Loading, Please Wait...

CST: 18/10/2019 08:50:57   

Citizens Community Bancorp, Inc. Earns $4.11 million, or $0.37 Per Share, for the Second Quarter; Closed on F. & M. Bancorp. of Tomah, Inc. Acquisition on July 1, 2019

81 Days ago

EAU CLAIRE, Wis., July 29, 2019 (GLOBE NEWSWIRE) -- Citizens Community Bancorp, Inc. (the "Company") (Nasdaq: CZWI), the parent company of Citizens Community Federal N.A. (the “Bank” or "CCFBank"), today reported earnings of $4.11 million, or $0.37 per diluted share for the quarter ended June 30, 2019, compared to $953,000, or $0.09 per diluted share for the previous quarter ended March 31, 2019.  The current quarter’s operations reflected a $2.3 million gain on the sale of a branch, partially offset by merger costs related to acquisition activity and higher marketing expenses to support branding due to the two recent acquisitions.  Subsequent to the quarter end, the Company closed on the acquisition of F. & M. Bancorp. of Tomah, Inc. ("F&M") on July 1, 2019 and completed the data systems conversion on July 14, 2019.  The transaction was valued at approximately $24 million.  At March 31, 2019, F&M had assets of approximately $195 million, deposits of $152 million and loans of $126 million.

"We are pleased to have successfully consolidated our branch network to Wisconsin and Minnesota, with the sale of our sole Michigan office in Rochester Hills.  We retained all loans associated with that branch and temporarily funded the branch sale with an increase in wholesale liabilities,” said Stephen Bianchi, Chairman, President and Chief Executive Officer.  “Meanwhile, we have enhanced our presence in Wisconsin with the recent acquisition of United Bank and F. & M. Bancorp. of Tomah, Inc.  Our larger platform has enhanced our profile within the region and enabled us to better focus our banking services on the communities we serve."

Net income as adjusted (non-GAAP)1 was $2.6 million, or $0.23 per diluted share for the second quarter of 2019, compared to $1.7 million, or $0.16 per diluted shares for the first quarter of 2019.  Net income as adjusted (non-GAAP)1 excludes (1) merger and branch closure expenditures, (2) gain on sale of branch (3) certain audit and financial reporting costs related to the change in year end, (4) initial Sarbanes-Oxley Act ("SOX") implementation costs, which are higher than the forecasted ongoing run rate, as well as (5) the net impact of the Tax Cuts and Jobs Act of 2017 (the "Tax Act") which are itemized on the accompanying financial table "Reconciliation of GAAP Net Income and Net Income as Adjusted (non-GAAP)1.

June 30, 2019 Highlights: (as of or for the periods ended June 30, 2019, compared to March 31, 2019)

  • Book value per share increased to $13.04 at June 30, 2019 from $12.59 at March 31, 2019. Tangible book value per share (non-GAAP)2 was $9.56 at June 30, 2019 - an increase of $0.49 or 5.4%, compared to $9.07 at March 31, 2019.  The components of this increase included (1) current quarter's earnings, (2) the reduction in accumulated other comprehensive loss, due to decreased unrealized losses in the Securities Available for Sale portfolio and (3) the amortization of intangible assets.
  • On May 17, 2019, the Company completed the sale of the Rochester Hills, MI branch for a deposit premium of 7 percent, or approximately $2.3 million, net of selling costs.  The branch sale included approximately $34 million in deposits and $300,000 in fixed assets.
  • Merger related costs of $206,000 for the quarter ended June 30, 2019 primarily related to the acquisition of F. & M. Bancorp. of Tomah, Inc.
  • In addition to merger related costs, the Company (1) increased marketing costs approximately $250,000 associated with Company branding of merged banking operations, (2) incurred approximately $110,000 in professional fees related to two one-time consulting engagements and (3) increased amortization of mortgage servicing rights by $110,000 due to impairment resulting from higher prepayment rates.  These costs were partially offset by $54,000 in increased accounting accretion related to acquired loans.
  • Net gross loan growth of $0.2 million for the quarter ended June 30, 2019, resulted from an increase in the Community Banking loan portfolio of $16.9 million, and the planned run off in the Legacy Loan portfolio of $16.7 million during the quarter ended June 30, 2019. The Company experienced lower loan originations in the current quarter. Impacts on loan growth included $3.8 million of payoffs/payments on classified assets - an increase from the prior quarter of $1.3 million and a reduction in loan originations partially due to the Company maintaining loan pricing.  The Community Banking loan portfolios reflect the Bank's strategy to grow its commercial banking business and consumer lending.  The Legacy loan portfolios reflect the Bank's strategy to sell substantially all newly originated one to four family loans in the secondary market and the discontinuation of originated and purchased indirect paper loans, effective in the first quarter of fiscal 2017.
  • Nonperforming assets increased to 1.18% of total assets at June 30, 2019.  Nonperforming assets, delinquencies and troubled debt restructures typically increase in the quarters immediately following a merger due to updated reporting and risk rating of the loan portfolio to CCFBank standards.  While nonperforming assets increased, classified assets decreased $1.9 million during the current quarter to $32.6 million.  The majority of new nonaccrual loans in the second quarter were classified loans as of March 31, 2019.
  • Loan loss provisions declined to $325,000 for the quarter ended June 30, 2019 from $1.2 million the prior quarter.  The provisions for each period were primarily due to continued newly originated loan growth and in the first quarter, the increase in specific reserves primarily related to one credit as discussed in the previous quarter.
  • On June 26, 2019, the Company borrowed $29.9 million, which included the refinancing of $10.1 million, to fund the F. & M. Bancorp. of Tomah, Inc. acquisition.
  • The net interest margin declined to 3.30% for the quarter ended June 30, 2019 from 3.43% the prior quarter.  The decline reflects the competitive market for deposits, the replacement funding for the branch sale and the sale of the Rochester Hills branch with lower deposit costs being replaced with wholesale borrowings.

Estimated Bank and Company capital ratios exceeded regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at June 30, 2019:

    Citizens
Community
Federal N.A.
  Citizens
Community
Bancorp, Inc.
  To Be Well Capitalized Under
Prompt Corrective Action
Provisions
Tier 1 leverage ratio (to adjusted total assets)   9.7%   8.1%   5.0%
Tier 1 capital (to risk weighted assets)   12.2%   10.2%   8.0%
Common equity tier 1 capital (to risk weighted assets)   12.2%   10.2%   6.5%
Total capital (to risk weighted assets)   13.1%   12.5%   10.0%

Capital ratio projections subsequent to the July 1, 2019 Tomah acquisition, have not been finalized as the related purchase accounting is not yet complete.  Based on our analysis, the impact of the Tomah acquisition on capital ratios is not expected to materially change the Bank's capital ratios at September 30, 2019 from the June 30, 2019 capital ratios.  The Company's capital ratios will be negatively impacted, as previously disclosed, and the Company's leverage ratio at September 30, 2019 is estimated to be approximately 7%.

Balance Sheet and Asset Quality Review

Total assets were $1.348 billion at June 30, 2019, compared to $1.327 billion at March 31, 2019 and $1.288 billion at December 31, 2018.  Despite the sale of $34.1 million in deposits, new deposits and borrowings supported organic loan production during the current quarter.

Net loans were $1.011 billion at June 30, 2019, compared to $1.011 billion at March 31, 2019.  Community Banking loans increased $16.9 million to $776.2 million at June 30, 2019, from $759.3 million at March 31, 2019, and offset the planned runoff of Legacy Loans. The growth was centered in real estate and construction and land development loans in various stages. Construction and land development loans are primarily commercial real estate loans with a small residential component. Legacy loans decreased $16.7 million to $250.4 million at June 30, 2019, from $267.1 million at March 31, 2019.

At June 30, 2019, total gross Community Banking portfolio loans, consisting of commercial, agricultural and consumer loans, represented 75.6% of gross loans, while the gross Legacy Loan portfolio of indirect paper and one-to-four family loans was 24.4% of gross loans.  One year earlier, the Community Banking portfolio loans totaled 62.2% of gross loans.

The allowance for loan and lease losses increased to $8.8 million, at June 30, 2019, representing 0.86% of total loans, compared to $8.7 million and 0.85% of total loans at March 31, 2019.  Approximately 33% of the Bank's loan portfolio represents acquired performing loans and marked to fair value as of the acquisition date, with a remaining $3.9 million purchase-discount related to credit impaired acquired loans.  Net charge offs were $273,000 for the quarter ended June 30, 2019, compared to $122,000 for the quarter ended March 31, 2019.  For the quarter ended June 30, 2019, charge offs of $225,000 were related to a partial charge off on the specific credit discussed and provided for in the quarter ended March 31, 2019.

Nonperforming assets increased to $15.9 million, or 1.18% of total assets at June 30, 2019, compared to $13.7 million or 1.03% at March 31, 2019 and $10.7 million or 0.83% of total assets at December 31, 2018.  The increase in the most recent quarter primarily related to acquired United Bank agricultural credits.  The impairment of these loans was included in the purchase credit impairment mark at the time of acquisition but not included as a nonperforming asset until this quarter.

On June 28, 2019, the Bank deposited $20.6 million with the transfer agent, as the cash portion of the purchase price for the closing of the F. & M. Bancorp, Inc. acquisition which became effective on July 1, 2019.

Deposits decreased $15.2 million to $1.015 billion at June 30, 2019 from $1.031 billion at March 31, 2019. The decline in deposits was due in part to the sale of the Rochester Hills branch deposits with $34.1 million during the middle of the quarter.  The composition of the deposit portfolio changed over the quarter as some low-cost funds left with the deposit sale and higher cost certificates of deposit were attracted to facilitate the funding of the sale.  Certificate accounts increased to $391.4 million at June 30, 2019 from $362.8 million at March 31, 2019.  Meanwhile, money market accounts decreased to $156.0 million from $174.5 million at March 31, 2019, savings accounts declined to $148.0 million from $159.3 million and interest-bearing demand deposits decreased to $180.0 million from $195.7 million over the same time frame.  The change in the deposit composition over the quarter contributed to an increase in the cost of deposits to 1.33% for the quarter ended June 30, 2019 from 1.20% the prior quarter.

Federal Home Loan Bank advances increased to $135.8 million at June 30, 2019 from $122.8 million at March 31, 2019 while other borrowings increased to $44.6 million from $24.7 million over the same time frame.  The increase in other borrowings represents new borrowings to fund the F. & M. Bancorp. of Tomah, Inc. acquisition.  The borrowings are variable rate based on the U.S. Prime Rate.

Total stockholders’ equity increased to $143.2 million at June 30, 2019, from $138.4 million one quarter earlier, as the Company benefitted from the addition of earnings and a reduction in accumulated other comprehensive loss, mainly due to lower long-term interest rates.  Tangible book value per share (non-GAAP)2 was $9.56 at June 30, 2019, compared to $9.07 at March 31, 2019.  Tangible common equity (non-GAAP)2 as a percent of tangible assets (non-GAAP) was 8.01% at June 30, 2019, compared to 7.74% at March 31, 2019.

Review of Operations

Net interest income was $10.1 million for the second quarter of 2019, compared to $10.1 million for the first quarter of 2019, and $7.5 million for the quarter ended June 30, 2018. The net interest margin (“NIM”) decreased to 3.30% for the second quarter of 2019 compared to 3.43% in the preceding quarter and 3.40% for the like quarter one year earlier.

The yield on interest earnings assets increased two basis points to 4.68% for the second quarter of 2019 from 4.66% the previous quarter and 25 basis points from the second quarter one year earlier.  Meanwhile, the cost of interest-bearing liabilities increased 15 basis points to 1.63% for the second quarter from 1.48% one quarter earlier and 45 basis points from one year earlier.  As noted above, the primary increase in funding costs was due to the competitive market for deposits, the replacement funding for the branch sale and the sale of the Rochester Hills branch with lower deposit costs being replaced with wholesale borrowings.

For the quarter ended June 30, 2019, the Company’s net interest margin benefited $54,000 from purchased loan accretion, or two basis points compared to $15,000, or one basis point in the prior quarter.  Scheduled accretion for acquired loans, was $194,000, $194,000, and $142,000 for the quarters ended June 30, 2019, March 31, 2019 and June 30, 2018, respectively.

Loan loss provisions were $325,000 for the second quarter of 2019 compared to $1.2 million for the prior quarter. Provision expense for the quarter ended June 30, 2018, was due to newly originated loan growth while the prior quarter provisions included some specific reserves related to a delinquent agricultural credit.

Total non-interest income was $5.2 million for the second quarter compared to $2.3 million for the preceding quarter and $1.8 million for the quarter ended June 30, 2018.  The increase reflects a $2.3 million gain on the sale of the Rochester Hills branch, increased gains on the sale of loans and loan fee income.  The gains on the sale of loans reflects increased mortgage activity from the lower interest rate environment and better weather.  Interchange income increased to $453,000 for the quarter ended June 30, 2019 from $338,000 for the quarter ended March 31, 2019.

Total non-interest expense was $9.4 million for the second quarter of 2019, compared to $9.9 million in the prior quarter and $7.9 million for the quarter ended June 30, 2018. Total non-interest expense for the current quarter reflects lower compensation and benefit expenses, lower occupancy expenses, lower data processing expenses, and lower professional fees offset in part by higher amortization of mortgage servicing rights and advertising/marketing costs.

Compensation and benefits expense decreased to $4.6 million for the second quarter of 2019 from $4.7 million the previous quarter.

Occupancy expenses declined to $866,000 for the second quarter from $954,000 in the prior quarter, partially due to lower weather-related expenses.

Data processing expenses declined to $868,000 for the second quarter of 2019 from $987,000 during the prior quarter due in part to the conversion of United Bank, resulting in lower data processing costs.

Amortization of mortgage servicing rights increased during the quarter ended June 30, 2019 from $191,000 in the prior quarter to $306,000 during the current quarter due to increased prepayments in the Company’s servicing portfolio due to the current rate environment.

Advertising, marketing and public relations expenses increased to $456,000 for the second quarter from $203,000 for the prior quarter as the Company incurred increased costs associated with Company branding of merged banking operations.  With two bank conversions in less than six months, we anticipate a modest reduction in expense during the third quarter, compared to the second quarter, and then decrease to the $200,000 to $250,000 range during the fourth quarter, which approximates the historic run rates for CCFBank as adjusted for the marketing costs in the acquired bank markets.

Professional fees declined to $575,000 for the second quarter of 2019 from $825,000 the previous quarter as the Company realized lower merger related fees.  The reduction in merger fees was partially offset by approximately $110,000 of one-time consulting projects.

Merger related expenses incurred this quarter and included in the consolidated statement of operations consisted of the following:  (1) $126,000 recorded in professional services and (2) $80,000 recorded in other non-interest expense.

Merger related expenses incurred in the quarter ended March 31, 2019 and included in the consolidated statement of operations consisted of the following: (1) $74,000 recorded in compensation and benefits, (2) $204,000 recorded in professional services and (3) $381,000 recorded in other non-interest expense.  Branch closure costs incurred in the quarter ended March 31, 2019, consisted of $4,000 recorded in professional services and $11,000 recorded in other non-interest expense in the consolidated statement of operations.  Audit and financial reporting expenses, related to our year end change, consisted of $358,000 recorded in professional services in the consolidated statement of operations during the quarter ended March 31, 2019.

About the Company

Citizens Community Bancorp, Inc. (NASDAQ: “CZWI”) is the holding company of the Bank, a national bank based in Altoona, Wisconsin, currently serving customers primarily in Wisconsin and Minnesota through 28 branch locations.  Its primary markets include the Chippewa Valley Region in Wisconsin, the Twin Cities and Mankato markets in Minnesota, and various rural communities around these areas. The Bank offers traditional community banking services to businesses, Ag operators and consumers, including one-to-four family mortgages.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements contained in this release are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified using forward-looking words or phrases such as “anticipate,” “believe,” “could,” “expect,” “intend,” “may,” “planned,” “potential,” “should,” “will,” “would” or the negative of those terms or other words of similar meaning. Such forward-looking statements in this release are inherently subject to many uncertainties arising in the operations and business environment of the Company and the Bank. These uncertainties include the conditions in the financial markets and economic conditions generally; the possibility of a deterioration in the residential real estate markets; interest rate risk; lending risk; the sufficiency of loan allowances; changes in the fair value or ratings downgrades of our securities; competitive pressures among depository and other financial institutions; our ability to realize the benefits of net deferred tax assets; our ability to maintain or increase our market share; acts of terrorism and political or military actions by the United States or other governments; legislative or regulatory changes or actions, or significant litigation, adversely affecting the Company or Bank; increases in FDIC insurance premiums or special assessments by the FDIC; disintermediation risk; our inability to obtain needed liquidity; risks related to the success of the acquisition of F. & M. Bancorp. of Tomah, Inc. ("F&M") through merger (the “F&M Merger”) and integration of F&M into the Company’s operations; the risk that the combined company may be unable to retain the Company and/or F&M personnel successfully after the F&M Merger is completed; our ability to successfully execute our acquisition growth strategy; risks posed by acquisitions and other expansion opportunities, including difficulties and delays in integrating the acquired business operations or fully realizing the cost savings and other benefits; our ability to raise capital needed to fund growth or meet regulatory requirements; the possibility that our internal controls and procedures could fail or be circumvented; our ability to attract and retain key personnel; our ability to keep pace with technological change; cybersecurity risks; changes in federal or state tax laws; changes in accounting principles, policies or guidelines and their impact on financial performance; restrictions on our ability to pay dividends; and the potential volatility of our stock price. Stockholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. Such uncertainties and other risks that may affect the Company’s performance are discussed further in Part I, Item 1A, “Risk Factors,” in the Company’s Form 10-K, for the transition period ended December 31, 2018 filed with the Securities and Exchange Commission ("SEC") on March 8, 2019 and the Company's subsequent filings with the SEC. The Company undertakes no obligation to make any revisions to the forward-looking statements contained in this news release or to update them to reflect events or circumstances occurring after the date of this release.

Non-GAAP Financial Measures (1)

This press release contains non-GAAP financial measures, such as net income as adjusted, tangible book value per share and tangible common equity as a percent of tangible assets, which management believes may be helpful in understanding the Company's results of operations or financial position and comparing results over different periods.

Net income as adjusted is a non-GAAP measure that eliminates the impact of certain expenses such as acquisition and branch closure costs and related data processing termination fees, legal costs, severance pay, accelerated depreciation expense and lease termination fees, the gain on sale of branch deposits and fixed assets and the net impact of the Tax Cuts and Jobs Act of 2017, which management believes enhances investors' ability to better understand the underlying business performance and trends related to core business activities.  Merger related charges represent expenses to either satisfy contractual obligations of acquired entities without any useful benefit to the Company or to convert and consolidate customer records onto the Company platforms.  These costs are unique to each transaction based on the contracts in existence at the merger date.  Tangible book value per share and tangible common equity as a percent of tangible assets are non-GAAP measures that eliminate the impact of preferred stock equity, goodwill and intangible assets on our financial position.  Management believes these measures are useful in assessing the strength of our financial position.

Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found in this press release. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other banks and financial institutions.

Contact: Steve Bianchi, CEO
(715)-836-9994

CITIZENS COMMUNITY BANCORP, INC.
Consolidated Balance Sheets
(in thousands)

    June 30,
2019
(unaudited)
  March 31,
2019
(unaudited)
  December 31,
2018
(audited)
  June 30,
2018
(unaudited)
Assets                
Cash and cash equivalents   $ 47,008     $ 41,358     $ 45,778     $ 27,731  
Other interest bearing deposits   5,980     6,235     7,460     8,160  
Securities available for sale "AFS"   154,760     160,201     146,725     119,702  
Securities held to maturity "HTM"   3,828     4,711     4,850     4,809  
Equity securities with readily determinable fair value   177     182          
Non-marketable equity securities, at cost   12,543     11,206     11,261     6,862  
Loans receivable   1,019,957     1,019,678     992,556     761,087  
Allowance for loan losses   (8,759 )   (8,707 )   (7,604 )   (6,458 )
Loans receivable, net   1,011,198     1,010,971     984,952     754,629  
Loans held for sale   2,475     1,231     1,927     1,778  
Mortgage servicing rights   4,319     4,424     4,486     1,841  
Office properties and equipment, net   15,287     13,487     13,513     9,947  
Accrued interest receivable   4,452     4,369     4,307     3,306  
Intangible assets   6,828     7,174     7,501     4,966  
Goodwill   31,474     31,474     31,474     10,444  
Foreclosed and repossessed assets, net   1,387     2,100     2,570     5,392  
Bank owned life insurance   18,022     17,905     17,792     11,581  
Escrow merger settlement proceeds   20,555              
Other assets   8,127     9,562     3,328     3,922  
TOTAL ASSETS   $ 1,348,420     $ 1,326,590     $ 1,287,924     $ 975,070  
Liabilities and Stockholders’ Equity                
Liabilities:                
Deposits   $ 1,015,459     $ 1,030,649     $ 1,007,512     $ 744,536  
Federal Home Loan Bank advances   135,844     122,828     109,813     58,000  
Other borrowings   44,551     24,675     24,647     29,059  
Other liabilities   9,324     10,058     7,765     8,264  
Total liabilities   1,205,178     1,188,210     1,149,737     839,859  
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; 10,982,008; 10,990,033; 10,953,512 and 5,914,379 shares issued and outstanding, respectively   110     110     109     59  
Additional paid-in capital   125,822     125,940     125,512     63,850  
Retained earnings   18,114     14,008     15,264     12,904  
Unearned deferred compensation   (757 )   (956 )   (857 )   (716 )
Accumulated other comprehensive loss   (47 )   (722 )   (1,841 )   (2,175 )
Total stockholders’ equity   143,242     138,380     138,187     135,211  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 1,348,420     $ 1,326,590     $ 1,287,924     $ 975,070  
                                 

 Note: Certain items previously reported were reclassified for consistency with the current presentation.


CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Operations (unaudited)
(in thousands, except per share data)

    Three Months Ended   Six Months Ended
    June 30, 2019   March 31, 2019   June 30, 2018   June 30, 2019   June 30, 2018
Interest and dividend income:                    
Interest and fees on loans   $ 12,976     $ 12,414     $ 8,865     $ 25,390     $ 17,404  
Interest on investments   1,360     1,304     905     2,664     1,718  
Total interest and dividend income   14,336     13,718     9,770     28,054     19,122  
Interest expense:                    
Interest on deposits   2,926     2,593     1,432     5,519     2,682  
Interest on FHLB borrowed funds   913     661     412     1,574     726  
Interest on other borrowed funds   414     402     446     816     878  
Total interest expense   4,253     3,656     2,290     7,909     4,286  
Net interest income before provision for loan losses   10,083     10,062     7,480     20,145     14,836  
Provision for loan losses   325     1,225     650     1,550     750  
Net interest income after provision for loan losses   9,758     8,837     6,830     18,595     14,086  
Non-interest income:                    
Service charges on deposit accounts   581     550     413     1,131     843  
Interchange income   453     338     338     791     640  
Loan servicing income   634     554     337     1,188     683  
Gain on sale of loans   573     308     226     881     415  
Loan fees and service charges   261     128     116     389     203  
Insurance commission income   192     184     187     376     374  
Gains (losses) on investment securities   21     34     4     55     (17 )
Gain on sale of branch   2,295             2,295      
Other   228     236     146     464     301  
Total non-interest income   5,238     2,332     1,767     7,570     3,442  
Non-interest expense:                    
Compensation and benefits   4,604     4,706     3,840     9,310     7,646  
Occupancy   866     954     733     1,820     1,494  
Office   528     522     417     1,050     843  
Data processing   868     987     720     1,855     1,453  
Amortization of intangible assets   346     327     161     673     322  
Amortization of mortgage servicing rights   306     191     84     497     160  
Advertising, marketing and public relations   456     203     185     659     331  
FDIC premium assessment   146     94     94     240     209  
Professional services   575     825     735     1,400     1,058  
(Gains) losses on repossessed assets, net   (90 )   (37 )   450     (127 )   450  
Other   784     1,122     455     1,906     1,011  
Total non-interest expense   9,389     9,894     7,874     19,283     14,977  
Income before provision for income taxes   5,607     1,275     723     6,882     2,551  
Provision for income taxes   1,500     322     220     1,822     707  
Net income attributable to common stockholders   $ 4,107     $ 953     $ 503     $ 5,060     $ 1,844  
Per share information:                    
Basic earnings   $ 0.37     $ 0.09     $ 0.09     $ 0.46     $ 0.31  
Diluted earnings   $ 0.37     $ 0.09     $ 0.08     $ 0.46     $ 0.30  
Cash dividends paid   $     $ 0.20     $     $ 0.20     $ 0.20  
Book value per share at end of period   $ 13.04     $ 12.59     $ 12.50     $ 13.04     $ 12.50  
Tangible book value per share at end of period (non-GAAP)   $ 9.56     $ 9.07     $ 9.89     $ 9.56     $ 9.89  

Note: Certain items previously reported were reclassified for consistency with the current presentation.

Reconciliation of GAAP Net Income and Net Income as Adjusted (non-GAAP)
(in thousands, except per share data)

    Three Months Ended   Six Months Ended
    June 30,
2019
  March 31,
2019
  June 30,
2018
  June 30,
2019
  June 30,
2018
                                         
GAAP earnings before income taxes   $ 5,607     $ 1,275     $ 723     $ 6,882     $ 2,551  
Merger related costs (1)   206     659     228     865     238  
Branch closure costs (2)       15     16     15     17  
Audit and Financial Reporting (3)       358         358      
Gain on sale of branch   (2,295 )           (2,295 )    
Net income as adjusted before income taxes (4)   3,518     2,307     967     5,825     2,806  
Provision for income tax on net income as adjusted (5)   943     584     294     1,544     777  
Net income as adjusted after income taxes (non-GAAP) (4)   $ 2,575     $ 1,723     $ 673     $ 4,281     $ 2,029  
GAAP diluted earnings per share, net of tax   $ 0.37     $ 0.09     $ 0.08     $ 0.46     $ 0.30  
Merger related costs, net of tax (1)   0.01     0.05     0.02     0.06     0.03  
Branch closure costs, net of tax                  
Audit and Financial Reporting       0.02         0.02      
Gain on sale of branch   (0.15 )         (0.15 )    
Diluted earnings per share, as adjusted, net of tax (non-GAAP)   $ 0.23     $ 0.16     $ 0.10     $ 0.39     $ 0.33  
                     
Average diluted shares outstanding   10,994,470     10,986,466     6,461,760     10,988,990     6,181,643  

(1)  Costs incurred are included as data processing, advertising, marketing and public relations, professional fees, compensation  and other non-interest expense in the consolidated statement of operations and include costs of $160,000, $119,000 and $232,000 for the quarters ended June 30, 2019, March 31, 2019 and June 30, 2018, respectively, and $279,000 and $232,000 for the six months ended June 30, 2019 and 2018, respectively, which are nondeductible expenses for federal income tax purposes.
(2)  Branch closure costs include severance pay recorded in compensation and benefits, accelerated depreciation expense and lease termination fees included in occupancy and other costs included in other non-interest expense in the consolidated statement of operations.
(3) Audit and financial reporting costs include professional fees related to initial SOX compliance and additional audit and professional fees related to the change in our year end from September 30 to December 31.
(4) Net income as adjusted is a non-GAAP measure that management believes enhances the market's ability to assess the underlying business performance and trends related to core business activities.
(5)  Provision for income tax on net income as adjusted is calculated at our effective tax rate for each respective period presented.

Reconciliation of tangible book value per share (non-GAAP):
(in thousands, except per share data)

Tangible book value per share at end of period   June 30,
2019
  March 31,
2019
  December 31,
 2018
  June 30,
 2018
Total stockholders' equity   $ 143,242     $ 138,380     $ 138,187     $ 135,211  
Less:  Preferred stock               (61,289 )
Less:  Goodwill   (31,474 )   (31,474 )   (31,474 )   (10,444 )
Less:  Intangible assets   (6,828 )   (7,174 )   (7,501 )   (4,966 )
Tangible common equity (non-GAAP)   $ 104,940     $ 99,732     $ 99,212     $ 58,512  
Ending common shares outstanding   10,982,008     10,990,033     10,953,512     5,914,379  
Book value per share   $ 13.04     $ 12.59     $ 12.62     $ 12.50  
Tangible book value per share (non-GAAP)   $ 9.56     $ 9.07     $ 9.06     $ 9.89  
                                 

               
Reconciliation of tangible common equity as a percent of tangible assets (non-GAAP):
(in thousands, except ratios)

Tangible common equity as a percent of tangible assets at end of period   June 30,
2019
  March 31,
2019
  December 31,
 2018
  June 30,
 2018
Total stockholders' equity   $ 143,242     $ 138,380     $ 138,187     $ 135,211  
Less:  Preferred stock               (61,289 )
Less:  Goodwill   (31,474 )   (31,474 )   (31,474 )   (10,444 )
Less:  Intangible assets   (6,828 )   (7,174 )   (7,501 )   (4,966 )
Tangible common equity (non-GAAP)   $ 104,940     $ 99,732     $ 99,212     $ 58,512  
Total Assets   $ 1,348,420     $ 1,326,590     $ 1,287,924     $ 975,070  
Less:  Goodwill   (31,474 )   (31,474 )   (31,474 )   (10,444 )
Less:  Intangible assets   (6,828 )   (7,174 )   (7,501 )   (4,966 )
Tangible Assets (non-GAAP)   $ 1,310,118     $ 1,287,942     $ 1,248,949     $ 959,660  
Total stockholders' equity to total assets ratio   10.62 %   10.43 %   10.73 %   13.87 %
Tangible common equity as a percent of tangible assets (non-GAAP)   8.01 %   7.74 %   7.94 %   6.10 %
                         

1 Net income as adjusted is a non-GAAP measure that management believes enhances investors' ability to better understand the underlying business performance and trends related to core business activities. For a detailed reconciliation of GAAP to non-GAAP results, see the accompanying financial table "Reconciliation of GAAP Net Income and Net Income as Adjusted (non-GAAP)".

2 Tangible book value per share and tangible common equity as a percent of tangible assets are non-GAAP measure that management believes enhances investors' ability to better understand the Company's financial position. For a detailed reconciliation of GAAP to non-GAAP results, see the accompanying financial table "Reconciliation of tangible book value per share (non-GAAP)" and “Reconciliation of tangible common equity as a percent of tangible assets (non-GAAP).”

Nonperforming Assets:
(in thousands, except ratios)

    June 30,
2019
and Three
Months
Ended
  March 31,
2019
and Three
Months
Ended
  December 31,
2018
and Three
Months
Ended
  June 30,
2018
and Three
Months
Ended
Nonperforming assets:                
Nonaccrual loans   $ 13,612     $ 9,871     $ 7,354     $ 6,627  
Accruing loans past due 90 days or more   880     1,713     736     710  
Total nonperforming loans (“NPLs”)   14,492     11,584     8,090     7,337  
Other real estate owned ("OREO")   1,354     2,071     2,522     5,328  
Other collateral owned   33     29     48     64  
Total nonperforming assets (“NPAs”)   $ 15,879     $ 13,684     $ 10,660     $ 12,729  
Troubled Debt Restructurings (“TDRs”)   $ 10,000     $ 9,984     $ 8,722     $ 8,210  
Nonaccrual TDRs   $ 4,101     $ 2,501     $ 2,667     $ 2,350  
Average outstanding loan balance   $ 1,023,447     $ 996,778     $ 921,951     $ 735,723  
Loans, end of period   $ 1,019,957     $ 1,019,678     $ 992,556     $ 761,087  
Total assets, end of period   $ 1,348,420     $ 1,326,590     $ 1,287,924     $ 975,070  
Allowance for loan losses ("ALL"), at beginning of period   $ 8,707     $ 7,604     $ 6,748     $ 5,887  
Loans charged off:                
Residential real estate   (23 )   (67 )   (43 )   (47 )
Commercial/Agricultural real estate   (225 )           (65 )
Consumer non-real estate   (48 )   (78 )   (79 )   (34 )
Commercial/Agricultural non-real estate               (5 )
Total loans charged off   (296 )   (145 )   (122 )   (151 )
Recoveries of loans previously charged off:                
Residential real estate       1     4     34  
Commercial/Agricultural real estate   3              
Consumer non-real estate   20     22     24     26  
Commercial/Agricultural non-real estate               12  
Total recoveries of loans previously charged off:   23     23     28     72  
Net loans charged off (“NCOs”)   (273 )   (122 )   (94 )   (79 )
Additions to ALL via provision for loan losses charged to operations   325     1,225     950     650  
ALL, at end of period   $ 8,759     $ 8,707     $ 7,604     $ 6,458  
Ratios:                
ALL to NCOs (annualized)   802.11 %   1,784.22 %   2,022.34 %   2,043.67 %
NCOs (annualized) to average loans   0.11 %   0.05 %   0.04 %   0.04 %
ALL to total loans   0.86 %   0.85 %   0.77 %   0.85 %
NPLs to total loans   1.42 %   1.14 %   0.82 %   0.96 %
NPAs to total assets   1.18 %   1.03 %   0.83 %   1.31 %

Nonaccrual Loans Rollforward:
(in thousands)

  Quarter Ended
  June 30,
2019
  March 31,
2019
  December 31,
2018
  June 30,
2018
Balance, beginning of period $ 9,871     $ 7,354     $ 7,210     $ 6,642  
Additions 7,405     3,428     906     3,225  
Acquired nonaccrual loans         941      
Charge offs (262 )   (31 )   (40 )   (38 )
Transfers to OREO (236 )   (362 )   (201 )    
Return to accrual status (149 )   (175 )        
Payments received (2,612 )   (282 )   (1,429 )   (2,915 )
Other, net (405 )   (61 )   (33 )   (287 )
Balance, end of period $ 13,612     $ 9,871     $ 7,354     $ 6,627  
                               

Other Real Estate Owned Rollforward:
(in thousands)

  Quarter Ended
  June 30,
2019
  March 31,
2019
  December 31,
2018
  June 30,
2018
Balance, beginning of period $ 2,071     $ 2,522     $ 2,749     $ 7,015  
Loans transferred in 236     362     201      
Sales (958 )   (808 )   (210 )   (889 )
Write-downs (23 )   (6 )       (498 )
Other, net 28     1     (218 )   (300 )
Balance, end of period $ 1,354     $ 2,071     $ 2,522     $ 5,328  
                               

Troubled Debt Restructurings in Accrual Status
(in thousands, except number of modifications)

  June 30, 2019   March 31, 2019   December 31, 2018   June 30, 2018
  Number of
Modifications
  Recorded
Investment
  Number of
Modifications
  Recorded
Investment
  Number of
Modifications
  Recorded
Investment
  Number of
Modifications
  Recorded
Investment
Troubled debt restructurings:  Accrual Status                              
Residential real estate 39     $ 3,137     37     $ 3,454     34     $ 3,319     32     $ 3,580  
Commercial/Agricultural real estate 14     2,202     17     3,454     15     2,209     14     1,662  
Consumer non-real estate 11     82     11     90     13     99     15     122  
Commercial/Agricultural non-real estate 4     478     3     485     2     428     3     496  
Total loans 68     $ 5,899     68     $ 7,483     64     $ 6,055     64     $ 5,860  
                                                       

Loan Composition - Detail 
(in thousands)

To help better understand the Bank's loan trends, we have added the table below.  The loan categories and amounts shown are the same as on the following page and are presented in a different format.  The Community Banking loan portfolios reflect the Bank's strategy to grow its commercial banking business and consumer lending.  The Legacy loan portfolios reflect the Bank's strategy to sell substantially all newly originated one to four family loans in the secondary market and the discontinuation of originated and purchased indirect paper loans, effective in the first quarter of fiscal 2017.

    June 30, 2019   March 31, 2019   December 31, 2018   June 30, 2018
Community Banking Loan Portfolios:                
Commercial/Agricultural real estate:                
Commercial real estate   $ 374,441     $ 368,530     $ 357,959     $ 208,526  
Agricultural real estate   92,137     90,920     86,015     70,881  
Multi-family real estate   83,423     83,961     69,400     45,707  
Construction and land development   52,071     42,446     22,691     15,258  
Commercial/Agricultural non-real estate:                
Commercial non-real estate   107,754     105,803     112,427     74,763  
Agricultural non-real estate   36,827     36,254     36,327     26,366  
Residential real estate:                
Purchased HELOC loans   11,125     12,346     12,883     15,237  
Consumer non-real estate:                
Other consumer   18,389     19,048     20,214     19,063  
Total Community Banking Loan Portfolios   776,167     759,308     717,916     475,801  
                 
Legacy Loan Portfolios:                
Residential real estate:                
One to four family   191,890     201,796     209,926     202,356  
Consumer non-real estate:                
Originated indirect paper   47,391     52,422     56,585     66,791  
Purchased indirect paper   11,155     12,910     15,006     19,801  
Total Legacy Loan Portfolios   250,436     267,128     281,517     288,948  
Gross loans   $ 1,026,603     $ 1,026,436     $ 999,433     $ 764,749  


Loan Composition   June 30, 2019   March 31, 2019   December 31, 2018   June 30, 2018
Originated Loans:                
Residential real estate:                
One to four family   $ 117,585     $ 119,477     $ 121,053     $ 122,028  
Purchased HELOC loans   11,125     12,346     12,883     15,237  
Commercial/Agricultural real estate:                
Commercial real estate   239,051     225,393     200,875     156,760  
Agricultural real estate   34,927     33,311     29,589     23,739  
Multi-family real estate   75,664     75,534     61,574     42,360  
Construction and land development   35,030     27,414     15,812     11,212  
Consumer non-real estate:                
Originated indirect paper   47,391     52,422     56,585     66,791  
Purchased indirect paper   11,155     12,910     15,006     19,801  
Other Consumer   15,229     15,123     15,553     15,549  
Commercial/Agricultural non-real estate:                
Commercial non-real estate   75,186     72,889     73,518     58,637  
Agricultural non-real estate   21,776     20,661     17,341     16,792  
Total originated loans   $ 684,119     $ 667,480     $ 619,789     $ 548,906  
Acquired Loans:                
Residential real estate:                
One to four family   $ 74,305     $ 82,319     $ 88,873     $ 80,328  
Commercial/Agricultural real estate:                
Commercial real estate   135,390     143,137     157,084     51,766  
Agricultural real estate   57,210     57,609     56,426     47,142  
Multi-family real estate   7,759     8,427     7,826     3,347  
Construction and land development   17,041     15,032     6,879     4,046  
Consumer non-real estate:                
Other Consumer   3,160     3,925     4,661     3,514  
Commercial/Agricultural non-real estate:                
Commercial non-real estate   32,568     32,914     38,909     16,126  
Agricultural non-real estate   15,051     15,593     18,986     9,574  
Total acquired loans   $ 342,484     $ 358,956     $ 379,644     $ 215,843  
Total Loans:                
Residential real estate:                
One to four family   $ 191,890     $ 201,796     $ 209,926     $ 202,356  
Purchased HELOC loans   11,125     12,346     12,883     15,237  
Commercial/Agricultural real estate:                
Commercial real estate   374,441     368,530     357,959     208,526  
Agricultural real estate   92,137     90,920     86,015     70,881  
Multi-family real estate   83,423     83,961     69,400     45,707  
Construction and land development   52,071     42,446     22,691     15,258  
Consumer non-real estate:                
Originated indirect paper   47,391     52,422     56,585     66,791  
Purchased indirect paper   11,155     12,910     15,006     19,801  
Other Consumer   18,389     19,048     20,214     19,063  
Commercial/Agricultural non-real estate:                
Commercial non-real estate   107,754     105,803     112,427     74,763  
Agricultural non-real estate   36,827     36,254     36,327     26,366  
Gross loans   $ 1,026,603     $ 1,026,436     $ 999,433     $ 764,749  
Unearned net deferred fees and costs and loans in process   98     318     409     693  
Unamortized discount on acquired loans   (6,744 )   (7,076 )   (7,286 )   (4,355 )
Total loans receivable   $ 1,019,957     $ 1,019,678     $ 992,556     $ 761,087  
                                 

Deposit Composition:
(in thousands)

    June 30,
 2019
  March 31,
 2019
  December 31,
2018
  June 30,
 2018
Non-interest bearing demand deposits   $ 140,130     $ 138,280     $ 155,405     $ 82,135  
Interest bearing demand deposits   180,001     195,741     169,310     151,117  
Savings accounts   148,005     159,325     192,310     98,427  
Money market accounts   155,964     174,508     126,021     115,369  
Certificate accounts   391,359     362,795     364,466     297,488  
Total deposits   $ 1,015,459     $ 1,030,649     $ 1,007,512     $ 744,536  
                                 

Average balances, Interest Yields and Rates:
(in thousands, except yields and rates)

    Three months ended June 30,  2019   Three months ended March 31, 2019   Three months ended June 30, 2018
    Average
Balance
  Interest
Income/
Expense
  Average
Yield/
Rate (1)
  Average
Balance
  Interest
Income/
Expense
  Average
Yield/
Rate (1)
  Average
Balance
  Interest
Income/
Expense
  Average
Yield/
Rate (1)
Average interest earning assets:                                    
Cash and cash equivalents   $ 30,076     $ 171     2.28 %   $ 26,014     $ 168     2.62 %   $ 19,203     $ 61     1.27 %
Loans receivable   1,023,447     12,976     5.09 %   996,778     12,414     5.05 %   729,390     8,865     4.87 %
Interest bearing deposits   5,967     35     2.35 %   6,913     39     2.29 %   8,418     44     2.10 %
Investment securities (1)   158,991     996     2.60 %   156,157     947     2.57 %   124,715     701     2.44 %
Non-marketable equity securities, at cost   12,114     158     5.23 %   10,375     150     5.86 %   8,158     99     4.87 %
Total interest earning assets (1)   $ 1,230,595     $ 14,336     4.68 %   $ 1,196,237     $ 13,718     4.66 %   $ 889,884     $ 9,770     4.43 %
Average interest bearing liabilities:                                                          
Savings accounts   $ 147,456     $ 149     0.41 %   $ 164,129     $ 175     0.43 %   $ 94,741     $ 53     0.22 %
Demand deposits   191,858     383     0.80 %   189,348     354     0.76 %   150,666     129     0.34 %
Money market accounts   164,402     448     1.09 %   152,963     382     1.01 %   115,625     196     0.68 %
CD’s   336,253     1,765     2.11 %   326,834     1,529     1.90 %   271,311     959     1.42 %
IRA’s   40,688     181     1.78 %   39,857     153     1.56 %   32,890     94     1.15 %
Total deposits   $ 880,657     $ 2,926     1.33 %   $ 873,131     $ 2,593     1.20 %   $ 665,233     $ 1,431     0.86 %
FHLB advances and other borrowings   165,733     1,327     3.21 %   126,239     1,063     3.41 %   114,498     859     3.01 %
Total interest bearing liabilities   $ 1,046,390     $ 4,253     1.63 %   $ 999,370     $ 3,656     1.48 %   $ 779,731     $ 2,290     1.18 %
Net interest income       $ 10,083               $ 10,062               $ 7,480        
Interest rate spread           3.05 %           3.18 %           3.25 %
Net interest margin (1)           3.30 %           3.43 %           3.40 %
Average interest earning assets to average interest bearing liabilities           1.18             1.20             1.14  
                                           

(1) Fully taxable equivalent (FTE).  The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21% for the quarters ended June 30, 2019 and March 31, 2019 and 24.5% for the quarter ended June 30, 2018.  The FTE adjustment to net interest income included in the rate calculations totaled $35,000, $42,000 and $55,000 for the three months ended June 30, 2019, March 31, 2019 and June 30, 2018, respectively.


    Six months ended June 30, 2019   Six months ended June 30, 2018
    Average
Balance
  Interest
Income/
Expense
  Average
Yield/
Rate (1)
  Average
Balance
  Interest
Income/
Expense
  Average
Yield/
Rate (1)
Average interest earning assets:                        
Cash and cash equivalents   $ 28,045     $ 339     2.44 %   $ 23,488     $ 123     1.06 %
Loans receivable   1,010,113     25,390     5.07 %   727,496     17,405     4.82 %
Interest bearing deposits   6,440     74     2.32 %   7,850     75     1.93 %
Investment securities (1)   157,574     1,943     2.59 %   119,329     1,321     2.41 %
Non-marketable equity securities, at cost   11,244     308     5.52 %   8,082     198     4.94 %
Total interest earning assets (1)   $ 1,213,416     $ 28,054     4.68 %   $ 886,245     $ 19,122     4.38 %
Average interest bearing liabilities:                            
Savings accounts   $ 155,792     $ 324     0.42 %   $ 94,619     $ 81     0.17 %
Demand deposits   190,603     737     0.78 %   151,849     243     0.32 %
Money market accounts   158,683     831     1.06 %   117,124     357     0.61 %
CD’s   331,543     3,293     2.00 %   268,466     1,822     1.37 %
IRA’s   40,272     334     1.67 %   33,289     178     1.08 %
Total deposits   $ 876,893     $ 5,519     1.27 %   $ 665,347     $ 2,681     0.81 %
FHLB advances and other borrowings   145,986     2,390     3.30 %   116,219     1,605     2.78 %
Total interest bearing liabilities   $ 1,022,879     $ 7,909     1.56 %   $ 781,566     $ 4,286     1.11 %
Net interest income       $ 20,145               $ 14,836        
Interest rate spread           3.12 %           3.27 %
Net interest margin (1)           3.36 %           3.40 %
Average interest earning assets to average interest bearing liabilities           1.19             1.13  
                             

(1) Fully taxable equivalent (FTE).  The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 21% for the six months ended June 30, 2019 and 24.5% for the six months ended June 30, 2018.  The FTE adjustment to net interest income included in the rate calculations totaled $77,000 and $107,000 for the six months ended June 30, 2019 and June 30, 2018, respectively.

CITIZENS COMMUNITY FEDERAL N.A.
Selected Capital Composition Highlights (unaudited)

    June 30,
2019
  March 31,
2019
  December 31,
2018
  June 30,
2018
  To Be Well Capitalized Under
Prompt Corrective Action
Provisions
Tier 1 leverage ratio (to adjusted total assets)   9.7%   9.6%   9.7%   9.3%   5.0%
Tier 1 capital (to risk weighted assets)   12.2%   11.9%   11.9%   11.9%   8.0%
Common equity tier 1 capital (to risk weighted assets)   12.2%   11.9%   11.9%   11.9%   6.5%
Total capital (to risk weighted assets)   13.1%   12.7%   12.7%   12.8%   10.0%

 

Is your business listed correctly on America’s largest city directory network of 1,000 portals?