Citizens Community Bancorp, Inc. Earns $1.1 million For Fourth Fiscal Quarter 2018; Fiscal Year 2018 Earnings Were Up 71% Compared to Fiscal 2017 Earnings; United Bank Acquisition Completed on October 19, 2018

EAU CLAIRE, Wis., Oct. 26, 2018 (GLOBE NEWSWIRE) — Citizens Community Bancorp, Inc. (the “Company”) (Nasdaq: CZWI), the parent company of Citizens Community Federal N.A. (the “Bank”), today reported earnings of $1.10 million, or $0.10 per diluted share in the fourth quarter of fiscal 2018 (“Q4 fiscal 2018”), compared to $503,000, or $0.08 per diluted share, in the third fiscal quarter.  The Q4 fiscal 2018 operations reflected higher net interest income, higher non-interest income and lower non-interest expense relative to the prior quarter.  For fiscal year ended September 30, 2018, earnings increased 71% to $4.28 million, or $0.58 per diluted share from $2.50 million, or $0.46 per diluted share for the fiscal year ended September 30, 2017.

Net income as adjusted (non-GAAP)1 was $1.50 million, or $0.12 per diluted share for Q4 fiscal 2018 compared to $731,000, or $0.14 per diluted shares for Q4 fiscal 2017.  Net income as adjusted (non-GAAP)1 excludes merger and branch closure expenditures, insurance and legal settlements received, and 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 (Loss) and Net Income as Adjusted (non-GAAP)1“.

“We closed the United Bank acquisition on October 19th which will enhance the composition of core community banking loans and increase our market presence in Eau Claire and the Chippewa Valley markets. We expect to report assets in excess of $1.2 billion next quarter and rank second in market presence in Eau Claire County as measured by deposits,” said Stephen Bianchi, President and Chief Executive Officer.  “The combination of two independent financial institutions will be better positioned to provide enhanced product lines and services along with knowledge and resources to our customers.”

“Though the total loan portfolio was flat for the quarter, core community bank loans continued to grow in the 4th quarter as expected.  The legacy indirect and one-to-four family loans continued the planned runoff.  Over the past two years, legacy indirect and one-to-four family loans have declined from 62.0% of gross loans to 36.0% of gross loans at the end of fiscal 2018.  This change in loan composition is a result of recent mergers as well as a focused effort by our lending team equipped with better resources, knowledge and incentives to provide the borrowing needs of the communities we serve,” Mr. Bianchi stated.

Q4 Fiscal 2018 Financial Highlights: (at or for the periods ended September 30, 2018, compared to September 30, 2017 and /or June 30, 2018)

  • Net income totaled $1.1 million, or $0.10 per diluted share in Q4 fiscal 2018, compared to $503,000, or $0.08 per diluted share in Q3 fiscal 2018 and a loss of $458,000, or ($0.08) per diluted share a year ago.  Higher net interest and non-interest income, as well as lower non-interest expense more than offset higher tax provisions for the quarter.
  • Net interest margin (NIM) increased slightly to 3.45% for the current quarter, compared to 3.40% for Q3 fiscal 2018 and 3.29% a year earlier.  This increase is primarily due to the full quarter impact of our June 2018 preferred stock issuance.
  • Non-interest income totaled $2.0 million in Q4 fiscal 2018 compared to $1.8 million the prior quarter and $1.4 million one year earlier.  The increase was a result of higher income from service charges on deposit accounts and loan fees/service charges.
  • Total non-interest expense for Q4 fiscal 2018 of $7.64 million was lower compared to Q3 fiscal 2018 at $7.87 million.  The decrease was related to lower compensation and benefit expenses, lower professional fees and lower losses on the sale of repossessed assets.
  • The effective tax rate increased to 40.1% for Q4 fiscal 2018 compared to 30.4% the previous quarter.  The higher rate, relative to statutory rates, was due in part to certain non-deductible merger related expenses, as well as tax adjustments related to the prior year acquisition, when the Company’s federal and state income tax returns for the fiscal year ended September 30, 2017 were completed.  In addition, the Company finalized the analysis of the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and determined an additional $63,000 of tax expense was necessary to properly value the deferred tax asset.
  • Non-performing assets declined to 1.14% for Q4 fiscal 2018 compared to 1.31% the previous quarter and 1.49% one year earlier.  The decline reflects the sale of foreclosed and repossessed assets which declined from $5.4 million the previous quarter to $2.8 million at Q4 fiscal 2018.
  • Total assets, total deposits and total loans were relatively flat over the most recent quarter relative to the prior quarter at $975 million, $747 million and $752 million, respectively. Core Community Banking portfolio loans increased to $488.4 million at Q4 fiscal 2018 compared to $475.8 million one quarter earlier and $391.8 million one year earlier.

1Net income as adjusted, previously referred to as Core Earnings, 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 (Loss) and Net Income as Adjusted (non-GAAP)”.

As a result of the conversion of preferred stock to common stock on September 28, 2018, the Company’s tangible common equity at September 30, 2018 increased to $120.6 million compared to $58.5 million one quarter earlier.  The Company’s capital ratios will decline in the next quarter reflecting the impact of the United Bank acquisition.  All capital ratios are expected to exceed regulatory guidelines for a well-capitalized financial institution.

Bank and Company capital ratios exceeded regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at September 30, 2018:

    Citizens
Community
Federal N.A.
  Citizens
Community
Bancorp, Inc.
  To Be Well Capitalized Under
Prompt Corrective Action
Provisions
Total capital (to risk weighted assets)   13.1%   19.8%   10.0%
Tier 1 capital (to risk weighted assets)   12.2%   16.8%   8.0%
Common equity tier 1 capital (to risk weighted assets)   12.2%   16.8%   6.5%
Tier 1 leverage ratio (to adjusted total assets)   9.2%   12.7%   5.0%

Balance Sheet and Asset Quality Review

Total assets were $975.4 million at September 30, 2018, compared to $975.1 million at June 30, 2018, and $940.7 million at September 30, 2017.  Loan balances declined slightly from the linked quarter primarily due to the planned runoff of the Legacy loan portfolio consisting of indirect paper and one-to-four family loans.  Total net loans were $752.5 million at September 30, 2018 compared to $754.6 million at June 30, 2018 and $727.1 million one year earlier.  At September 30, 2018, total gross Community Banking portfolio loans, consisting of commercial, agricultural and consumer loans, were $488.4 million, or 64.0% of gross loans while gross Legacy portfolio indirect paper and one-to-four family loans totaled $274.3 million, or 36.0%.  Gross commercial and agricultural real estate secured loans total $353.0 million or 72.3% of the total Community Banking loan portfolio, or a 3.7% increase relative to Q3 fiscal 2018. The commercial real estate portfolio includes a large single $8.2 million bridge loan which was expected to be repaid before our fiscal year-end but will be repaid in our next quarter. During the current year, the Community Banking portfolio increased $96.6 million or 24.7%, while the Legacy loan portfolio planned runoff was $70.6 million or a 20.5% reduction in the loan balances during the current year.

The allowance for loan and lease losses increased in Q4 fiscal 2018 to $6.7 million, representing 0.89% of total loans, compared to $6.5 million and 0.85% of total loans at June 30, 2018.  Net charge offs were $160,000 for Q4 fiscal 2018 compared to $79,000 for Q3 fiscal 2018.

Nonperforming assets declined to $11.1 million, or 1.14% of total assets at September 30, 2018 compared to $12.7 million, or 1.31% of total assets at June 30, 2018.  The decrease was primarily the result of sales of foreclosed and repossessed assets during the quarter.  Foreclosed and repossessed assets declined to $2.8 million at September 30, 2018 from $5.4 million at June 30, 2018.

Deposits totaled $746.5 million at September 30, 2018, compared to $744.5 million at June 30, 2018, and $742.5 million at September 30, 2017. Certificate of deposits increased to $313.1 million at September 30, 2018 from $297.5 million at June 30, 2018 as the rising interest rate environment has compelled more customers to switch from money market and interest-bearing demand deposits to certificate accounts.  Noninterest-bearing deposits also increased to $87.5 million at September 30, 2018 from $82.1 million at June 30, 2018 due in part to new customer relationships associated with the increased commercial lending.

Federal Home Loan Bank (“FHLB”) advances increased to $63.0 million at September 30, 2018, compared to $58.0 million at June 30, 2018. Other borrowings decreased to $24.6 million at September 30, 2018 from $29.0 million one quarter earlier, as the Company modestly reduced higher cost holding company debt with proceeds from the preferred stock offering.

On September 25, 2018, the Company received shareholder approval to issue common stock upon the conversion of the Company’s 8.00% Series A Mandatorily Convertible Non-Cumulative Non-Voting Perpetual Preferred Stock. As a result, on September 28, 2018, total common shares outstanding increased to 10,913,853 shares.  The Company’s tangible book value per share (non-GAAP) increased to $11.05 per share from $9.89 per share at June 30, 2018.  Tangible common equity (non-GAAP) as a percent of tangible assets (non-GAAP) increased to 12.56% from 6.51% at June 30, 2018, due to the conversion of preferred equity to common equity subsequent to shareholder approval.  These capital ratios will decrease as a result of the closing of the United Bank acquisition.

As a result of this conversion, common shares outstanding increased 5,000,000 shares on September 28, 2018 and had a time weighted impact on fully diluted shares calculations.  In the next quarter, shares used to compute fully diluted shares will include the full quarter impact of these outstanding common shares.

“Our tangible common book value and all capital ratios include the impact of the conversion of preferred stock to common shares at the end of September 2018, but do not include the impact of the October 19 closing of the United Bank acquisition,” said Jim Broucek, Chief Financial Officer.   “We will incur some transition costs next quarter as we re-align our personnel and incur professional fees associated with the transaction.   Earnings from the United Bank acquisition will offset a portion of these expenses.  In the following quarter, we anticipate expenses associated with converting the core data processing system to our platform in February 2019,” Broucek continued.

Review of Operations

Net interest income was $7.9 million for Q4 fiscal 2018, compared to $7.5 million for Q3 fiscal 2018 and $6.2 million one year earlier.  For the fiscal year ended September 30, 2018, net interest income was $30.3 million compared to $22.3 million for the fiscal year ended September 30, 2017.  The net interest margin (“NIM”) increased to 3.45% for Q4 fiscal 2018 compared to 3.40% one quarter earlier and 3.29% for the like quarter one year earlier.

Loan yields increased to 4.95% for Q4 fiscal 2018 compared to 4.87% one quarter earlier and 4.59% for Q4 fiscal 2017.  Meanwhile, deposit costs increased to 0.99% for Q4 fiscal 2018 from 0.86% one quarter earlier and 0.77% for Q4 fiscal 2017.  Costs on the FHLB and other borrowings increased to 3.14% for Q4 fiscal 2018 from 3.01% one quarter earlier and 2.12% for the quarter ended Q4 2017.  For the fiscal year ended September 30, 2018, the NIM increased to 3.42% from 3.31% for the fiscal year ended September 30, 2017.

For Q4 fiscal 2018, $450,000 of provision for loan losses was recorded, reflecting organic loan growth and the impact of modest higher charge offs, which was equivalent to two basis points of the loan portfolio in the quarter.  Total provisions for loan losses for the fiscal year ended September 30, 2018 was $1.3 million compared to $319,000 for the fiscal year ended September 30, 2017.

Total non-interest income was $1.99 million for Q4 fiscal 2018 compared to $1.77 million for Q3 fiscal 2018 and $1.39 million for Q4 fiscal 2017.  The higher level of non-interest income primarily relates to higher income from service charges on deposit accounts, loan servicing income and loan fees/service charges primarily due to the full year impact of the Wells Financial Corp (“Wells”) acquisition.  For the fiscal year ended September 30, 2018, non-interest income totaled $7.37 million compared to $4.75 million for the fiscal year ended September 30, 2017.

Total non-interest expense was $7.64 million for Q4 fiscal 2018 compared to $7.87 million for Q3 fiscal 2018 and $7.91 million for Q4 fiscal 2017.  Total non-interest expense for the fourth quarter reflects lower compensation and benefit expenses and lower professional fees.  For the fiscal year ended September 30, 2018, total non-interest expenses totaled $29.76 million compared to $22.88 million for the fiscal year ended September 30, 2017.  The higher expenses for the fiscal 2018 period relate to increased costs associated with the full year impact of the Wells acquisition completed on August 18, 2017 and higher staffing levels to support growth.

Provisions for income taxes were $736,000 for Q4 fiscal 2018 compared to $220,000 for Q3 fiscal 2018 and a tax benefit of $207,000 for Q4 fiscal 2017.  The effective tax rate for Q4 fiscal 2018 was 40.1% compared to 30.4% one quarter earlier.  The higher effective tax rate for Q4 fiscal 2018 was partially the result of  tax non-deductible expenses related to the proposed United Bank acquisition and the true-up of the Company’s tax position.  For the fiscal year ended September 30, 2018, the effective tax rate was 35.2% compared to 34.6% for the fiscal year ended September 30, 2017.  The fiscal year ended September 30, 2018, was impacted by the revaluation of net deferred tax assets in the first and fourth quarters of fiscal 2018  and the tax impact of non-deductible acquisition costs. The Tax Act, enacted on December 22, 2017, reduces the corporate Federal income tax rate for the Company from 34% to 24.5% in fiscal 2018 and 21% in fiscal 2019.  Additionally, the Tax Act made other changes to U.S. corporate income tax laws.

In Q1 fiscal 2018, we performed a preliminary analysis of the impact as a result of the Tax Act based on the information available at the time.  In Q4 fiscal 2018, based on updated information obtained in connection with the filing of our tax return and analysis of deferred charges both from the return and 2018 tax provisions, we finalized the tax analysis and recorded an additional $63,000 of expense, or a net increase in our tax provision for the year of $338,000 related to the Tax Act.

On September 25, 2018, the Board of Directors of Citizens Community Bancorp, Inc. adopted a resolution to change the Company’s fiscal year end from September 30 to December 31, commencing December 31, 2018. In addition, on September 25, 2018, the Board of Directors of the Bank, a wholly-owned subsidiary of the Company, also adopted resolutions to amend the Bank’s bylaws to change the Bank’s fiscal year end from September 30 to December 31, commencing December 31, 2018. The Company intends to file a transition report on Form 10-K/T covering the transition period from October 1, 2018 to December 31, 2018.

The Company expects to incur approximately $500,000 in administrative, accounting and legal expenses in connection with its change in fiscal year.

These financial results are preliminary until the Form 10-K is filed in December 2018.

About the Company

Citizens Community Bancorp, Inc. (NASDAQ: “CZWI”) is the holding company of the Bank, a national bank based in Altoona, Wisconsin, serving customers in Wisconsin, Minnesota and Michigan through 27 branch locations.  Its primary markets include the Chippewa Valley Region in Wisconsin, the Twin Cities and Mankato, MN, 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. The Company’s recent acquisition of United Bank and its merger with the Bank, expands its market share in Wisconsin and added six branch locations.

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 by the use of 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 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; the risk that the acquisition of United Bank may be more difficult, costly or time consuming or that the expected benefits are not realized; difficulties and delays in integrating the acquired business operations or fully realizing cost savings and other benefits; 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 the Bank; increases in FDIC insurance premiums or special assessments by the FDIC; disintermediation risk; our inability to obtain needed liquidity; 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; risks posed by acquisitions and other expansion opportunities; changes in federal or state tax laws; litigation risk; 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.  Shareholders, 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 year ended September 30, 2017 filed with the Securities and Exchange Commission (“SEC”) on December 13, 2017 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, which management believes may be helpful in understanding the Company’s results of operations or financial position and comparing results over different periods.  Non-GAAP measures eliminate the impact of certain one-time 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.  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.  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 (unaudited)
(in thousands)
 
    September 30, 2018   June 30, 2018   September 30, 2017
Assets            
Cash and cash equivalents   $ 34,494     $ 27,731     $ 41,677  
Other interest bearing deposits   7,180     8,160     8,148  
Securities available for sale “AFS”   118,482     119,702     95,883  
Securities held to maturity “HTM”   4,619     4,809     5,453  
Non-marketable equity securities, at cost   7,218     6,862     7,292  
Loans receivable   759,247     761,087     732,995  
Allowance for loan losses   (6,748 )   (6,458 )   (5,942 )
Loans receivable, net   752,499     754,629     727,053  
Loans held for sale   1,917     1,778     2,334  
Mortgage servicing rights   1,840     1,841     1,886  
Office properties and equipment, net   10,034     9,947     9,645  
Accrued interest receivable   3,600     3,306     3,291  
Intangible assets   4,805     4,966     5,449  
Goodwill   10,444     10,444     10,444  
Foreclosed and repossessed assets, net   2,768     5,392     6,017  
Bank owned life insurance   11,661     11,581     11,343  
Other assets   3,848     3,922     4,749  
TOTAL ASSETS   $ 975,409     $ 975,070     $ 940,664  
Liabilities and Stockholders’ Equity            
Liabilities:            
Deposits   $ 746,529     $ 744,536     $ 742,504  
Federal Home Loan Bank advances   63,000     58,000     90,000  
Other borrowings   24,619     29,059     30,319  
Other liabilities   5,414     8,264     4,358  
Total liabilities   839,562     839,859     867,181  
Stockholders’ equity:            
Preferred stock – $0.01 par value, $130.00 per share liquidation, 1,000,000 shares authorized, 0; 500,000; 0 shares issued and outstanding, respectively       61,289      
Common stock— $0.01 par value, authorized 30,000,000; 10,913,853; 5,914,379; and 5,888,816 shares issued and outstanding, respectively   109     59     59  
Additional paid-in capital   125,063     63,850     63,383  
Retained earnings   14,003     12,904     10,764  
Unearned deferred compensation   (622 )   (716 )   (456 )
Accumulated other comprehensive loss   (2,706 )   (2,175 )   (267 )
Total stockholders’ equity   135,847     135,211     73,483  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 975,409     $ 975,070     $ 940,664  
                         

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   Twelve Months Ended
    September 30,
2018
  June 30,
2018
  September 30,
2017
  September 30,
2018
  September 30,
2017
Interest and dividend income:                    
Interest and fees on loans   $ 9,414     $ 8,865     $ 7,194     $ 35,539     $ 25,826  
Interest on investments   948     905     576     3,357     2,052  
Total interest and dividend income   10,362     9,770     7,770     38,896     27,878  
Interest expense:                    
Interest on deposits   1,659     1,432     1,095     5,543     4,299  
Interest on FHLB borrowed funds   323     412     217     1,310     717  
Interest on other borrowed funds   440     446     286     1,740     594  
Total interest expense   2,422     2,290     1,598     8,593     5,610  
Net interest income before provision for loan losses   7,940     7,480     6,172     30,303     22,268  
Provision for loan losses   450     650     319     1,300     319  
Net interest income after provision for loan losses   7,490     6,830     5,853     29,003     21,949  
Non-interest income:                    
Service charges on deposit accounts   489     413     368     1,792     1,433  
Interchange income   338     338     214     1,284     789  
Loan servicing income   368     337     175     1,379     380  
Gain on sale of mortgage loans   234     226     196     943     686  
Loan fees and service charges   164     116     20     521     438  
Insurance commission income   180     187     122     720     122  
Settlement proceeds                   283  
Gains (losses) on available for sale securities       4     82     (17 )   111  
Other   216     146     214     748     509  
Total non-interest income   1,989     1,767     1,391     7,370     4,751  
Non-interest expense:                    
Compensation and benefits   3,778     3,840     3,233     14,979     10,862  
Occupancy   776     733     584     2,975     2,780  
Office   468     407     426     1,715     1,204  
Data processing   771     720     650     2,928     2,052  
Amortization of intangible assets   161     161     100     645     219  
Amortization of mortgage servicing rights   85     84     39     335     39  
Advertising, marketing and public relations   265     185     302     745     545  
FDIC premium assessment   121     94     69     472     300  
Professional services   577     735     860     2,323     2,078  
Loss on repossessed assets, net   71     450     48     535     32  
Other   571     465     1,598     2,112     2,767  
Total non-interest expense   7,644     7,874     7,909     29,764     22,878  
Income before provision for income taxes   1,835     723     (665 )   6,609     3,822  
Provision (benefit) for income taxes   736     220     (207 )   2,326     1,323  
Net income (loss) attributable to common stockholders   $ 1,099     $ 503     $ (458 )   $ 4,283     $ 2,499  
Per share information:                    
Basic earnings (loss)   $ 0.18     $ 0.09     $ (0.08 )   $ 0.72     $ 0.47  
Diluted earnings (loss)   $ 0.10     $ 0.08     $ (0.08 )   $ 0.58     $ 0.46  
Cash dividends paid   $     $     $     $ 0.20     $ 0.16  
Book value per share at end of period   $ 12.45     $ 12.50     $ 12.48     $ 12.45     $ 12.48  
Tangible book value per share at end of period (non-GAAP)   $ 11.05     $ 9.89     $ 9.78     $ 11.05     $ 9.78  

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

Reconciliation of GAAP Net Income (Loss) and Net Income as Adjusted (non-GAAP):

    Three Months Ended   Twelve Months Ended
    September
30, 2018
  June 30,
2018
  September
30, 2017
  September
30, 2018
  September
30, 2017
     
     
GAAP earnings (loss) before income taxes   $ 1,835     $ 723     $ (665 )   $ 6,609     $ 3,822  
Merger related costs (1)   131     228     1,517     463     1,860  
Branch closure costs (2)   2     16     255     26     951  
Settlement proceeds                   (283 )
Prepayment fee                   104  
Net income as adjusted before income taxes (3)   1,968     967     1,107     7,098     6,454  
Provision for income tax on net income as adjusted (4)   482     237     376     1,739     2,194  
Tax Cuts and Jobs Act of 2017 (5)   63             338      
Total Provision for income tax   545     237     376     2,077     2,194  
Net income as adjusted after income taxes (non-GAAP) (3)   $ 1,423     $ 730     $ 731     $ 5,021     $ 4,260  
GAAP diluted earnings (loss) per share, net of tax   $ 0.10     $ 0.08     $ (0.08 )   $ 0.58     $ 0.46  
Merger related costs, net of tax (1)   0.01     0.03     0.19     0.06     0.23  
Branch closure costs, net of tax           0.03         0.12  
Tax Cuts and Jobs Act of 2017 tax provision (5)   0.01             0.04      
Settlement Proceeds                   (0.03 )
Prepayment fee                   0.01  
Net income as adjusted diluted earnings per share, net of tax (non-GAAP)   $ 0.12     $ 0.11     $ 0.14     $ 0.68     $ 0.79  
                     
Average diluted shares outstanding   10,950,980     6,461,760     5,629,363     7,335,247     5,378,548  

(1)  Costs incurred are included as data processing, advertising, marketing and public relations, professional fees and other non-interest expense in the consolidated statement of operations and include costs of $118,000 in Q4 F2018 and $350,000 in fiscal 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, other non-interest expense includes costs related to the valuation reduction of the Ridgeland branch office in the fourth quarter of fiscal 2017.
(3) Net income as adjusted is a non-GAAP measure that management believes enhances investors’ ability to better understand the underlying business performance and trends related to core business activities.
(4)  Provision for income tax on net income as adjusted is calculated at 24.5% for all quarters in fiscal 2018 and at 34% for all quarters in the prior fiscal year, which represents our federal statutory tax rate for each respective period presented.
(5) As a result of the Tax Cuts and Jobs Act of 2017, we recorded a one-time net tax provision of $275 and $63 in December 2017 and September 2018, respectively, totaling $338 in fiscal 2018.  These tax entries are included in provision for income taxes expense in the consolidated statement of operations.
(6)  Reconciliation of tangible book value:

Tangible book value per share at end of period   September 30,
2018
  June 30,
 2018
  March 31,
2018
  September 30,
 2017
Total stockholders’ equity   $ 135,847     $ 135,211     $ 73,509     $ 73,483  
Less:  Preferred stock       (61,289 )        
Less:  Goodwill   (10,444 )   (10,444 )   (10,444 )   (10,444 )
Less:  Intangible assets   (4,805 )   (4,966 )   (5,126 )   (5,449 )
Tangible common equity (non-GAAP)   $ 120,598     $ 58,512     $ 57,939     $ 57,590  
Ending common shares outstanding   10,913,853     5,914,379     5,902,481     5,888,816  
Tangible book value per share (non-GAAP)   $ 11.05     $ 9.89     $ 9.82     $ 9.78  
                                 

(7) Reconciliation of tangible common equity as a percent of tangible assets:

Tangible common equity as a percent of tangible assets at end of period   September 30,
2018
  June 30,
 2018
  March 31,
2018
  September 30,
 2017
Total stockholders’ equity   $ 135,847     $ 135,211     $ 73,509     $ 73,483  
Less:  Preferred stock       (61,289 )        
Less:  Goodwill   (10,444 )   (10,444 )   (10,444 )   (10,444 )
Less:  Intangible assets   (4,805 )   (4,966 )   (5,126 )   (5,449 )
Tangible common equity (non-GAAP)   $ 120,598     $ 58,512     $ 57,939     $ 57,590  
Total Assets   $ 975,409     $ 975,070     $ 940,383     $ 940,664  
Less:  Preferred stock       (61,289 )        
Less:  Goodwill   (10,444 )   (10,444 )   (10,444 )   (10,444 )
Less:  Intangible assets   (4,805 )   (4,966 )   (5,126 )   (5,449 )
Tangible Assets (non-GAAP)   $ 960,160     $ 898,371     $ 924,813     $ 924,771  
Tangible common equity as a percent of tangible assets (non-GAAP)   12.56 %   6.51 %   6.26 %   6.23 %
                         

Nonperforming Assets:

    September 30,
2018
and Three
Months Ended
  June 30, 2018
and Three
Months
Ended
  September 30,
2018 
and Twelve
Months Ended
  September 30,
2017
and Twelve
Months Ended
Nonperforming assets:                
Nonaccrual loans   $ 7,210     $ 6,627     $ 7,210     $ 7,452  
Accruing loans past due 90 days or more   1,117     710     1,117     589  
Total nonperforming loans (“NPLs”)   8,327     7,337     8,327     8,041  
Other real estate owned (“OREO”)   2,749     5,328     2,749     5,962  
Other collateral owned   19     64     19     55  
Total nonperforming assets (“NPAs”)   $ 11,095     $ 12,729     $ 11,095     $ 14,058  
Troubled Debt Restructurings (“TDRs”)   $ 8,418     $ 8,210     $ 8,418     $ 5,851  
Nonaccrual TDRs   $ 2,687     $ 2,349     $ 2,687     $ 621  
Average outstanding loan balance   $ 754,442     $ 735,723     $ 735,602     $ 653,717  
Loans, end of period   $ 759,247     $ 761,087     $ 759,247     $ 732,995  
Total assets, end of period   $ 975,409     $ 975,070     $ 975,409     $ 940,664  
Allowance for loan losses (“ALL”), at beginning of period   $ 6,458     $ 5,887     $ 5,942     $ 6,068  
Loans charged off:                
Residential real estate   (82 )   (47 )   (202 )   (233 )
Commercial/Agricultural real estate       (65 )   (74 )   (389 )
Consumer non-real estate   (85 )   (34 )   (379 )   (9 )
Commercial/Agricultural non-real estate   (47 )   (5 )   (52 )    
Total loans charged off   (214 )   (151 )   (707 )   (631 )
Recoveries of loans previously charged off:                
Residential real estate   28     34     80     14  
Commercial/Agricultural real estate                
Consumer non-real estate   25     26     121     171  
Commercial/Agricultural non-real estate   1     12     12     1  
Total recoveries of loans previously charged off:   54     72     213     186  
Net loans charged off (“NCOs”)   (160 )   (79 )   (494 )   (445 )
Additions to ALL via provision for loan losses charged to operations   450     650     1,300     319  
ALL, at end of period   $ 6,748     $ 6,458     $ 6,748     $ 5,942  
Ratios:                
ALL to NCOs (annualized)   1,054.38 %   2,043.67 %   1,365.99 %   1,335.28 %
NCOs (annualized) to average loans   0.08 %   0.04 %   0.07 %   0.07 %
ALL to total loans   0.89 %   0.85 %   0.89 %   0.81 %
NPLs to total loans   1.10 %   0.96 %   1.10 %   1.10 %
NPAs to total assets   1.14 %   1.31 %   1.14 %   1.49 %

Nonaccrual Loans Rollforward:

  Quarter Ended
  September 30,
2018
  June 30,
2018
  March 31,
2018
  December 31,
2017
  September 30,
2017
Balance, beginning of period $ 6,627     $ 6,642     $ 6,388     $ 7,452     $ 6,035  
Additions 2,030     3,225     $ 901     287     514  
Acquired nonaccrual loans                 1,449  
Charge-offs (68 )   (38 )   (34 )   (74 )   (22 )
Transfers to OREO (400 )       (334 )   (52 )   (163 )
Return to accrual status (93 )                
Payments received (676 )   (2,915 )   (257 )   (1,207 )   (345 )
Other, net (210 )   (287 )   (22 )   (18 )   (16 )
Balance, end of period $ 7,210     $ 6,627     $ 6,642     $ 6,388     $ 7,452  
                                       

Other Real Estate Owned Rollforward:

  Quarter Ended
  September 30,
2018
  June 30,
2018
  March 31,
2018
  December 31,
2017
  September 30,
2017
Balance, beginning of period $ 5,328     $ 7,015     $ 6,996     $ 5,962     $ 580  
Loans transferred in 400         $ 334     52     163  
Acquired OREO                 5,343  
Branch properties transferred in             1,444     250  
Branch properties sales (1,245 )                
Sales (1,762 )   (889 )   (256 )   (394 )   (353 )
Write-downs (127 )   (498 )   (27 )   (16 )   (33 )
Other, net 155     (300 )   (32 )   (52 )   12  
Balance, end of period $ 2,749     $ 5,328     $ 7,015     $ 6,996     $ 5,962  
                                       

Troubled Debt Restructurings in Accrual Status

  September 30, 2018   June 30, 2018   March 31, 2018   September 30, 2017
  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 34     $ 3,495     32     $ 3,580     28     $ 3,015     28     $ 3,084  
Commercial/Agricultural real estate 14     1,646     14     1,662     12     2,414     8     1,890  
Consumer non-real estate 14     109     15     122     16     146     17     168  
Commercial/Agricultural non-real estate 3     481     3     496     3     517     2     88  
Total loans 65     $ 5,731     64     $ 5,860     59     $ 6,092     55     $ 5,230  
                                                       

Loan Composition – Detail

To better help understand the Bank’s loan trends, we have added the below table.  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.

    September 30, 2018   June 30, 2018   September 30, 2017
Community Banking Loan Portfolios:            
Commercial/Agricultural real estate:            
Commercial real estate   $ 216,703     $ 208,526     $ 159,962  
Agricultural real estate   70,517     70,881     68,002  
Multi-family real estate   48,061     45,707     26,228  
Construction and land development   17,739     15,258     19,708  
Commercial/Agricultural non-real estate:            
Commercial non-real estate   76,254     74,763     55,251  
Agricultural non-real estate   26,549     26,366     23,873  
Residential real estate:            
Purchased HELOC loans   13,729     15,237     18,071  
Consumer non-real estate:            
Other consumer   18,844     19,063     20,668  
Total Community Banking Loan Portfolios   488,396     475,801     391,763  
             
Legacy Loan Portfolios:            
Residential real estate:            
One to four family   196,052     202,356     229,563  
Consumer non-real estate:            
Originated indirect paper   60,991     66,791     85,732  
Purchased indirect paper   17,254     19,801     29,555  
Total Legacy Loan Portfolios   274,297     288,948     344,850  
Gross loans   $ 762,693     $ 764,749     $ 736,613  
                         

Loan Composition   September 30, 2018   June 30,
2018
  September 30, 2017
Originated Loans:            
Residential real estate:            
One to four family   $ 122,797     $ 122,028     $ 132,380  
Purchased HELOC loans   13,729     15,237     18,071  
Commercial/Agricultural real estate:            
Commercial real estate   168,319     156,760     97,155  
Agricultural real estate   27,017     23,739     10,628  
Multi-family real estate   44,767     42,360     24,486  
Construction and land development   14,648     11,212     12,399  
Consumer non-real estate:            
Originated indirect paper   60,991     66,791     85,732  
Purchased indirect paper   17,254     19,801     29,555  
Other Consumer   15,959     15,549     14,496  
Commercial/Agricultural non-real estate:            
Commercial non-real estate   62,196     58,637     35,198  
Agricultural non-real estate   17,514     16,792     12,493  
Total originated loans   $ 565,191     $ 548,906     $ 472,593  
Acquired Loans:            
Residential real estate:            
One to four family   $ 73,255     $ 80,328     $ 97,183  
Commercial/Agricultural real estate:            
Commercial real estate   48,384     51,766     62,807  
Agricultural real estate   43,500     47,142     57,374  
Multi-family real estate   3,294     3,347     1,742  
Construction and land development   3,091     4,046     7,309  
Consumer non-real estate:            
Other Consumer   2,885     3,514     6,172  
Commercial/Agricultural non-real estate:            
Commercial non-real estate   14,058     16,126     20,053  
Agricultural non-real estate   9,035     9,574     11,380  
Total acquired loans   $ 197,502     $ 215,843     $ 264,020  
Total Loans:            
Residential real estate:            
One to four family   $ 196,052     $ 202,356     $ 229,563  
Purchased HELOC loans   13,729     15,237     18,071  
Commercial/Agricultural real estate:            
Commercial real estate   216,703     208,526     159,962  
Agricultural real estate   70,517     70,881     68,002  
Multi-family real estate   48,061     45,707     26,228  
Construction and land development   17,739     15,258     19,708  
Consumer non-real estate:            
Originated indirect paper   60,991     66,791     85,732  
Purchased indirect paper   17,254     19,801     29,555  
Other Consumer   18,844     19,063     20,668  
Commercial/Agricultural non-real estate:            
Commercial non-real estate   76,254     74,763     55,251  
Agricultural non-real estate   26,549     26,366     23,873  
Gross loans   $ 762,693     $ 764,749     $ 736,613  
Unearned net deferred fees and costs and loans in process   557     693     1,471  
Unamortized discount on acquired loans   (4,003 )   (4,355 )   (5,089 )
Total loans receivable   $ 759,247     $ 761,087     $ 732,995  
                         

Deposit Composition:

    September 30,
 2018
  June 30,
2018
  September 30,
 2017
Non-interest bearing demand deposits   $ 87,495     $ 82,135     $ 75,318  
Interest bearing demand deposits   139,276     151,117     147,912  
Savings accounts   97,329     98,427     102,756  
Money market accounts   109,314     115,369     125,749  
Certificate accounts   313,115     297,488     290,769  
Total deposits   $ 746,529     $ 744,536     $ 742,504  
                         

Average balances, Interest Yields and Rates:

    Three months ended September
30, 2018
  Three months ended June 30,
2018
  Three months ended September
30, 2017
    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   $ 24,468     $ 117     1.90 %   $ 19,203     $ 61     1.27 %   $ 32,692     $ 71     0.86 %
Loans receivable   754,442     9,414     4.95 %   729,390     8,865     4.87 %   621,530     7,194     4.59 %
Interest bearing deposits   7,971     42     2.09 %   8,418     44     2.10 %   4,571     18     1.56 %
Investment securities (1)   124,991     674     2.30 %   124,715     701     2.44 %   90,467     511     2.24 %
Non-marketable equity securities, at cost   7,581     115     6.02 %   8,158     99     4.87 %   5,701     57     3.97 %
Total interest earning assets (1)   $ 919,453     $ 10,362     4.49 %   $ 889,884     $ 9,770     4.43 %   $ 754,961     $ 7,851     4.13 %
Average interest bearing liabilities:                                    
Savings accounts   $ 93,551     $ 59     0.25 %   $ 94,741     $ 53     0.22 %   $ 72,476     $ 21     0.11 %
Demand deposits   146,372     142     0.38 %   150,666     129     0.34 %   98,416     79     0.32 %
Money market accounts   116,597     213     0.72 %   115,625     196     0.68 %   128,039     168     0.52 %
CD’s   277,125     1,145     1.64 %   271,311     959     1.42 %   235,076     752     1.27 %
IRA’s   33,029     100     1.20 %   32,890     94     1.15 %   31,302     75     0.95 %
Total deposits   $ 666,674     $ 1,659     0.99 %   $ 665,233     $ 1,431     0.86 %   $ 565,309     $ 1,095     0.77 %
FHLB advances and other borrowings   96,448     763     3.14 %   114,498     859     3.01 %   93,978     503     2.12 %
Total interest bearing liabilities   $ 763,122     $ 2,422     1.26 %   $ 779,731     $ 2,290     1.18 %   $ 659,287     $ 1,598     0.96 %
Net interest income       $ 7,940             $ 7,480             $ 6,253      
Interest rate spread           3.23 %           3.25 %           3.17 %
Net interest margin (1)           3.45 %           3.40 %           3.29 %
Average interest earning assets to average interest bearing liabilities           1.20             1.14             1.15  
                                           

(1) Fully taxable equivalent (FTE).  The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 24.5% for the quarters ended September 30, 2018 and June 30, 2018.  The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 34% for the quarter ended September 30, 2017.  The FTE adjustment to net interest income included in the rate calculations totaled $51, $55 and $81 for the three months ended September 30, 2018, June 30, 2018 and September 30, 2017, respectively.

    Twelve months ended September 30,
2018
  Twelve months ended September 30,
2017
    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   $ 24,747     $ 308     1.24 %   $ 19,368     $ 139     0.72 %
Loans receivable   735,602     35,539     4.83 %   568,670     25,826     4.54 %
Interest bearing deposits   7,871     149     1.89 %   1,922     29     1.51 %
Investment securities (1)   116,517     2,508     2.33 %   87,449     1,974     2.26 %
Non-marketable equity securities, at cost   7,735     392     5.07 %   5,136     205     3.99 %
Total interest earning assets (1)   $ 892,472     $ 38,896     4.38 %   $ 682,545     $ 28,173     4.13 %
Average interest bearing liabilities:                        
Savings accounts   $ 94,854     $ 162     0.17 %   $ 53,530     $ 67     0.13 %
Demand deposits   149,282     475     0.32 %   65,283     273     0.42 %
Money market accounts   118,229     738     0.62 %   126,487     555     0.44 %
CD’s   269,749     3,807     1.41 %   236,590     3,104     1.31 %
IRA’s   33,668     361     1.07 %   29,042     300     1.03 %
Total deposits   $ 665,782     $ 5,543     0.83 %   $ 510,932     $ 4,299     0.84 %
FHLB advances and other borrowings   110,790     3,050     2.75 %   82,781     1,311     1.58 %
Total interest bearing liabilities   $ 776,572     $ 8,593     1.11 %   $ 593,713     $ 5,610     0.94 %
Net interest income       $ 30,303             $ 22,563      
Interest rate spread           3.28 %           3.19 %
Net interest margin (1)           3.42 %           3.31 %
Average interest earning assets to average interest bearing liabilities           1.15             1.15  
                             

(1) Fully taxable equivalent (FTE).  The average yield on tax exempt securities is computed on a tax equivalent basis using a tax rate of 24.5% and 34% for the twelve months ended September 30, 2018 and September 30, 2017, respectively.   The FTE adjustment to net interest income included in the rate calculations totaled $211 and $295 for the twelve months ended September 30, 2018 and 2017, respectively.

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

    September
30, 2018
  June 30,
2018
  September
30, 2017
  To Be Well Capitalized Under
Prompt Corrective Action
Provisions
Total capital (to risk weighted assets)   13.1%   12.8%   13.2%   10.0%
Tier 1 capital (to risk weighted assets)   12.2%   11.9%   12.4%   8.0%
Common equity tier 1 capital (to risk weighted assets)   12.2%   11.9%   12.4%   6.5%
Tier 1 leverage ratio (to adjusted total assets)   9.2%   9.3%   9.2%   5.0%

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