County Bancorp (ICBK) 10-Q 2017 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2017

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: 001-36808

COUNTY BANCORP, INC.

(Exact Name of Registrant as Specified in its Charter)

Wisconsin	39-1850431
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
860 North Rapids Road Manitowoc, WI	54221
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (920) 686-9998

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  ☒    No  ☐  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ☒    No  ☐

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

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐  (Do not check if a smaller reporting company)	Smaller reporting company	☐
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  ☒

As of November 8, 2017, the registrant had 6,673,381 shares of common stock, $0.01 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations	2
	Consolidated Statements of Comprehensive Income	3
	Consolidated Statements of Shareholders’ Equity	4
	Consolidated Statements of Cash Flows	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	39
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	41
Signatures		42

i

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

COUNTY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2017 and December 31, 2016

(Unaudited)

	September 30, 2017			December 31, 2016
	(dollars in thousands)
ASSETS
Cash and cash equivalents	$	71,795		$	42,679
Securities available-for-sale, at fair value		107,242			123,437
FHLB Stock, at cost		4,309			5,688
Loans held for sale		2,054			1,162
Loans, net of allowance for loan losses of $13,625 as of September 30, 2017;    $12,645 as of December 31, 2016		1,112,976			1,017,841
Premises and equipment, net		9,598			9,819
Loan servicing rights		8,986			9,264
Other real estate owned, net		6,974			3,161
Cash surrender value of bank owned life insurance		17,274			11,448
Deferred tax asset, net		5,218			5,486
Goodwill		5,038			5,038
Core deposit intangible, net of accumulated amortization of $403 as of    September 30, 2017; $360 as of December 31, 2016		1,038			1,441
Accrued interest receivable and other assets		6,823			6,206
Total assets	$	1,359,325		$	1,242,670
LIABILITIES
Deposits:
Noninterest-bearing	$	118,815		$	118,657
Interest-bearing		947,279			858,861
Total deposits		1,066,094			977,518
Other borrowings		1,352			2,152
Advances from FHLB		128,300			107,895
Subordinated debentures		15,506			15,451
Accrued interest payable and other liabilities		8,344			8,366
Total liabilities		1,219,596			1,111,382
SHAREHOLDERS' EQUITY
Preferred stock-variable rate, non-cumulative, nonparticipating, $1,000 stated    value; 15,000 shares authorized; 8,000 shares issued at September 30, 2017 and    December 31, 2016		8,000			8,000
Common stock - $0.01 par value; 50,000,000 authorized; 7,074,020 shares issued    and 6,657,601 shares outstanding at September 30, 2017; 7,018,248 shares issued    and 6,586,335 shares outstanding at December 31, 2016		27			26
Surplus		51,806			50,553
Retained earnings		84,751			77,907
Treasury stock, at cost; 432,861 shares at September 30, 2017; 431,913 shares at    December 31, 2016		(4,828	)		(4,828	)
Accumulated other comprehensive loss		(27	)		(370	)
Total shareholders' equity		139,729			131,288
Total liabilities and shareholders' equity	$	1,359,325		$	1,242,670

See accompanying notes to unaudited consolidated financial statements.

1

COUNTY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended September 30, 2017 and 2016

(Unaudited)

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2017		2016		2017		2016
	(dollars in thousands except per share data)
INTEREST AND DIVIDEND INCOME
Loans, including fees	$	13,070	$	12,245	$	36,952	$	31,180
Taxable securities		461		426		1,346		1,021
Tax-exempt securities		82		84		262		283
Federal funds sold and other		102		48		243		137
Total interest and dividend income		13,715		12,803		38,803		32,621
INTEREST EXPENSE
Deposits		3,108		2,100		8,351		5,907
FHLB advances and other borrowed funds		511		408		1,356		1,043
Subordinated debentures		135		119		380		254
Total interest expense		3,754		2,627		10,087		7,204
Net interest income		9,961		10,176		28,716		25,417
Provision for loan losses		33		1,134		2,318		2,416
Net interest income after provision for loan losses		9,928		9,042		26,398		23,001
NON-INTEREST INCOME
Services charges		350		288		1,074		976
Gain on sale of loans, net		47		79		96		240
Loan servicing fees		1,563		1,458		4,038		5,037
Other		127		189		451		456
Total non-interest income		2,087		2,014		5,659		6,709
NON-INTEREST EXPENSE
Employee compensation and benefits		3,845		3,461		11,735		9,554
Occupancy		162		157		519		364
Information processing		450		288		1,209		2,045
Write-down of other real estate owned		7		250		85		334
Other		1,827		1,949		5,279		5,852
Total non-interest expense		6,291		6,105		18,827		18,149
Income before income taxes		5,724		4,951		13,230		11,561
Income tax expense		2,120		1,849		4,936		4,338
NET INCOME	$	3,604	$	3,102	$	8,294	$	7,223
NET INCOME PER SHARE:
Basic	$	0.53	$	0.46	$	1.21	$	1.13
Diluted	$	0.52	$	0.46	$	1.19	$	1.12
Dividends paid per share	$	0.06	$	0.05	$	0.18	$	0.15

See accompanying notes to unaudited consolidated financial statements.

2

COUNTY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three and Nine Months Ended September 30, 2017 and 2016

(Unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2017			2016			2017			2016
	(dollars in thousands)
Net income	$	3,604		$	3,102		$	8,294		$	7,223
Other comprehensive income:
Unrealized gains on securities available-for-sale		(16	)		(308	)		563			1,204
Income tax expense		6			120			(220	)		(470	)
Total other comprehensive income		(10	)		(188	)		343			734
Comprehensive income	$	3,594		$	2,914		$	8,637		$	7,957

See accompanying notes to unaudited consolidated financial statements.

3

COUNTY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2017 and 2016

(Unaudited)

	Preferred Stock		Common Stock		Surplus		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Equity
	(dollars in thousands)
Balance at December 31, 2015	$	8,000	$	19	$	34,717	$	68,825		$	(4,758	)	$	221		$	107,024
Net income		—		—		—		7,223			—			—			7,223
Other comprehensive income		—		—		—		—			—			734			734
Stock compensation expense, net of tax		—		—		295		—			—			—			295
Purchase of treasury stock (10,305 shares)		—		—		—		—			(70	)		—			(70	)
Cash dividends declared on common stock		—		—		—		(941	)		—			—			(941	)
Cash dividends declared on preferred stock		—		—		—		(240	)		—			—			(240	)
Cash dividends declared on SBLF preferred    stock		—		—		—		(21	)		—			—			(21	)
Shares issued in the acquisition of Fox River    Valley Bancorp, Inc. (712,830 shares)		—		7		14,249		—			—			—			14,256
Proceeds from exercise of common stock    options (45,493 shares)		—		—		534		—			—			—			534
Balance at September 30, 2016	$	8,000	$	26	$	49,795	$	74,846		$	(4,828	)	$	955		$	128,794
Balance at December 31, 2016	$	8,000	$	26	$	50,553	$	77,907		$	(4,828	)	$	(370	)	$	131,288
Net income		—		—		—		8,294			—			—			8,294
Other comprehensive income		—		—		—		—			—			343			343
Stock compensation expense, net of tax		—		—		393		—			—			—			393
Cash dividends declared on common stock		—		—		—		(1,194	)		—			—			(1,194	)
Cash dividends declared on preferred stock		—		—		—		(256	)		—			—			(256	)
Proceeds from exercise of common stock    options (65,026 shares)		—		1		860		—			—			—			861
Balance at September 30, 2017	$	8,000	$	27	$	51,806	$	84,751		$	(4,828	)	$	(27	)	$	139,729

See accompanying notes to unaudited consolidated financial statements.

4

COUNTY BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2017 and 2016

(Unaudited)

	September 30, 2017			September 30, 2016
	(dollars in thousands)
Cash flows from operating activities
Net income	$	8,294		$	7,223
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment		744			726
Amortization of core deposit intangible		403			211
Amortization of subordinated debentures		55			—
Provision for loan losses		2,318			2,416
Realized loss on sale of securities available-for-sale		37			—
Realized gain on sales of other real estate owned		(363	)		(121	)
Write-down of other real estate owned		85			334
Realized gain (loss) on sales of premises and equipment		290			(13	)
Increase in cash surrender value of bank owned life insurance		(326	)		(219	)
Deferred income tax expense		45			459
Stock compensation expense, net		393			295
Net amortization of securities		685			637
Net change in:
Accrued interest receivable and other assets		(617	)		1,511
Loans held for sale		(892	)		6,241
Loan servicing rights		278			(1,020	)
Accrued interest payable and other liabilities		(22	)		492
Net cash provided by operating activities		11,407			19,172
Cash flows from investing activities
Proceeds from maturities, principal repayments, and call of securities available for sale		22,757			15,252
Purchases of securities available-for-sale		(10,108	)		(6,764	)
Proceeds from sales of securities available-for-sale		3,389			—
Redemption (purchases) of FHLB stock		1,379			(2,181	)
Purchases of bank owned life insurance		(5,500	)		—
Loan originations and principal collections, net		(102,231	)		(104,067	)
Proceeds from sales of premises and equipment		1,615			25
Purchases of premises and equipment		(2,428	)		(1,516	)
Proceeds from sales of other real estate owned		1,244			2,471
Net cash provided by business combination		—			12,320
Net cash used in investing activities		(89,883	)		(84,460	)
Cash flows from financing activities
Net decrease in demand and savings deposits		(28,940	)		(40,851	)
Net increase in certificates of deposits		117,516			95,123
Net change in other borrowings		(800	)		(1,727	)
Proceeds from FHLB advances		192,660			767,200
Repayment of FHLB advances		(172,255	)		(700,750	)
Payments to acquire treasury stock		—			(70	)
Proceeds from issuance of common stock		861			534
Redemption of SBLF preferred stock		—			(15,000	)
Dividends paid on SBLF preferred stock		—			(21	)
Dividends paid on preferred stock		(256	)		(240	)
Dividends paid on common stock		(1,194	)		(941	)
Net cash provided by financing activities		107,592			103,257
Net change in cash and cash equivalents		29,116			37,969
Cash and cash equivalents, beginning of period		42,679			14,907
Cash and cash equivalents, end of period	$	71,795		$	52,876
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	9,841		$	6,987
Income taxes	$	5,050			3,935
Noncash investing activities:
Transfer from loans to other real estate owned	$	4,779		$	159
Transfer from premises and equipment to other real estate owned	$	—		$	397
Loans charged off	$	1,492		$	1,232

See accompanying notes to unaudited consolidated financial statements.

5

County Bancorp, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

NOTE 1 – BASIS OF PRESENTATION

The unaudited consolidated financial statements of County Bancorp, Inc. (“we,” “us,” ”our,” or the “Company”) and its subsidiaries, including Investors Community Bank (the “Bank”), have been prepared, in the opinion of management, to reflect all adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows as of and for the nine months ended September 30, 2017 for the interim period.  The results of operations for the three and nine months ended September 30, 2017 may not necessarily be indicative of the results to be expected for the year ending December 31, 2017, or for any other period.

Management of the Company is required to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods.  Actual results could differ significantly from those estimates.

These unaudited interim financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”).  Certain information in footnote disclosure normally included in financial statements prepared in accordance with GAAP has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act (the “JOBS Act”). Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company elected to take advantage of the benefits of this extended transition period.

New Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation to simplify several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The amendments in this update became effective beginning January 1, 2017 and did not have a significant impact the Company’s financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses, to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.  The amendment replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  This amendment is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted for the fiscal year beginning after December 15, 2018, including interim periods within those fiscal years.  Entities should apply this amendment as a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.  The Company has developed a steering committee to implement this ASU, and is currently in the process of evaluating which methodology we will apply to our loan portfolio.  The steering committee is also interviewing third-party vendors that will provide consulting and software services.  At this time, the effect this ASU will have on its consolidated financial statements is unknown.

In January 2017, the FASB issued ASU No. 2017-04 Intangibles – Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment.  This update eliminates Step 2 of the goodwill impairment test, and instead, recognizes an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value not to exceed the total amount of goodwill allocated.  The Company early adopted this amendment effective January 1, 2017 for its goodwill impairment analysis.  The result of this amendment had no impact on the Company since its goodwill is not impaired as of September 30, 2017.  

In March 2017, the FASB issued updated guidance codified within ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs, which is intended to enhance the accounting for the amortization of premiums for purchased callable debt securities.  The amendment is effective for fiscal years beginning after December 15, 2018, with early adoption permitted including adoption in an interim period.  The Company is currently evaluating the effects this ASU will have on its consolidated financial statements.  

6

In May 2017, the FASB issued updated guidance codified within ASU No. 2017-09, Compensation – Stock Compensation to provide clarity and reduce the diversity in practice and cost and complexity of applying the guidance when there is a change of terms condition of share-based awards.  The amendment is effective for fiscal years beginning after December 15, 2017, with early adoption permitted including adoption in an interim period.  The adoption of this ASU is not expected to have a significant impact on the Company’s consolidated financial because modification to share-based awards are rarely made.

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share – Accounting for Certain Financial Instruments with Down Round Features to address the complexity of the accounting for equity-classified financial instruments with down round features.  The amendment is effective for fiscal years beginning after December 15, 2019, with early adoption permitted including adoption in an interim period.  The adoption of this ASU is not expected to have a significant impact on the Company’s consolidated financial because the Company does not issues equity-classified financial instruments with down round features.

NOTE 2 – EARNINGS PER SHARE

Earnings per common share is computed using the two-class method.  Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the applicable period.  Diluted earnings per share is computed using the weighted-average number of shares determined for the basic earnings per common share plus the dilutive effect of share-based compensation using the treasury stock method.

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
	(dollars in thousands)
Net income from continuing operations	$	3,604	$	3,102	$	8,294	$	7,223
Less:  preferred stock dividends		91		80		257		261
Income available to common shareholders for basic    earnings per common share	$	3,513	$	3,022	$	8,037	$	6,962
Average number of common shares issued		7,333,799		7,310,944		7,327,268		6,951,282
Less: weighted average treasury shares		432,861		428,806		432,653		424,408
Less: weighted average nonvested equity incentive plan shares		256,638		357,708		271,338		367,357
Weighted average number of common shares outstanding		6,644,300		6,524,430		6,623,277		6,159,517
Effect of dilutive options		112,904		94,924		119,371		97,485
Weighted average number of common shares outstanding    used to calculate diluted earnings per common share		6,757,204		6,619,354		6,742,648		6,257,002

NOTE 3 – SECURITIES AVAILABLE-FOR-SALE

The amortized cost and fair value of securities available-for-sale as of September 30, 2017 and December 31, 2016 were as follows:

	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(dollars in thousands)
September 30, 2017
Municipal securities	$	37,772	$	175	$	(68	)	$	37,879
Mortgage-backed securities		69,515		291		(443	)		69,363
Asset-backed securities		—		—		—			—
	$	107,287	$	466	$	(511	)	$	107,242
December 31, 2016
U.S. government and agency securities	$	1,000	$	—	$	—		$	1,000
Municipal securities		45,638		57		(239	)		45,456
Mortgage-backed securities		73,648		292		(632	)		73,308
Asset-backed securities		3,761		3		(91	)		3,673
	$	124,047	$	352	$	(962	)	$	123,437

7

The amortized cost and fair value of securities at September 30, 2017 and December 31, 2016, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
	Cost		Value
	(dollars in thousands)
September 30, 2017
Due in one year or less	$	9,553	$	9,554
Due from one to five years		19,268		19,333
Due from five to ten years		8,951		8,992
Due after ten years		—		—
Mortgage-backed securities		69,515		69,363
	$	107,287	$	107,242
December 31, 2016
Due in one year or less	$	17,396	$	17,311
Due from one to five years		25,960		25,912
Due from five to ten years		7,043		6,906
Due after ten years		—		—
Mortgage-backed securities		73,648		73,308
	$	124,047	$	123,437

Proceeds from sale of securities available-for-sale were $3.4 million and the gross loss realized was $37,000 for the nine months ended September 30, 2017.  There were no security sales for the nine months ended September 30, 2016.  

At September 30, 2017 and December 31, 2016, no securities were pledged to secure the FHLB advances besides FHLB stock of $4.3 million and $5.7 million, respectively.   At September 30, 2017 and December 31, 2016, the carrying amount of securities pledged to secure the Federal Reserve Bank Line of Credit was $8.5 million and $11.2 million, respectively.  

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temorarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2017 and December 31, 2016:

	Less Than 12 Months					12 Months or Greater					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(dollars in thousands)
September 30, 2017
Municipal securities	$	12,116	$	(50	)	$	3,492	$	(18	)	$	15,608	$	(68	)
Mortgage-backed securities		28,930		(221	)		10,647		(222	)		39,577		(443	)
Asset-backed securities		—		—			—		—			—		—
	$	41,046	$	(271	)	$	14,139	$	(240	)	$	55,185	$	(511	)
December 31, 2016
U.S. government and agency securities	$	—	$	—		$	—	$	—		$	—	$	—
Municipal securities		24,924		(236	)		604		(3	)		25,528		(239	)
Mortgage-backed securities		48,719		(632	)		—		—			48,719		(632	)
Asset-backed securities		2,745		(91	)		—		—			2,745		(91	)
	$	76,388	$	(959	)	$	604	$	(3	)	$	76,992	$	(962	)

The unrealized loss on the investments at September 30, 2017 and December 31, 2016 was due to normal fluctuations and pricing inefficiencies.  The contractual terms of the investments do not permit the issuers to settle the securities at a price less than the amortized cost basis of the investment.  Because the Company does not intend to sell the investments and it is not more-likely-than-not that the Company will be required to sell the investments before recovery of the amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2017 and December 31, 2016.

8

NOTE 4 – LOANS

The components of loans were as follows:  

	September 30,			December 31,
	2017			2016
	(dollars in thousands)
Agricultural loans	$	675,856		$	624,632
Commercial real estate loans		290,420			270,475
Commercial loans		107,569			89,944
Residential real estate loans		52,527			45,276
Installment and consumer other		229			159
Total gross loans		1,126,601			1,030,486
Allowance for loan losses		(13,625	)		(12,645	)
Loans, net	$	1,112,976		$	1,017,841

Changes in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2017 and 2016 were as follows: 

September 30, 2017	Agricultural			Commercial Real Estate			Commercial			Residential Real Estate			Installment and Consumer Other			Unallocated		Total
	(dollars in thousands)
Balance, beginning of year	$	8,173		$	2,762		$	1,239		$	470		$	1		$	—	$	12,645
Provision for loan losses		688			733			1,137			(241	)		1			—		2,318
Loans charged off		—			(575	)		(917	)		—			—			—		(1,492	)
Recoveries		43			80			31			—			—			—		154
Balance, end of period	$	8,904		$	3,000		$	1,490		$	229		$	2		$	—	$	13,625
September 30, 2016	Agricultural			Commercial Real Estate			Commercial			Residential Real Estate			Installment and Consumer Other			Unallocated		Total
	(dollars in thousands)
Balance, beginning of year	$	6,355		$	2,237		$	1,268		$	533		$	12		$	—	$	10,405
Provision for loan losses		1,947			419			168			(118	)		(6	)		6		2,416
Loans charged off		(896	)		(50	)		(277	)		(5	)		(4	)		—		(1,232	)
Recoveries		2			26			9			—			—			—		37
Balance, end of period	$	7,408		$	2,632		$	1,168		$	410		$	2		$	6	$	11,626

9

The following tables present the balances in the allowance for loan losses and the recorded balance in loans by portfolio segment and based on impairment method as of September 30, 2017 and December 31, 2016: 

	September 30, 2017
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
	(dollars in thousands)
Allowance for loan losses:
Agricultural loans	$	884	$	8,020	$	8,904
Commercial real estate loans		200		2,800		3,000
Commercial loans		43		1,447		1,490
Residential real estate loans		—		229		229
Installment and consumer other		—		2		2
Total ending allowance for loan losses		1,127		12,498		13,625
Loans:
Agricultural loans		29,097		646,759		675,856
Commercial real estate loans		3,834		286,586		290,420
Commercial loans		1,158		106,411		107,569
Residential real estate loans		—		52,527		52,527
Installment and consumer other		—		229		229
Total loans		34,089		1,092,512		1,126,601
Net loans	$	32,962	$	1,080,014	$	1,112,976
	December 31, 2016
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
	(dollars in thousands)
Allowance for loan losses:
Agricultural loans	$	546	$	7,627	$	8,173
Commercial real estate loans		377		2,385		2,762
Commercial loans		413		826		1,239
Residential real estate loans		—		470		470
Installment and consumer other		—		1		1
Total ending allowance for loan losses		1,336		11,309		12,645
Loans:
Agricultural loans		13,044		611,588		624,632
Commercial real estate loans		4,952		265,523		270,475
Commercial loans		3,376		86,568		89,944
Residential real estate loans		68		45,208		45,276
Installment and consumer other		—		159		159
Total loans		21,440		1,009,046		1,030,486
Net loans	$	20,104	$	997,737	$	1,017,841

10

The following table presents the aging of the recorded investment in past due loans at September 30, 2017 and December 31, 2016:

	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Loans Not Past Due
	(dollars in thousands)
September 30, 2017
Agricultural loans	$	3,429	$	258	$	6,264	$	9,951	$	665,905
Commercial real estate loans		—		624		2,892		3,516		286,904
Commercial loans		135		—		1,118		1,253		106,316
Residential real estate loans		3		—		—		3		52,524
Installment and consumer other		—		—		—		—		229
Total	$	3,567	$	882	$	10,274	$	14,723	$	1,111,878
December 31, 2016
Agricultural loans	$	12	$	—	$	9,680	$	9,692	$	614,940
Commercial real estate loans		—		287		2,710		2,997		267,478
Commercial loans		371		—		2,695		3,066		86,878
Residential real estate loans		—		—		—		—		45,276
Installment and consumer other		—		—		—		—		159
Total	$	383	$	287	$	15,085	$	15,755	$	1,014,731

The following table lists information on nonaccrual, restructured, and certain past due loans at September 30, 2017 and December 31, 2016:

	September 30,		December 31,
	2017			2016
	(dollars in thousands)
Nonaccrual loans, 90 days or more past due	$	10,274	$	15,085
Nonaccrual loans 30-89 days past due		2,430		371
Nonaccrual loans, less than 30 days past due		158		4,651
Restructured loans not on nonaccrual status		8,087		4,300
90 days or more past due and still accruing		—		—
Total		20,949		24,407

The following table presents the recorded investment in nonaccrual loans and loans past due 90 days or more at September 30, 2017 and December 31, 2016:

	September 30,		December 31,
	2017			2016
	(dollars in thousands)
Agricultural loans	$	8,228	$	12,323
Commercial real estate loans		3,516		4,340
Commercial loans		1,118		3,376
Residential real estate loans		—		68
Total	$	12,862	$	20,107

The average recorded investment in total impaired loans for the nine months ended September 30, 2017 and for the year ended December 31, 2016 amounted to approximately $27.8 million and $25.9 million, respectively.  Impaired loans include nonaccrual loans, restructured loans, and loans that are 90 days or more past due and still accruing.  Interest income recognized on total impaired loans for the nine months ended September 30, 2017 and for the year ended December 31, 2016 amounted to approximately $0.3 million and $0.4 million, respectively.  For nonaccrual loans included in impaired loans, the interest income that would have been recognized had those loans been performing in accordance with their original terms would have been approximately $0.7 million and $1.5 million for the nine months ended September 30, 2017 and for the year ended December 31, 2016, respectively.  

11

Troubled Debt Restructurings

The Company has allocated approximately $0.8 million and $0.5 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDR”) at September 30, 2017 and December 31, 2016, respectively.  The Company had no additional lending commitments at September 30, 2017 or December 31, 2016 to customers with outstanding loans that are classified as TDRs.

A TDR on nonaccrual status is classified as a nonaccrual loan until evaluation supports reasonable assurance of repayment and there has been a satisfactory period of performance according to the modified terms of the loan.  Once this assurance is reached, the TDR is classified as a restructured loan.  There were no unfunded commitments on these loans at September 30, 2017 and December 31, 2016.  The following table presents the TDRs by loan class at September 30, 2017 and December 31, 2016:

	Non-Accrual		Restructured and Accruing		Total
	(dollars in thousands)
September 30, 2017
Agricultural loans	$	4,356	$	7,729	$	12,085
Commercial real estate loans		624		318		942
Commercial loans		—		40		40
Total	$	4,980	$	8,087	$	13,067
December 31, 2016
Agricultural loans	$	7,947	$	3,925	$	11,872
Commercial real estate loans		1,400		325		1,725
Commercial loans		371		50		421
Total	$	9,718	$	4,300	$	14,018

 The following table provides the number of loans modified in a troubled debt restructuring investment by class for the nine months ended September 30, 2017 and 2016:

	For the Nine Months Ended				For the Nine Months Ended
	September 30, 2017				September 30, 2016
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
	(dollars in thousands)
Troubled debt restructurings:
Agricultural loans		16	$	6,810		14	$	8,704
Commercial real estate loans		—		—		2		553
Commercial loans		—		—		2		1,632
Total		16	$	6,810		18	$	10,889

The following table provides the troubled debt restructurings for the nine months ended September 30, 2017 and 2016 grouped by type of concession:

	For the Nine Months Ended				For the Nine Months Ended
	September 30, 2017				September 30, 2016
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
	(dollars in thousands)
Agricultural loans
Payment concessions		9	$	5,581		6	$	1,732
Extension of interest-only payments		6		908		5		1,243
Combination of extension of term and interest rate      concessions		1		321		3		5,729
Commercial real estate loans
Extension of interest-only payments		—		—		2		553
Commercial loans
Extension of interest-only payments		—		—		2		1,632
Total		16	$	6,810		18	$	10,889

12

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. Beginning in the third quarter of 2016, the substandard category was separated in to performing and impaired subcategories to provide more detailed analysis of this category of loans. The Company analyzes agricultural, commercial, and commercial real estate loans individually by classifying the credits as to credit risk. The process of analyzing loans for changes in risk rating is ongoing through routine monitoring of the portfolio and annual internal credit reviews for credits with total exposure in excess of $300,000. The Company uses the following definitions for credit risk ratings:

Sound. Credits classified as sound show very good probability of ongoing ability to meet and/or exceed obligations.

Acceptable. Credits classified as acceptable show a good probability of ongoing ability to meet and/or exceed obligations.

Satisfactory. Credits classified as satisfactory show fair probability of ongoing ability to meet and/or exceed obligations.

Low Satisfactory.  Credits classified as low satisfactory show fair probability of ongoing ability to meet and/or exceed obligations.  Low satisfactory credits may be newer or have a less established track record of financial performance, inconsistent earnings, or may be going through an expansion.

Watch. Credits classified as watch show some questionable probability of ongoing ability to meet and/or exceed obligations.

Special Mention. Credits classified as special mention show potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.

Substandard – Performing.  Credits classified as substandard – performing generally have well-defined weaknesses. Collateral coverage is adequate and the loans are not considered impaired.  Payments are being made and the loans are on accrual status. 

Substandard - Impaired. Credits classified as substandard generally have well-defined weaknesses that jeopardize the repayment of the debt. They have a distinct possibility that a loss will be sustained if the deficiencies are not corrected.  Loans are considered impaired.  Loans are either exhibiting signs of delinquency, are on non-accrual or are identified as a TDR. 

Doubtful. Credits classified as doubtful have all the weaknesses inherent in those classified as substandard 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.

The Company categorizes residential real estate, installment and consumer other loans as satisfactory at the time of origination based on information obtained as to the ability of the borrower(s) to service their debt, such as current financial information, employment status and history, historical payment experience, credit scores and type and amount of collateral among other factors. The Company updates relevant information on these types of loans at the time of refinance, troubled debt restructuring or other indications of financial difficulty, downgrading as needed using the same category descriptions as for agricultural, commercial, and commercial real estate loans. In addition, the Company further considers current payment status as an indicator of which risk category to assign the borrower.

The greater the level of deteriorated risk as indicated by a loan’s assigned risk category, the greater the likelihood a loss will occur in the future. If the loan is substandard - impaired, then the loan loss reserves for the loan are recorded at the loss level of impairment. If the loan is not impaired, then its loan loss reserves are determined by the application of a loss rate that increases with risk in accordance with the allowance for loan loss analysis.

13

Based on the most recent analysis performed by management, the risk category of loans by class of loans was as follows as of September 30, 2017 and December 31, 2016: 

	As of  September 30, 2017
	Sound/ Acceptable/ Satisfactory/ Low Satisfactory		Watch		Special Mention		Substandard Performing		Substandard Impaired		Total Loans
	(dollars in thousands)
Agricultural loans	$	508,722	$	100,993	$	15,012	$	41,923		9,206	$	675,856
Commercial real estate loans		225,807		43,907		7,300		9,890		3,516		290,420
Commercial loans		88,132		12,741		1,144		4,434		1,118		107,569
Residential real estate loans		48,623		3,784		—		—		120		52,527
Installment and consumer other		229		—		—		—		—		229
Total	$	871,513	$	161,425	$	23,456	$	56,247	$	13,960	$	1,126,601
	As of December 31, 2016
	Sound/ Acceptable/ Satisfactory/ Low Satisfactory		Watch		Special Mention		Substandard Performing		Substandard Impaired		Total Loans
	(dollars in thousands)
Agricultural loans	$	502,084	$	84,801	$	12,657	$	12,046	$	13,044	$	624,632
Commercial real estate loans		225,038		27,368		378		12,739		4,952		270,475
Commercial loans		74,221		6,624		1,632		4,091		3,376		89,944
Residential real estate loans		40,556		4,151		501		—		68		45,276
Installment and consumer other		159		—		—		—		—		159
Total	$	842,058	$	122,944	$	15,168	$	28,876	$	21,440	$	1,030,486

NOTE 5 – LOAN SERVICING RIGHTS

Loans serviced for others are not included in the accompanying consolidated balance sheets.  The risks inherent in servicing assets relate primarily to changes in prepayments that result from shifts in interest rates.  The unpaid principal balances of mortgage and other loans serviced for others were approximately $594.6 million and $577.0 million at September 30, 2017 and December 31, 2016, respectively.  The fair value of these rights were approximately $12.4 million and $12.2 million at September 30, 2017 and December 31, 2016, respectively.  The fair value of servicing rights was determined using an assumed discount rate of 10 percent and prepayment speeds primarily ranging from 4 percent to 9 percent, depending upon the stratification of the specific right, and nominal credit losses.

The following summarizes servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances:

	September 30,			December 31,
	2017			2016
	(dollars in thousands)
Loan servicing rights:
Balance, beginning of period	$	9,264		$	8,145
Additions		1,831			4,794
Disposals		(474	)		(1,552	)
Amortization		(1,635	)		(2,123	)
Balance, end of period	$	8,986		$	9,264

NOTE 6 – GOODWILL AND CORE DEPOSIT INTANGIBLE

The excess of the purchase price in an acquisition over the fair value of net assets acquired consists primarily of goodwill and the core deposit intangible. Goodwill is not amortized but is instead subject to impairment tests on at least an annual basis. Core deposit intangible, which arose from value ascribed to the deposit base of a bank acquired, has an estimated finite life and is amortized on an accelerated basis to expense over a 66-month period.

14

Management will periodically review the carrying value of its long-lived and intangible assets to determine if any impairment has occurred, in which case an impairment charge would be recorded as an expense in the period of impairment, or whether changes in circumstances have occurred that would require a revision to the remaining useful life which would impact expense prospectively. In making such determination, management evaluates whether there are any adverse qualitative factors indicating that an impairment may exist, as well as the performance, on an undiscounted basis, of the underlying operations or assets which give rise to the intangible.

Goodwill:  Goodwill resulted from the acquisition of Fox River Valley Bancorp, Inc. (“Fox River Valley”) on May 13, 2016.  The carrying amount of goodwill was $5.0 million at September 30, 2017 and December 31, 2016.

Core deposit intangible:  Core deposit intangible, primarily related to acquired customer relationships, is amortized over their estimated finite lives.  The core deposit intangible related to the Fox River Valley acquisition had a gross carrying amount of $1.8 million. Amortization on core deposit intangible was $763 thousand at September 30, 2017 and $360 thousand at December 31, 2016.

	September 30, 2017			December 31, 2016
	(dollars in thousands)
Core deposit intangible:
Gross carrying amount	$	1,801		$	1,801
Accumulated amortization		(763	)		(360	)
Net book value	$	1,038		$	1,441
Additions during the period	$	—		$	1,801

NOTE 7 – DEPOSITS

Deposits are summarized as follows at September 30, 2017 and December 31, 2016:

	September 30,		December 31,
	2017		2016
	(dollars in thousands)
Demand deposits	$	118,815	$	118,657
Savings		233,199		262,296
Certificates of deposit		714,080		596,565
Total deposits	$	1,066,094	$	977,518

At September 30, 2017 and December 31, 2016, brokered deposits amounted to $281.2 million and $193.6 million, respectively, and are included in savings and certificates of deposit categories.

15

NOTE 8—ADVANCES FROM FHLB AND OTHER BORROWINGS

The Bank had advances outstanding from the FHLB in the amount of $128.3 million and $107.9 million on September 30, 2017 and December 31, 2016, respectively. These advances, rates, and maturities were as follows:

					September 30,		December 31,
	Maturity	Rate			2017		2016
					(dollars in thousands)
Fixed rate, fixed term	01/03/2017		0.94	%	$	—	$	595
Fixed rate, fixed term	02/27/2017		0.76	%		—		5,000
Fixed rate, fixed term	03/15/2017		1.46	%		—		2,000
Fixed rate, fixed term	06/16/2017		0.80	%		—		10,000
Fixed rate, fixed term	08/11/2017		0.83	%		—		5,000
Fixed rate, fixed term	11/15/2017		0.95	%		3,800		3,800
Fixed rate, fixed term	12/29/2017		1.27	%		3,000		3,000
Fixed rate, fixed term	01/02/2018		1.23	%		1,000		1,000
Fixed rate, fixed term	01/12/2018		0.85	%		8,000		8,000
Fixed rate, fixed term	02/12/2018		0.91	%		5,000		5,000
Fixed rate, fixed term	04/23/2018		1.07	%		2,300		2,300
Fixed rate, fixed term	06/18/2018		0.93	%		10,000		10,000
Fixed rate, fixed term	07/09/2018		1.41	%		15,000		—
Fixed rate, fixed term	07/16/2018		1.21	%		762		762
Fixed rate, fixed term	07/16/2018		1.21	%		1,038		1,038
Fixed rate, fixed term	08/20/2018		1.15	%		1,000		1,000
Fixed rate, fixed term	08/20/2018		1.15	%		800		800
Fixed rate, fixed term	08/20/2018		1.27	%		2,200		2,200
Fixed rate, fixed term	11/09/2018		1.47	%		10,000		—
Fixed rate, fixed term	12/31/2018		1.65	%		3,000		3,000
Fixed rate, fixed term	02/27/2019		1.47	%		5,000		5,000
Fixed rate, fixed term	03/08/2019		1.54	%		10,000		—
Fixed rate, fixed term	07/15/2019		1.11	%		8,000		8,000
Fixed rate, fixed term	08/14/2019		1.77	%		2,000		2,000
Fixed rate, fixed term	02/20/2020		1.71	%		5,000		5,000
Fixed rate, fixed term	07/16/2020		1.85	%		800		800
Fixed rate, fixed term	08/25/2020		1.84	%		3,000		3,000
Fixed rate, fixed term	08/27/2020		1.88	%		5,000		5,000
Fixed rate, fixed term	12/30/2020		2.09	%		4,000		4,000
Fixed rate, fixed term	12/31/2020		1.94	%		600		600
Fixed rate, fixed term	04/12/2021		1.92	%		8,000		—
Fixed rate, fixed term	06/15/2021		1.39	%		5,000		5,000
Fixed rate, fixed term	08/16/2021		2.29	%		3,000		3,000
Fixed rate, fixed term	12/30/2021		2.29	%		2,000		2,000
					$	128,300	$	107,895

The terms of security agreements with the FHLB require the Bank to pledge collateral for its borrowings. The collateral consists of qualifying first mortgage loans, certain securities available for sale, and stock of the FHLB.

The Bank had no irrevocable letters of credit with the FHLB as of September 30, 2017 and December 31, 2016.

16

Future maturities of borrowings were as follows:

	September 30,		December 31,
	2017		2016
	(dollars in thousands)
1 year or less	$	53,900	$	29,395
1 to 2 years		38,000		35,100
2 to 3 years		13,800		15,000
3 to 4 years		20,600		18,400
Over 4 years		2,000		10,000
	$	128,300	$	107,895

As of September 30, 2017 and December 31, 2016, the Bank also had a $50.0 million line-of-credit available with the Federal Reserve Bank of Chicago.  Borrowings under this line of credit are limited by the amount of securities pledged by the Bank as collateral, which totaled $8.5 million and $11.2 million at September 30, 2017 and December 31, 2016, respectively.  There were no outstanding advances included in other borrowings at September 30, 2017 and December 31, 2016, respectively.  

On September 14, 2017, the Company entered into a credit agreement with U.S. Bank National Association for a $15.0 million revolving line-of-credit with an interest rate of the one-month LIBOR rate plus 2.25%.  The line also bears a non-usage fee of 0.275% per annum.  The line did not have an outstanding balance as of September 30, 2017, and was unused during the quarter.  

Other borrowings are borrowings as a result of sold loans that do not qualify for sale accounting. These agreements are recorded as financing transactions as the Bank maintains effective control over the transferred loans. The dollar amount of the loans underlying the sale agreements continues to be carried in the Bank’s loan portfolio, and the transfer is reported as a secured borrowing with pledge of collateral.  At September 30, 2017 and December 31, 2016, the amounts of these borrowings were $1.3 million and $2.0 million, respectively.

Also included in other borrowings is the capital lease for our full service banking location in Appleton, Wisconsin that was assumed in connection with our merger of Fox River Valley.  Under the terms of the current triple-net lease the Company is obligated to pay monthly rent of $15 thousand, and the lease term expires in April, 2018.  As of September 30, 2017, liability remaining under the capital lease was $81 thousand, and the amortization related to the lease was $109 thousand for the nine months ended September 30, 2017.  As of December 31, 2016, liability remaining under the capital lease was $189 thousand, and the amortization related to the lease was $65 thousand for the year ended December 31, 2016.  

The following table sets forth information concerning balances and interest rates on other borrowings as of and for the periods indicated:

	September 30,			December 31,
	2017			2016
	(dollars in thousands)
Balance outstanding at end of period	$	1,352		$	2,152
Average amount outstanding during the period		1,618			3,047
Maximum amount outstanding at any month end		1,825			3,930
Weighted average interest rate during the period		5.84	%		5.30	%
Weighted average interest rate at end of period		6.20	%		5.32	%

NOTE 9 – EQUITY INCENTIVE PLAN

Under the Company’s 2016 Long Term Incentive Plan (the “Plan”), the Company may grant options to purchase shares of common stock and issue restricted stock to its directors, officers, and employees.  Both qualified and non-qualified stock options and restricted stock may be granted and issued, respectively, under the Plan.  As of September 30, 2017, 30,234 options or shares of restricted stock have been granted under the Plan.

The exercise price of each option equals the market price of the Company’s stock on the date of grant and an option’s maximum term is ten years. Vesting periods range from one to five years from the date of grant. The restricted stock vesting periods range from one to five years from the date of issuance.

17

The status of the Plan as of September 30, 2017 and changes in the Plan during the nine months ended September 30, 2017 were as follows:

	September 30, 2017
	Number of Options			Weighted-Average Exercise Price		Aggregate Intrinsic Value (1)
	(dollars in thousands except option and per share data)
Outstanding, beginning of year		291,059		$	15.18
Granted		24,653			26.27
Exercised		(65,026	)		12.68
Forfeited/expired		(4,868	)		21.69
Outstanding, end of period		245,818		$	16.83	$	3,250
Options exercisable at period-end		159,329		$	14.67	$	2,450
Weighted-average fair value of options granted during    the period (2)				$	9.54

(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on September 30, 2017. This amount changes based on changes in the market value of the Company’s stock.

(2) The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.

Activity in restricted stock awards (“RSA”) and restricted stock units (“RSU”) for the nine months ended September 30, 2017 was as follows:

	September 30, 2017
	RSAs			Weighted Average Grant Price
Outstanding, beginning of year		38,593		$	17.27
Granted		5,988			27.31
Vested		(2,416	)		19.77
Forfeited/expired		(948	)		27.31
Outstanding, end of period		41,217		$	18.35

	September 30, 2017
	RSUs		Weighted Average Grant Price
Outstanding, beginning of year		—	$	—
Granted		8,691		25.53
Vested		—		—
Forfeited/expired		—		—
Outstanding, end of period		8,691	$	25.53

For the nine months ended September 30, 2017 and 2016, share-based compensation expense, including options and restricted stock awards, applicable to the Plan was $393 thousand and $295 thousand, respectively.

As of September 30, 2017, unrecognized share-based compensation expense related to nonvested options and restricted stock awards amounted to $0.7 million and is expected to be recognized over a weighted average period of 2.20 years.

NOTE 10 – REGULATORY MATTERS

The Company (on a consolidated basis) and the Bank are each subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s

18

financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total, Tier 1 and Tier 1 Common Equity capital to risk-weighted assets, and of Tier 1 capital to average assets, as such terms are defined in the regulations. Management believed, as of September 30, 2017 and December 31, 2016, that the Company and the Bank met all capital adequacy requirements to which they were subject.

As of September 30, 2017, the Bank’s capital ratios met those required to be considered as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 Common Equity risk-based, and Tier 1 leverage ratios as set forth in the following tables.

The Company’s and the Bank’s actual capital amounts and ratios are presented in the following table:

	Actual					Minimum For Capital Adequacy Purposes (a):					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions:
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
September 30, 2017
Total Capital (to risk weighted assets):
Consolidated	$	163,592		13.19	%	$	114,751		9.25	%	Not applicable
Bank		158,824		12.81	%		114,692		9.25	%	$	123,992		10.00	%
Tier 1 Capital (to risk weighted assets):
Consolidated		149,394		12.04	%		89,940		7.25	%	Not applicable
Bank		144,626		11.66	%		89,894		7.25	%		99,193		8.00	%
Tier 1 Capital (to average assets):
Consolidated		149,394		11.53	%		51,809		4.00	%	Not applicable
Bank		144,626		11.17	%		51,770		4.00	%		64,713		5.00	%
Tier 1 Common Equity Ratio (to risk weighted assets):
Consolidated		125,888		10.15	%		71,332		5.75	%	Not applicable
Bank		144,626		11.66	%		71,295		5.75	%		80,595		6.50	%
December 31, 2016
Total Capital (to risk weighted assets):
Consolidated	$	154,335		13.59	%	$	97,949		8.625	%	Not applicable
Bank		149,278		13.23	%		97,295		8.625	%	$	112,805		10.00	%
Tier 1 Capital (to risk weighted assets):
Consolidated		141,206		12.43	%		75,236		6.625	%	Not applicable
Bank		136,148		12.07	%		74,734		6.625	%		90,244		8.00	%
Tier 1 Capital (to average assets):
Consolidated		141,206		11.48	%		49,183		4.00	%	Not applicable
Bank		136,148		11.08	%		49,144		4.00	%		61,430		5.00	%
Tier 1 Common Equity Ratio (to risk weighted assets):
Consolidated		117,755		10.37	%		58,201		5.125	%	Not applicable
Bank		136,148		12.07	%		57,813		5.125	%		73,323		6.50	%

(a) The ratios for September 30, 2017 and December 31, 2016 include a capital conservation buffer of 1.25% and 0.625%, respectively.

The rules of the Basel III regulatory capital framework implemented a capital conservation buffer that is added to the minimum requirements for capital adequacy purposes.  The capital conservation buffer is subject to a three year phase-in period that began on January 1, 2016 and will be fully phased in on January 1, 2019 at 2.5%.  The required phase-in capital conservation buffer during

19

2017 is 1.25%.  At the present time, the ratios for the Company and the Bank are sufficient to meet the fully phased-in conservation buffer.

NOTE 11 – FAIR VALUE MEASUREMENTS

ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not  adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, and both able and willing to transact.

ASC 820-10 requires the use of valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC 820-10 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1—Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2—Valuation is based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3—Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

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

The following methods and assumptions were used by the Company in estimating the fair value disclosures for financial instruments:

Cash and Cash Equivalents and Interest-Bearing Deposits in Banks

The carrying amounts of cash and short-term instruments approximate fair values based on the short-term nature of the assets.

Fair values of other interest-bearing deposits in banks are estimated using discounted cash flow analyses based on current rates for similar types of deposits.

Securities Available for Sale

Where quoted prices are available in an active market, the Company classifies the securities within Level 1 of the valuation hierarchy. Securities are defined as both long and short positions. Level 1 securities include highly liquid government bonds and exchange-traded equities.

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If quoted market prices are not available, the Company estimates fair values using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes and credit spreads.

Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include U.S. government and agency securities, corporate bonds and other securities. Mortgage-backed securities are included in Level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, the Company classifies those securities in Level 3.

Loans

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (e.g., one-to-four family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other loans (e.g., commercial and agricultural loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Loans Held for Sale

The carrying value of loans held for sale generally approximates fair value based on the short-term nature of the assets. If management identifies a loan held for sale that will ultimately sell at a value less than its carrying value, it is recorded at the estimated value. 

Loan Servicing Rights

Fair value is based on market prices for comparable loan servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.

Other Real Estate Owned

Loans on which the underlying collateral has been repossessed are adjusted to fair value upon transfer to other real estate owned. Subsequently, other real estate owned is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. Due to the significance of the unobservable inputs, all other real estate owned is classified as Level 3.

Deposits

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, statement savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Other Borrowings

The carrying amounts of federal funds purchased, other borrowings, and other short-term borrowings maturing within 90 days approximate their fair values.

Advances from the Federal Home Loan Bank

Current market rates for debt with similar terms and remaining maturities are used to estimate fair value of advances from the Federal Home Loan Bank (the “FHLB”). Fair values are estimated using discounted cash flow analyses based on current market rates for similar types of borrowing arrangements.

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Subordinated Debentures

The fair values of these debt instruments utilize a discounted cash flow analysis based on an estimate of current interest rates being offered by instruments with similar terms and credit quality.  Since the market for these instruments is limited, the internal evaluation represents a Level 3 measurement and approximates fair value.

Accrued Interest

The carrying amounts approximate fair value.

Commitments to Extend Credit and Standby Letters of Credit

As of September 30, 2017 and December 31, 2016, the carrying and fair values of the commitments to extend credit and standby letters of credit are not considered significant.

Assets measured at fair value on a recurring basis are summarized below:

	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(dollars in thousands)
September 30, 2017
Securities available for sale:
Municipal securities	$	—	$	37,879	$	—	$	37,879
Mortgage-backed securities		—		69,363		—		69,363
Asset-backed securities		—		—		—		-
Total assets at fair value	$	—	$	107,242	$	—	$	107,242
December 31, 2016
Securities available for sale:
U.S. government and agency securities	$	—	$	1,000	$	—	$	1,000
Municipal securities		—		45,456		—		45,456
Mortgage-backed securities		—		73,308		—		73,308
Asset-backed securities		—		3,673		—		3,673
Total assets at fair value	$	—	$	123,437	$	—	$	123,437

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy for which a nonrecurring change in fair value has been recorded:

	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Impairment Losses
	(dollars in thousands)
September 30, 2017
Impaired loans	$	—	$	—	$	32,962	$	1,127
Other real estate owned		—		—		6,974		85
Total assets at fair value	$	—	$	—	$	39,936	$	1,212
December 31, 2016
Impaired loans	$	—	$	—	$	20,104	$	1,336
Other real estate owned		—		—		3,161		480
Total assets at fair value	$	—	$	—	$	23,265	$	1,816

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The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis are as follows:

September 30, 2017
	Valuation Techniques	Unobservable Inputs	Range (Average)
Impaired loans	Evaluation of collateral	Estimation of value	NM*
Other real estate owned	Appraisal	Appraisal adjustment	10%-41% (22%)
December 31, 2016
	Valuation Techniques	Unobservable Inputs	Range (Average)
Impaired loans	Evaluation of collateral	Estimation of value	NM*
Other real estate owned	Appraisal	Appraisal adjustment	7%-39% (21%)

* Not Meaningful. Evaluations of the underlying assets are completed for each impaired loan with a specific reserve. The types of collateral vary widely and could include accounts receivable, inventory, a variety of equipment, and real estate. Collateral evaluations are reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent appraisal may be obtained. Types of discounts considered include aging of receivables, condition of the collateral, potential market for the collateral, and estimated disposal costs. These discounts will vary from loan to loan, thus providing a range would not be meaningful.

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows:

	September 30,				December 31,
	2017				2016
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Input Level
	(dollars in thousands)
Financial assets:
Cash and cash equivalents	$	71,795	$	71,795	$	42,679	$	42,679	1
Securities available for sale		107,242		107,242		123,437		123,437	2
FHLB Stock		4,309		4,309		5,688		5,688	2
Loans, net of allowance for loan losses		1,112,976		1,117,970		1,017,841		1,022,391	3
Loans held for sale		2,054		2,054		1,162		1,162	3
Accrued interest receivable		3,847		3,847		3,151		3,151	2
Loan servicing rights		8,986		12,423		9,264		12,194	3
Financial liabilities:
Deposits:
Time		714,080		720,041		596,565		600,153	3
Other deposits		352,014		349,037		380,953		377,980	1
Other borrowings		1,352		1,352		2,152		2,152	3
Advances from FHLB		128,300		129,184		107,895		108,517	3
Subordinated debentures		15,506		15,506		15,451		15,451	3
Accrued interest payable		2,125		2,125		1,879		1,879	2

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NOTE 12 – OTHER REAL ESTATE OWNED

Changes in other real estate owned were as follows:

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
		2017			2016			2017			2016
	(dollars in thousands)
Balance, beginning of period	$	6,917		$	2,789		$	3,161		$	2,872
Assets foreclosed		268			—			4,779			159
Assets acquired		—			—			—			1,951
Assets transferred from premises and equipment		—			397						397
Write-down of other real estate owned		(7	)		(250	)		(85	)		(334	)
Net gain on sales of other real estate owned		(39	)		32			363			121
Proceeds from sale of other real estate owned		(165	)		(272	)		(1,244	)		(2,470	)
Balance, end of period	$	6,974		$	2,696		$	6,974		$	2,696

Expenses (income) applicable to other real estate owned included in non-interest expense include the following:

	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
		2017		2016			2017			2016
	(dollars in thousands)
Net gain on sales of other real estate owned	$	39	$	(32	)	$	(363	)	$	(121	)
Write-down of other real estate owned		7		250			85			334
Operating expenses, net of rental income		30		41			99			120
	$	76	$	259		$	(179	)	$	333

NOTE 13 – SUBSEQUENT EVENTS

Management evaluated subsequent events through the date the financial statements were issued. There were no significant events or transactions occurring after September 30, 2017, but prior to November 8, 2017, that provided additional evidence about conditions that existed at September 30, 2017.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Form 10-Q.  This report contains statements that constitute forward-looking statements within the meaning of the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.  Forward-looking statements can be identified by the use of words such as “estimate,” “project,” “predict,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “may,” “might,” “should,” “indicate,” “will,” “would,” “could,” “contemplate,” “continue,” “intend,” “target” and words of similar meaning. These forward-looking statements are not historical facts and include statements of our goals, intentions, expectations, business plans, and operating strategies.

Forward-looking statements are subject to significant risks and uncertainties, and our actual results may differ materially from the results discussed in such forward-looking statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

•adverse changes in economic conditions in our market area and to the agriculture market generally, dairy in particular;

•adverse changes in the financial services industry and national and local real estate markets (including real estate values);

•competition among depository and other financial institutions;

•risks related to a high concentration of dairy-related collateral located in our market area;

•credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance for loan losses and provision for loan losses;

•changes in U.S. monetary policy, the level and volatility of interest rates, the capital markets and other market conditions that may affect, among other things, our liquidity, our net interest margin, our funding sources and the value of our assets and liabilities;

•our success in introducing new financial products;

•our ability to attract and maintain deposits;

•fluctuations in the demand for loans, which may be affected by numerous factors, including commercial conditions in our market areas and by declines in the value of real estate in our market areas;

•changes in consumer spending, borrowing and saving habits that may affect deposit levels;

•costs or difficulties related to the integration of the business of acquired entities and the risk that the anticipated benefits, cost savings and any other savings from such transactions may not be fully realized or may take longer than expected to realize;

•our ability to enter new markets successfully and capitalize on growth opportunities;

•any negative perception of our reputation or financial strength;

•our ability to raise additional capital on acceptable terms when needed;

•changes in laws or government regulations or policies affecting financial institutions, including increased costs of compliance with such laws and regulations;

•changes in accounting policies and practices;

•our ability to retain key members of our senior management team;

•the failure or security breaches of computer systems on which we depend;

•the ability of key third-party service providers to perform their obligations to us;

•the impact of any claims or legal actions, including any effect on our reputation;

•each of the factors and risks identified in the “Risk Factors” section included under Item 1A. of Part I of our most recent Annual Report on Form 10-K.

These statements are only current predictions and are subject to known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Forward-looking statements are made only as of the date of this report,

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and County undertakes no obligation to update any forward-looking statements contained in this report to reflect new information or events or conditions after the date hereof.

Overview

County Bancorp, Inc. is a Wisconsin corporation founded in May 1996 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Our primary activities consist of operating through our wholly-owned subsidiary bank, Investors Community Bank, headquartered in Manitowoc, Wisconsin, and providing a wide range of banking and related business services through the Bank and our other subsidiaries.

On May 13, 2016, the Company acquired Fox River Valley and its wholly owned banking subsidiary, The Business Bank.  The Company paid aggregate merger consideration of approximately $14.45 million in cash and 712,830 shares of the Company’s common stock.

In addition to the Bank, we have three wholly-owned subsidiaries, County Bancorp Statutory Trust II, County Bancorp Statutory Trust III, and Fox River Valley Capital Trust I, which are Delaware statutory trusts.  The Bank is the sole member of Investors Insurance Services, LLC and ABS 1, LLC, which are both Wisconsin limited liability companies, and is the sole shareholder of ICB Investment Corp., a Nevada corporation, which was dissolved on August 17, 2017, and all assets were assumed by the Bank.

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans, and the interest we pay on interest-bearing liabilities, such as deposits. We generate most of our revenue from interest on loans and investments and loan- and deposit-related fees. Our loan portfolio consists of a mix of agricultural, commercial real estate, commercial, and residential real estate loans. Our primary source of funding is deposits. Our largest expenses are interest on these deposits and salaries and related employee benefits. We measure our performance through various metrics, including our pre-tax net income, net interest margin, net overhead ratio, return on average assets, earnings per share, and ratio of non-performing assets to total assets.  We also utilize non-GAAP metrics such as efficiency ratio, return on average common shareholders’ equity, income before provision for loan losses and income tax expense.  We are required to maintain appropriate regulatory leverage and risk-based capital ratios.

Operational Overview

• Net income for the three months ended September 30, 2017 was $3.6 million compared to $3.1 million for the three months ended September 30, 2016, and $8.3 million for the nine months ended September 30, 2017 compared to $7.2 million for the nine months ended September 30, 2016.

• Net interest income increased by $3.3 million from $25.4 million for the nine months ended September 30, 2016, to $28.7 million for the nine months ended September 30, 2017.

• Total loans were $1.1 billion at September 30, 2017 compared to $1.0 billion at December 31, 2016, and $992.5 million at September 30, 2016, an increase of 9.3% and 13.5%, respectively.

• Non-performing assets have decreased $3.4 million since December 31, 2016 to $19.4 million at September 30, 2017, a decrease of 15.0%, and have decreased $5.4 million, or 21.6%, since September 30, 2016.

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Selected Financial Data

	Three Months Ended						Nine Months Ended						Year Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016			December 31, 2016
	(unaudited)						(unaudited)
	(Dollars in thousands, except per share data)
Selected Income Statement Data:
Interest income	$	13,715		$	12,803		$	38,803		$	32,621		$	45,581
Interest expense		3,754			2,627			10,087			7,204			10,014
Net interest income		9,961			10,176			28,716			25,417			35,567
Provision for loan losses		33			1,134			2,318			2,416			2,959
Net interest income after provision for loan losses		9,928			9,042			26,398			23,001			32,608
Non-interest income		2,087			2,014			5,659			6,709			8,715
Non-interest expense		6,291			6,105			18,827			18,149			24,146
Income tax expense		2,120			1,849			4,936			4,338			6,483
Net income	$	3,604		$	3,102		$	8,294		$	7,223		$	10,694
Per Common Share Data:
Basic earnings per common share	$	0.53		$	0.46		$	1.21		$	1.13		$	1.65
Diluted earnings per common share	$	0.52		$	0.46		$	1.19		$	1.12		$	1.61
Cash dividends per common share	$	0.06		$	0.05		$	0.18		$	0.15		$	0.20
Book value per share, end of period	$	19.79		$	18.49		$	19.79		$	18.49		$	18.72
Tangible book value per share, end of period (1)	$	18.87		$	17.48		$	18.87		$	17.48		$	17.74
Weighted average common shares - basic		6,644,300			6,524,430			6,623,277			6,159,517			6,260,040
Weighted average common shares - diluted		6,757,204			6,619,354			6,742,648			6,257,002			6,415,204
Common shares outstanding, end of period		6,657,601			6,532,776			6,657,601			6,532,776			6,586,335
Selected Balance Sheet Data (at period end):
Total assets							$	1,359,325		$	1,217,149		$	1,242,670
Securities available-for-sale								107,242			124,442			123,437
Total loans								1,126,601			992,478			1,030,486
Allowance for loan losses								(13,625	)		(11,626	)		(12,645	)
Total deposits								1,066,094			929,448			977,518
Other borrowings and FHLB advances								129,652			135,113			110,047
Subordinated debentures								15,506			15,407			15,451
Total shareholders' equity								139,729			128,794			131,288
Performance Ratios:
Return on average assets		1.11	%		1.04	%		0.87	%		0.92	%		0.98	%
Return on average common shareholders' equity (1)		10.72	%		10.00	%		8.34	%		9.67	%		9.51	%
Equity to assets ratio		10.28	%		10.58	%		10.28	%		10.58	%		10.56	%
Net interest margin		3.17	%		3.57	%		3.12	%		3.38	%		3.35	%
Interest rate spread		2.95	%		3.40	%		2.91	%		3.19	%		3.16	%
Non-interest income to average assets		0.64	%		0.68	%		0.60	%		0.86	%		0.80	%
Non-interest expense to average assets		1.93	%		2.05	%		1.98	%		2.31	%		2.21	%
Net overhead ratio (2)		1.29	%		1.37	%		1.39	%		1.46	%		1.41	%
Efficiency ratio (1)		51.83	%		48.29	%		55.58	%		55.83	%		53.72	%
Dividend payout ratio		11.54	%		10.87	%		15.13	%		13.39	%		12.42	%
Asset Quality Ratios:
Non-performing loans to total loans		1.14	%		2.27	%		1.14	%		2.27	%		1.95	%
Allowance for loan losses to:
Total loans		1.21	%		1.17	%		1.21	%		1.17	%		1.23	%
Non-performing loans		105.93	%		51.67	%		105.93	%		51.67	%		62.89	%
Net charge-offs to average loans		-0.01	%		0.03	%		0.12	%		0.14	%		0.08	%
Non-performing assets to total assets (3)		1.43	%		2.04	%		1.43	%		2.04	%		1.84	%

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	Three Months Ended						Nine Months Ended						Year Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016			December 31, 2016
	(unaudited)						(unaudited)
Capital Ratios:
Shareholders' common equity to assets		9.69	%		9.92	%		9.69	%		9.92	%		9.92	%
Total risk-based capital (Bank)		12.81	%		13.31	%		12.81	%		13.31	%		13.23	%
Tier 1 risk-based capital (Bank)		11.66	%		12.19	%		11.66	%		12.19	%		12.07	%
Tier 1 Common Equity ratio (Bank)		11.66	%		12.19	%		11.66	%		12.19	%		12.07	%
Leverage ratio (Bank)		11.17	%		11.19	%		11.17	%		11.19	%		11.08	%

(1) Tangible book value per share, return on average common shareholders’ equity, and the efficiency ratio are not recognized under GAAP and are therefore considered to be non-GAAP financial measures.  See below for reconciliations of these financial measures to their most comparable GAAP measures.

(2) Net overhead ratio represents the difference between noninterest expense and noninterest income, divided by average assets.

(3) Non-performing assets consist of nonaccrual loans and other real estate owned.

Non-GAAP Financial Measures

“Efficiency ratio” is defined as non-interest expenses, excluding gains and losses on sales and write-downs of other real estate owned, divided by operating revenue, which is equal to net interest income plus non-interest income excluding gains and losses on sales of securities.  In our judgment, the adjustments made to non-interest expense allow investors to better assess our operating expenses in relation to our core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items that are unrelated to our core business.

	Three Months Ended						Nine Months Ended						Year Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016			December 31, 2016
	(dollars in thousands)
Efficiency Ratio GAAP to Non-GAAP reconciliation:
Non-interest expense	$	6,291		$	6,105		$	18,827		$	18,149		$	24,146
Less: net gain (loss) on sales and write-downs of OREO		(47	)		(218	)		278			(213	)		(358	)
Adjusted non-interest expense (non-GAAP)	$	6,244		$	5,887		$	19,105		$	17,936		$	23,788
Net interest income	$	9,961		$	10,176		$	28,716		$	25,417		$	35,567
Non-interest income		2,087			2,014			5,659			6,709			8,715
Operating revenue	$	12,048		$	12,190		$	34,375		$	32,126		$	44,282
Efficiency ratio		51.83	%		48.29	%		55.58	%		55.83	%		53.72	%

Return on average common shareholders’ equity is a non-GAAP based financial measure calculated using non-GAAP based amounts.  The most directly comparable GAAP based measure is return on average shareholders’ equity.  We calculate return on average common shareholders’ equity by excluding the average preferred shareholders’ equity and the related dividends.  Management uses the return on average common shareholders’ equity in order to review our core operating results and our performance.  

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	Three Months Ended						Nine Months Ended						Year Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016			December 31, 2016
Return on Average Common Shareholders' Equity    GAAP to Non-GAAP reconciliation:
Return on average shareholders' equity		10.36	%		9.63	%		8.10	%		8.09	%		8.99	%
Effect of excluding average preferred     shareholders' equity		0.36	%		0.37	%		0.24	%		1.58	%		0.52	%
Return on average common shareholders'     equity		10.72	%		10.00	%		8.34	%		9.67	%		9.51	%

Tangible net book value per share is a non-GAAP financial measure based on GAAP amounts.  In our judgment, the adjustments made to net book value allow investors to better assess our capital adequacy and net worth by removing the effect of intangible assets that are unrelated to our core business.

	Three Months Ended				Nine Months Ended				Year Ended
	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016		December 31, 2016
	(dollars in thousands, except per share data)
Tangible book value per share    reconciliation:
Common equity	$	131,729	$	120,794	$	131,729	$	120,794	$	123,288
Less: Goodwill		5,038		5,038		5,038		5,038		5,038
Less: Core deposit intangible, net of amortization		1,038		1,590		1,038		1,590		1,441
Tangible common equity	$	125,653	$	114,166	$	125,653	$	114,166	$	116,809
Common shares outstanding		6,657,601		6,532,776		6,657,601		6,532,776		6,586,335
Tangible book value per share	$	18.87	$	17.48	$	18.87	$	17.48	$	17.74

Results of Operations

Our operating revenue is comprised of interest income and non-interest income.  Net interest income decreased by 2.1% to $10.0 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016, primarily due to an increase in interest expense in time deposits.  The average rate of rate of time deposits for the three months ended September 30, 2017 was 1.60% compared to 1.25% for the three months ended September 30, 2016, as interest rates increased generally throughout the industry.

Interest income increased to $13.7 million for the third quarter of 2017 compared to $12.8 million for the third quarter of 2016 despite a decrease in loan yield from 4.93% for the third quarter of 2016 to 4.73% for the third quarter of 2017.  The increase in interest income was partially offset by an increase in interest expense from $2.6 million for the third quarter of 2016 to $3.8 million for the third quarter of 2017, which was the result of both an increase in the volume of deposits and borrowings and an increase in the rates paid between the two periods.  The loan yield for the three months ended September 30, 2016 was positively impacted by 0.25% for the accretion of a fair value discount resulting from the acquisition of The Business Bank, which closed on May 13, 2016.  The accretion adjustment for three months ended September 30, 2017 is immaterial.  

The rates paid on deposits increased from 1.04% for the third quarter of 2016 to 1.38% for the third quarter of 2017.  Non-interest income for the three months ended September 30, 2017 increased 3.6% to $2.1 million from $2.0 million for the three months ended September 30, 2016, primarily as a result of a slight increase in loan servicing fees.  Non-interest expense increased 3.1% to $6.3 million for the three months ended September 30, 2017 compared to $6.1 million for the same period in 2016.  This increase was primarily a result of a $0.4 million increase in employee compensation and benefits expense resulting from a 9.7% increase in

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headcount since September 30, 2016.  The increase in employee compensation and benefits was partially offset by a $0.2 million reduction in OREO writedowns.

For the nine months ended September 30, 2017, net interest income was $28.7 million, an increase of $3.3 million, or 13.0% from the nine months ended September 30, 2016.  The net interest margin for the nine months ended September 30, 2016 was positively impacted by 0.10% for the accretion of a fair value discount resulting from the acquisition of The Business Bank.  Non-interest income decreased to $5.7 million for the nine months ended September 30, 2017 which represents a 15.7% decrease from the nine month ended September 30, 2016, primarily from a $1.0 million decrease in secondary market loan sales.  Non-interest expense increased to $18.8 million for the nine months ended September 30, 2017, which is a slight increase from $18.1 million for the nine months ended September 30, 2016.  The increase is related to a 9.7% increase in headcount since September 30, 2016, offset by nonrecurring merger related expenses that were incurred during the nine months ended September 30, 2016.

Analysis of Net Interest Income

Net interest income is the largest component of our income and is dependent on the amounts of and yields on interest-earning assets as compared to the amounts of and rates paid on interest-bearing liabilities.  The following table reflects the components of net interest income for the three and nine months ended September 30, 2017 and 2016:

	Three Months Ended
	September 30, 2017								September 30, 2016
	Average Balance (1)			Income/ Expense		Yields/ Rates			Average Balance (1)			Income/ Expense		Yields/ Rates
	(dollars in thousands)
Assets
Investment securities	$	111,306		$	543		1.95	%	$	126,319		$	510		1.61	%
Loans (2)		1,104,259			13,070		4.73	%		993,156			12,245		4.93	%
Interest bearing deposits due from other banks		41,187			102		0.99	%		21,480			48		0.89	%
Total interest-earning assets	$	1,256,752		$	13,715		4.37	%	$	1,140,955		$	12,803		4.49	%
Allowance for loan losses		(13,517	)							(11,499	)
Other assets		59,186								63,588
Total assets	$	1,302,421							$	1,193,044
Liabilities
Savings, NOW, money market, interest checking	$	224,819		$	387		0.69	%	$	245,001		$	333		0.54	%
Time deposits		679,324			2,721		1.60	%		565,899			1,767		1.25	%
Total interest-bearing deposits	$	904,143		$	3,108		1.38	%	$	810,900		$	2,100		1.04	%
Other borrowings		1,384			20		5.82	%		2,287			35		6.15	%
FHLB advances		136,561			491		1.44	%		133,815			373		1.11	%
Junior subordinated debentures		15,506			135		3.48	%		15,407			119		3.09	%
Total interest-bearing liabilities	$	1,057,594		$	3,754		1.42	%	$	962,409		$	2,627		1.09	%
Non-interest bearing deposits		96,717								93,758
Other liabilities		8,995								8,041
Total liabilities	$	1,163,306							$	1,064,208
SBLF preferred stock (3)		-								-
Shareholders' equity		139,115								128,836
Total liabilities and equity	$	1,302,421							$	1,193,044
Net interest income				$	9,961							$	10,176
Interest rate spread (4)							2.95	%							3.40	%
Net interest margin (5)							3.17	%							3.57	%
Ratio of interest-earning assets to interest-bearing    liabilities		1.19								1.19

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	Nine Months Ended
	September 30, 2017								September 30, 2016
	Average Balance (1)			Income/ Expense		Yields/ Rates			Average Balance (1)			Income/ Expense		Yields/ Rates
	(dollars in thousands)
Assets
Investment securities	$	114,528		$	1,608		1.87	%	$	104,021		$	1,304		1.67	%
Loans (2)		1,070,840			36,952		4.60	%		879,471			31,180		4.73	%
Interest bearing deposits due from other banks		40,800			243		0.80	%		18,664			137		0.98	%
Total interest-earning assets	$	1,226,168		$	38,803		4.22	%	$	1,002,156		$	32,621		4.34	%
Allowance for loan losses		(13,575	)							(11,203	)
Other assets		54,906								54,853
Total assets	$	1,267,499							$	1,045,806
Liabilities
Savings, NOW, money market, interest checking		239,365			1,113		0.62	%		198,428			774		0.52	%
Time deposits		644,472			7,238		1.50	%		511,452			5,133		1.34	%
Total interest-bearing deposits	$	883,837		$	8,351		1.26	%	$	709,880		$	5,907		1.11	%
Other borrowings		1,618			71		5.84	%		3,094			128		5.52	%
FHLB advances		128,093			1,285		1.34	%		107,538			915		1.13	%
Junior subordinated debentures		15,482			380		3.27	%		13,917			254		2.43	%
Total interest-bearing liabilities	$	1,029,030		$	10,087		1.30	%	$	834,429		$	7,204		1.15	%
Non-interest bearing deposits		93,323								81,480
Other liabilities		8,665								7,995
Total liabilities		1,131,018								923,904
SBLF preferred stock (3)		-								2,912
Shareholders' equity		136,481								118,990
Total liabilities and equity	$	1,267,499							$	1,045,806
Net interest income				$	28,716							$	25,417
Interest rate spread (4)							2.92	%							3.19	%
Net interest margin (5)							3.12	%							3.38	%
Ratio of interest-earning assets to interest -bearing    liabilities		1.19								1.20

(1) Average balances are calculated on amortized cost.

(2) Includes loan fee income, nonaccruing loan balances, and interest received on such loans.

(3) The SBLF preferred stock refers to the 15,000 shares of our Series C noncumulative perpetual preferred stock issued to the U.S. Treasury through the U.S. Treasury’s Small Business Lending Fund Program, which were redeemed on February 23, 2016.

(4) Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(5) Net interest margin represents net interest income divided by average total interest-earning assets.

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Rate/Volume Analysis

The following tables present the effects of changing rates and volumes on our net interest income between the periods indicated.  The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The net column represents the sum of the volume and rate columns. For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.

	Three Months Ended September 30, 2017 v. 2016
	Increase (Decrease) Due to Change in Average
	Volume			Rate			Net
	(dollars in thousands)
Interest Income:
Investment securities	$	(44	)	$	77		$	33
Loans		1,284			(459	)		825
Federal funds sold and interest-bearing deposits with    banks		49			5			54
Total interest income		1,289			(377	)		912
Interest Expense:
Savings, NOW, money market and interest checking		(24	)		78			54
Time deposits		396			558			954
Other borrowings		(13	)		(2	)		(15	)
FHLB advances		8			110			118
Junior subordinated debentures		1			15			16
Total interest expense		368			759			1,127
Net interest income	$	921		$	(1,136	)	$	(215	)
	Nine Months Ended September 30, 2017 v. 2016
	Increase (Decrease) Due to Change in Average
	Volume			Rate			Net
	(dollars in thousands)
Interest Income:
Investment securities	$	139		$	165		$	304
Loans		6,578			(806	)		5,772
Federal funds sold and interest-bearing deposits with    banks		126			(20	)		106
Total interest income		6,843			(661	)		6,182
Interest Expense:
Savings, NOW, money market and interest checking		175			164			339
Time deposits		1,444			661			2,105
Other borrowings		(65	)		8			(57	)
FHLB advances		190			180			370
Junior subordinated debentures		31			95			126
Total interest expense		1,775			1,108			2,883
Net interest income	$	5,068		$	(1,769	)	$	3,299

Provision for Loan Losses

Based on our analysis of the components of the allowance for loan losses, management recorded a provision for loan losses of $33,000 for the three months ended September 30, 2017 compared to a provision of $1.1 million for the three months ended September 30, 2016.  The decreased provision is primarily the result of improved historical charge-off factors and a more stable agricultural economy which offset an increase in the allowance that would otherwise have been made in light of loan growth.

For the nine months ended September 30, 2017, the provision for loan losses was $2.3 million compared to $2.4 million for the nine months ended September 30, 2016.  The specific reserve related to impaired loans decreased 15.6% from $1.3 million at December 31, 2016 to $1.1 million at September 30, 2017.  In addition non-performing loans have decreased $7.2 million since

32

December 31, 2016 to $12.9 million at September 30, 2017, an improvement of 36.0%.  As a percentage of total loans, non-performing loans has improved to 1.14% at September 30, 2017 from 1.95% at December 31, 2016.

There have been no substantive changes to our methodology for estimating the appropriate level of allowance for loan losses from what was previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016. Based upon this methodology, which includes actively monitoring the asset quality and inherent risks within the loan and lease portfolio, management concluded that an allowance for loan losses of $13.6 million, or 1.21% of total loans, was appropriate as of September 30, 2017.  This is compared to an allowance for loan losses of $11.6 million, or 1.17% of total loans, at September 30, 2016, and $12.6 million, or 1.23% of total loans, at December 31, 2016.  

Non-Interest Income

Non-interest income for the three months ended September 30, 2017 increased by 3.6% from the three months ended September 30, 2016 from $2.0 million to $2.1 million.  The increase was the result of an increase in loan servicing fees of $0.1 million which resulted from a higher volume of loans serviced.

For the nine months ended September 30, 2017, non-interest income decreased by 15.7% from $6.7 million to $5.7 million. The decrease was due to a Farm Service Agency procedural change that has delayed our secondary market sale activity.  While our secondary market sale activity did increase from second quarter 2017, we expect the fourth quarter of 2017 to be lower than 2016 levels.

Loan servicing rights are included in loan servicing fees in our consolidated statement of operations.  The following table reflects the components of non-interest income for the three and nine months ended September 30, 2017 and 2016:

	Three Months Ended				Nine Months Ended
	September 30, 2017		September 30, 2016		September 30, 2017			September 30, 2016
	(dollars in thousands)
Service charges	$	350	$	288	$	1,074		$	976
Gain on sale of loans, net		47		79		96			240
Loan servicing fees		1,469		1,404		4,316			4,017
Loan servicing rights		94		54		(278	)		1,020
Income on other real estate owned		20		19		57			33
Other		107		170		394			423
Total non-interest income	$	2,087	$	2,014	$	5,659		$	6,709

Non-Interest Expense

Non-interest expense remained steady for the three months ended September 30, 2017 at $6.3 million compared to $6.1 million for the three months ended September 30, 2016. Changes to specific expenses included an increase in employee compensation and benefits from the three months ended September 30, 2016 to the three months ended September 30, 2017 of $0.4 million, reflective of an increase in the number of employees.  

For the nine months ended September 30, 2017, non-interest expense increased by 3.7% to $18.8 million from $18.1 million for the nine months ended September 30, 2016. The increase is the result of increased operating costs associated with two additional branches acquired through the merger, including an increase of $2.2 million or 22.8% in employee compensation and benefits. As previously discussed in Note 6 of the Consolidated Financial Statements, amortization of the core deposit intangible for the nine months ended September 30, 2017, included in other expense, was $0.4 million higher than for the same period in 2016. Results for the nine months ended September 30, 2016 included $2.3 million of expenses related to the merger, which were included in other expenses.

The following table reflects the components of our non-interest expense for the three and nine months ended September 30, 2017 and 2016:

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	Three Months Ended					Nine Months Ended
	September 30, 2017		September 30, 2016			September 30, 2017			September 30, 2016
	(dollars in thousands)
Employee compensation and benefits	$	3,845	$	3,461		$	11,735		$	9,554
Occupancy		162		157			519			364
Information processing		450		288			1,209			2,045
Professional fees		414		304			1,251			1,337
Business development		275		167			731			452
FDIC assessment		99		163			287			424
Other real estate owned expenses		50		60			157			153
Write-down of other real estate owned		8		250			85			334
Net loss (gain) on other real estate owned		39		(32	)		(363	)		(121	)
Depreciation and amortization		323		419			988			707
Other		626		868			2,228			2,900
Total non-interest expense	$	6,291	$	6,105		$	18,827		$	18,149

Income taxes

The Company accounts for income taxes in accordance with income tax accounting guidance, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions.

The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. 

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term “more likely than not” means a likelihood of more than 50%; the terms “examined” and “upon examination” also include resolution of the related appeals or litigation processes, if any. A tax position that meets the “more likely than not” recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the “more likely than not” recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of the deferred tax asset will not be realized.

The Company files income tax returns in the U.S. federal jurisdiction and in the state of Wisconsin. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2013.

The Company recognizes interest and penalties on income taxes, if any, as a component of other non-interest expense.

Income tax expense for the nine months ended September 30, 2017 and 2016 was $4.9 million and $4.3 million, which represents an effective tax rate of 37.3% and 37.5%, respectively.  

Financial Condition

Total assets increased $116.7 million, or 9.4%, from $1.2 billion at December 31, 2016 to $1.4 billion at September 30, 2017.  Total loan growth amounted to $96.1 million, a 9.3% increase, since December 31, 2016. Other significant changes from December 31, 2016 to September 30, 2017 include a $29.1 million increase to cash and cash equivalents, a decrease in securities available-for-sale of $16.2 million, and an increase in bank owned life insurance of $5.8 million.

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Total liabilities increased $108.2 million, or 9.7%, from $1.1 billion at December 31, 2016 to $1.2 million at September 30, 2017.  This increase is primarily attributed to increased deposits and FHLB advances associated with our increased loan demand.  

Shareholders’ equity increased $8.4 million, or 6.4%, to $139.7 million at September 30, 2017 from $131.3 million at December 31, 2016.  This increase was due primarily to net income for the nine months ended September 30, 2017 of $8.3 million, and the exercise of 65,026 shares of stock options during the first nine months of 2017, which were partially offset by the payment of $1.2 million of dividends on common stock during the nine months ended September 30, 2017.

Net Loans

Total net loans increased by $95.1 million, or 9.3%, from $1.0 billion at December 31, 2016 to $1.1 billion at September 30, 2017. This increase was driven primarily by commercial loans growing $17.6 million or 19.6%, commercial real estate loans growing $19.9 million or 7.3%, and agricultural loans growing $51.2 million or 8.2% during the first nine months of 2017.

The following table sets forth the composition of our loan portfolio at the dates indicated:

	September 30, 2017						December 31, 2016
	Amount			Percent			Amount			Percent
	(dollars in thousands)
Agriculture loans	$	675,856			60.0	%	$	624,632			60.6	%
Commercial real estate loans		290,420			25.8	%		270,475			26.3	%
Commercial loans		107,569			9.5	%		89,944			8.7	%
Residential real estate loans		52,527			4.7	%		45,276			4.4	%
Installment and consumer other		229			0.0	%		159			0.0	%
Total gross loans	$	1,126,601			100.0	%	$	1,030,486			100.0	%
Allowance for loan losses		(13,625	)					(12,645	)
Loans, net	$	1,112,976					$	1,017,841

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to expense, which affects our earnings directly. Loans are charged against the allowance for loan losses when management believes that the collectability of all or some of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that reflects management’s estimate of the level of probable incurred losses in the loan portfolio. Factors considered by management in determining the adequacy of the allowance include, but are not limited to, detailed reviews of individual loans, historical and current trends in loan charge-offs for the various portfolio segments evaluated, the level of the allowance in relation to total loans and to historical loss levels, levels and trends in non-performing and past due loans, volume and migratory direction of adversely graded loans, external factors including regulation, reputation, and competition, and management’s assessment of economic conditions. Our board of directors reviews the recommendations of management regarding the appropriate level for the allowance for loan losses based upon these factors.

The provision for loan losses is the charge to operating earnings necessary to maintain an adequate allowance for loan losses. We have developed policies and procedures for evaluating the overall quality of our loan portfolio and the timely identification of problem credits. Management continuously reviews these policies and procedures and makes further improvements as needed. The adequacy of our allowance for loan losses and the effectiveness of our internal policies and procedures are also reviewed periodically by our regulators, our auditors, and external loan review personnel. Our regulators may advise us to recognize additions to the allowance based upon their judgments about information available to them at the time of their examination. Such regulatory guidance is taken under consideration by management, and we may recognize additions to the allowance as a result.

We continually refine our methodology for determining the allowance for loan losses by comparing historical loss ratios utilized to actual experience and by classifying loans for analysis based on similar risk characteristics. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreements; however, cash receipts on impaired and nonaccrual loans for which the accrual of interest has been discontinued are applied to principal and interest income depending upon the overall risk of principal loss to us.

At September 30, 2017 and December 31, 2016, the allowance for loan losses was $13.6 million and $12.6 million, respectively, which resulted in a ratio of the allowance to total loans of 1.21% and 1.23%, respectively.  The overall increase in the allowance for loan losses was the result of organic loan growth and offset by a slight improvement in qualitative economic factors we use to assess our portfolio.

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Charge-offs and recoveries by loan category for the three and nine months ended September 30, 2017 and 2016 were as follows:

	Three Months Ended						Nine Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
	(dollars in thousands)
Balance, beginning of period	$	13,503		$	10,791		$	12,645		$	10,405
Loans charged off:
Agriculture loans		—			—			—			896
Commercial real estate loans		—			45			575			50
Commercial loans		—			277			917			277
Residential real estate loans		—			5			—			5
Installment and consumer other		—			—			—			4
Total loans charged off	$	—		$	327		$	1,492		$	1,232
Recoveries:
Agriculture loans		42			—			43			2
Commercial real estate loans		44			25			80			26
Commercial loans		3			3			31			9
Residential real estate loans		—			—			—			—
Installment and consumer other		—			—			—			—
Total recoveries		89			28			154			37
Net loans charged-off	$	(89	)	$	299		$	1,338		$	1,195
Provision for loan losses		33			1,134			2,318			2,416
Allowance for loan losses, end of period	$	13,625		$	11,626		$	13,625		$	11,626
Selected loan quality ratios:
Net charge-offs (recoveries) to    average loans		-0.01	%		0.03	%		0.12	%		0.14	%
Allowance for loan losses to    total loans (end of period)		1.21	%		1.17	%		1.21	%		1.17	%
Allowance for loan losses to    non-performing loans and    performing troubled debt    restructurings (end of period)		65.04	%		42.46	%		65.04	%		42.46	%

Loan Servicing Rights

As part of our growth and risk management strategy, we have actively developed a loan participation and loan sales network. Our ability to sell loan participations and whole loans benefits us by freeing up capital and funding to lend to new customers as well as to increase non-interest income through the recognition of loan sale and servicing revenue. Because we continue to service these loans, we are able to maintain a relationship with the customer. Additionally, we receive a servicing fee that offsets some of the cost of administering the loan, while maintaining the customer relationship.  

Servicing assets are recognized as separate assets when rights are acquired through the sale of financial assets. Servicing rights resulting from the sale or securitization of loans originated by the Company are initially measured at fair value at the date of transfer. The Company subsequently measures each class of servicing asset using the amortization method. Under the amortization method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment or increased obligation based on fair value at each reporting date.

Fair value is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables may have an adverse impact on the value of the servicing right and may result in a reduction to non-interest income.

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Servicing assets measured using the amortization method are evaluated and measured for impairment. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the carrying amount of the servicing assets for that tranche. The valuation allowance is adjusted to reflect changes in the measurement of impairment after the initial measure of the impairment.

Changes in the valuation allowances are reported with loan servicing fees on the Company’s consolidated statements of operations. Fair value in excess of the carrying amount of servicing assets for that stratum is not recognized.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of loan servicing rights is netted against loan servicing fee income.

Information about the loan servicing portfolio is shown below:

	September 30, 2017			December 31, 2016
	(dollars in thousands)
Total loans	$	1,126,601		$	1,030,486
Less:  Nonqualified loan sales included below		(1,272	)		(1,963	)
Loans serviced:
Agricultural		571,240			562,843
Commercial		20,310			11,038
Commercial real estate		3,082			3,083
Total loans serviced		594,632			576,964
Total loans and loans serviced	$	1,719,961		$	1,605,487

Securities

Our securities portfolio is predominately composed of municipal securities, investment grade mortgage-backed securities, U.S. Government and agency securities, and asset-backed securities. We classify substantially all of our securities as available for sale. We do not engage in active securities trading in carrying out our investment strategies.

Securities decreased to $107.2 million at September 30, 2017 from $123.4 million at December 31, 2016.  During the nine months ended September 30, 2017, we recognized unrealized holding gains of $0.3 million before income taxes through other comprehensive income.

During the three months ended September 30, 2017, asset backed securities totaling $3.8 million were sold resulting in a pre-tax loss of $37,000.

The following table sets forth the amortized cost and fair values of our securities portfolio at September 30, 2017 and December 31, 2016:

	September 30, 2017				December 31, 2016
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(dollars in thousands)
Available for sale:
Municipal securities	$	37,772	$	37,879	$	45,638	$	45,456
Mortgage-backed securities		69,515		69,363		73,648		73,308
Asset-backed securities		—		—		3,761		3,673
U.S. Government and agency securities		—		—		1,000		1,000
Total available for sale	$	107,287	$	107,242	$	124,047	$	123,437

Deposits

Deposits are the major source of our funds for lending and other investment purposes. Deposits are attracted principally from within our primary market area through the offering of a broad variety of deposit instruments including checking accounts,

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noninterest-bearing demand accounts, money market accounts, savings accounts, time deposit accounts (including “jumbo” certificates in denominations of $100,000 or more) and retirement savings plans.  We also obtain brokered deposits on an as-needed basis.

Deposit growth was 9.1% to $1.1 billion at September 30, 2017 from $977.5 million at December 31, 2016.  Organic deposit growth has been slow in recent years due to strong competition in a market with compressed interest rates.  We anticipate continued competition as rates are projected to rise, however, and in the coming months we plan to refocus our efforts on core deposit generation in an attempt to lessen our reliance on brokered deposits.  As of September 30, 2017 and December 31, 2016, the distribution by type of deposit account was as follows:

	September 30, 2017					December 31, 2016
	Amount		% of Deposits			Amount		% of Deposits
	(dollars in thousands)
Time deposits	$	443,882		41.7	%	$	404,667		41.4	%
Brokered deposits		281,205		26.4	%		193,613		19.8	%
Money market accounts		169,612		15.9	%		206,435		21.1	%
Demand, noninterest-bearing		118,815		11.1	%		118,657		12.1	%
NOW accounts and interest checking		46,178		4.3	%		48,727		5.0	%
Savings		6,402		0.6	%		5,419		0.6	%
Total deposits	$	1,066,094		100.0	%	$	977,518		100.0	%

Liquidity Management and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature including, but not limited to, funding loans and depositor withdrawals. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, calls of investment securities and borrowed funds and prepayments on loans are greatly influenced by general interest rates, economic conditions and competition.

At September 30, 2017, advances from the FHLB were $128.3 million compared to $107.9 million at December 31, 2016.  This increase helped fund our loan growth as load demands outpaced deposit growth.  

Management adjusts our investments in liquid assets based upon an assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, (4) the objectives of our interest-rate risk and investment policies and (5) the risk tolerance of management and our board of directors.

Our cash flows are composed of three primary classifications: cash flows from operating activities, investing activities, and financing activities.  Net cash provided by operating activities was $11.4 million and $19.2 million for the nine months ended September 30, 2017 and 2016, respectively.  Net cash used in investing activities, which consists primarily of purchases of and proceeds from the sale, maturities, calls, and principal repayments of securities available for sale, as well as loan originations, net of repayments, was $89.8 million and $84.5 million for the nine months ended September 30, 2017 and 2016, respectively.  Net cash provided by financing activities, consisting primarily of the activity in deposit accounts, and FHLB advances was $107.6 million and $103.3 million for the nine months ended September 30, 2017 and 2016, respectively.

At September 30, 2017, the Bank exceeded all of its regulatory capital requirements, with Tier 1 leverage capital of $144.6 million, or 11.17% of adjusted average total assets, which is above the minimum level to be well-capitalized of $64.7 million, or 5.0% of adjusted average total assets, and total risk-based capital of $158.8 million, or 12.81% of risk-weighted assets, which is above the minimum level to be well-capitalized of $124.0 million, or 10.0% of risk-weighted assets.

At the holding company level, our primary sources of liquidity are dividends from the Bank, investment income and net proceeds from investment sales, borrowings and capital offerings. The main uses of liquidity are the payment of interest to holders of our junior subordinated debentures and the payment of interest or dividends to common and preferred shareholders.  The Bank is subject to certain regulatory limitations regarding its ability to pay dividends to the Company; however, we do not believe that the Company will be adversely affected by these dividend limitations.  At September 30, 2017, there were $76.9 million of retained earnings available for the payment of dividends by the Bank to the holding company.  Management believes liquidity to be sufficient as of September 30, 2017.

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Off-Balance Sheet Arrangements

On September 14, 2017, the Company entered into a credit agreement with U.S. Bank National Association for a $15.0 million revolving line-of-credit with an interest rate of the one-month LIBOR rate plus 2.25%.  The line also bears a non-usage fee of 0.275% per annum.  The line did not have an outstanding balance as of September 30, 2017, and was unused during the quarter.

As of September 30, 2017, there were no other significant changes to our contractual obligations and off-balance sheet arrangements disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.  We continue to believe that we have adequate capital and liquidity available from various sources to fund projected obligations and commitments.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2017. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2017, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act.

There are inherent limitations in the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and circumvention or overriding of controls. Accordingly, even an effective system of disclosure controls and procedures can provide only reasonable assurance with respect to financial statement preparation. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We and our subsidiaries may be involved from time to time in ordinary routine litigation incidental to our respective businesses.  Neither we nor any of our subsidiaries are currently engaged in, nor is any of our property the subject of, any legal proceedings, other than ordinary routine litigation incidental to the business, that are expected to have a material adverse effect on our results of operations or financial position.  

Item 1A. Risk Factors.

There are no material changes to the risk factors set forth in “Risk Factors” in Item 1A to Part I of our Annual Report on Form 10-K for the year ended December 31, 2016.  

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The Company did not issue any unregistered equity securities or repurchase any shares of its common stock during the quarter ended September 30, 2017.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

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Item 6. Exhibits.

Exhibit Number	Description
10.1	Employment Agreement dated July 18, 2017, by and among County Bancorp, Inc., Investors Community Bank and Glen L. Stiteley (incorporated by reference to Exhibit 10.1 to County Bancorp, Inc.’s current report on Form 8-K (File no. 001-36808) filed on July 20, 2017)
10.2	Employment Agreement dated August 7, 2017, by and among County Bancorp, Inc., Investors Community Bank and Timothy J. Schneider (incorporated by reference to Exhibit 10.1 to County Bancorp, Inc.’s quarterly report on Form 10-Q (File no. 001-36808) filed on August 8, 2017).
10.3	Employment Agreement dated August 7, 2017, by and among County Bancorp, Inc., Investors Community Bank and Mark R. Binversie (incorporated by reference to Exhibit 10.2 to County Bancorp, Inc.’s quarterly report on Form 10-Q (File no. 001-36808) filed on August 8, 2017).
10.4	Employment Agreement dated August 7, 2017, by and among County Bancorp, Inc., Investors Community Bank and David A. Coggins (incorporated by reference to Exhibit 10.3 to County Bancorp, Inc.’s quarterly report on Form 10-Q (File no. 001-36808) filed on August 8, 2017).
10.5	Credit Agreement dated September 14, 2017, by and between County Bancorp, Inc. and U.S. Bank National Association (incorporated by reference to Exhibit 10.1 to County Bancorp, Inc.’s current report on Form 8-K (File no. 001-36808) filed on September 18, 2017)
31.1	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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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.

	County Bancorp, Inc.
Date:  November 8, 2017	By:	/s/ Timothy J. Schneider
		Timothy J. Schneider
		President (principal executive officer)
Date:  November 8, 2017	By:	/s/ Glen L. Stiteley
		Glen L. Stiteley
		Chief Financial Officer (principal financial and accounting officer)

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