Attached files

file filename
EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - Citizens Community Bancorp Inc.czwi-20160630xex321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - Citizens Community Bancorp Inc.czwi-20160630xex312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - Citizens Community Bancorp Inc.czwi-20160630xex311.htm


 
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, 2016
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
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 12, 2016 there were 5,251,998 shares of the registrant’s common stock, par value $0.01 per share, outstanding.




CITIZENS COMMUNITY BANCORP, INC.
FORM 10-Q
June 30, 2016
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

CITIZENS COMMUNITY BANCORP, INC.
Consolidated Balance Sheets
June 30, 2016 (unaudited) and September 30, 2015
(derived from audited financial statements)
(in thousands, except share data)
 
June 30, 2016
 
September 30, 2015
Assets
 
 
 
Cash and cash equivalents
$
21,345

 
$
23,872

Other interest-bearing deposits
745

 
2,992

Investment securities (available for sale securities at fair value of $84,508 and $79,921, and held to maturity securities at cost of $7,163 and $8,012 at June 30, 2016 and September 30, 2015, respectively)
91,671

 
87,933

Non-marketable equity securities, at cost
5,034

 
4,626

Loans receivable
584,046

 
450,510

Allowance for loan losses
(6,236
)
 
(6,496
)
Loans receivable, net
577,810

 
444,014

Office properties and equipment, net
5,576

 
2,669

Accrued interest receivable
1,971

 
1,574

Intangible assets
917

 
104

Goodwill
4,003

 

Foreclosed and repossessed assets, net
911

 
902

Other assets
13,026

 
11,462

TOTAL ASSETS
$
723,009

 
$
580,148

 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Deposits
$
585,224

 
$
456,298

Federal Home Loan Bank advances
58,874

 
58,891

Other borrowings
11,000

 

Other liabilities
4,316

 
4,424

Total liabilities
659,414

 
519,613

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock— $0.01 par value, authorized 30,000,000, 5,240,114 and 5,232,579 shares issued and outstanding, respectively
52

 
52

Additional paid-in capital
54,793

 
54,740

Retained earnings
8,144

 
6,245

Unearned deferred compensation
(179
)
 
(288
)
Accumulated other comprehensive income (loss)
785

 
(214
)
Total stockholders’ equity
63,595

 
60,535

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
723,009

 
$
580,148

See accompanying condensed notes to unaudited consolidated financial statements.


3




CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Operations (unaudited)
Three and Nine Months Ended June 30, 2016 and 2015
(in thousands, except per share data)
 
Three Months Ended
 
Nine Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Interest and dividend income:
 
 
 
 
 
 
 
Interest and fees on loans
$
6,072

 
$
5,304

 
$
16,623

 
$
16,275

Interest on investments
402

 
317

 
1,267

 
998

Total interest and dividend income
6,474

 
5,621

 
17,890

 
17,273

Interest expense:
 
 
 
 
 
 
 
Interest on deposits
1,081

 
947

 
2,988

 
2,845

Interest on FHLB borrowed funds
167

 
148

 
496

 
476

Interest on other borrowed funds
47

 

 
47

 

Total interest expense
1,295

 
1,095

 
3,531

 
3,321

Net interest income before provision for loan losses
5,179

 
4,526

 
14,359

 
13,952

Provision for loan losses

 
150

 
75

 
535

Net interest income after provision for loan losses
5,179

 
4,376

 
14,284

 
13,417

Non-interest income:
 
 
 
 
 
 
 
Net gains on sale of available for sale securities
43

 
13

 
47

 
60

Service charges on deposit accounts
410

 
423

 
1,164

 
1,273

Loan fees and service charges
302

 
276

 
886

 
923

Other
258

 
219

 
676

 
633

Total non-interest income
1,013

 
931

 
2,773

 
2,889

Non-interest expense:
 
 
 
 
 
 
 
Salaries and related benefits
2,378

 
2,195

 
6,784

 
6,548

Occupancy
554

 
589

 
1,835

 
2,073

Office
350

 
317

 
864

 
825

Data processing
445

 
393

 
1,274

 
1,177

Amortization of core deposit intangible
31

 
15

 
66

 
43

Advertising, marketing and public relations
174

 
126

 
456

 
410

FDIC premium assessment
86

 
98

 
255

 
306

Professional services
182

 
251

 
574

 
840

Other
453

 
374

 
1,006

 
1,049

Total non-interest expense
4,653

 
4,358

 
13,114

 
13,271

Income before provision for income taxes
1,539

 
949

 
3,943

 
3,035

Provision for income taxes
572

 
337

 
1,415

 
1,112

Net income attributable to common stockholders
$
967

 
$
612

 
$
2,528

 
$
1,923

Per share information:
 
 
 
 
 
 
 
Basic earnings
$
0.18

 
$
0.12

 
$
0.48

 
$
0.37

Diluted earnings
$
0.18

 
$
0.12

 
$
0.48

 
$
0.37

Cash dividends paid
$

 
$

 
$
0.12

 
$
0.08

See accompanying condensed notes to unaudited consolidated financial statements.
 

4




CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Comprehensive Income (unaudited)
Nine months ended June 30, 2016 and 2015
(in thousands, except per share data)
 
Nine Months Ended
 
June 30, 2016

 
June 30, 2015

Net income attributable to common stockholders
$
2,528

 
$
1,923

Other comprehensive income (loss), net of tax:
 
 
 
Securities available for sale
 
 
 
Net unrealized gains arising during period
1,006

 
27

Reclassification adjustment for gains included in net income
28

 
36

Unrealized gains on available for sale securities
1,034

 
63

Defined benefit plans:
 
 
 
Amortization of unrecognized prior service costs and net (losses) gains
(35
)
 
1

Total other comprehensive income, net of tax
999

 
64

Comprehensive income
$
3,527

 
$
1,987


Reclassifications out of accumulated other comprehensive income for the nine months ended June 30, 2016 were as follows:

Details about Accumulated Other Comprehensive Income Components
 
Amounts Reclassified from Accumulated Other Comprehensive Income
(1)
Affected Line Item on the Statement of Operations
Unrealized gains and losses
 
 
 
 
Sale of securities
 
$
47

 
Net gain on sale of available for sale securities
 
 
(19
)
 
Provision for income taxes
Total reclassifications for the period
 
$
28

 
Net income attributable to common shareholders


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


See accompanying condensed notes to unaudited consolidated financial statements.


5




CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statement of Changes in Stockholders’ Equity (unaudited)
Nine Months Ended June 30, 2016
(in thousands, except shares and per share data)
 
 
 
 
 
Additional Paid-In Capital
 
Retained Earnings
 
Unearned Deferred Compensation
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
 
Common Stock
 
 
 
 
 
 
Shares
 
Amount
 
 
 
 
 
Balance, October 1, 2015
5,232,579

 
$
52

 
$
54,740

 
$
6,245

 
$
(288
)
 
$
(214
)
 
$
60,535

Net income
 
 
 
 
 
 
2,528

 
 
 
 
 
2,528

Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
 
999

 
999

Forfeiture of unvested shares
(22,162
)
 
 
 
(176
)
 
 
 
176

 
 
 

Surrender of restricted shares of common stock
(5,309
)
 
 
 
(49
)
 
 
 
 
 
 
 
(49
)
Common stock awarded under the equity incentive plan
9,091

 
 
 
100

 
 
 
(100
)
 
 
 

Common stock options exercised
25,915

 
 
 
153

 
 
 
 
 
 
 
153

Stock option expense
 
 
 
 
25

 
 
 
 
 
 
 
25

Amortization of restricted stock
 
 
 
 
 
 
 
 
33

 
 
 
33

Cash dividends ($0.12 per share)
 
 
 
 
 
 
(629
)
 
 
 
 
 
(629
)
Balance, June 30, 2016
5,240,114

 
$
52

 
$
54,793

 
$
8,144

 
$
(179
)
 
$
785

 
$
63,595

See accompanying condensed notes to unaudited consolidated financial statements.
 

6




CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended June 30, 2016 and 2015
(in thousands, except per share data)
 
Nine Months Ended
 
June 30, 2016

 
June 30, 2015

Cash flows from operating activities:
 
 
 
Net income attributable to common stockholders
$
2,528

 
$
1,923

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net amortization of premium/discount on securities
851

 
637

Depreciation
583

 
937

Provision for loan losses
75

 
535

Net realized gain on sale of securities
(47
)
 
(60
)
Amortization of core deposit intangible
66

 
43

Amortization of restricted stock
33

 
70

Stock based compensation expense
25

 
44

Loss on sale of office properties

 

Provision (benefit) for deferred income taxes
555

 
(151
)
Net gains from disposals of foreclosed properties
(77
)
 
(5
)
Provision for valuation allowance on foreclosed properties

 
34

Increase in accrued interest receivable and other assets
(1,218
)
 
(441
)
(Decrease) increase in other liabilities
(357
)
 
435

Total adjustments
489

 
2,078

Net cash provided by operating activities
3,017

 
4,001

Cash flows from investing activities:
 
 
 
Purchase of investment securities
(15,062
)
 
(36,695
)
Net decrease (increase) in interest-bearing deposits
7,241

 
(1,250
)
Proceeds from sale of securities available for sale
17,665

 
29,286

Principal payments on investment securities
11,301

 
5,703

Proceeds from sale of Federal Home Loan Bank (FHLB) stock

 
650

Purchase of Federal Reserve Bank Stock
(3
)
 

Proceeds from sale of Federal Reserve Bank (FRB) Stock

 
239

Proceeds from sale of foreclosed properties
892

 
1,049

Net (increase) decrease in loans
(5,723
)
 
11,732

Net capital expenditures
(711
)
 
(217
)
Net cash received in business combinations
20,658

 

Net cash received from sale of office properties

 
7

Net cash provided by investing activities
36,258

 
10,504

Cash flows from financing activities:
 
 
 
Net decrease in Federal Home Loan Bank advances
(3,017
)
 
(13,000
)
Increase in other borrowings
11,000

 

Net (decrease) increase in deposits
(49,225
)
 
6,686

Surrender of restricted shares of common stock
(49
)
 
(35
)
Exercise of common stock options
153

 
299

Termination of director retirement plan/supplemental executive retirement plan
(35
)
 

Cash dividends paid
(629
)
 
(419
)
Net cash used in financing activities
(41,802
)
 
(6,469
)
Net (decrease) increase in cash and cash equivalents
(2,527
)
 
8,036

Cash and cash equivalents at beginning of period
23,872

 
11,434

Cash and cash equivalents at end of period
$
21,345

 
$
19,470

Supplemental cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest on deposits
$
2,859

 
$
2,842

Interest on borrowings
$
495

 
$
484

Income taxes
$
1,211

 
$
979

Supplemental noncash disclosure:
 
 
 
Transfers from loans receivable to foreclosed and repossessed assets
$
542

 
$
947

Fair value of assets acquired, net of cash and cash equivalents
$
168,129

 
$

Fair value of liabilities assumed, net of cash and cash equivalents
$
154,250

 
$

See accompanying condensed notes to unaudited consolidated financial statements. 

7




CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except 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.
On April 16, 2014, the U.S. Office of the Comptroller of the Currency (the "OCC"), the primary federal regulator for
the Company and the Bank, provided written notice to the Bank of the OCC's approval for the Bank to convert to a national banking association (a "National Bank") and operate under the title of Citizens Community Federal National Association ("Citizens Community Federal N.A."). The consummation of the conversion to a National Bank was effective as of May 31, 2014.
On April 18, 2014, Citizens Community Bancorp, Inc. received written notice from the Federal Reserve Bank of
Minneapolis (the "FRB") notifying the Company of the FRB's approval of the Company becoming a bank holding company as
a result of the proposed conversion of the Bank from a federally-chartered savings bank to a National Bank, which approval
was also effective as of May 31, 2014.
The consolidated income of the Company is principally derived from the income of the Bank, the Company’s wholly owned subsidiary. The Bank originates residential, commercial, agricultural, consumer and commercial and industrial (C&I) loans and accepts deposits from customers, primarily in Wisconsin, Minnesota and Michigan. The Bank operates 21 full-service offices, eight stand-alone locations and 8 branches predominantly located inside Walmart Supercenters.
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, 2016 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.

Effective May 16, 2016, Community Bank of Northern Wisconsin ("CBN") was acquired through merger (“Merger”) by the Bank. The Merger was consummated pursuant to the terms of a Plan and Agreement of Merger (“Merger Agreement”), dated February 10, 2016, as amended by the First Amendment to Agreement and Plan of Merger dated as of May 13, 2016 by and among the Bank, Old Murry Bancorp, Inc. ("Old Murry"), the controlling shareholders of Old Murry, and CBN. In accordance with the terms of the Merger Agreement, the Bank agreed to purchase all of the assets and assume all of the liabilities of CBN. The total purchase price paid in cash by the Bank was $17,447, which represented a $16,762 book value of the CBN as of April 30, 2016, less a capital dividend of $4,342 declared by CBN to Old Murry, plus a $5,000 fixed premium and daily interest through May 16, 2016 in the amount of $27. The purchase price was funded by $11,000 of debt, and the remaining $6,447 of cash.
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, valuation of acquired intangible assets, useful lives for depreciation and amortization, indefinite-lived intangible assets and long-lived assets, deferred tax assets, uncertain income tax positions and contingencies. Management does not anticipate any material changes to

8




estimates made herein in the near term. Factors that may cause sensitivity to the aforementioned estimates include, but are not limited to, 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, 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 as separate components of 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. Unrealized losses on available for sale securities, other than credit, will continue to be recognized in other comprehensive income (loss), net of tax. Unrealized losses reflected in the preceding tables have not been included in results of operations because the unrealized loss was not deemed other-than-temporary. Management has determined that more likely than not, the Company neither intends to sell, nor will it be required to sell each debt security before its anticipated recovery, and therefore recovery of cost will occur.
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 insured.
Interest income on commercial, mortgage and consumer loans is discontinued according to the following schedules:
Commercial loans, including agricultural and C&I loans, past due 90 days or more;
Closed end consumer loans past due 120 days or more; and
Real estate loans and open ended consumer loans past due 180 days or more.
Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for a loan placed on nonaccrual status is reversed against interest income. Interest received on such loans is accounted for on the cash basis or cost recovery method, 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.
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

9




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 90 days or more.
Allowance for Loan Losses – The allowance for loan losses (“ALL”) is a valuation allowance for probable and inherent credit losses in our loan portfolio. Loan losses are charged against the ALL when management believes that the collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the ALL. Management estimates the required ALL balance taking into account the following factors: past loan loss experience; the nature, volume and composition of our loan portfolio; known and inherent risks in our 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 4, “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.

Loans Acquired through Business Combination with Deteriorated Credit Quality - Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("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 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 - Goodwill resulting from the acquisition by merger of CBN was determined as the excess of the fair value of the consideration transferred, over the fair value of the net assets acquired, less liabilities assumed in the acquisition by merger, as of the acquisition date. Goodwill resulting from the selective purchase of loans and deposits from Central Bank in February 2016 was determined as the excess of the Premium Deposit less the Core Deposit Intangible as of the acquisition date. Goodwill is determined to have an indefinite useful life, and is not amortized. Goodwill is tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed.


10




The following table provides changes in goodwill from September 30, 2015 through June 30, 2016:

Balance at beginning of period
$

Select loans and deposit purchase from Central Bank
435

CBN acquisition
3,568

Valuation allowance

Balance at end of period
$
4,003


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. See Note 7, "Income Taxes" for details on the Company’s income taxes.
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.
Earnings Per Share – Basic earnings per common share is net income or loss divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable during the period, consisting of stock options outstanding under the Company’s stock incentive plans that have an exercise price that is less than the Company's stock price on the reporting date.

Operating Segments—While our 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 June, 2016 the FASB issued Accounting Standards Update ("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.

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 is 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. The Company expects the adoption of ASU 2016-12 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

11




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 is currently evaluating the effect on the consolidated results of operations, financial position and 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 expects the adoption of ASU 2016-02 to have no material effect on the Company's consolidated 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.
In August 2014, the FASB issued ASU 2014-14, "Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)". ASU 2014-14 is intended to improve accounting and disclosure consistency related to how creditors classify government-guaranteed mortgage loans, including the Federal Housing Administration ("FHA") or United States Department of Veterans Affairs ("VA") guaranteed loans, upon foreclosure. For public entities, ASU 2014-09 is effective on a prospective basis for the annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company has adopted ASU 2014-14 effective December 31, 2015. The adoption of ASU 2014-04 had no effect on the Company's consolidated results of operations, financial position or cash flows.
In January 2014, the FASB issued ASU 2014-04, "Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)". ASU 2014-04 is intended to improve consistency among reporting entities by clarifying when an in substance foreclosure occurs, that is, when a creditor should derecognize a loan and recognize the corresponding real estate collateral as a separate asset. For public entities, ASU 2014-04 is effective for the annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company has adopted ASU 2014-04 effective December 31, 2015. The adoption of ASU 2014-04 had no effect on the Company's consolidated results of operations, financial position or cash flows.
NOTE 2 – ACQUISITIONS

On May 16, 2016, the Company completed the acquisition through merger of CBN, with the Bank surviving the merger. The Merger was consummated pursuant to the terms of the Merger Agreement, dated February 10, 2016, and as amended on May 13, 2016. The Merger expands our presence in our Rice Lake, Wisconsin market with five additional branches.

Under the terms of the Merger Agreement, the total purchase price paid in cash by the Bank was $17,447, which represented a $16,762 book value of CBN as of April 30, 2016, less a capital dividend of $4,342 declared by CBN, plus a $5,000 fixed premium and daily interest through May 16, 2016 in the amount of $27. The Merger added $168,129 in assets, $112,327 in loans, $151,020 in deposits, $3,568 in goodwill, and $607 in a core deposit intangible. Acquisition costs consisting of accounting, legal and other professional fees were approximately $312 through June 30, 2016 and were accrued for in non-interest expense.
 
    

12




The following is a reconciliation of cash paid, net assets acquired, net of fair value adjustments, and goodwill resulting from the acquisition of CBN as of the acquisition date:

 
(Dollars in thousands)
 
Debt issued by buyer
$
11,000

 
Cash paid by buyer
6,447

 
Total consideration paid for CBN
$
17,447

 
 
 
 
CBN's net assets at fair value:
 
 
CBN net assets acquired
$
12,510

 
Adjustments to reflect assets acquired at fair value:
 
 
Investment securities discount/premium, net
(108
)
(2)
Performing loans
(164
)
(3)
Nonperforming loans
(1,168
)
(3)
Allowance for loan losses
1,832

(3)
Property and equipment, net
88

(4)
Deposits
282

(6)
Less: adjusted identifiable net assets acquired
$
13,272

 
 
 
 
Other intangibles:
 
 
Adjustment to recognize other intangibles
(607
)
(5)
 
 
 
Total goodwill
$
3,568

(7)

    

    

13




The acquisition of the net assets of CBN constitutes a business combination as defined by FASB ASC Topic 805, "Business Combinations." Accordingly, the assets acquired and liabilities assumed are presented at their fair values at acquisition date. Fair values were determined based on the requirements of FASB ASC Topic 820, Fair Value Measurements. In many cases, the determination of these fair values required management to make estimates regarding discount rates, future expected cash flows, market conditions and other future events that are highly objective in nature and subject to change. The following schedule is a breakdown of the assets acquired, liabilities assumed, related fair value adjustments, and resulting goodwill:

 
Community Bank of Northern Wisconsin
Fair Value Adjustments
 
Fair Value
Assets
(Dollars in thousands)
Cash and cash equivalents
$
28,104

$

 
$
28,104

Other interest bearing deposits
5,000

(6
)
(2)
4,994

Investment securities
16,825

(102
)
(2)
16,723

Federal Home Loan Bank stock
405


 
405

Loans receivable
113,659

(1,332
)
(3)
112,327

Allowance for loan losses
(1,832
)
1,832

(3)

Loans receivable, net
111,827

500

 
112,327

Office properties and equipment, net
2,741

88

(4)
2,829

Accrued interest receivable
540


 
540

Intangible assets

607

(5)
607

Foreclosed and repossessed assets, net
265


 
265

Other assets
1,335


 
1,335

TOTAL ASSETS
$
167,042

$
1,087

 
$
168,129

 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
Liabilities:
 
 
 
 
Deposits
$
151,302

$
(282
)
(6)
$
151,020

Federal Home Loan Bank advances
3,000


 
3,000

Other liabilities
230


 
230

Total liabilities
154,532

(282
)
 
154,250

Stockholders’ equity:
 
 
 
 
Common stock


 

Additional paid-in capital
12,510

(12,510
)
(7)

Retained earnings


 

Unearned deferred compensation


 

Accumulated other comprehensive loss


 

Total stockholders’ equity
12,510

(12,510
)
 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
167,042

$
(12,792
)
 
$
154,250

Net assets acquired
 
 
 
13,879

Purchase price
 
 
 
17,447

Goodwill
 
 
 
$
3,568


The following is a description of the methods used to determine, and adjustments necessary to present, the fair values of significant assets and liabilities presented above:

Cash and cash equivalents-The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets.


14




Other interest bearing deposits-Other interest bearing deposits were acquired from CBN with a $6 adjustment (2) to market value based upon quoted market prices or other observable outputs.

Investment Securities-Investment securities were acquired from CBN with a $102 adjustment (2) to market value based upon quoted market prices or other observable outputs.

Federal Home Loan Bank (FHLB) stock-Non-marketable investments in FHLB stock are carried at cost, which is their redeemable fair value since the market for each category of this stock is restricted.

Loans Receivable-Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan, related collateral, classification status, interest rate, term of the loan, whether the loan was amortizing, and current discount rates. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns.

We evaluated $111,519 of loans purchased in conjunction with the acquisition in accordance with the provisions of FASB ASC Topic 310-20, Nonrefundable Fees and Other Costs, and those loans were recorded with a $164 discount, included in fair value adjustment (3) above. As a result, the fair value discount on these loans is being accreted into interest income over the weighted average life of the loans, using a constant yield method. The remaining $2,140 of loans evaluated were considered purchased credit impaired loans within the provisions of FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, and were recorded with a $1,168 discount, which is included in fair value adjustment (3) above. These purchased credit impaired loans will recognize interest income through accretion of the difference between the carrying amount of the loans and the expected cash flows.

Office properties and equipment-The fair values of office properties and equipment were based on the appraised value of the property. The fair value adjustment (4) of $88 will be amortized over the remaining economic life of the properties, which is estimated to be 25 years.

Accrued interest receivable-Accrued interest receivable was acquired at market value.

Intangible assets-Core deposit intangible assets represent the value of the relationships that CBN had with its deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base, and the net maintenance cost attributable to customer deposits. The Company recorded $607 of gross core deposit intangible as a result of the CBN acquisition, fair value adjustment (5) above, which will be amortized over seven years.

Foreclosed and repossessed assets-The carrying amount of these acquired assets were deemed to be a reasonable estimate of their fair value at the date of acquisition.

Other assets- The carrying amount of these acquired assets were deemed to be a reasonable estimate of their fair value at the date of acquisition.

Deposits-The fair value of deposits with no stated maturity, such as demand deposits, savings accounts, and money market accounts, is the amount payable on demand at the reporting date. The fair value of fixed rate certificate accounts is calculated by using discounted cash flows applying interest rates currently being offered on similar certificates. The Company determined that the fair value of fixed rate certificate deposits exceeded book value by $282; fair value adjustment (6) above. This fair value adjustment will be amortized over the weighted average life of these deposits, which is estimated to be 17 months.

FHLB advances and other borrowings-The fair value of long-term borrowed funds is estimated using discounted cash flows based on the Bank’s current incremental borrowing rates for similar borrowing arrangements. The carrying value of short-term borrowed funds approximates their fair value.

Other liabilities- The carrying amount of these acquired assets were deemed to be a reasonable estimate of their fair value at the date of acquisition.

Stockholders' equity-All equity of the acquired CBN entity was eliminated as a result of the acquisition; fair value adjustment (7) above.

The purchase price allocation and certain fair value measurements remain preliminary due to the timing of the acquisition. We will continue to review the estimated fair values of loans, deposits, property and equipment, intangible assets, and other assets

15




and liabilities. Our operating results for the period ended June 30, 2016, include the operating results of the acquired assets and assumed liabilities subsequent to the acquisition date.

The following unaudited pro forma condensed financial information presents our results of operations, including the effects of the purchase accounting adjustments and acquisition expenses, had the acquisition taken place at the beginning of the period presented:

 
Citizens Community Bancorp, Inc. Year Ended 09/30/2015
Community Bank of Northern Wisconsin Year Ended 12/31/2015
Pro Forma Adjustments
 
Pro Forma Combined
Interest and dividend income:
 
 
 
 
 
Interest and fees on loans
$
21,641

$
5,698

$
27

(3)
$
27,366

Interest and dividends on investments
1,363

469


 
1,832

Total interest and dividend income
23,004

6,167

27

 
29,198

Interest expense:
 
 
 
 
 
Interest on deposits
3,808

956

199

(6)
4,963

Interest on borrowed funds
630

31

367

(1)
1,028

Total interest expense
4,438

987

566

 
5,991

Net interest income before provision for loan losses
18,566

5,180

(539
)
 
23,207

Provision for loan losses
656

84


 
740

Net interest income after provision for loan losses
17,910

5,096

(539
)
 
22,467

Non-interest income
3,913

463


 
4,376

Non-interest expense
17,719

4,123

91

(4) (5)
21,933

Income before provision for income tax
4,104

1,436

(630
)
 
4,910

Provision for income taxes
1,490

18


 
1,508

Net income attributable to common stockholders
$
2,614

$
1,418

$
(630
)
 
$
3,402

 
 
 
 
 
 
Per share information:
 
 
 
 
 
Basic earnings
$
0.50

 
 
 
$
0.65

Diluted earnings
$
0.50

 
 
 
$
0.65

The following is a description of the methods used to determine the pro forma adjustments presented above:
(1) Annual interest expense of $367; represents interest on debt incurred to partially fund the acquisition of CBN. Interest expense was based on $11,000 borrowings at an annual interest rate of 3.3366%.
Pro forma adjustments to non-interest expense consist of the following:
(3) Fair value adjustment to performing loans of $164, amortized over 72 months; the weighted average remaining life of the loans, or ($27) annually.
(4) Fair value adjustment to office properties and equipment of $88, amortized over the estimated remaining life of the buildings of 25 years, or $4 annually.
(5) Core deposit intangible of $607, amortized over the estimated life of the intangible asset of seven years, or $87 annually.
(6) Fair value adjustment to deposits of $282, amortized over the weighted average life of the deposits of 17 months, or $199 annually.

Selectively purchased loans and deposits - Central Bank - In February 2016, the Bank selectively purchased loans and deposit from Central Bank in Rice Lake and Barron, Wisconsin. The fair value of the acquired assets totaled $17,323, including $10,001 in cash, $16,363 in loans and $786 in fixed and other assets. The Bank also assumed $27,131 in deposits, for which it paid a deposit premium of $707, as part of the transaction. The assets and liabilities relating to these selectively purchased loans and deposits were recorded on the Bank’s balance sheet at their preliminary fair values as of February 5, 2016 and the related results of operations for these branches have been included in the Company's consolidated statement of comprehensive income

16




since that date. Based on the preliminary purchase price allocation, the Corporation recorded $435 in goodwill and $272  in core deposit intangibles. These fair value estimates are provisional amounts based on third party valuations that are currently under review. The goodwill for this transaction is deductible for income tax purposes.


NOTE 3 – FAIR VALUE ACCOUNTING
ASC Topic 820-10, “Fair Value Measurements and Disclosures” establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The statement describes three levels of inputs that may be used to measure fair value:
Level 1- Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.
Level 2- Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3- Significant unobservable inputs that reflect the Company’s assumptions about the factors that market participants would use in pricing an asset or liability.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the fair value measurement.
The fair value of securities available for sale is determined by obtaining market price quotes from independent third parties wherever such quotes are available (Level 1 inputs); or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Where such quotes are not available, the Company utilizes independent third party valuation analysis to support the Company’s estimates and judgments in determining fair value (Level 3 inputs).

17




Assets Measured on a Recurring Basis
The following tables present the financial instruments measured at fair value on a recurring basis as of June 30, 2016 and September 30, 2015:
 
Fair
Value
 
Quoted Prices in
Active Markets
for Identical
Instruments
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
June 30, 2016
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
U.S. government agency obligations
$
14,737

 
$

 
$
14,737

 
$

Obligations of states and political subdivisions
33,773

 

 
33,773

 

Mortgage-backed securities
35,559

 

 
35,559

 

Federal Agricultural Mortgage Corporation
65

 

 
65

 

Trust preferred securities
374

 

 

 
374

Total
$
84,508

 
$

 
$
84,134

 
$
374

September 30, 2015
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
U.S. government agency obligations
$
15,020

 
$

 
$
15,020

 
$

Obligations of states and political


 


 


 


subdivisions
27,407

 

 
27,407

 

Mortgage-backed securities
37,440

 

 
37,440

 

Federal Agricultural Mortgage Corporation
54

 

 
54

 

Total
$
79,921

 
$

 
$
79,921

 
$

Assets Measured on a Nonrecurring Basis
The following tables present the financial instruments measured at fair value on a nonrecurring basis as of June 30, 2016 and September 30, 2015:
 
Fair
Value
 
Quoted Prices in
Active Markets
for Identical
Instruments
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level  3)
June 30, 2016
 
 
 
 
 
 
 
Foreclosed and repossessed assets, net
$
911

 
$

 
$

 
$
911

Impaired loans with allocated allowances
2,352

 

 

 
2,352

Total
$
3,263

 
$

 
$

 
$
3,263

September 30, 2015
 
 
 
 
 
 
 
Foreclosed and repossessed assets, net
$
902

 
$

 
$

 
$
902

Impaired loans with allocated allowances
2,349

 

 

 
2,349

Total
$
3,251

 
$

 
$

 
$
3,251

The fair value of impaired loans referenced above was determined by obtaining independent third party appraisals and/or internally developed collateral valuations to support the Company’s estimates and judgments in determining the fair value of the underlying collateral supporting impaired loans.
The fair value of foreclosed and repossessed assets was determined by obtaining market price valuations from independent third parties wherever such quotes were available for other collateral owned. The Company utilized independent third party appraisals to support the Company’s estimates and judgments in determining fair value for other real estate owned.
The following table represents additional quantitative information about assets measured at fair value on a
recurring and nonrecurring basis and for which we have utilized Level 3 inputs to determine their fair value at
June 30, 2016.


18




 
Fair
Value
 
Valuation Techniques (1)
 
Significant Unobservable Inputs (2)
 
Range
June 30, 2016
 
 
 
 
 
 
 
Foreclosed and repossessed assets, net
$
911

 
Appraisal value
 
Estimated costs to sell
 
10 - 15%
Impaired loans with allocated allowances
$
2,352

 
Appraisal value
 
Estimated costs to sell
 
10 - 15%
September 30, 2015
 
 
 
 
 
 
 
Foreclosed and repossessed assets, net
$
902

 
Appraisal value
 
Estimated costs to sell
 
10 - 15%
Impaired loans with allocated allowances
$
2,349

 
Appraisal value
 
Estimated costs to sell
 
10 - 15%


(1)     Fair value is generally determined through independent third-party appraisals of the underlying
collateral, which generally includes various level 3 inputs which are not observable.

(2)     The fair value basis of impaired loans and real estate owned may be adjusted to reflect management
estimates of disposal costs including, but not limited to, real estate brokerage commissions, legal fees,
and delinquent property taxes.

Fair Values of Financial Instruments
ASC 825-10 and ASC 270-10, Interim Disclosures about Fair Value Financial Instruments, require disclosures about fair value financial instruments and significant assumptions used to estimate fair value. The estimated fair values of financial instruments not previously disclosed are determined as follows:
Cash and Cash Equivalents
Due to their short-term nature, the carrying amounts of cash and cash equivalents are considered to be a reasonable estimate of fair value and represents a level 1 measurement.
Other Interest-Bearing Deposits
Fair value of interest bearing deposits is estimated using a discounted cash flow analysis based on current interest rates being offered by instruments with similar terms and represents a level 3 measurement.
Non-marketable Equity Securities, at cost
Non-marketable equity securities are comprised of Federal Home Loan Bank stock and Federal Reserve Bank stock carried at cost, which are their redeemable fair values since the market for each category of this stock is restricted and represents a level 1 measurement.
Loans Receivable, net
Fair value is estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as real estate, C&I and consumer. The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity date using market discount rates reflecting the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Bank’s repayment schedules for each loan classification. The fair value of variable rate loans approximates carrying value. The net carrying value of the loans acquired through the CBN acquisition approximates the fair value of the loans at June 30, 2016. The fair value of loans is considered to be a level 3 measurement.
Accrued Interest Receivable and Payable
Due to their short-term nature, the carrying amounts of accrued interest receivable and payable are considered to be a reasonable estimate of fair value and represents a level 1 measurement.
Deposits

19




The fair value of deposits with no stated maturity, such as demand deposits, savings accounts, and money market accounts, is the amount payable on demand at the reporting date and represents a level 1 measurement. The fair value of fixed rate certificate accounts is calculated by using discounted cash flows applying interest rates currently being offered on similar certificates and represents a level 3 measurement. The net carrying value of fixed rate certificate accounts acquired through the CBN acquisition approximates the fair value of the loans at June 30, 2016 and represents a level 3 measurement.
Federal Home Loan Bank Advances
The fair value of long-term borrowed funds is estimated using discounted cash flows based on the Bank’s current incremental borrowing rates for similar borrowing arrangements. The carrying value of short-term borrowed funds approximates their fair value and represents a level 2 measurement.
Off-Balance Sheet Instruments
The fair value of off-balance sheet commitments would be estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the current interest rates, and the present creditworthiness of the customers. Since this amount is immaterial to the Company’s consolidated financial statements, no amount for fair value is presented.
The table below represents what we would receive to sell an asset or what we would have to pay to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying amount and estimated fair value of the Company's financial instruments as of the dates indicated below were as follows:
 
June 30, 2016
 
September 30, 2015
 
Carrying
Amount
 
Estimated
Fair
Value
 
Carrying
Amount
 
Estimated
Fair
Value
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
21,345

 
$
21,345

 
$
23,872

 
$
23,872

Interest-bearing deposits
745

 
759

 
2,992

 
3,022

Investment securities
91,671

 
91,960

 
87,933

 
88,140

Non-marketable equity securities, at cost
5,034

 
5,034

 
4,626

 
4,626

Loans receivable, net
577,810

 
596,313

 
444,014

 
462,227

Accrued interest receivable
1,971

 
1,971

 
1,574

 
1,574

Financial liabilities:
 
 
 
 
 
 
 
Deposits
$
585,224

 
$
589,144

 
$
456,298

 
$
460,450

FHLB advances
58,874

 
59,020

 
58,891

 
59,357

Other liabilities
11,000

 
11,000

 

 

Accrued interest payable
130

 
130

 
18

 
18

NOTE 4 – LOANS, ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
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.

20




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.


Below is a summary of originated and acquired loans by type and risk rating as of June 30, 2016:
Originated Loans:
 
1 to 5
 
6
 
7
 
8
 
9
 
TOTAL
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
$
167,989

 
$

 
$
1,738

 
$

 
$

 
$
169,727

Commercial/agricultural
 
95,658

 

 

 

 

 
95,658

Total real estate loans
 
263,647

 

 
1,738

 

 

 
265,385

Consumer and other loans:
 
207,549

 
11

 
577

 

 

 
208,137

Total originated loans
 
$
471,196

 
$
11

 
$
2,315

 
$

 
$

 
$
473,522

Acquired Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
$
24,089

 
$
607

 
$
892

 
$
236

 
$

 
$
25,824

Commercial/agricultural
 
57,337

 
182

 
3,444

 

 

 
60,963

Total real estate loans
 
81,426

 
789

 
4,336

 
236

 

 
86,787

Consumer and other loans:
 
22,964

 
41

 
40

 

 
1

 
23,046

Total acquired loans
 
$
104,390

 
$
830

 
$
4,376

 
$
236

 
$
1

 
$
109,833

Total Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
$
192,078

 
$
607

 
$
2,630

 
$
236

 
$

 
$
195,551

Commercial/agricultural
 
152,995

 
182

 
3,444

 

 

 
156,621

Total real estate loans
 
345,073

 
789

 
6,074

 
236

 

 
352,172

Consumer and other loans:
 
230,513

 
52

 
617

 

 
1

 
231,183

Gross loans
 
$
575,586

 
$
841

 
$
6,691

 
$
236

 
$
1

 
$
583,355

Net deferred loan costs (fees) and acquisition loan discount
 
 
 
 
 
 
 
 
 
 
 
691

Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
(6,236
)
Loans receivable, net
 
 
 
 
 
 
 
 
 
 
 
$
577,810





21




Below is a summary of originated loans by type and risk rating as of September 30, 2015:
 
 
1 to 5
 
6
 
7
 
8
 
9
 
TOTAL
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
$
179,946

 
$

 
$
1,260

 
$

 
$

 
$
181,206

Commercial/agricultural
 
63,266

 

 

 

 

 
63,266

Total real estate loans
 
243,212

 

 
1,260

 

 

 
244,472

Consumer and other loans:
 
203,054

 

 
547

 

 
7

 
203,608

Gross loans
 
$
446,266

 
$

 
$
1,807

 
$

 
$
7

 
$
448,080

Net deferred loan costs (fees)
 
 
 
 
 
 
 
 
 
 
 
2,430

Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
(6,496
)
Loans receivable, net
 
 
 
 
 
 
 
 
 
 
 
$
444,014

The ALL represents management’s estimate of probable and inherent credit losses in the Bank’s loan portfolio. Estimating the amount of the ALL requires the exercise of significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of other qualitative factors such as current economic trends and conditions, all of which may be susceptible to significant change.
There are many factors affecting the ALL; some are quantitative, while others require qualitative judgment. The process for determining the ALL (which management believes adequately considers potential factors which result in probable credit losses), includes subjective elements and, therefore, may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for loan losses could be required that could adversely affect the Company’s earnings or financial position in future periods. Allocations of the ALL may be made for specific loans but the entire ALL is available for any loan that, in management’s judgment, should be charged-off or for which an actual loss is realized.
As an integral part of their examination process, various regulatory agencies also review the Bank’s ALL. Such agencies may require that changes in the ALL be recognized when such regulators’ credit evaluations differ from those of our management based on information available to the regulators at the time of their examinations.

22




Changes in the ALL by loan type for the periods presented below were as follows:
 
Consumer Real Estate
 
Commercial/Agriculture Real Estate
 
Consumer and Other
 
Unallocated
 
Total
Nine Months Ended June 30, 2016:
 
 
 
 
 
 
 
 
 
Allowance for Loan Losses:
 
 
 
 
 
 
 
 
 
Beginning balance, October 1, 2015
$
2,364

 
$
1,617

 
$
2,263

 
$
252

 
$
6,496

Charge-offs
(111
)
 

 
(394
)
 

 
(505
)
Recoveries
7

 

 
163

 

 
170

Provision
30

 
10

 
35

 

 
75

Allowance allocation adjustment
(166
)
 
249

 
128

 
(211
)
 

Total allowance on originated loans
$
2,124

 
$
1,876

 
$
2,195

 
$
41

 
$
6,236

Purchased credit-impaired loans
$

 
$

 
$

 
$

 
$

Other acquired loans

 

 

 

 

Total allowance on acquired loans
$

 
$

 
$

 
$

 
$

Ending balance, June 30, 2016
$
2,124

 
$
1,876

 
$
2,195

 
$
41

 
$
6,236

Allowance for Loan Losses at June 30, 2016:
 
 
 
 
 
 
 
 
 
Amount of allowance for loan losses arising from loans individually evaluated for impairment
$
422

 
$

 
$
189

 
$

 
$
611

Amount of allowance for loan losses arising from loans collectively evaluated for impairment
$
1,702

 
$
1,876

 
$
2,006

 
$
41

 
$
5,625

Loans Receivable as of June 30, 2016:

 

 

 
 
 
 
Ending balance of originated loans
$
124,316

 
$
128,089

 
$
221,808

 
$

 
$
474,213

Ending balance of purchased credit-impaired loans
399

 
1,762

 
1,489

 

 
3,650

Ending balance of other acquired loans
69,198

 
26,770

 
10,215

 

 
106,183

Ending balance of loans
$
193,913

 
$
156,621

 
$
233,512

 
$

 
$
584,046

Ending balance: individually evaluated for impairment
$
4,670

 
$

 
$
914

 
$

 
$
5,584

Ending balance: collectively evaluated for impairment
$
189,243

 
$
156,621

 
$
232,598

 
$

 
$
578,462


23




 
Consumer Real Estate
 
Commercial/Agriculture Real Estate
 
Consumer and Other
 
Unallocated
 
Total
Year Ended September 30, 2015:
 
 
 
 
 
 
 
 
 
Allowance for Loan Losses:
 
 
 
 
 
 
 
 
 
Beginning balance, October 1, 2014
$
2,759

 
$

 
$
3,747

 
$

 
$
6,506

Charge-offs
(405
)
 

 
(601
)
 

 
(1,006
)
Recoveries
69

 

 
271

 

 
340

Provision
382

 
16

 
258

 

 
656

Allowance allocation adjustment
(441
)
 
1,601

 
(1,412
)
 
252

 

Ending balance, September 30, 2015
$
2,364

 
$
1,617

 
$
2,263

 
$
252

 
$
6,496

Allowance for Loan Losses at September 30, 2015:
 
 
 
 

 
 
 
 
Amount of allowance for loan losses arising from loans individually evaluated for impairment
$
463

 
$

 
$
119

 
$

 
$
582

Amount of allowance for loan losses arising from loans collectively evaluated for impairment
$
1,901

 
$
1,617

 
$
2,144

 
$
252

 
$
5,914

Loans Receivable as of September 30, 2015:
 
 
 
 

 
 
 
 
Ending balance
$
180,693

 
$
63,266

 
$
206,551

 
$

 
$
450,510

Ending balance: individually evaluated for impairment
$
4,466

 
$

 
$
848

 
$

 
$
5,314

Ending balance: collectively evaluated for impairment
$
176,227

 
$
63,266

 
$
205,703

 
$

 
$
445,196

The Bank has originated most of the loans currently recorded on the Company’s accompanying Consolidated Balance Sheet, except as noted below.
In February 2016, the Bank selectively purchased loans and deposits from Central Bank in Rice Lake and Barron, Wisconsin in the amount of $16,363 and $27,131, respectively. In May 2016, the Bank acquired loans and deposits from Community Bank of Northern Wisconsin, headquartered in Rice Lake, Wisconsin in the amount of $112,327 and $151,020, respectively.
During October 2012, the Bank entered into an agreement to purchase short term consumer loans from a third party on an ongoing basis. As part of the servicer agreement entered into in connection with this purchase agreement, the third party seller agreed to purchase or substitute performing consumer loans for all contracts that become 120 days past due. Pursuant to the ongoing loan purchase agreement, a Board of Director determinant was originally established to limit the purchase of these consumer loans under this arrangement to a maximum of $40,000 and a restricted reserve account was established at 3% of the outstanding consumer loan balances purchased up to a maximum of $1,000, with such percentage amount of the loans being deposited into a segregated reserve account. The funds in the reserve account are to be released to compensate the Bank for any purchased loans that are not purchased back by the seller or substituted with performing loans and are ultimately charged off by the Bank. During the first quarter of fiscal 2015, the Board of Directors increased the limit of these purchased consumer loans to a maximum of $50,000. As of June 30, 2016, the balance of the consumer loans purchased was $47,865. The balance in the cash reserve account has reached the maximum allowed balance of $1,000, which is included in Deposits on the accompanying Consolidated Balance Sheet. To date, the Company has not charged off or experienced losses related to the purchased loans.
The weighted average rate earned on these purchased consumer loans was 4.24% as of June 30, 2016. From March 2014 through December 2015, the rate earned for all new loan originations of these purchased consumer loans was 4.00%. As of January 2016, new loans purchased are at an interest rate of 4.25% due to the increase in the Prime Rate.

24




Loans receivable by loan type as of the end of the periods shown below were as follows:
 
Real Estate Loans
 
Commercial/Agriculture Real Estate Loans
 
Consumer and Other Loans
 
Total Loans
 
June 30, 2016
 
September 30, 2015
 
June 30, 2016
 
September 30, 2015
 
June 30, 2016
 
September 30, 2015
 
June 30, 2016
 
September 30, 2015
Performing loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Performing TDR loans
$
3,006

 
$
3,206

 
$
1,078

 
$