10-Q 1 czwi-20180630x10q.htm 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission file number 001-33003
 
 
CITIZENS COMMUNITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
 
 
Maryland
 
20-5120010
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
2174 EastRidge Center, Eau Claire, WI 54701
(Address of principal executive offices)
715-836-9994
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically 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  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer
 
¨
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (do not check if a smaller reporting company)
 
Smaller reporting company  
 
x
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨ No  x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
At August 10, 2018 there were 5,914,379 shares of the registrant’s common stock, par value $0.01 per share, outstanding.




CITIZENS COMMUNITY BANCORP, INC.
FORM 10-Q
June 30, 2018
INDEX
 
 
 
Page Number
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 

2



PART 1 – FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

3




CITIZENS COMMUNITY BANCORP, INC.
Consolidated Balance Sheets
June 30, 2018 (unaudited) and September 30, 2017
(derived from audited financial statements)
(in thousands, except share and per share data)
 
June 30, 2018
 
September 30, 2017
Assets
 
 
 
Cash and cash equivalents
$
27,731

 
$
41,677

Other interest-bearing deposits
8,160

 
8,148

Securities available for sale
119,702

 
95,883

Securities held to maturity
4,809

 
5,453

Non-marketable equity securities, at cost
6,862

 
7,292

Loans receivable
761,087

 
732,995

Allowance for loan losses
(6,458
)
 
(5,942
)
Loans receivable, net
754,629

 
727,053

Loans held for sale
1,778

 
2,334

Mortgage servicing rights
1,841

 
1,886

Office properties and equipment, net
9,947

 
9,645

Accrued interest receivable
3,306

 
3,291

Intangible assets
4,966

 
5,449

Goodwill
10,444

 
10,444

Foreclosed and repossessed assets, net
5,392

 
6,017

Bank owned life insurance ("BOLI")
11,581

 
11,343

Other assets
3,922

 
4,749

TOTAL ASSETS
$
975,070

 
$
940,664

 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Deposits
$
744,536

 
$
742,504

Federal Home Loan Bank advances
58,000

 
90,000

Other borrowings
29,059

 
30,319

Other liabilities
8,264

 
4,358

Total liabilities
839,859

 
867,181

 
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock - $0.01 par value, $130.00 per share liquidation, 1,000,000 shares authorized, 500,000 shares issued and outstanding
61,289

 

Common stock— $0.01 par value, authorized 30,000,000; 5,914,379; and 5,888,816 shares issued and outstanding, respectively
59

 
59

Additional paid-in capital
63,850

 
63,383

Retained earnings
12,904

 
10,764

Unearned deferred compensation
(716
)
 
(456
)
Accumulated other comprehensive loss
(2,175
)
 
(267
)
Total stockholders’ equity
135,211

 
73,483

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
975,070

 
$
940,664

See accompanying condensed notes to unaudited consolidated financial statements.

4




CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Operations (unaudited)
Three and Nine Months Ended June 30, 2018 and 2017
(in thousands, except per share data)
 
Three Months Ended
 
Nine Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Interest and dividend income:
 
 
 
 
 
 
 
Interest and fees on loans
$
8,865

 
$
6,030

 
$
26,125

 
$
18,632

Interest on investments
905

 
591

 
2,409

 
1,476

Total interest and dividend income
9,770

 
6,621

 
28,534

 
20,108

Interest expense:
 
 
 
 
 
 
 
Interest on deposits
1,432

 
1,035

 
3,884

 
3,204

Interest on FHLB borrowed funds
412

 
164

 
987

 
500

Interest on other borrowed funds
446

 
107

 
1,300

 
308

Total interest expense
2,290

 
1,306

 
6,171

 
4,012

Net interest income before provision for loan losses
7,480

 
5,315

 
22,363

 
16,096

Provision for loan losses
650

 

 
850

 

Net interest income after provision for loan losses
6,830

 
5,315

 
21,513

 
16,096

Non-interest income:
 
 
 
 
 
 
 
Service charges on deposit accounts
413

 
325

 
1,303

 
1,065

Interchange income
338

 
203

 
946

 
575

Loan servicing income
337

 
62

 
1,011

 
205

Gain on sale of mortgage loans
226

 
206

 
709

 
490

Loan fees and service charges
116

 
96

 
357

 
418

Insurance commission income
187

 

 
540

 

Settlement proceeds

 

 

 
283

Gains (losses) on available for sale securities
4

 

 
(17
)
 
29

Other
146

 
99

 
532

 
295

Total non-interest income
1,767

 
991

 
5,381

 
3,360

Non-interest expense:
 
 
 
 
 
 
 
Compensation and related benefits
3,840

 
2,395

 
11,201

 
7,629

Occupancy
733

 
565

 
2,199

 
2,196

Office
417

 
304

 
1,281

 
897

Data processing
720

 
476

 
2,157

 
1,402

Amortization of intangible assets
161

 
38

 
484

 
119

Amortization of mortgage servicing rights
84

 

 
250

 

Advertising, marketing and public relations
185

 
75

 
480

 
243

FDIC premium assessment
94

 
79

 
351

 
231

Professional services
735

 
382

 
1,746

 
1,218

Loss (gain) on repossessed assets, net
450

 
(11
)
 
464

 
(16
)
Other
455

 
316

 
1,507

 
1,050

Total non-interest expense
7,874

 
4,619

 
22,120

 
14,969

Income before provision for income taxes
723

 
1,687

 
4,774

 
4,487

Provision for income taxes
220

 
604

 
1,590

 
1,530

Net income attributable to common stockholders
$
503

 
$
1,083

 
$
3,184

 
$
2,957

Per share information:
 
 
 
 
 
 
 
Basic earnings
$
0.09

 
$
0.21

 
$
0.54

 
$
0.56

Diluted earnings
$
0.08

 
$
0.20

 
$
0.52

 
$
0.56

Cash dividends paid
$

 
$

 
$
0.20

 
$
0.16

See accompanying condensed notes to unaudited consolidated financial statements.


5




CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Comprehensive Income (unaudited)
Three and Nine months ended June 30, 2018 and 2017
(in thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Net income attributable to common stockholders
 
$
503

 
$
1,083

 
$
3,184

 
$
2,957

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Securities available for sale
 
 
 
 
 
 
 
 
Net unrealized losses arising during period
 
(164
)
 
514

 
(1,755
)
 
(770
)
Reclassification adjustment for (losses) gains included in net income
 

 

 
(16
)
 
17

Other comprehensive loss
 
(164
)
 
514

 
(1,771
)
 
(753
)
Comprehensive income
 
$
339

 
$
1,597

 
$
1,413

 
$
2,204

See accompanying condensed notes to unaudited consolidated financial statements.
 


6




CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statement of Changes in Stockholders’ Equity (unaudited)
Nine Months Ended June 30, 2018
(in thousands, except shares and per share data)
 
 
 
 
 
 
 
Additional Paid-In Capital
 
Retained Earnings
 
Unearned Deferred Compensation
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
 
Common Stock
 
Preferred Stock
 
 
 
 
 
 
Shares
 
Amount
 
Amount
 
 
 
 
 
Balance, October 1, 2017
5,888,816

 
$
59

 
$

 
$
63,383

 
$
10,764

 
$
(456
)
 
$
(267
)
 
$
73,483

Net income
 
 
 
 
 
 
 
 
3,184

 
 
 
 
 
3,184

Preferred stock issued net of costs
 
 
 
 
61,289

 
 
 
 
 
 
 
 
 
61,289

Reclassification of certain deferred tax effects (1)
 
 
 
 
 
 
 
 
137

 
 
 
(137
)
 

Other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
(1,771
)
 
(1,771
)
Forfeiture of unvested shares
(11,847
)
 
 
 
 
 
(124
)
 
 
 
124

 
 
 

Surrender of restricted shares of common stock
(1,809
)
 
 
 
 
 
(25
)
 
 
 
 
 
 
 
(25
)
Restricted Common stock awarded under the equity incentive plan
33,230

 
 
 
 
 
561

 
 
 
(561
)
 
 
 

Common stock repurchased
(53
)
 
 
 
 
 
(1
)
 
 
 
 
 
 
 
(1
)
Common stock options exercised
6,042

 
 
 
 
 
50

 
 
 
 
 
 
 
50

Stock option expense
 
 
 
 
 
 
6

 
 
 
 
 
 
 
6

Amortization of restricted stock
 
 
 
 
 
 
 
 
 
 
177

 
 
 
177

Cash dividends ($0.20 per share)
 
 
 
 
 
 
 
 
(1,181
)
 
 
 
 
 
(1,181
)
Balance, June 30, 2018
5,914,379

 
$
59

 
$
61,289

 
$
63,850

 
$
12,904

 
$
(716
)
 
$
(2,175
)
 
$
135,211

(1) Amounts reclassified to retained earnings due to early adoption of ASU 2018-02. For further information, refer to Note 1.
See accompanying condensed notes to unaudited consolidated financial statements.
 

7




CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended June 30, 2018 and 2017
(in thousands)
 
Nine Months Ended
 
June 30, 2018
 
June 30, 2017
Cash flows from operating activities:
 
 
 
Net income attributable to common stockholders
$
3,184

 
$
2,957

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net amortization of premium/discount on securities
736

 
575

Depreciation
749

 
674

Provision for loan losses
850

 

Net realized loss (gain) on sale of securities
17

 
(29
)
Amortization of intangible assets
484

 
119

Amortization of restricted stock
177

 
48

Net stock based compensation expense
6

 
23

(Gain) loss on sale of office properties and equipment
(4
)
 
2

Provision for deferred income taxes
137

 
456

Net loss (gain) from disposals of foreclosed properties
489

 
(16
)
Provision for valuation allowance on foreclosed properties

 

Gain on sale of loans held for sale, net
(709
)
 
(490
)
Proceeds from sale of loans held for sale
37,989

 
19,530

Origination of loans held for sale
(29,689
)
 
(19,857
)
Decrease (increase) in accrued interest receivable and other assets
1,952

 
319

Decrease in other liabilities
3,906

 
(1,755
)
Total adjustments
17,090

 
(401
)
Net cash provided by operating activities
20,274

 
2,556

Cash flows from investing activities:
 
 
 
Purchase of investment securities
(34,123
)
 
(16,239
)
Purchase of bank owned life insurance

 
(3,500
)
Net increase in interest-bearing deposits
(12
)
 
(250
)
Proceeds from sale of securities available for sale
31

 
10,644

Principal payments on investment securities
7,609

 
6,458

Proceeds from sale of non-marketable equity securities
8,114

 
953

Purchase of non-marketable equity securities
(7,684
)
 
(417
)
Proceeds from sale of foreclosed properties
2,171

 
713

Net (increase) decrease in loans
(36,741
)
 
53,888

Net capital expenditures
(2,562
)
 
(366
)
Net cash received from sale of office properties
73

 
7

Net cash (used in) provided by investing activities
(63,124
)
 
51,891

Cash flows from financing activities:
 
 
 
Net (decrease) increase in Federal Home Loan Bank advances
(32,000
)
 
8,609

Decrease in other borrowings
(1,260
)
 

Net increase (decrease) in deposits
2,032

 
(38,544
)
Proceeds from sale of preferred stock, net of costs
61,289

 

Surrender of restricted shares of common stock
(25
)
 
(17
)
Exercise of common stock options
50

 
67

Repurchase shares of common stock
(1
)
 
(16
)
Cash dividends paid
(1,181
)
 
(843
)
Net cash provided by (used in) financing activities
28,904

 
(30,744
)
Net (decrease) increase in cash and cash equivalents
(13,946
)
 
23,703

Cash and cash equivalents at beginning of period
41,677

 
10,046

Cash and cash equivalents at end of period
$
27,731

 
$
33,749


8




Supplemental cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest on deposits
$
3,907

 
$
3,172

Interest on borrowings
$
2,119

 
$
584

Income taxes
$
920

 
$
979

Supplemental noncash disclosure:
 
 
 
Transfers from loans receivable to foreclosed and repossessed assets
$
591

 
$
543

See accompanying condensed notes to unaudited consolidated financial statements. 

9




CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(UNAUDITED)
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of Citizens Community Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Citizens Community Federal N.A. (the "Bank"), and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. As used in this quarterly report, the terms “we”, “us”, “our”, and “Citizens Community Bancorp, Inc.” mean the Company and its wholly owned subsidiary, the Bank, unless the context indicates other meaning.
The Company is a bank holding company, supervised by the Federal Reserve Bank of Minneapolis (the "FRB"), and operates under the title of Citizens Community Bancorp, Inc. The Bank is a national banking association (a "National Bank") and operates under the title of Citizens Community Federal National Association ("Citizens Community Federal N.A."). The U.S. Office of the Comptroller of the Currency (the "OCC"), is the primary federal regulator for the Bank.
The consolidated income of the Company is principally derived from the income of the Bank, the Company’s wholly owned subsidiary, serving customers in Wisconsin, Minnesota and Michigan through 22 branch locations. Its primary markets include the Chippewa Valley Region in Wisconsin, the Twin Cities and Mankato Minnesota, and various rural communities around these areas. The Bank offers traditional community banking services to businesses, agricultural operators and consumers, including one to four family residential mortgages.
The Bank is subject to competition from other financial institutions and non-financial institutions providing financial products. Additionally, the Bank is subject to the regulations of certain regulatory agencies and undergoes periodic examination by those regulatory agencies.
In preparing these consolidated financial statements, we evaluated the events and transactions that occurred subsequent to the balance sheet date as of June 30, 2018 and through the date the financial statements were available to be issued for items that should potentially be recognized or disclosed in these consolidated financial statements.
On August 18, 2017, the Company completed its merger with Wells Financial Corporation ("WFC"), pursuant to the merger agreement, dated March 17, 2017. At that time, the separate corporate existence of WFC ceased, and the Company survived the merger. In connection with the merger, the Company caused Wells Federal Bank to merge with and into the Bank, with the Bank surviving the merger. The merger expands the Bank's market share in Mankato and southern Minnesota, and added seven branch locations along with expanded services through Wells Insurance Agency, Inc. and loan servicing.
On June 20, 2018, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with United Bancorporation (“Parent”) and its wholly-owned subsidiary, United Bank, a Wisconsin chartered bank (“United Bank”), pursuant to which the Company will, subject to the terms and conditions set forth therein, acquire 100% of the common stock of United Bank (the “Acquisition”) for approximately $50.7 million in cash, subject to adjustment as provided in the Stock Purchase Agreement. At the closing of the Acquisition, United Bank will become a wholly-owned subsidiary of the Company. Immediately following the closing of the Acquisition, the Company intends to merge United Bank with and into the Bank.
On June 20, 2018, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with each of a limited number of institutional and other accredited investors, including certain officers and directors of the Company (collectively the “Purchasers”), pursuant to which the Company sold an aggregate of 500,000 shares of the Company’s 8.00% Series A Mandatorily Convertible Non-Cumulative Non-Voting Perpetual Preferred Stock, par value $0.01 per share, (the “Series A Preferred Stock”), in a private placement (the “Private Placement”) at $130.00 per share, for aggregate gross proceeds of $65 million. The Securities Purchase Agreement contains customary representations, warranties, and covenants of the Company and the Purchasers.
Each share of Series A Preferred Stock will be mandatorily convertible into ten shares of common stock following receipt of stockholder approval of the issuance of the shares of common stock into which the Series A Preferred Stock is expected to be converted.  The Company has scheduled a special meeting of stockholders on September 25, 2018 for purposes of a stockholder vote regarding approval of issuance of the shares of common stock into which the Series A Preferred Stock is expected to be converted.


10




The accompanying consolidated interim financial statements are unaudited. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Unless otherwise stated herein, and except for shares and per share amounts, all amounts are in thousands.
Principles of Consolidation – The accompanying consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates – Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, fair value of financial instruments, the allowance for loan losses, mortgage servicing rights, foreclosed and repossessed assets, valuation of acquired intangible assets, useful lives for depreciation and amortization, indefinite-lived intangible assets, stock-based compensation and long-lived assets, deferred tax assets, uncertain income tax positions and contingencies. Management does not anticipate any material changes to estimates made herein in the near term. Factors that may cause sensitivity to the aforementioned estimates include, but are not limited to: those items described under the caption, "Risk Factors" in Item 1A of the annual report on Form 10-K for the year ended September 30, 2017, filed with the SEC on December 13, 2017, external market factors such as market interest rates and unemployment rates, changes to operating policies and procedures, and changes in applicable banking regulations. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period.
Investment Securities; Held to Maturity and Available for Sale – Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of the date of each balance sheet. Securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Held to maturity securities are stated at amortized cost. Investment securities not classified as held to maturity are classified as available for sale. Available for sale securities are stated at fair value, with unrealized holding gains and losses deemed other than temporarily impaired due to non-credit issues being reported in other comprehensive income (loss), net of tax. Unrealized losses deemed other-than-temporary due to credit issues are reported in the Company’s net income in the period in which the losses arise. Interest income includes amortization of purchase premium or accretion of purchase discount. Amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the estimated lives of the underlying securities.
The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. As part of such monitoring, the credit quality of individual securities and their issuer is assessed. Significant inputs used to measure the amount of other-than-temporary impairment related to credit loss include, but are not limited to; the Company's intent and ability to sell the debt security prior to recovery, that it is more likely than not that the Company will not sell the security prior to recovery, default and delinquency rates of the underlying collateral, remaining credit support, and historical loss severities. Adjustments to market value of available for sale securities that are considered temporary are recorded in other comprehensive income or loss as separate components of stockholders' equity, net of tax. If the unrealized loss of a security is identified as other-than-temporary based on information available, such as the decline in the creditworthiness of the issuer, external market ratings, or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if credit loss exists. If there is a credit loss, it will be recorded in the Company's consolidated statement of operations. Non-credit components of the unrealized losses on available for sale securities will continue to be recognized in other comprehensive income (loss), net of tax.
Loans – Loans that management has the intent and ability to hold for the foreseeable future, until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, and net of deferred loan fees and costs. Interest income is accrued on the unpaid principal balance of these loans. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the interest method without anticipating prepayments. Delinquency fees are recognized into income when chargeable, assuming collection is reasonably assured.
Interest income on commercial, mortgage and consumer loans is discontinued according to the following schedules:
Commercial/agricultural real estate loans past due 90 days or more;
Commercial/agricultural non-real estate loans past due 90 days or more;
Closed end consumer non-real estate loans past due 120 days or more; and
Residential real estate loans and open ended consumer non-real estate loans past due 180 days or more.

11




Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for a loan placed on nonaccrual status is reversed against interest income. Interest received on such loans is accounted for on the cash basis or cost recovery method, and is generally applied against principal, until qualifying for return to accrual status. Loans are returned to accrual status when payments are made that bring the loan account current with the contractual term of the loan and a 6 month payment history has been established. Interest on impaired loans considered troubled debt restructurings (“TDRs”) or substandard, less than 90 days delinquent, is recognized as income as it accrues based on the revised terms of the loan over an established period of continued payment. Substandard loans, as defined by the OCC, our primary banking regulator, are loans that are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.
Residential real estate loans and open ended consumer loans are charged off to estimated net realizable value less estimated selling costs at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 180 days or more. Closed end consumer loans are charged off to net realizable value at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 120 days or more. Commercial loans, including agricultural and C&I loans, are charged off to net realizable value at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 180 days or more for open ended loans or loans secured by real estate collateral, or the loan becomes 120 days past due or more for loans secured by non-real estate collateral.
The Company defines Acquired Loans as all loans acquired in a business combination accounted for under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 805, "Business Combinations". These loans include, but are not limited to loans accounted for under FASB ASC 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" as discussed below. All other loans are defined as Originated Loans.
Allowance for Loan Losses – The allowance for loan losses (“ALL”) is a valuation allowance for probable and inherent credit losses in our loan portfolio. Loan losses are charged against the ALL when management believes that the collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the ALL. Management estimates the required ALL balance taking into account the following factors: past loan loss experience; the nature, volume and composition of our loan portfolio; known and inherent risks in our loan portfolio; information about specific borrowers’ ability to repay; estimated collateral values; current economic conditions; and other relevant factors determined by management. The ALL consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for certain qualitative factors. The entire ALL balance is available for any loan that, in our management’s judgment, should be charged off.
A loan is impaired when full payment under the loan terms is not expected. Impaired loans consist of all TDRs, as well as individual substandard loans not considered a TDR when full payment under the loan terms is not expected. All TDRs are individually evaluated for impairment. See Note 3, “Loans, Allowance for Loan Losses and Impaired Loans” for more information on what we consider to be a TDR. If a TDR or substandard loan is deemed to be impaired, a specific ALL allocation may be established so that the loan is reported, net, at the lower of (a) outstanding principal balance, (b) the present value of estimated future cash flows using the loan’s existing rate; or (c) at the fair value of any collateral, less estimated disposal costs, if repayment is expected solely from the underlying collateral of the loan. For TDRs less than 90 days past due, and certain substandard loans that are less than 90 days delinquent, the likelihood of the loan migrating to over 90 days past due is also taken into account when determining the specific ALL allocation for these particular loans. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, as well as non-TDR commercial loans, are collectively evaluated for impairment, and accordingly, are not separately identified for impairment disclosures.

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

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


12




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

Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if we can reasonably estimate the timing and amount of the expected cash flows on such loans and if we expect to fully collect the new carrying value of the loans. As such, we may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable yield.

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

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

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

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

Loans Acquired through Business Combination with Deteriorated Credit Quality - ASC Topic 310-30, "Loan and Debt Securities Acquired with Deteriorated Credit Quality", applies to loans acquired in a business combination that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that we will be unable to collect all contractually required payments receivable. In accordance with this guidance, these loans are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield”, is recognized as interest income over the life of the loans using a method that approximates the level-yield method. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference”, are not recognized as a yield adjustment, a loss accrual, or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized as impairments. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition.
Foreclosed and Repossessed Assets, net – Assets acquired through foreclosure or repossession are initially recorded at fair value, less estimated costs to sell, which establishes a new cost basis. If the fair value declines subsequent to foreclosure or

13




repossession, a valuation allowance is recorded through expense. Costs incurred after acquisition are expensed and are included in non-interest expense, other on our Consolidated Statements of Operations.

Goodwill and other intangible assets-The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350, "Intangibles - Goodwill and Other." The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, as goodwill. The Company amortizes acquired intangible assets with definite useful economic lives over their useful economic lives utilizing the straight-line method. On a periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amounts of the intangible assets may be impaired. The Company does not amortize goodwill and any acquired intangible asset with an indefinite useful economic life, but reviews them for impairment at a reporting unit level on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired. A reporting unit is defined as any distinct, separately identifiable component of the Company’s one operating segment for which complete, discrete financial information is available and reviewed regularly by the segment’s management. The Company has one reporting unit as of September 30, 2017 which is related to its banking activities. The Company has performed the required goodwill impairment test and has determined that goodwill was not impaired as of September 30, 2017.
Income Taxes – The Company accounts for income taxes in accordance with the FASB ASC Topic 740, “Income Taxes.” Under this guidance, deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
The Tax Cuts and Jobs Act of 2017 ("the Tax Act"), enacted on December 22, 2017, reduces corporate Federal income tax rates for the Company from 34% to 24.5% for 2018, and 21% for 2019. GAAP requires the impact of the provisions of the Tax Act be accounted for in the period of enactment. At December 31, 2017, we had not completed our accounting for the tax effects of enactment of the Tax Act; however, in certain cases, as described below, we made a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. The Company revalued its net deferred tax assets to account for the future impact of lower corporate taxes. For the items for which we were able to determine a reasonable estimate, we recorded an increased provisional amount of income tax expense of $275 in December 2017, related to the revaluation of the deferred tax assets to both the revaluation of timing differences and the unrealized loss on securities. In the second and third quarter of fiscal 2018, we reviewed our analysis from first quarter and determined there were no material changes warranting any further adjustment.
Provisional amounts. Deferred tax assets and liabilities: We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amounts recorded in December 2017 related to the re-measurement of our deferred tax balance was $275.
The Company regularly reviews the carrying amount of its net deferred tax assets to determine if the establishment of a valuation allowance is necessary. If based on the available evidence, it is more likely than not that all or a portion of the Company’s net deferred tax assets will not be realized in future periods, a deferred tax valuation allowance would be established. Consideration is given to various positive and negative factors that could affect the realization of the deferred tax assets. In evaluating this available evidence, management considers, among other things, historical performance, expectations of future earnings, the ability to carry back losses to recoup taxes previously paid, the length of statutory carryforward periods, any experience with utilization of operating loss and tax credit carryforwards not expiring, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. Accordingly, the Company’s evaluation is based on current tax laws as well as management’s expectations of future performance.

Revenue Recognition - The Company recognizes revenue in the consolidated statements of operations as it is earned and when collectability is reasonably assured. The primary source of revenue is interest income from interest earning assets, which is recognized on the accrual basis of accounting using the effective interest method. The recognition of revenues from interest earning assets is based upon formulas from underlying loan agreements, securities contracts or other similar contracts. Non-interest income is recognized on the accrual basis of accounting as services are provided or as transactions occur. Non-interest income includes fees from brokerage and advisory service, insurance commission, deposit accounts, merchant services, ATM and debit card fees, mortgage banking activities, and other miscellaneous services and transactions. Commission revenue is recognized as of the effective date of the insurance policy or the date the customer is billed, whichever is later. The

14




Company also receives contingent commissions from insurance companies which are based on the overall profitability of their relationship based primarily on the loss experience of the insurance placed by the Company. Contingent commissions from insurance companies are recognized when determinable. Commission revenue is included in non-interest insurance commission income in the consolidated statement of operations.
Earnings Per Share – Basic earnings per common share is net income or loss divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable during the period, consisting of stock options outstanding under the Company’s stock incentive plans that have an exercise price that is less than the Company's stock price on the reporting date and the Series A Preferred Stock which is mandatorily convertible into ten shares of common stock following receipt of stockholder approval of the issuance of the shares of common stock into which the Series A Preferred Stock is expected to be converted. .
Operating Segments—While our chief decision makers monitor the revenue streams of the various banking products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the
Company’s banking operations are considered by management to be aggregated in one reportable operating segment.
Reclassifications – Certain items previously reported were reclassified for consistency with the current presentation.
Recent Accounting Pronouncements - In February 2018, the FASB issued Accounting Standards Update ("ASU") 2018-02, "Income Statement--Reporting Comprehensive Income (Topic 220): Reclassification of Certain Income Tax Effects from Accumulated Other Comprehensive Income." ASU 2018-02 allows a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for certain stranded tax effects resulting from the Tax Cuts and Jobs Act. For public entities, ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company adoption of ASU 2018-02 in the current period resulted in a reclassification of $137 from AOCI to retained earnings and had no material effect on the Company's consolidated results of operations, financial position or cash flows.
In May 2017, the FASB issued Accounting Standards Update ("ASU") 2017-09, "Compensation--Stock Compensation (Topic 718): Scope of Modification Accounting." ASU 2017-09 provides specific guidance as to which changes to terms and conditions of share-based payment awards require an entity to apply modification accounting in Topic 718. For public entities, ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company expects the adoption of ASU 2017-09 will have no material effect on the Company's consolidated results of operations, financial position or cash flows.
In March 2017, the FASB issued ASU 2017-08, "Receivables--Nonrefundable fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities." ASU 2017-08 amends the amortization period for certain purchased callable debt securities held at a premium. For public entities, ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company expects the adoption of ASU 2017-08 will have no material effect on the Company's consolidated results of operations, financial position or cash flows.
In February 2017, the FASB issued ASU 2017-05, "Other Income--Gains and Losses from the Derecognition of Non-financial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Non-financial Assets." ASU 2017-05 clarifies previously issued ASU 2014-09, primarily with respect to (a) derecognition of an in substance non-financial asset, and (b) partial sales of non-financial assets. For public entities, ASU 2017-05 is effective at the same time of adoption of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is for annual reporting periods beginning after December 15, 2017 and related interim periods. Early adoption is not permitted. The Company expects the adoption of ASU 2017-05 will have no material effect on the Company's consolidated results of operations, financial position or cash flows.
In January, 2017, the FASB issued ASU 2017-04, "Intangibles--Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." ASU 2017-04 intends to simplify how an entity is required to test goodwill impairment. For public entities, ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, and any related interim annual goodwill impairment tests thereon. The Company expects the adoption of ASU 2017-04 will have no material effect on the Company's consolidated results of operations, financial position or cash flows.
In January, 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business." ASU 2017-01 narrows the definition of a "business" with respect to accounting for business combinations. For public entities, ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company expects the adoption of ASU 2017-01 will have no material effect on the Company's consolidated results of operations, financial position or cash flows.

15




In June, 2016 the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 is intended to provide financial statement users with more decision-useful information about the excepted credit losses on financial instruments and other commitments to extend credit. For public entities, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has not yet evaluated the potential effects of adopting ASU 2016-13 on the Company’s consolidated results of operations, financial position or cash flows. The Company has not yet evaluated the potential effects of adopting ASU 2016-13 on the Company's consolidated results of operations, financial position or cash flows.
In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606); Narrow-Scope Improvements and Practical Expedients.” ASU 2016-12 is intended to address certain specific issues identified by the FASB-IASB Joint Transition Resource Group for Revenue Recognition with respect to ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” For public entities, ASU 2016-12 and ASU 2014-09 are effective on a retrospective basis for the annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is not permitted. Based on our evaluation under the current guidance, we estimate that substantially all of our interest income and non-interest income will not be impacted by the adoption of these standards, because either the revenue from those contracts with customers is covered by other guidance in U.S. GAAP, or the anticipated revenue recognition outcomes with the adoption of these standards will likely be similar to our current revenue recognition practices. The company evaluated certain non-interest revenue streams, including deposit related fees, service charges and interchange fees, to determine the potential impact of the guidance on the Company's consolidated financial statements. The Company is expected to use the modified retrospective method for transition, in which the cumulative effect will be recognized at the date of adoption with no restatement of comparative periods presented. The Company expects additional financial statement disclosures of non-interest income revenue streams and associated internal controls to be implemented along with the adoption of these standards. In addition, we are reviewing our business processes, systems and controls to support recognition and disclosures under the new standard. The Company expects that the adoption of ASUs 2016-12 and 2014-09 will have no material effect on the Company's consolidated results of operations, financial position or cash flows.
In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 is intended to simplify certain areas of share-based payment transaction accounting, including the income tax consequences, equity or liability classification of certain share awards, and classification on the statement of cash flows. ASU 2016-09 is effective for the annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. The Company adoption of ASU 2016-09 had no material effect on the Company's results of operations, financial position or cash flows.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)". ASU 2016-02 is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for the annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. The Company has not yet evaluated the impact of ASU 2016-02 on the Company's results of operations, financial position or cash flows.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. ASU 2016-01 is intended to address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. For public entities, ASU 2016-01 is effective for the annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is not permitted, except for certain provisions of ASU 2016-01, which are not applicable to the Company. The Company expects the adoption of ASU 2016-01 to have no material effect on the Company's consolidated results of operations, financial position or cash flows.


16




NOTE 2 – INVESTMENT SECURITIES
The amortized cost, estimated fair value and related unrealized gains and losses on securities available for sale and held to maturity as of June 30, 2018 and September 30, 2017, respectively, were as follows:
Available for sale securities
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
June 30, 2018
 
 
 
 
 
 
 
U.S. government agency obligations
$
37,067

 
$
7

 
$
1,088

 
$
35,986

Obligations of states and political subdivisions
35,518

 
18

 
558

 
34,978

Mortgage-backed securities
44,653

 
24

 
1,214

 
43,463

Agency securities
104

 
119

 

 
223

Corporate debt securities
5,360

 

 
308

 
5,052

Total available for sale securities
$
122,702

 
$
168

 
$
3,168

 
$
119,702

 
 
 
 
 
 
 
 
September 30, 2017
 
 
 
 
 
 
 
U.S. government agency obligations
$
18,454

 
$
35

 
$
448

 
$
18,041

Obligations of states and political subdivisions
35,656

 
270

 
131

 
35,795

Mortgage-backed securities
36,661

 
124

 
311

 
36,474

Agency Securities
147

 
83

 

 
230

Corporate debt securities
5,410

 

 
67

 
5,343

Total available for sale securities
$
96,328

 
$
512

 
$
957

 
$
95,883

Held to maturity securities
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
June 30, 2018
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
1,308

 
$

 
$
1

 
$
1,307

Mortgage-backed securities
3,501

 
44

 
25

 
3,520

Total held to maturity securities
$
4,809

 
$
44

 
$
26

 
$
4,827

 
 
 
 
 
 
 
 
September 30, 2017
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
1,311

 
$
17

 
$

 
$
1,328

Mortgage-backed securities
4,142

 
136

 
1

 
4,277

Total held to maturity securities
$
5,453

 
$
153

 
$
1

 
$
5,605

As of June 30, 2018, the Bank has pledged U.S. Government Agency securities with a market value of $2,191 as collateral against a borrowing line of credit with the Federal Reserve Bank. However, as of June 30, 2018, there were no borrowings outstanding on this Federal Reserve Bank line of credit. As of June 30, 2018, the Bank has pledged U.S. Government Agency securities with a market value of $5,490, mortgage-backed securities with a market value of $22,779 and interest bearing investment CD's with a carrying value of $746 as collateral against specific municipal deposits.



17




The estimated fair value of securities at June 30, 2018 and September 30, 2017, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities on mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Expected maturities may differ from contractual maturities on certain agency and municipal securities due to the call feature.
 
June 30, 2018
 
September 30, 2017
Available for sale securities
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
$
1,663

 
$
1,657

 
$
160

 
$
160

Due after one year through five years
17,493

 
17,331

 
15,008

 
15,056

Due after five years through ten years
41,136

 
39,826

 
30,586

 
30,330

Due after ten years
17,653

 
17,202

 
13,766

 
13,633

 
$
77,945

 
$
76,016

 
$
59,520

 
$
59,179

Mortgage backed securities
44,653

 
43,463

 
36,661

 
36,474

Securities without contractual maturities
104

 
223

 
147

 
230

Total available for sale securities
$
122,702

 
$
119,702

 
$
96,328

 
$
95,883


 
June 30, 2018
 
September 30, 2017
Held to maturity securities
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Due after one year through five years
$
1,308

 
$
1,307

 
$
1,311

 
$
1,328

Mortgage backed securities
3,501

 
3,520

 
4,142

 
4,277

Total held to maturity securities
$
4,809

 
$
4,827

 
$
5,453

 
$
5,605


Securities with unrealized losses at June 30, 2018 and September 30, 2017, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:

 
 
Less than 12 Months
 
12 Months or More
 
Total
Available for sale securities
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency obligations
 
$
25,149

 
$
358

 
$
10,281

 
$
730

 
$
35,430

 
$
1,088

Obligations of states and political subdivisions
 
26,592

 
390

 
3,666

 
168

 
30,258

 
558

Mortgage backed securities
 
30,404

 
753

 
8,885

 
461

 
39,289

 
1,214

Corporate debt securities
 
5,052

 
308

 

 

 
5,052

 
308

Total
 
$
87,197

 
$
1,809

 
$
22,832

 
$
1,359

 
$
110,029

 
$
3,168

September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency obligations
 
$
8,296

 
$
186

 
$
6,932

 
$
262

 
$
15,228

 
$
448

Obligations of states and political subdivisions
 
8,170

 
62

 
3,701

 
69

 
11,871

 
131

Mortgage backed securities
 
14,167

 
96

 
9,753

 
215

 
23,920

 
311

Corporate debt securities
 
5,343

 
67

 

 

 
5,343

 
67

Total
 
$
35,976

 
$
411

 
$
20,386

 
$
546

 
$
56,362

 
$
957


18




 
 
Less than 12 Months
 
12 Months or More
 
Total
Held to maturity securities
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
 
$
1,132

 
$
1

 
$

 
$

 
$
1,132

 
$
1

Mortgage-backed securities
 
2,409

 
25

 

 

 
2,409

 
25

Total
 
$
3,541

 
$
26

 
$

 
$

 
$
3,541

 
$
26

September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
 
$

 
$

 
$

 
$

 
$

 
$

Mortgage-backed securities
 
406

 
1

 

 

 
406

 
1

Total
 
$
406

 
$
1

 
$

 
$

 
$
406

 
$
1



19




NOTE 3 – LOANS, ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
Portfolio Segments:
Residential real estate loans are collateralized by primary and secondary positions on real estate and are underwritten primarily based on borrower's documented income, credit scores, and collateral values. Under consumer home equity loan guidelines, the borrower will be approved for a loan based on a percentage of their home's appraised value less the balance owed on the existing first mortgage. Credit risk is minimized within the residential real estate portfolio as relatively small loan amounts are spread across many individual borrowers. Management evaluates trends in past due loans and current economic factors such as the housing price index on a regular basis.
Commercial and agricultural real estate loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and prudently expand its business. Management examines current and projected cash flows to determine the ability of the borrower to repay its obligations as agreed. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The level of owner-occupied property versus non-owner-occupied property are tracked and monitored on a regular basis. Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Loan-to-value ratios on loans secured by farmland generally do not exceed 75%.
Consumer non-real estate loans are comprised of originated indirect paper loans secured primarily by boats and recreational vehicles, purchased indirect paper loans secured primarily by household goods and other consumer loans secured primarily by automobiles and other personal assets. Consumer loans underwriting terms often depend on the collateral type, debt to income ratio and the borrower's creditworthiness as evidenced by their credit score. Collateral value alone may not provide an adequate source of repayment of the outstanding loan balance in the event of a consumer non-real estate default. This shortage is a result of the greater likelihood of damage, loss and depreciation for consumer based collateral.
Commercial non-real estate loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. These cash flows, however, may not be as expected and the value of collateral securing the loans may fluctuate. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. Agricultural non-real estate loans are generally comprised of term loans to fund the purchase of equipment, livestock and seasonal operating lines. Operating lines are typically written for one year and secured by the crop and other farm assets as considered necessary. Agricultural loans carry significant credit risks as they may involve larger balances concentrated with single borrowers or groups of related borrowers. In addition, repayment of such loans depends on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. Farming operations may be affected by adverse weather conditions such as drought, hail or floods that can severely limit crop yields.

20




Credit Quality/Risk Ratings:
Management utilizes a numeric risk rating system to identify and quantify the Bank’s risk of loss within its loan portfolio. Ratings are initially assigned prior to funding the loan, and may be changed at any time as circumstances warrant.
Ratings range from the highest to lowest quality based on factors that include measurements of ability to pay, collateral type and value, borrower stability and management experience. The Bank’s loan portfolio is presented below in accordance with the risk rating framework that has been commonly adopted by the federal banking agencies. The definitions of the various risk rating categories are as follows:
1 through 4 - Pass. A "Pass" loan means that the condition of the borrower and the performance of the loan is satisfactory or better.
5 - Watch. A "Watch" loan has clearly identifiable developing weaknesses that deserve additional attention from management. Weaknesses that are not corrected or mitigated, may jeopardize the ability of the borrower to repay the loan in the future.
6 - Special Mention. A "Special Mention" loan has one or more potential weakness that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position in the future.
7 - Substandard. A "Substandard" loan is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Assets classified as substandard must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
8 - Doubtful. A "Doubtful" loan has all the weaknesses inherent in a Substandard loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
9 - Loss. Loans classified as "Loss" are considered uncollectible, and their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, and a partial recovery may occur in the future.

21




Below is a summary of originated and acquired loans by type and risk rating as of June 30, 2018:
 
 
1 to 5
 
6
 
7
 
8
 
9
 
TOTAL
Originated Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
 
One to four family
 
$
119,680

 
$

 
$
2,348

 
$

 
$

 
$
122,028

Purchased HELOC loans
 
15,237

 

 

 

 

 
15,237

Commercial/Agricultural real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
156,560

 
200

 

 

 

 
156,760

Agricultural real estate
 
22,709

 
530

 
500

 

 

 
23,739

Multi-family real estate
 
42,230

 

 
130

 

 

 
42,360

Construction and land development
 
11,212

 

 

 

 

 
11,212

Consumer non-real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Originated indirect paper
 
66,649

 

 
142

 

 

 
66,791

Purchased indirect paper
 
19,801

 

 

 

 

 
19,801

Other Consumer
 
15,444

 

 
105

 

 

 
15,549

Commercial/Agricultural non-real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial non-real estate
 
58,620

 

 
17

 

 

 
58,637

Agricultural non-real estate
 
15,360

 
960

 
472

 

 

 
16,792

Total originated loans
 
$
543,502

 
$
1,690

 
$
3,714

 
$

 
$

 
$
548,906

Acquired Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
 
One to four family
 
$
78,392

 
$

 
$
1,936

 
$

 
$

 
$
80,328

Commercial/Agricultural real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
46,926

 
2,046

 
2,794

 

 

 
51,766

Agricultural real estate
 
42,921

 
903

 
3,318

 

 

 
47,142

Multi-family real estate
 
3,158

 

 
189

 

 

 
3,347

Construction and land development
 
3,548

 

 
498

 

 

 
4,046

Consumer non-real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Other Consumer
 
3,485

 

 
29

 

 

 
3,514

Commercial/Agricultural non-real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial non-real estate
 
14,547

 
253

 
1,326

 

 

 
16,126

Agricultural non-real estate
 
9,192

 
182

 
200

 

 

 
9,574

Total acquired loans
 
$
202,169

 
$
3,384

 
$
10,290

 
$

 
$

 
$
215,843

Total Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
 
One to four family
 
$
198,072

 
$

 
$
4,284

 
$

 
$

 
$
202,356

Purchased HELOC loans
 
15,237

 

 

 

 

 
15,237

Commercial/Agricultural real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
203,486

 
2,246

 
2,794

 

 

 
208,526

Agricultural real estate
 
65,630

 
1,433

 
3,817

 

 

 
70,881

Multi-family real estate
 
45,388

 

 
319

 

 

 
45,707

Construction and land development
 
14,760

 

 
498

 

 

 
15,258

Consumer non-real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Originated indirect paper
 
66,649

 

 
142

 

 

 
66,791

Purchased indirect paper
 
19,801

 

 

 

 

 
19,801

Other Consumer
 
18,929

 

 
134

 

 

 
19,063

Commercial/Agricultural non-real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial non-real estate
 
73,167

 
253

 
1,342

 

 

 
74,763

Agricultural non-real estate
 
24,552

 
1,142

 
672

 

 

 
26,366

Gross loans
 
$
745,671

 
$
5,074

 
$
14,004

 
$

 
$

 
$
764,749

Less:
 
 
 
 
 
 
 
 
 
 
 
 
Unearned net deferred fees and costs and loans in process
 
 
 
 
 
 
 
 
 
 
 
693

Unamortized discount on acquired loans
 
 
 
 
 
 
 
 
 
 
 
(4,355
)
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
(6,458
)
Loans receivable, net
 
 
 
 
 
 
 
 
 
 
 
$
754,629



22




Below is a summary of originated loans by type and risk rating as of September 30, 2017:
 
 
1 to 5
 
6
 
7
 
8
 
9
 
TOTAL
Originated Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
 
One to four family
 
$
130,837

 
$

 
$
1,543

 
$

 
$

 
$
132,380

Purchased HELOC loans
 
18,071

 

 

 

 

 
18,071

Commercial/Agricultural real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
96,953

 
49

 
153

 

 

 
97,155

Agricultural real estate
 
10,051

 
497

 
80

 

 

 
10,628

Multi-family real estate
 
24,338

 

 
148

 

 

 
24,486

Construction and land development
 
12,399

 

 

 

 

 
12,399

Consumer non-real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Originated indirect paper
 
85,330

 
8

 
394

 

 

 
85,732

Purchased indirect paper
 
29,555

 

 

 

 

 
29,555

Other Consumer
 
14,361

 

 
135

 

 

 
14,496

Commercial/Agricultural non-real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial non-real estate
 
35,102

 

 
96

 

 

 
35,198

Agricultural non-real estate
 
10,798

 
708

 
987

 

 

 
12,493

Total originated loans
 
$
467,795

 
$
1,262

 
$
3,536

 
$

 
$

 
$
472,593

Acquired Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
 
One to four family
 
$
94,932

 
$
873

 
$
1,378

 
$

 
$

 
$
97,183

Commercial/Agricultural real estate:
 
 
 
 
 
 
 
 
 
 
 

Commercial real estate
 
57,795

 
1,814

 
3,198

 

 

 
62,807

Agricultural real estate
 
51,516

 
266

 
5,592

 

 

 
57,374

Multi-family real estate
 
1,519

 

 
223

 

 

 
1,742

Construction and land development
 
6,739

 

 
570

 

 

 
7,309

Consumer non-real estate:
 
 
 
 
 
 
 
 
 
 
 

Other Consumer
 
6,130

 

 
42

 

 

 
6,172

Commercial/Agricultural non-real estate:
 
 
 
 
 
 
 
 
 
 
 

Commercial non-real estate
 
18,257

 
372

 
1,424

 

 

 
20,053

Agricultural non-real estate
 
11,259

 
28

 
93

 

 

 
11,380

Total acquired loans
 
$
248,147

 
$
3,353

 
$
12,520

 
$

 
$

 
$
264,020

Total Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate: