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Citizens Community Bancorp, Inc. Earns $953,000 For Quarter Ending March 31, 2019; Loans up 3% From Quarter Ended December 31, 2018

EAU CLAIRE, Wis., April 26, 2019 (GLOBE NEWSWIRE) -- Citizens Community Bancorp, Inc. (the "Company") (CZWI), the parent company of Citizens Community Federal N.A. (the “Bank” or "CCFBank"), today reported earnings of $953,000, or $0.09 per diluted share for the quarter ended March 31, 2019, compared to $1.26 million, or $0.12 per diluted share for the previous quarter ended December 31, 2018.  The current quarter’s operations reflected merger related costs, financial reporting expenses associated with changing our year end and higher loan loss provisions related to a growing loan portfolio and specific reserves related to a dairy loan and modest increases to specific reserves due to methodology enhancements.

"We continue to build momentum in our banking platform.  Despite a harsh winter, our pipeline for new loans is healthy,” said Stephen Bianchi, Chairman, President and Chief Executive Officer.  “We are seeing better community recognition of our brand while our efforts to better staff branches, train our team and leverage our name through acquisitions are beginning to pay dividends with solid organic loan and deposit growth.  We completed the conversion of the United Bank data systems in February and expect to close the acquisition of F. & M. Bancorp. of Tomah, Inc. this summer."

Net income as adjusted (non-GAAP)1 was $1.82 million, or $0.17 per diluted share for the quarter ended March 31, 2019, compared to $2.19 million, or $0.20 per diluted shares for the quarter ended December 31, 2018.  Net income as adjusted (non-GAAP)1 excludes (1) merger and branch closure expenditures, (2) certain audit and financial reporting costs related to the change in year end, (3) initial Sarbanes-Oxley Act ("SOX") implementation costs, which are higher than the forecasted ongoing run rate, as well as (4) 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.

March 31, 2019 Highlights: (as of or for the periods ended March 31, 2019, compared to December 31, 2018 and /or September 30, 2018)

  • Our Community Banking loan portfolio, consisting of commercial, agricultural and consumer loans, increased $41 million, or 5.7%, as of March 31, 2019, while our Legacy Loan portfolio of indirect paper and one-to-four family loans, declined $14 million from December 31, 2018.  Gross loan growth for the quarter was $27 million or a 3% quarterly growth rate.

  • Merger related costs were $659,000 for the quarter ended March 31, 2019, while audit and financial reporting costs of $358,000 were realized associated with changing our fiscal year end to December 31.

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

  • Loan loss provisions were $1.225 million for the quarter ended March 31, 2019. Provision expense for the quarter of approximately (1) $600,000 was due to newly originated loan growth reflecting strong organic loan growth, (2) $122,000 was due to net charge offs for the quarter and (3) $500,000 was due to increases in specific reserves on impaired credits.

  • The quarter was impacted by our typical first quarter slowdown due to weather and fewer days within the quarter relative to the prior quarter. As a result, net pretax income reductions occurred in the following: (1) net interest income was approximately $220,000 lower due to fewer days, (2) deposit service charges were $70,000 lower, (3) gain on sale of loans was $80,000 lower and (4) payroll tax expense was higher by $75,000 due to payroll expense seasonality.  These reductions in net pretax income were partially offset by lower compensation expense of approximately $100,000 due to fewer business days within the quarter. In total, these items were approximately $365,000 lower, pretax, than the previous calendar quarter.  Additionally, the Bank recorded a one-time charge of approximately $160,000 related to Wisconsin domicile taxes associated with the Bank's initial public offering in 2006.

  • The stabilized interest rate environment helped to reduce the accumulated other comprehensive loss in equity from $1.8 million at December 31, 2018 to $722,000 at March 31, 2019.  At September 30, 2018, the accumulated other comprehensive loss was $2.7 million.

Estimated Bank and Company capital ratios exceeded regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at March 31, 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)   9.6%   7.9%   5.0%
Tier 1 capital (to risk weighted assets)   11.9%   9.8%   8.0%
Common equity tier 1 capital (to risk weighted assets)   11.9%   9.8%   6.5%
Total capital (to risk weighted assets)   12.7%   12.2%   10.0%

Balance Sheet and Asset Quality Review

Total assets were $1.327 billion at March 31, 2019, compared to $1.288 billion at December 31, and $975 million at September 30, 2018.  Strong organic loan and deposit growth largely supported the increase in assets in the current quarter.  The asset growth from September 30, 2018 through December 31, 2018 was mainly due to the acquisition of United Bank as well as approximately $30 million in organic loan growth.

Total loans were $1.02 billion at March 31, 2019, compared to $993 million at December 31, 2018.  Community Banking loans increased $41 million to $759 million at March 31, 2019, from $718 million at December 31, 2018, and more than offset the planned runoff of Legacy Loans. The growth was centered in CRE, multifamily and construction and land development loans in various stages. Legacy loans decreased $14 million to $267 million at March 31, 2019, from $281 million at December 31, 2018.

At March 31, 2019, total gross Community Banking portfolio loans, consisting of commercial, agricultural and consumer loans, represented 74% of gross loans, while the gross Legacy Loan portfolio of indirect paper and one-to-four family loans was 26% of gross loans.  One year earlier, the Community Banking portfolio loans totaled 58% of gross loans.

The allowance for loan and lease losses increased to $8.7 million, at March 31, 2019, representing 0.85% of total loans, compared to $7.6 million and 0.77% of total loans at December 31, 2018.  Approximately 35% of the Bank's loan portfolio represents acquired performing loans and marked to fair value as of the acquisition date, with a remaining $4.1 million purchase-discount related to credit impaired acquired loans.  Net charge offs were $122,000 for the quarter ended March 31, 2019, compared to $94,000 for the quarter ended December 31, 2018.

Nonperforming assets increased to $13.7 million, or 1.03% of total assets at March 31, 2019, compared to $10.7 million or 0.83% of total assets at December 31, 2018.  The increase primarily relates to the dairy credit discussed above and increases in loan relationships aggregating $550,000 or less partially offset by the reduction in foreclosed assets.

Securities available for sale increased $13 million to $160 million at March 31, 2019, from $147 million at December 31, 2018, as the Bank increased on-balance sheet liquidity modestly.

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

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

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

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

Review of Operations

Net interest income was $10.06 million for the first quarter of 2019, compared to $10.04 million for the fourth quarter of 2018, and $7.36 million for the first quarter a year ago.  The net interest margin (“NIM”) decreased to 3.43% for the quarter ended March 31, 2019 compared to 3.56% in the preceding quarter and 3.40% for the like quarter one year earlier.  For the preceding quarter, the Company’s net interest margin benefited from $235,000, or 8 bp, of interest income realized on the payoff of classified loans, compared to $15,000, or 1 bp, in the current quarter.  Scheduled accretion for acquired loans, was $194,000, $182,000, and $142,000 for the quarters ended March 31, 2019, December 31, 2018 and March 31, 2018, respectively. The impact on margin was 1 bp at March 31, 2019 and 8 bp at December 31, 2018.  Increased deposit costs more than offset higher asset yields, which resulted in the remainder of the decline in NIM.

Loan loss provisions were $1.225 million for the quarter ended March 31, 2019. Provision expense for the quarter of approximately (1) $600,000 was due to newly originated loan growth reflecting strong organic loan growth, (2) $122,000 was due to net charge offs for the quarter and (3) $500,000 was due to increases in specific reserves on impaired credits. Provision expense was higher mainly due to increasing specific reserves. The largest specific reserve was established on a single dairy relationship of approximately $350,000 or $0.02 per share, whose status changed to nonaccrual during the quarter ended March 31, 2019. While the agricultural sector is currently challenged, the issues on this specific credit were isolated and are being addressed.  Management believes its agricultural lending processes remain prudent and there is no evidence to suggest systemic problems.
Additionally, approximately half of the specific reserves increase was due to enhancements on various impaired loans.

Total non-interest income was $2.33 million for the quarter ended March 31, 2019 compared to $2.53 million for the quarter ended December 31, 2018 and $1.68 million one year earlier.  The slight decline in non-interest income relates partially to the seasonality of gains recognized on the sale of loans into the secondary market and service charges on deposit accounts.

Total non-interest expense was $9.89 million for the first quarter of 2019, compared to $9.79 million on a linked quarter basis and $7.10 million for the first quarter a year ago. Total non-interest expense for the current quarter reflects lower compensation and benefit expenses which decreased to $4.71 million for the quarter ended March 31, 2019, from $4.95 million for the quarter ended December 31, 2018.

Compensation and benefits expense decreased $240,000 in the current quarter. During the current quarter, merger related compensation expense decreased by approximately $280,000.  Two fewer business days in the quarter resulted in $100,000 less compensation expense, offset by higher seasonal payroll tax expense of $75,000.  This net decrease was partially offset by higher compensation costs related to the full quarter impact of United Bank, and reduced by lower health care costs and reductions in FTE's.

Additionally, professional fees declined from $1.12 million for the quarter ended December 31, 2018 to $825,000 for the quarter ended March 31, 2019, due to changes in professional fees discussed below and normal fiscal year audit expenses in the quarter ended December 31, 2018.

Increase in other expense includes a one-time charge of approximately $160,000 related to Wisconsin domicile taxes associated with the Bank's initial public offering in 2006 and an additional one-time charge of approximately $140,000 related to Wisconsin domicile taxes arising from our 2018 United Bank Acquisition.

Merger related expenses incurred this quarter and included in the consolidated statement of operations consisted of the following: (1) $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 this quarter 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.

Merger related expenses incurred in the quarter ended December 31, 2018 and included in the consolidated statement of operations consisted of the following: (1) $352,000 recorded in compensation and benefits, (2) $580,000 recorded in professional services and (3) $125,000 recorded in other non-interest expense.  Branch closure costs incurred in the quarter ended December 31, 2018 consisted of $9,000 recorded in professional services and $3,000 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 $135,000 recorded in professional services in the consolidated statement of operations during the quarter ended December 31, 2018.

The effective tax rate declined to 25.3% for the quarter ended March 31, 2019 from 30.8% the previous quarter.  Provisions for income taxes were $322,000 for the quarter ended March 31, 2019 compared to $561,000 for the quarter ended December 31, 2018.  The higher effective tax rate for the quarter ended December 31, 2018 was partially the result of non-deductible tax expenses related to the United Bank acquisition and the true-up of the Company's net deferred tax asset. Tax expense for the quarter ended December 31, 2018, includes the impact of $461,000 of tax non-deductible merger expenses.

These financial results are preliminary until the Form 10-Q is filed in May 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 26 branch locations, along with one branch in Michigan which the Company has a signed agreement to sell.  Its primary markets include the Chippewa Valley Region in Wisconsin, the Twin Cities and Mankato markets in Minnesota, and various rural communities around these areas. The Bank offers traditional community banking services to businesses, 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 F&M Merger may be more difficult, costly or time consuming or that the expected benefits are not realized; the risk that the combined company may be unable to retain the Company and/or F&M personnel successfully after the F&M Merger is completed; the risk that regulatory approvals needed effect the F&M Merger may not be received, may take longer than expected or may impose unanticipated conditions; the possibility that the F&M Merger Agreement may be terminated in accordance with its terms and may not be completed in the anticipated timeframe or at all; the risk that if the F&M Merger were not completed it could negatively impact the stock price and the future business and financial results of the Company; the transaction and merger-related costs in connection with the F&M Merger; litigation relating to the F&M Merger, which could require the Company and F&M to incur significant costs and suffer management distraction, as well as delay and/or enjoin the F&M Merger; our ability to successfully execute our acquisition growth strategy; risks posed by acquisitions and other expansion opportunities, including difficulties and delays in integrating the acquired business operations or fully realizing the cost savings and other benefits; our ability to raise capital needed to fund growth or meet regulatory requirements; the possibility that our internal controls and procedures could fail or be circumvented; our ability to attract and retain key personnel; our ability to keep pace with technological change; cybersecurity risks; changes in federal or state tax laws; changes in accounting principles, policies or guidelines and their impact on financial performance; restrictions on our ability to pay dividends; and the potential volatility of our stock price. 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

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 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)

    March 31,
2019
(unaudited)
  December 31,
2018
(audited)
  September 30,
2018
(audited)
  March 31,
2018
(unaudited)
Assets                
Cash and cash equivalents   $ 41,358     $ 45,778     $ 34,494     $ 31,468  
Other interest bearing deposits   6,235     7,460     7,180     8,399  
Securities available for sale "AFS"   160,201     146,725     118,482     118,314  
Securities held to maturity "HTM"   4,711     4,850     4,619     5,013  
Equity securities with readily determinable fair value   182              
Non-marketable equity securities, at cost   11,206     11,261     7,218     7,707  
Loans receivable   1,019,678     992,556     759,247     721,128  
Allowance for loan losses   (8,707 )   (7,604 )   (6,748 )   (5,887 )
Loans receivable, net   1,010,971     984,952     752,499     715,241  
Loans held for sale   1,231     1,927     1,917     1,520  
Mortgage servicing rights   4,424     4,486     1,840     1,849  
Office properties and equipment, net   13,487     13,513     10,034     9,151  
Accrued interest receivable   4,369     4,307     3,600     3,251  
Intangible assets   7,174     7,501     4,805     5,126  
Goodwill   31,474     31,474     10,444     10,444  
Foreclosed and repossessed assets, net   2,100     2,570     2,768     7,080  
Bank owned life insurance   17,905     17,792     11,661     11,502  
Other assets   9,562     3,328     3,848     4,318  
TOTAL ASSETS   $ 1,326,590     $ 1,287,924     $ 975,409     $ 940,383  
Liabilities and Stockholders’ Equity                
Liabilities:                
Deposits   $ 1,030,649     $ 1,007,512     $ 746,529     $ 748,615  
Federal Home Loan Bank advances   122,828     109,813     63,000     85,000  
Other borrowings   24,675     24,647     24,619     29,479  
Other liabilities   10,058     7,765     5,414     3,780  
Total liabilities   1,188,210     1,149,737     839,562     866,874  
Stockholders’ equity:                
Common stock— $0.01 par value,
authorized 30,000,000; 10,990,033;
10,953,512, 10,913,853; and
5,902,481 shares issued and
outstanding, respectively
  110     109     109     59  
Additional paid-in capital   125,940     125,512     125,063     63,575  
Retained earnings   14,008     15,264     14,003     12,401  
Unearned deferred compensation   (956 )   (857 )   (622 )   (515 )
Accumulated other comprehensive
loss
  (722 )   (1,841 )   (2,706 )   (2,011 )
Total stockholders’ equity   138,380     138,187     135,847     73,509  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 1,326,590     $ 1,287,924     $ 975,409     $ 940,383  

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


CITIZENS COMMUNITY BANCORP, INC.

Consolidated Statements of Operations
(in thousands, except per share data)

    Three Months Ended   Twelve Months Ended
    March 31,
2019
(unaudited)
  December 31,
2018
(audited)
  March 31,
2018
(unaudited)
  September 30,
2018
(audited)
Interest and dividend income:                
Interest and fees on loans   $ 12,414     $ 11,839     $ 8,539     $ 35,539  
Interest on investments   1,304     1,208     813     3,357  
Total interest and dividend income   13,718     13,047     9,352     38,896  
Interest expense:                
Interest on deposits   2,593     2,131     1,250     5,543  
Interest on FHLB borrowed funds   661     482     314     1,310  
Interest on other borrowed funds   402     394     432     1,740  
Total interest expense   3,656     3,007     1,996     8,593  
Net interest income before provision for loan losses   10,062     10,040     7,356     30,303  
Provision for loan losses   1,225     950     100     1,300  
Net interest income after provision for loan losses   8,837     9,090     7,256     29,003  
Non-interest income:                
Service charges on deposit accounts   550     619     430     1,792  
Interchange income   338     336     302     1,284  
Loan servicing income   554     510     346     1,379  
Gain on sale of loans   308     388     189     943  
Loan fees and service charges   128     273     87     521  
Insurance commission income   184     162     187     720  
Gains (losses) on investment securities   34         (21 )   (17 )
Other   236     238     155     748  
Total non-interest income   2,332     2,526     1,675     7,370  
Non-interest expense:                
Compensation and benefits   4,706     4,946     3,806     14,979  
Occupancy   954     808     761     2,975  
Office   522     464     426     1,715  
Data processing   987     993     733     2,928  
Amortization of intangible assets   327     325     161     644  
Amortization of mortgage servicing rights   191     175     76     335  
Advertising, marketing and public relations   203     226     146     745  
FDIC premium assessment   94     144     115     472  
Professional services   825     1,118     323     2,323  
(Gains) losses on repossessed assets, net   (37 )   (30 )       535  
Other   1,122     625     556     2,113  
Total non-interest expense   9,894     9,794     7,103     29,764  
Income before provision for income taxes   1,275     1,822     1,828     6,609  
Provision for income taxes   322     561     487     2,326  
Net income attributable to common stockholders   $ 953     $ 1,261     $ 1,341     $ 4,283  
Per share information:                
Basic earnings   $ 0.09     $ 0.12     $ 0.23     $ 0.72  
Diluted earnings   $ 0.09     $ 0.12     $ 0.23     $ 0.58  
Cash dividends paid   $ 0.20     $     $ 0.20     $ 0.20  
Book value per share at end of period   $ 12.59     $ 12.62     $ 12.45     $ 12.45  
Tangible book value per share at end of period (non-
GAAP)
  $ 9.07     $ 9.06     $ 9.82     $ 11.05  

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):

    Three Months Ended   Twelve Months
Ended
    March 31,
2019
  December 31,
2018
  March 31,
2018
  September 30,
2018
     
GAAP earnings before income taxes   $ 1,275     $ 1,822     $ 1,828     $ 6,609  
Merger related costs (1)   659     1,057     10     463  
Branch closure costs (2)   15     12     1     26  
Audit and Financial Reporting (3)   358     135          
Net income as adjusted before income taxes (4)   2,307     3,026     1,839     7,098  
Provision for income tax on net income as adjusted (5)   484     832     451     1,739  
Tax Cuts and Jobs Act of 2017 (6)               338  
Total Provision for income tax   484     832     451     2,077  
Net income as adjusted after income taxes (non-GAAP) (4)   $ 1,823     $ 2,194     $ 1,388     $ 5,021  
GAAP diluted earnings per share, net of tax   $ 0.09     $ 0.12     $ 0.23     $ 0.58  
Merger related costs, net of tax (1)   0.05     0.07         0.06  
Branch closure costs, net of tax                
Audit and Financial Reporting   0.03     0.01          
Tax Cuts and Jobs Act of 2017 tax provision (6)               0.04  
Diluted earnings per share, as adjusted, net of tax (non-GAAP)   $ 0.17     $ 0.20     $ 0.23     $ 0.68  
                 
Average diluted shares outstanding   10,986,466     10,967,386     5,932,342     7,335,247  

(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 $119,000, $461,000 and $0 for the quarters ended March 31, 2019, December 31, 2018 and March 31, 2018, respectively, and $350,000 for the year ended September 30, 2018, 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.  In addition, legal costs related to the sale of the sole Michigan branch, are recorded in professional services and included in these Branch closure costs.
(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 21.0% for the quarter ended March 31, 2019, 26.0% for the quarter ended December 31, 2018 and at 24.5% for all quarters in fiscal 2018, which represents our federal statutory tax rate for each respective period presented.
(6) As a result of the Tax Cuts and Jobs Act of 2017, we recorded a one-time net tax provision of $275,000 and $63,000 in December 2017 and September 2018, respectively, totaling $338,000 in fiscal 2018.  These tax entries are included in provision for income taxes expense in the consolidated statement of operations.

Reconciliation of tangible book value per share (non-GAAP):

Tangible book value per share at end of period   March 31,
2019
  December 31,
2018
  September 30,
2018
  March 31,
2018
Total stockholders' equity   $ 138,380     $ 138,187     $ 135,847     $ 73,509  
Less:  Preferred stock                
Less:  Goodwill   (31,474 )   (31,474 )   (10,444 )   (10,444 )
Less:  Intangible assets   (7,174 )   (7,501 )   (4,805 )   (5,126 )
Tangible common equity (non-GAAP)   $ 99,732     $ 99,212     $ 120,598     $ 57,939  
Ending common shares outstanding   10,990,033     10,953,512     10,913,853     5,902,481  
Book value per share   $ 12.59     $ 12.62     $ 12.45     $ 12.45  
Tangible book value per share (non-GAAP)   $ 9.07     $ 9.06     $ 11.05     $ 9.82  


Reconciliation of tangible common equity as a percent of tangible assets (non-GAAP):

Tangible common equity as a percent of tangible assets at end of period   March 31,
2019
  December 31,
2018
  September 30,
2018
  March 31,
2018
Total stockholders' equity   $ 138,380     $ 138,187     $ 135,847     $ 73,509  
Less:  Goodwill   (31,474 )   (31,474 )   (10,444 )   (10,444 )
Less:  Intangible assets   (7,174 )   (7,501 )   (4,805 )   (5,126 )
Tangible common equity (non-GAAP)   $ 99,732     $ 99,212     $ 120,598     $ 57,939  
Total Assets   $ 1,326,590     $ 1,287,924     $ 975,409     $ 940,383  
Less:  Goodwill   (31,474 )   (31,474 )   (10,444 )   (10,444 )
Less:  Intangible assets   (7,174 )   (7,501 )   (4,805 )   (5,126 )
Tangible Assets (non-GAAP)   $ 1,287,942     $ 1,248,949     $ 960,160     $ 924,813  
Total stockholders' equity to total assets ratio   10.43 %   10.73 %   13.93 %   7.82 %
Tangible common equity as a percent of tangible assets (non-GAAP)   7.74 %   7.94 %   12.56 %   6.26 %

1Net 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)".

2Tangible 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:

    March 31,
2019
and Three
Months
Ended
  December 31,
2018
and Three
Months
Ended
  September 30,
2018
and Twelve
Months
Ended
  March 31,
2018
and Three
Months
Ended
Nonperforming assets:                
Nonaccrual loans   $ 9,871     $ 7,354     $ 7,210     $ 6,642  
Accruing loans past due 90 days or more   1,713     736     1,117     281  
Total nonperforming loans (“NPLs”)   11,584     8,090     8,327     6,923  
Other real estate owned ("OREO")   2,071     2,522     2,749     7,015  
Other collateral owned   29     48     19     65  
Total nonperforming assets (“NPAs”)   $ 13,684     $ 10,660     $ 11,095     $ 14,003  
Troubled Debt Restructurings (“TDRs”)   $ 9,984     $ 8,722     $ 8,418     $ 8,699  
Nonaccrual TDRs   $ 2,501     $ 2,667     $ 2,687     $ 2,607  
Average outstanding loan balance   $ 996,778     $ 921,951     $ 735,602     $ 725,601  
Loans, end of period   $ 1,019,678     $ 992,556     $ 759,247     $ 721,128  
Total assets, end of period   $ 1,326,590     $ 1,287,924     $ 975,409     $ 940,383  
Allowance for loan losses ("ALL"), at beginning of period   $ 7,604     $ 6,748     $ 5,942     $ 5,859  
Loans charged off:                
Residential real estate   (67 )   (43 )   (202 )   (49 )
Commercial/Agricultural real estate           (74 )   (8 )
Consumer non-real estate   (78 )   (79 )   (379 )   (67 )
Commercial/Agricultural non-real estate           (52 )    
Total loans charged off   (145 )   (122 )   (707 )   (124 )
Recoveries of loans previously charged off:                
Residential real estate   1     4     80     4  
Commercial/Agricultural real estate                
Consumer non-real estate   22     24     121     48  
Commercial/Agricultural non-real estate           12      
Total recoveries of loans previously charged off:   23     28     213     52  
Net loans charged off (“NCOs”)   (122 )   (94 )   (494 )   (72 )
Additions to ALL via provision for loan losses charged to operations   1,225     950     1,300     100  
ALL, at end of period   $ 8,707     $ 7,604     $ 6,748     $ 5,887  
Ratios:                
ALL to NCOs (annualized)   1,784.22 %   2,022.34 %   1,365.99 %   2,044.10 %
NCOs (annualized) to average loans   0.05 %   0.04 %   0.07 %   0.04 %
ALL to total loans   0.85 %   0.77 %   0.89 %   0.82 %
NPLs to total loans   1.14 %   0.82 %   1.10 %   0.96 %
NPAs to total assets   1.03 %   0.83 %   1.14 %   1.49 %

Nonaccrual Loans Rollforward:

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

Other Real Estate Owned Rollforward:

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

Troubled Debt Restructurings in Accrual Status

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

Loan Composition - Detail

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.

    March 31, 2019   December 31, 2018   September 30, 2018   March 31, 2018
Community Banking Loan Portfolios:                
Commercial/Agricultural real estate:                
Commercial real estate   $ 368,530     $ 357,959     $ 216,703     $ 187,735  
Agricultural real estate   90,920     86,015     70,517     64,143  
Multi-family real estate   83,961     69,400     48,061     38,389  
Construction and land development   42,446     22,691     17,739     13,180  
Commercial/Agricultural non-real estate:                
Commercial non-real estate   105,803     112,427     76,254     58,200  
Agricultural non-real estate   36,254     36,327     26,549     23,529  
Residential real estate:                
Purchased HELOC loans   12,346     12,883     13,729     16,187  
Consumer non-real estate:                
Other consumer   19,048     20,214     18,844     18,402  
        Total Community Banking Loan Portfolios   759,308     717,916     488,396     419,765  
                 
Legacy Loan Portfolios:                
Residential real estate:                
One to four family   201,796     209,926     196,052     209,044  
Consumer non-real estate:                
Originated indirect paper   52,422     56,585     60,991     73,599  
Purchased indirect paper   12,910     15,006     17,254     22,665  
                            Total Legacy Loan Portfolios   267,128     281,517     274,297     305,308  
Gross loans   $ 1,026,436     $ 999,433     $ 762,693     $ 725,073  


Loan Composition   March 31, 2019   December 31, 2018   September 30, 2018   March 31, 2018
Originated Loans:                
Residential real estate:                
One to four family   $ 119,477     $ 121,053     $ 122,797     $ 122,903  
Purchased HELOC loans   12,346     12,883     13,729     16,187  
Commercial/Agricultural real estate:                
Commercial real estate   225,393     200,875     168,319     130,795  
Agricultural real estate   33,311     29,589     27,017     12,683  
Multi-family real estate   75,534     61,574     44,767     36,713  
Construction and land development   27,414     15,812     14,648     8,990  
Consumer non-real estate:                
Originated indirect paper   52,422     56,585     60,991     73,599  
Purchased indirect paper   12,910     15,006     17,254     22,665  
Other Consumer   15,123     15,553     15,991     14,466  
Commercial/Agricultural non-real estate:                
Commercial non-real estate   72,889     73,518     62,196     41,141  
Agricultural non-real estate   20,661     17,341     17,514     13,064  
Total originated loans   $ 667,480     $ 619,789     $ 565,223     $ 493,206  
Acquired Loans:                
Residential real estate:                
One to four family   $ 82,319     $ 88,873     $ 73,255     $ 86,141  
Commercial/Agricultural real estate:                
Commercial real estate   143,137     157,084     48,384     56,940  
Agricultural real estate   57,609     56,426     43,500     51,460  
Multi-family real estate   8,427     7,826     3,294     1,676  
Construction and land development   15,032     6,879     3,091     4,190  
Consumer non-real estate:                
Other Consumer   3,925     4,661     2,853     3,936  
Commercial/Agricultural non-real estate:                
Commercial non-real estate   32,914     38,909     14,058     17,059  
Agricultural non-real estate   15,593     18,986     9,035     10,465  
Total acquired loans   $ 358,956     $ 379,644     $ 197,470     $ 231,867  
Total Loans:                
Residential real estate:                
One to four family   $ 201,796     $ 209,926     $ 196,052     $ 209,044  
Purchased HELOC loans   12,346     12,883     13,729     16,187  
Commercial/Agricultural real estate:                
Commercial real estate   368,530     357,959     216,703     187,735  
Agricultural real estate   90,920     86,015     70,517     64,143  
Multi-family real estate   83,961     69,400     48,061     38,389  
Construction and land development   42,446     22,691     17,739     13,180  
Consumer non-real estate:                
Originated indirect paper   52,422     56,585     60,991     73,599  
Purchased indirect paper   12,910     15,006     17,254     22,665  
Other Consumer   19,048     20,214     18,844     18,402  
Commercial/Agricultural non-real estate:                
Commercial non-real estate   105,803     112,427     76,254     58,200  
Agricultural non-real estate   36,254     36,327     26,549     23,529  
Gross loans   $ 1,026,436     $ 999,433     $ 762,693     $ 725,073  
Unearned net deferred fees and costs and loans in process   318     409     557     839  
Unamortized discount on acquired loans   (7,076 )   (7,286 )   (4,003 )   (4,784 )
Total loans receivable   $ 1,019,678     $ 992,556     $ 759,247     $ 721,128  


Deposit Composition:

    March 31,
2019
  December 31,
2018
  September 30,
2018
  March 31,
2018
Non-interest bearing demand deposits   $ 138,280     $ 155,405     $ 87,495     $ 79,945  
Interest bearing demand deposits   195,741     169,310     139,276     151,860  
Savings accounts   159,325     192,310     97,329     100,363  
Money market accounts   174,508     126,021     109,314     115,299  
Certificate accounts   362,795     364,466     313,115     301,148  
Total deposits   $ 1,030,649     $ 1,007,512     $ 746,529     $ 748,615  

Average balances, Interest Yields and Rates:

    Three months ended March 31,
2019
  Three months ended December 31,
2018
  Three months ended March 31,
2018
    Average
Balance
  Interest
Income/
Expense
  Average
Yield/
Rate (1)
  Average
Balance
  Interest
Income/
Expense
  Average
Yield/
Rate (1)
  Average
Balance
  Interest
Income/
Expense
  Average
Yield/
Rate (1)
Average interest earning assets:                                    
Cash and cash equivalents   $ 26,014     $ 168     2.62 %   $ 40,733     $ 195     1.90 %   $ 27,772     $ 62     0.91 %
Loans receivable   996,778     12,414     5.05 %   921,951     11,839     5.09 %   725,601     8,540     4.77 %
Interest bearing deposits   6,913     39     2.29 %   7,268     40     2.18 %   7,281     31     1.73 %
Investment securities (1)   156,157     947     2.57 %   145,114     861     2.47 %   113,943     620     2.39 %
Non-marketable equity securities, at cost   10,375     150     5.86 %   7,974     112     5.57 %   8,005     99     5.02 %
Total interest earning assets (1)   $ 1,196,237     $ 13,718     4.66 %   $ 1,123,040     $ 13,047     4.62 %   $ 882,602     $ 9,352     4.32 %
Average interest bearing liabilities:                                    
Savings accounts   $ 164,129     $ 175     0.43 %   $ 165,434     $ 145     0.35 %   $ 94,497     $ 28     0.12 %
Demand deposits   189,348     354     0.76 %   162,866     166     0.40 %   153,032     114     0.30 %
Money market accounts   152,963     382     1.01 %   140,321     367     1.04 %   118,622     161     0.55 %
CD’s   326,834     1,529     1.90 %   309,428     1,329     1.70 %   265,621     863     1.32 %
IRA’s   39,857     153     1.56 %   37,789     124     1.30 %   33,688     84     1.01 %
Total deposits   $ 873,131     $ 2,593     1.20 %   $ 815,838     $ 2,131     1.04 %   $ 665,460     $ 1,250     0.76 %
FHLB advances and other borrowings   126,239     1,063     3.41 %   99,595     876     3.49 %   117,939     746     2.57 %
Total interest bearing liabilities   $ 999,370     $ 3,656     1.48 %   $ 915,433     $ 3,007     1.30 %   $ 783,399     $ 1,996     1.03 %
Net interest income       $ 10,062             $ 10,040             $ 7,356      
Interest rate spread           3.18 %           3.32 %           3.29 %
Net interest margin (1)           3.43 %           3.56 %           3.40 %
Average interest earning assets to average interest bearing liabilities           1.20             1.23             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 quarters ended March 31, 2019 and December 31, 2018 and 24.5% for the quarter ended March 31, 2018.  The FTE adjustment to net interest income included in the rate calculations totaled $42,000, $43,000 and $52,000 for the three months ended March 31, 2019, December 31, 2018 and March 31, 2018, respectively.

 

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

    March 31,
2019
  December 31,
2018
  September 30,
2018
  March 31,
2018
  To Be Well Capitalized Under
Prompt Corrective Action
Provisions
Tier 1 leverage ratio (to adjusted total assets)   9.6%   9.7%   9.2%   9.3%   5.0%
Tier 1 capital (to risk weighted assets)   11.9%   11.9%   12.2%   12.4%   8.0%
Common equity tier 1 capital (to risk weighted assets)   11.9%   11.9%   12.2%   12.4%   6.5%
Total capital (to risk weighted assets)   12.7%   12.7%   13.1%   13.2%   10.0%