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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

EAU CLAIRE, Wis., July 29, 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 $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

%

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)".

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%