a) Certification of the Company’s Chief Executive Officer
31.2	Rule 13a-14(a) Certification of the Company’s Chief Financial Officer
32.1*	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
101	The following materials from Citizens Community Bancorp, Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2019 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statement of Changes in Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Condensed Notes to Consolidated Financial Statements.

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

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SIGNATURES

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

	CITIZENS COMMUNITY BANCORP, INC.
Date: May 9, 2019	By:	/s/ Stephen M. Bianchi
		Stephen M. Bianchi
		Chief Executive Officer
Date: May 9, 2019	By:	/s/ James S. Broucek
		James S. Broucek
		Chief Financial Officer

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