QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-33003
CITIZENS COMMUNITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland
20-5120010
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification Number)
2174 EastRidge Center
Eau Claire, WI
54701
(Address of principal executive offices)
(Zip Code)
715-836-9994
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨
Smaller reporting company
x
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value per share
CZWI
NASDAQ Global Market SM
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
At November 7, 2019 there were 11,269,726 shares of the registrant’s common stock, par value $0.01 per share, outstanding.
September 30, 2019 (unaudited) and December 31, 2018
(derived from audited financial statements)
(in thousands, except share and per share data)
September 30, 2019
December 31, 2018
Assets
Cash and cash equivalents
$
52,276
$
45,778
Other interest-bearing deposits
5,245
7,460
Securities available for sale "AFS"
182,956
146,725
Securities held to maturity "HTM"
3,665
4,850
Other investments
12,863
11,261
Loans receivable
1,124,378
992,556
Allowance for loan losses
(9,177
)
(7,604
)
Loans receivable, net
1,115,201
984,952
Loans held for sale
3,262
1,927
Mortgage servicing rights
4,245
4,486
Office properties and equipment, net
20,938
13,513
Accrued interest receivable
4,993
4,307
Intangible assets
7,999
7,501
Goodwill
31,841
31,474
Foreclosed and repossessed assets, net
1,373
2,570
Bank owned life insurance ("BOLI")
22,895
17,792
Other assets
5,612
3,328
TOTAL ASSETS
$
1,475,364
$
1,287,924
Liabilities and Stockholders’ Equity
Liabilities:
Deposits
$
1,161,750
$
1,007,512
Federal Home Loan Bank advances
113,466
109,813
Other borrowings
44,545
24,647
Other liabilities
7,574
7,765
Total liabilities
1,327,335
1,149,737
Stockholders’ Equity:
Common stock— $0.01 par value, authorized 30,000,000; 11,270,710 and 10,953,512 shares issued and outstanding, respectively
113
109
Additional paid-in capital
128,926
125,512
Retained earnings
19,348
15,264
Unearned deferred compensation
(630
)
(857
)
Accumulated other comprehensive loss
272
(1,841
)
Total stockholders’ equity
148,029
138,187
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
1,475,364
$
1,287,924
See accompanying condensed notes to unaudited consolidated financial statements.
5
CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Operations (unaudited)
Three and Nine Months Ended September 30, 2019 and 2018
(in thousands, except per share data)
Three Months Ended
Nine Months Ended
September 30, 2019
September 30, 2018
September 30, 2019
September 30, 2018
Interest and dividend income:
Interest and fees on loans
$
14,646
$
9,414
$
40,036
$
26,818
Interest on investments
1,577
948
4,241
2,666
Total interest and dividend income
16,223
10,362
44,277
29,484
Interest expense:
Interest on deposits
3,371
1,659
8,890
4,341
Interest on FHLB borrowed funds
639
323
2,213
1,049
Interest on other borrowed funds
620
440
1,436
1,318
Total interest expense
4,630
2,422
12,539
6,708
Net interest income before provision for loan losses
11,593
7,940
31,738
22,776
Provision for loan losses
575
450
2,125
1,200
Net interest income after provision for loan losses
11,018
7,490
29,613
21,576
Non-interest income:
Service charges on deposit accounts
625
489
1,756
1,332
Interchange income
476
338
1,267
978
Loan servicing income
714
368
1,902
1,051
Gain on sale of loans
679
234
1,560
649
Loan fees and service charges
471
164
860
367
Insurance commission income
197
180
573
554
Gains (losses) on investment securities
96
—
151
(17
)
Gain on sale of branch
—
—
2,295
—
Other
363
216
827
517
Total non-interest income
3,621
1,989
11,191
5,431
Non-interest expense:
Compensation and related benefits
5,295
3,778
14,605
11,424
Occupancy
905
776
2,725
2,270
Office
599
468
1,649
1,311
Data processing
1,092
771
2,953
2,224
Amortization of intangible assets
412
161
1,085
483
Amortization of mortgage servicing rights
325
85
822
245
Advertising, marketing and public relations
315
265
974
596
FDIC premium assessment
78
121
318
330
Professional services
561
577
1,961
1,635
Loss (gain) on repossessed assets, net
(16
)
71
(143
)
521
Other
3,409
571
5,309
1,582
Total non-interest expense
12,975
7,644
32,258
22,621
Income before provision for income tax
1,664
1,835
8,546
4,386
Provision for income taxes
430
736
2,252
1,443
Net income attributable to common stockholders
$
1,234
$
1,099
$
6,294
$
2,943
Per share information:
Basic earnings
$
0.11
$
0.18
$
0.57
$
0.49
Diluted earnings
$
0.11
$
0.10
$
0.57
$
0.38
Cash dividends paid
$
—
$
—
$
0.20
$
0.20
See accompanying condensed notes to unaudited consolidated financial statements.
6
CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Comprehensive Income (unaudited)
Three and Nine months ended September 30, 2019 and 2018
(in thousands)
Three Months Ended
Nine Months Ended
September 30, 2019
September 30, 2018
September 30, 2019
September 30, 2018
Net income attributable to common stockholders
$
1,234
$
1,099
$
6,294
$
2,943
Other comprehensive income (loss), net of tax:
Securities available for sale
Net unrealized gains (losses) arising during period
250
(531
)
2,049
(1,753
)
Reclassification adjustment for net gains (losses) included in net income
69
—
109
(13
)
Other comprehensive income (loss)
319
(531
)
2,158
(1,766
)
Comprehensive income
$
1,553
$
568
$
8,452
$
1,177
See accompanying condensed notes to unaudited consolidated financial statements.
7
CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statement of Changes in Stockholders’ Equity (unaudited)
Nine Months Ended September 30, 2019
(in thousands, except shares and per share data)
Additional Paid-In Capital
Retained Earnings
Unearned Deferred Compensation
Accumulated Other Comprehensive Income (Loss)
Total Stockholders’ Equity
Common Stock
Shares
Amount
Balance, January 1, 2019
10,953,512
$
109
$
125,512
$
15,264
$
(857
)
$
(1,841
)
$
138,187
Net income
—
—
—
953
—
—
953
Other comprehensive income, net of tax
—
—
—
—
—
1,164
1,164
Forfeiture of unvested shares
(958
)
—
(13
)
—
13
—
—
Surrender of restricted shares of common stock
(798
)
—
(9
)
—
—
—
(9
)
Common stock awarded under the equity incentive plan
10,847
—
252
—
(252
)
—
—
Common stock options exercised
27,430
1
194
—
—
—
195
Stock option expense
—
—
4
—
—
—
4
Amortization of restricted stock
—
—
—
—
140
—
140
Adoption of ASU 2016-01; Equity securities
—
—
—
45
—
(45
)
—
Adoption of ASU 2016-02; Leases
—
—
—
(56
)
—
—
(56
)
Cash dividends ($0.20 per share)
—
—
—
(2,198
)
—
—
(2,198
)
Balance at March 31, 2019
10,990,033
110
125,940
14,008
(956
)
(722
)
138,380
Net income
—
—
—
4,107
—
—
4,107
Other comprehensive income, net of tax
—
—
—
—
—
675
675
Forfeiture of unvested shares
(7,958
)
—
(118
)
—
118
—
—
Surrender of restricted shares of common stock
(3,067
)
—
(35
)
—
—
—
(35
)
Common stock awarded under the equity incentive plan
2,000
—
22
—
(22
)
—
—
Common stock options exercised
1,000
—
8
—
—
—
8
Stock option expense
—
—
5
—
—
—
5
Amortization of restricted stock
—
—
—
—
103
—
103
Adoption of ASU 2016-02; Leases
—
—
—
(1
)
—
—
(1
)
Balance at June 30, 2019
10,982,008
110
125,822
18,114
(757
)
(47
)
143,242
Net income
—
—
—
1,234
—
—
1,234
Other comprehensive income, net of tax
—
—
—
—
—
319
319
Surrender of restricted shares of common stock
(297
)
—
(3
)
—
—
—
(3
)
Common stock issued to F&M shareholders
288,999
3
3,102
—
—
—
3,105
Stock option expense
—
—
5
—
—
—
5
Amortization of restricted stock
—
—
—
—
127
—
127
Balance, September 30, 2019
11,270,710
$
113
$
128,926
$
19,348
$
(630
)
$
272
$
148,029
See accompanying condensed notes to unaudited consolidated financial statements.
8
CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statement of Changes in Stockholders’ Equity (unaudited)
Nine Months Ended September 30, 2018
(in thousands, except shares and per share data)
Additional Paid-In Capital
Retained Earnings
Unearned Deferred Compensation
Accumulated Other Comprehensive Income (Loss)
Total Stockholders’ Equity
Common Stock
Preferred Stock
Shares
Amount
Amount
Balance, January 1, 2018
5,883,603
$
59
$
—
$
63,348
$
12,104
$
(391
)
$
(666
)
$
74,454
Net income
—
—
—
—
1,341
—
—
1,341
Reclassification of certain deferred tax effects (1)
—
—
—
—
137
—
(137
)
—
Other comprehensive loss, net of tax
—
—
—
—
—
—
(1,208
)
(1,208
)
Forfeiture of unvested shares
(1,437
)
—
—
(20
)
—
20
—
—
Common stock awarded under the equity incentive plan
15,523
—
—
211
—
(211
)
—
—
Common stock options exercised
4,792
—
—
41
—
—
—
41
Stock option expense
—
—
—
(5
)
—
—
—
(5
)
Amortization of restricted stock
—
—
—
—
—
67
—
67
Cash dividends ($0.20 per share)
—
—
—
—
(1,181
)
—
—
(1,181
)
Balance at March 31, 2018
5,902,481
59
—
63,575
12,401
(515
)
(2,011
)
73,509
Net income
—
—
—
—
503
—
—
503
Preferred stock issued (net of issuance costs)
—
—
61,289
—
—
—
—
61,289
Other comprehensive loss, net of tax
—
—
—
—
—
—
(164
)
(164
)
Surrender of restricted shares of common stock
(1,809
)
—
—
(25
)
—
—
—
(25
)
Common stock awarded under the equity incentive plan
13,707
—
—
295
—
(295
)
—
—
Stock option expense
—
—
—
5
—
—
—
5
Amortization of restricted stock
—
—
—
—
—
94
—
94
Balance at June 30, 2018
5,914,379
59
61,289
63,850
12,904
(716
)
(2,175
)
135,211
Net income
—
—
—
—
1,099
—
—
1,099
Preferred stock issued net of issuance costs
—
—
(24
)
—
—
—
—
(24
)
Preferred stock converted to common stock
5,000,000
50
(61,265
)
61,215
—
—
—
—
Other comprehensive loss, net of tax
—
—
—
—
—
—
(531
)
(531
)
Surrender of restricted shares of common stock
(526
)
—
—
(8
)
—
—
—
(8
)
Stock option expense
—
—
—
6
—
—
—
6
Amortization of restricted stock
—
—
—
—
—
94
—
94
Balance, September 30, 2018
10,913,853
$
109
$
—
$
125,063
$
14,003
$
(622
)
$
(2,706
)
$
135,847
(1) Amounts reclassified to retained earnings due to early adoption of ASU 2018-02.
See accompanying condensed notes to unaudited consolidated financial statements.
9
CITIZENS COMMUNITY BANCORP, INC.
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 30, 2019 and 2018
(in thousands)
Nine Months Ended
September 30, 2019
September 30, 2018
Cash flows from operating activities:
Net income attributable to common stockholders
$
6,294
$
2,943
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premium/accretion discount on investment securities
762
843
Provision for depreciation
1,110
819
Provision for loan losses
2,125
1,200
Net realized (gain) loss on sale of securities
(151
)
17
Increase in MSR assets resulting from transfers of financial assets
(581
)
(289
)
Amortization of MSR assets
822
335
Amortization of intangible assets
1,085
483
Amortization of restricted stock
370
255
Net stock based compensation expense
14
6
Gain on sale of office properties and equipment
(32
)
(3
)
Benefit for deferred income taxes
—
(194
)
Increase in cash surrender value of life insurance
(384
)
(318
)
Net (gain) loss from disposals of foreclosed and repossessed assets
(143
)
522
Gain on sale of loans held for sale, net
(1,560
)
(943
)
Net change in loans held for sale
225
1,360
Decrease in accrued interest receivable and other assets
3,009
433
(Decrease) increase in other liabilities
(6,482
)
620
Total adjustments
189
5,146
Net cash provided by operating activities
6,483
8,089
Cash flows from investing activities:
Purchase of investment securities
(23,457
)
(33,622
)
Net decrease (increase) in interest-bearing deposits
3,207
(25
)
Proceeds from sale of investment securities
7,976
26
Principal payments on investment securities
19,579
8,776
Net sales of other investments
1,084
933
Proceeds from sale of foreclosed and repossessed assets
2,238
4,805
Net increase in loans
(6,710
)
(28,644
)
Net capital expenditures
(6,149
)
(2,405
)
Net cash acquired in business combinations
(8,137
)
—
Proceeds from disposal of office properties and equipment
300
74
Net cash used in investing activities
(10,069
)
(50,082
)
Cash flows from financing activities:
Net decrease in Federal Home Loan Bank advances
(16,469
)
(31,000
)
Proceeds from other borrowings, net of debt issuance costs
—
9,911
Proceeds from other borrowings to fund business combination, net of origination costs
29,889
—
Principal payment reduction to other borrowings
(10,000
)
(15,191
)
Net increase in deposits
5,601
5,460
Proceeds from private placement stock offering, net of issuance costs
—
61,265
Common stock issued in F&M acquisition less capitalized equity costs
3,105
—
Surrender of restricted shares of common stock
(47
)
(33
)
Exercise of common stock options
203
41
Cash dividends paid
(2,198
)
(1,181
)
Net cash provided by financing activities
10,084
29,272
Net increase (decrease) in cash and cash equivalents
6,498
(12,721
)
Cash and cash equivalents at beginning of period
45,778
47,215
Cash and cash equivalents at end of period
$
52,276
$
34,494
10
Supplemental cash flow information:
Cash paid during the period for:
Interest on deposits
$
8,775
$
4,285
Interest on borrowings
$
3,966
$
2,366
Income taxes
$
3,847
$
1,160
Supplemental noncash disclosure:
Transfers from loans receivable to foreclosed and repossessed assets
$
898
$
1,064
Fair value of assets acquired, net of cash and cash equivalents
$
177,494
$
—
Fair value of liabilities assumed, net of cash and cash equivalents
$
169,724
$
—
See accompanying condensed notes to unaudited consolidated financial statements.
11
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(UNAUDITED)
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of Citizens Community Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Citizens Community Federal N.A. (the “Bank”), and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. As used in this quarterly report, the terms “we”, “us”, “our”, and “Citizens Community Bancorp, Inc.” mean the Company and its wholly owned subsidiary, the Bank, unless the context indicates other meaning.
The Bank is a national banking association (a “National Bank”) and operates under the title of Citizens Community Federal National Association (“Citizens Community Federal N.A.” or “Bank” or “CCFBank”). The Company is a bank holding company, supervised by the Federal Reserve Bank of Minneapolis (the “FRB”), and operates under the title of Citizens Community Bancorp, Inc. The U.S. Office of the Comptroller of the Currency (the “OCC”), is the primary federal regulator for the Bank.
The consolidated income of the Company is principally derived from the income of the Bank, the Company’s wholly owned subsidiary, serving customers in Wisconsin and Minnesota through 28 branch locations, including two branch locations acquired in the F. & M. Bancorp. of Tomah, Inc. merger on July 1, 2019. 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, Agricultural operators and consumers, including one-to-four family residential mortgages, as well as expanded services through Wells Insurance Agency, Inc.
The Bank is subject to competition from other financial institutions and non-financial institutions providing financial products. Additionally, the Bank is subject to the regulations of certain regulatory agencies and undergoes periodic examination by those regulatory agencies.
In preparing these consolidated financial statements, we evaluated the events and transactions that occurred subsequent to the balance sheet date as of September 30, 2019 and through the date the financial statements were available to be issued for items that should potentially be recognized or disclosed in these consolidated financial statements.
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. The Bank retained all loans associated with the branch.
On July 1, 2019, the Company closed on the acquisition of F. & M. Bancorp. of Tomah, Inc. and completed the related data systems conversion on July 14, 2019. See Note 2, “Acquisitions” for additional information.
On October 25, 2019, the Department of the Treasury released regulations which clarified the tax status of acquired life insurance policies, resulting in policies acquired from United Bank and F&M retaining their tax-free status. As a result, the Company will be reducing its related deferred tax liabilities by $350 thousand (F&M), and $300 thousand (United Bank) and F&M’s initial goodwill will be reduced by $350 thousand on the December 31, 2019 consolidated balance sheet. $300 thousand will be recorded as a discrete tax credit reduction on the Company’s statement of operations for the three and twelve-months ended December 31, 2019. See Note 12, “Subsequent Event” for additional information.
The accompanying consolidated interim financial statements are unaudited. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Unless otherwise stated herein, and except for shares and per share amounts, all amounts are in thousands.
Principles of Consolidation – The accompanying consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates – Preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, fair value of financial instruments, the allowance for loan losses, mortgage servicing rights, foreclosed and repossessed assets, valuation of acquired intangible assets, useful lives for depreciation and amortization,
12
indefinite-lived intangible assets, stock-based compensation and long-lived assets, deferred tax assets, uncertain income tax positions and contingencies. Management does not anticipate any material changes to estimates made herein in the near term. Factors that may cause sensitivity to the aforementioned estimates include, but are not limited to: those items described under the caption, “Risk Factors” in Item 1A in our transition report on Form 10-K for the transition period from October 1, 2018 to December 31, 2018, filed with the SEC on March 8, 2019, external market factors such as market interest rates and unemployment rates, changes to operating policies and procedures, and changes in applicable banking regulations. Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual reporting period.
Investment Securities; Held to Maturity and Available for Sale – Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of the date of each balance sheet. Securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Held to maturity securities are stated at amortized cost. Investment securities not classified as held to maturity are classified as available for sale. Available for sale securities are stated at fair value, with unrealized holding gains and losses being reported in other comprehensive income (loss), net of tax. Unrealized losses deemed other-than-temporary due to credit issues are reported in the Company’s net income in the period in which the losses arise. Interest income includes amortization of purchase premium or accretion of purchase discount. Amortization of premiums and accretion of discounts are recognized in interest income using the interest method over the estimated lives of the securities.
The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. As part of such monitoring, the credit quality of individual securities and their issuer is assessed. Significant inputs used to measure the amount of other-than-temporary impairment related to credit loss include, but are not limited to; the Company’s intent and ability to sell the debt security prior to recovery, that it is more likely than not that the Company will not sell the security prior to recovery, default and delinquency rates of the underlying collateral, remaining credit support, and historical loss severities. Adjustments to market value of available for sale securities that are considered temporary are recorded in other comprehensive income or loss as separate components of stockholders’ equity, net of tax. If the unrealized loss of a security is identified as other-than-temporary based on information available, such as the decline in the creditworthiness of the issuer, external market ratings, or the anticipated or realized elimination of associated dividends, such impairments are further analyzed to determine if credit loss exists. If there is a credit loss, it will be recorded in the Company’s consolidated statement of operations. Non-credit components of the unrealized losses on available for sale securities will continue to be recognized in other comprehensive income (loss), net of tax.
Other Investments - Other investments includes equity securities with readily determinable fair values, “restricted” equity securities, and private company securities. Other investments includes $241 of equity securities with readily determinable fair values. Equity investment securities are carried at their fair market value, based on an “exit price” notion. Changes in the fair value of equity investment securities are recognized as Gains (losses) on investment securities in the consolidated Statement of Operations.
As a member of the Federal Reserve Bank (“FRB”) System and the Federal Home Loan Bank (“FHLB”) System, the Bank is required to maintain an investment in the capital stock of these entities. These securities are “restricted” in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other exchange traded equity securities. As no ready market exists for these stocks, and they have no quoted market value, these investments are carried at cost and periodically evaluated for impairment based on the ultimate recovery of par value. Cash dividends are reported as income.
Also included in other investments is stock in a private company that does not have a quoted market price. This stock is carried at cost plus or minus changes resulting from observable price changes in orderly transactions for this stock, less other-than-temporary impairment charges, if any.
Management’s evaluation for impairment of these other investments, includes consideration of the financial condition and other available relevant information of the issuer. Based on management’s quarterly evaluation, no impairment has been recorded on these securities.
Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, and net of deferred loan fees and costs, and non-accretable discount on purchased of credit impaired loans. Interest income is accrued on the unpaid principal balance of these loans. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the interest method without anticipating prepayments. Late charge fees are recognized into income when collected.
Interest income on commercial, mortgage and consumer loans is discontinued according to the following schedules:
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•Commercial/agricultural real estate loans past due 90 days or more;
•Commercial/agricultural non-real estate loans past due 90 days or more;
•Closed end consumer non-real estate loans past due 120 days or more; and
•Residential real estate loans and open ended consumer non-real estate loans past due 180 days or more.
Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not received for a loan placed on nonaccrual status is reversed against interest income. Interest received on such loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual status. Loans are returned to accrual status when payments are made that bring the loan account current with the contractual term of the loan and a six month payment history has been established. Interest on impaired loans considered troubled debt restructurings (“TDRs”) or substandard, less than 90 days delinquent, is recognized as income as it accrues based on the revised terms of the loan over an established period of continued payment. Substandard loans, as defined by the OCC, our primary banking regulator, are loans that are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.
Residential real estate loans and open ended consumer non-real estate loans are charged off to estimated net realizable value less estimated selling costs at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 180 days or more. Closed ended consumer non-real estate loans are charged off to net realizable value at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 120 days or more. Commercial/agricultural real estate and non-real estate loans are charged off to net realizable value at the earlier of when (a) the loan is deemed by management to be uncollectible, or (b) the loan becomes past due 90 days or more.
Allowance for Loan Losses – The allowance for loan losses (“ALL”) is a valuation allowance for probable and inherent credit losses in our loan portfolio. Loan losses are charged against the ALL when management believes that the collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the ALL. Management estimates the required ALL balance taking into account the following factors: past loan loss experience; the nature, volume and composition of our loan portfolio; known and inherent risks in our portfolio; information about specific borrowers’ ability to repay; estimated collateral values; current economic conditions; and other relevant factors determined by management. The ALL consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for certain qualitative factors. The entire ALL balance is available for any loan that, in management’s judgment, should be charged off.
A loan is impaired when full payment under the loan terms is not expected. Impaired loans consist of all TDRs, as well as individual loans not considered a TDR, that are either (1) rated substandard or worse, (2) on nonaccrual status or (3) PCI loans which are impaired at the time of acquisition. All TDRs are individually evaluated for impairment. See Note 4, “Loans, Allowance for Loan Losses and Impaired Loans” for more information on what we consider to be a TDR. For TDR’s or substandard loans deemed to be impaired, a specific ALL allocation may be established so that the loan is reported, net, at the lower of (a) its outstanding principal balance; (b) the present value of the loan’s estimated future cash flows using the loan’s existing rate; or (c) at the fair value of any loan collateral, less estimated disposal costs, if repayment is expected solely from the underlying collateral of the loan. For TDRs less than 90+ days past due, and certain substandard loans that are less than 90+ days delinquent, the likelihood of the loan migrating to over 90 days past due is also taken into account when determining the specific ALL allocation for these particular loans. Large groups of smaller balance homogeneous loans, such as non-TDR commercial, consumer and residential real estate loans, are collectively evaluated for ALL purposes, and accordingly, are not separately identified for ALL disclosures.
Acquired Loans— Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value with no carryover of related allowance for credit losses. Any allowance for loan loss on these pools reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received). Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition-date fair value including the remaining life of the acquired loans, delinquency status, estimated prepayments, payment options and other loan features, internal risk grade, estimated value of the underlying collateral and interest rate environment.
Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if we can reasonably estimate the timing and amount of the expected cash flows on such loans and if we expect to fully collect the new carrying value of the loans. As such,
14
we may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable yield.
Loans acquired with deteriorated credit quality are accounted for in accordance with Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC 310-30) if, at acquisition, the loans have evidence of credit quality deterioration since origination and it is probable that all contractually required payments will not be collected. At acquisition, the Company considers several factors as indicators that an acquired loan has evidence of deterioration in credit quality. These factors include; loans 90 days or more past due, loans with an internal risk grade of substandard or below, loans classified as non-accrual by the acquired institution, and loans that have been previously modified in a troubled debt restructuring.
Under the ASC 310-30 model, the excess of cash flows expected to be collected at acquisition over recorded fair value is referred to as the accretable yield and is the interest component of expected cash flow. The accretable yield is recognized into income over the remaining life of the loan if the timing and/or amount of cash flows expected to be collected can be reasonably estimated (the accretion method). If the timing or amount of cash flows expected to be collected cannot be reasonably estimated, the cost recovery method of income recognition is used. The difference between the loan’s total scheduled principal and interest payments over all cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the non-accretable difference. The non-accretable difference represents contractually required principal and interest payments which the Company does not expect to collect.
Over the life of the loan, management continues to estimate cash flows expected to be collected. Decreases in expected cash flows are recognized as impairments through a charge to the provision for loan losses resulting in an increase in the allowance for loan losses. Subsequent improvements in cash flows result in first, reversal of existing valuation allowances recognized subsequent to acquisition, if any, and next, an increase in the amount of accretable yield to be subsequently recognized in interest income on a prospective basis over the loan’s remaining life.
Acquired loans that were not individually determined to be purchased with deteriorated credit quality are accounted for in accordance with ASC 310-20, Nonrefundable Fees and Other Costs (ASC 310-20), whereby the premium or discount derived from the fair market value adjustment, on a loan-by-loan or pooled basis, is recognized into interest income on a level yield basis over the remaining expected life of the loan or pool.
For all acquired loans, the outstanding loan balances less any related accretable yield and/or non-accretable difference is referred to as the loans’ carrying amount.
Loans Held for Sale — Loans held for sale are those loans the Company has the intent to sell in the foreseeable future. They are carried at the lower of aggregate cost or fair value. Gains and losses on sales of loans are recognized at settlement dates, and are determined by the difference between the sales proceeds and the carrying value of the loans after allocating costs to servicing rights retained. All sales are made without recourse. Interest rate lock commitments on mortgage loans to be funded and sold are valued at fair value, and are included in other assets or liabilities, if material.
Mortgage Servicing Rights- Mortgage servicing rights (“MSR”) assets result as the Company sells loans to investors in the secondary market and retains the rights to service mortgage loans sold to others. MSR assets are initially measured at fair value; assessed at least annually for impairment; carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value. MSR assets are amortized in proportion to and over the period of estimated net servicing income, with the amortization recorded in non-interest expense in the consolidated statement of operations.
The valuation of MSRs and related amortization thereon are based on numerous factors, assumptions and judgments, such as those for: changes in the mix of loans, interest rates, prepayment speeds, and default rates. Changes in these factors, assumptions and judgments may have a material effect on the valuation and amortization of MSRs. Although management believes that the assumptions used to evaluate the MSRs for impairment are reasonable, additional future adjustment may be necessary if future economic conditions differ substantially from the economic assumptions used to determine the value of MSRs.
Foreclosed and Repossessed Assets, net –Assets acquired through foreclosure or repossession are initially recorded at fair value, less estimated costs to sell, which establishes a new cost basis. If the fair value declines subsequent to foreclosure or repossession, a write-down is recorded through expense. Costs incurred after acquisition are expensed and are included in non-interest expense, other in the Consolidated Statements of Operations.
Transfers of financial assets—Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the entity, (2) the transferee obtains the right, free of conditions that constrain it from taking advantage of that right, to pledge or
15
exchange the transferred assets, and (3) the entity does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.
Goodwill and other intangible assets-The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350, “Intangibles - Goodwill and Other.” The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired, less liabilities assumed, as goodwill. The Company amortizes acquired intangible assets with definite useful economic lives over their useful economic lives utilizing the straight-line method. On a periodic basis, management assesses whether events or changes in circumstances indicate that the carrying amounts of the intangible assets may be impaired. The Company does not amortize goodwill and any acquired intangible asset with an indefinite useful economic life, but reviews them for impairment at a reporting unit level on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired. A reporting unit is defined as any distinct, separately identifiable component of the Company’s one operating segment for which complete, discrete financial information is available and reviewed regularly by the segment’s management. The Company has one reporting unit as of December 31, 2018 which is related to its banking activities. The Company has performed the required goodwill impairment test and has determined that goodwill was not impaired as of December 31, 2018.
Leases - We determine if an arrangement is a lease at inception. All of our existing leases have been determined to be operating leases under ASC 842. Right-of-use (“ROU”) assets are included in other assets in our consolidated balance sheets. Operating lease liabilities are included in other liabilities in our consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date, based on the present value of lease payments over the lease term. As none of our existing leases provide an implicit rate, we use our incremental borrowing rate, based on information available at commencement date, in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease, when it is reasonably certain that we will exercise that option. Lease expense is recognized based on the total contractually required lease payments, over the term of the lease, on a straight-line basis.
Income Taxes – The Company accounts for income taxes in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes.” Under this guidance, deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
The Tax Cuts and Jobs Act of 2017 (“the Tax Act”), enacted on December 22, 2017, reduces corporate Federal income tax rates for the Company from 34% to 24.5% for 2018, and 21% for 2019. GAAP requires the impact of the provisions of the Tax Act be accounted for in the period of enactment. At December 31, 2017, we had not completed our accounting for the tax effects of enactment of the Tax Act; however, in certain cases, as described below, we made a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. The Company revalued its net deferred tax assets to account for the future impact of lower corporate taxes. For the items for which we were able to determine a reasonable estimate, we recorded an increased provisional amount of income tax expense of $275 in December 2017, related to the revaluation of the deferred tax assets to both the revaluation of timing differences and the unrealized loss on securities. In the fourth quarter of fiscal 2018, based on updated information obtained in connection with the filing of our tax return and analysis of our net deferred tax asset both from the return and 2018 tax provisions, we finalized the tax analysis and recorded an additional $63 of expense, or a net increase in our tax provision for the year of $338 related to the Tax Act.
The Company regularly reviews the carrying amount of its net deferred tax assets to determine if the establishment of a valuation allowance is necessary. If based on the available evidence, it is more likely than not that all or a portion of the Company’s net deferred tax assets will not be realized in future periods, a deferred tax valuation allowance would be established. Consideration is given to various positive and negative factors that could affect the realization of the deferred tax assets. In evaluating this available evidence, management considers, among other things, historical performance, expectations of future earnings, the ability to carry back losses to recoup taxes previously paid, the length of statutory carry forward periods, any experience with utilization of operating loss and tax credit carry forwards not expiring, tax planning strategies and timing of reversals of temporary differences. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences. Accordingly, the Company’s evaluation is based on current tax laws as well as management’s expectations of future performance.
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Revenue Recognition - The Company recognizes revenue in the consolidated statements of operations as performance obligations are met and when collectability is reasonably assured. The primary source of revenue is interest income from interest earning assets, which is recognized on the accrual basis of accounting using the effective interest method. The recognition of revenues from interest earning assets is based upon formulas from underlying loan agreements, securities contracts or other similar contracts. Non-interest income is recognized on the accrual basis of accounting as performance obligations are met or as transactions occur. Non-interest income includes fees from brokerage and advisory service, deposit accounts, merchant services, ATM and debit card fees, mortgage banking activities, and other miscellaneous services and transactions. Commission revenue is recognized as of the effective date of the insurance policy or the date the customer is billed, whichever is later. The Company also receives contingent commissions from insurance companies which are based on the overall profitability of their relationship based primarily on the loss experience of the insurance placed by the Company. Contingent commissions from insurance companies are recognized when determinable. Commission revenue is included in other non-interest income in the consolidated statement of operations.
Earnings Per Share – Basic earnings per common share is net income or loss divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable during the period, consisting of stock options outstanding under the Company’s stock incentive plans that have an exercise price that is less than the Company’s stock price on the reporting date.
Operating Segments—While our executive officers monitor the revenue streams of the various banking products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company’s banking operations are considered by management to be aggregated in one reportable operating segment.
Recognition of a prior period error—In April 2019 the Company determined that certain state franchise returns had not ever been filed. The franchise liability calculation is primarily based on the Company’s equity. The initial franchise return should have been filed in 2006 when the Company went public. Additionally, with the Company’s 2018 capital raise, an additional franchise liability should have been recorded in fiscal 2018. The Company should have recorded a $140 pre-tax charge related to 2006 initial public offering in fiscal year ended September 30, 2006 and a $160 pre-tax charge related to 2018 capital raise in fiscal year ended September 30, 2018. The correction of these prior period errors to record both the 2006 and 2018 franchise liability totaling $300, was recorded during the three months ended March 31, 2019. The impact on results of operations for the three months ended March 31, 2019 and the six months ended June 30, 2019, were as follows: pre-tax income was understated by $300, tax expense was overstated by $81 and net income was understated by $219 or $0.02 per share. For the fiscal year ended September 30, 2018, pre-tax income was overstated by $160, tax expense was understated by $44 and net income was overstated by $116 or $0.02 per share. Management of the Company evaluated these prior period errors under the accounting guidance FASB ASC 250, Accounting Changes and Error Corrections and concluded that the effect of these errors will be immaterial to the Company’s estimated annual results and consolidated financial statements for the year ending December 31, 2019 and were also immaterial to the fiscal year ended September 30, 2018 consolidated financial statements.
Reclassifications – Certain items previously reported were reclassified for consistency with the current presentation.
Recent Accounting Pronouncements—The Financial Accounting Standards Board (FASB) issues Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification (ASC). This section provides a summary description of recent ASUs that have significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on financial statements issued in the near future.
Recent Accounting Pronouncements—Adopted
ASU 2016-01; Recognition and Measurement of Financial Assets and Liabilities—The guidance requires certain equity investments to be measured at fair value, with changes in fair value recognized in net income. The Company’s adoption of ASU 2016-01 as of January 1, 2019, constitutes a change in accounting principle. The Company recorded a cumulative effect adjustment to retained earnings of $45 as of January 1, 2019, as a result of implementing this new accounting standard.
ASU 2016-02; Leases (Topic 842)—The ASU changed current GAAP by requiring that lease assets and liabilities arising from operating leases be recognized on the balance sheet. In July 2018, the FASB issued ASU 2018-10 and ASU 2018-11, Codification Improvements to Topic 842, Leases, amending various aspects of Topic 842. Topic 842 does not significantly change the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee from current U.S. GAAP. For leases with a term of 12 months or less, a lessee would be permitted to make an accounting policy election, by class of underlying asset, not to recognize lease assets and liabilities. Topic 842 became effective for the Company for annual and interim periods beginning in the first quarter 2019.
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The Company leased (1) 9 branch locations, (2) its corporate offices (3) 1 production office and (4) office equipment under operating leases that resulted in the recognition of right-of-use assets and corresponding lease liabilities of approximately $5,000 on the consolidated balance sheet under Topic 842. Adoption of Topic 842 did not have a material impact on the Company’s consolidated statement of operations. Management adopted the guidance on January 1, 2019, and elected certain practical expedients offered by the FASB, including foregoing the restatement of comparative periods upon adoption. Management also excluded short-term leases from the recognition of right-of-use asset and lease liabilities. Additionally, the Company elected the transition relief allowed by FASB in foregoing reassessment of the following: whether any existing contracts were or contained leases, the classification of existing leases, and the determination of initial direct costs for existing leases. As of September 30, 2019, the Company leases (1) 6 branch locations, (2) its corporate offices (3) 1 production office and (4) office equipment under operating leases. See Note 6 for additional detail.
ASU 2014-09; Revenue from Contracts with Customers (Topic 606)—Under the ASU, as modified by subsequent ASUs, revenue is recognized when a customer obtains control of promised services in an amount that reflects the consideration the entity expects to receive in exchange for those services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company applied the five-step method outlined in the ASU to all revenue streams scoped-in by the ASU and elected the modified retrospective implementation method. Substantially all of the Company’s interest income and certain noninterest income were not impacted by the adoption of this ASU because the revenue from those contracts with customers is covered by other guidance in U.S. GAAP. The Company’s largest sources of noninterest revenue which are subject to the guidance include fees and service charges on loan and deposit accounts and interchange revenue from debit card transactions. ASU 2014-08, as amended, became effective for the Company’s annual and interim periods beginning in the first quarter 2019. Adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements as the change in the timing and pattern of the Company’s revenue recognition related to scoped-in noninterest income recognized under the newly issued ASU is consistent with the current applicable accounting guidance. The Company has made all required additional disclosures related to non-interest income in the consolidated financial statements, primarily in Note 1-Nature of Business and Summary of Significant Accounting Policies.
Recently Issued, But Not Yet Effective Accounting Pronouncements
ASU 2017-04; Intangibles--Goodwill and Other (Topic 350)--The ASU simplifies the accounting for goodwill impairment. This guidance, among other things, removes step two of the goodwill impairment test thus eliminating the need to determine the fair value of individual assets and liabilities of the reporting unit. Upon adoption of this ASU, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This may result in either greater or less impairment being recognized than under current guidance. This Update will become effective for the Company’s annual goodwill impairment tests beginning in the first quarter 2020. The Company does not expect adoption of this ASU to have a material impact on its consolidated financial statements.
ASU 2016-13; Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments--The ASU changes accounting for credit losses on loans receivable and debt securities from an incurred loss methodology to an expected credit loss methodology. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, ASU 2016-13 requires the use of forward-looking information to form credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, though the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. On July 17, 2019, the FASB proposed delaying the effective date for ASU 2016-13 for smaller reporting companies. This proposal was approved on October 18, 2019, resulting in ASU 2016-13 becoming effective in the first quarter of 2023 for the Company. Earlier adoption is permitted; however, the Company does not currently plan to adopt the ASU early. Management is assessing alternative loss estimation methodologies and the Company’s data and system needs in order to evaluate the impact that adoption of this standard will have on the Company’s financial condition and results of operations. The Company anticipates recording the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which the ASU is effective, which will be January 1, 2023.
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NOTE 2 – ACQUISITION
F. & M. Bancorp. of Tomah, Inc.
On July 1, 2019 the Company completed its previously announced acquisition of F. & M. Bancorp. of Tomah, Inc. (“F&M”) pursuant to the merger agreement. In connection with the acquisition, the Company merged Farmers & Merchants Bank with and into the Bank, with the Bank surviving the merger.
Under the terms of the merger agreement, each issued and outstanding share of F&M common stock, $0.25 par value, other than F&M common stock held by dissenting shareholders, or shares of F&M common stock held by F&M as treasury stock or owned by the Company, was converted into the right to receive, without interest (i) $94.92 in cash, (ii) 1.3350 shares of Citizens common stock, and (iii) cash in lieu of fractional shares. The value of the aggregate consideration paid to F&M shareholders was approximately $24 million.
The merger added $192.3 million in assets, gross loans of $130.3 million and $148.5 million in deposits. Based on preliminary estimates, $367 of goodwill and $1.6 million of a core deposit intangible asset was created at September 30, 2019. We expect our analysis to be final at December 31, 2019. The goodwill is not deductible for tax purposes, as the acquisition is accounted for as a tax-free exchange for tax purposes.
In connection with the F&M acquisition, we incurred expenses related to (1) accounting, legal and other professional services, (2) contract termination costs, and (3) other costs of integrating and conforming acquired operations with and into the Company. These merger-related expenses, that were expensed as incurred, amounted to $2,575 for the three months ended September 30, 2019 and $3,086 for the nine months ended September 30, 2019, and were included in non-interest expense on the consolidated statement of operations.
The acquisition of the net assets of F&M constitutes a business combination as defined by FASB ASC Topic 805, “Business Combinations.” Accordingly, the assets acquired and liabilities assumed are presented at their fair values at acquisition date. Fair values were determined based on the requirements of FASB ASC Topic 820, “Fair Value Measurements.” In many cases, the determination of these fair values required management to make estimates regarding discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change for a period up to 12 months after the acquisition date. Management engaged third-party valuation specialists to assist in determining such values. The preliminary results of the fair value evaluation generated goodwill and intangible assets as noted above.
The following pro forma financial information for the periods presented reflects our estimated consolidated pro forma results of operations as if the F&M acquisition occurred on January 1, 2019, not considering potential cost savings and other business synergies we expect to receive as a result of the acquisition:
Nine Months Ended September 30, 2019
(1) Citizens Community Bancorp, Inc.
(2) F&M
(3) Pro Forma Adjustments
Pro Forma Combined
Revenue (net interest income and non-interest income)
$
42,929
$
4,918
$
(299
)
$
47,548
Net income attributable to common stockholders
$
6,294
$
1,007
$
(321
)
$
6,980
Earnings per share--basic
$
0.57
$
0.63
Earnings per share-diluted
$
0.57
$
0.63
(1) Revenue and net income attributable to common stockholders for Citizens Community Bancorp, Inc. are for the consolidated entity through September 30, 2019 which includes the results of operations of F&M for the time period July 1, 2019 through September 30, 2019.
(2) Revenue and net income attributable to common stockholders for F&M includes the results of operations of F&M for the time period January 1, 2019 through June 30, 2019.
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(3) Pro-forma adjustments are for the time period January 1, 2019 through June 30, 2019 and include:
•Six month adjustment to record accretion of loan discount ($814) on a straight line basis over approximately six years
•Six month adjustment to record amortization of the deposit premium on a straight line basis over the estimated lives of the underlying deposits ranging from seven months to approximately twenty months
•Six month adjustment to record amortization of the FHLB borrowings premium on a straight line basis over the estimated lives of the underlying advances ranging from four months up to approximately thirty-three months
•Six month adjustment to record interest expense on funds borrowed to fund the acquisition of Tomah.
These pro forma adjustments reflect (1) additional depreciation and amortization expense related to, and associated tax effects of, the purchase accounting adjustments made to record various items at fair value and (2) elimination of acquisition related costs incurred.
The revenue and earnings of F&M since the acquisition date of July 1, 2019 are presented below:
Three Months Ended September 30, 2019
F&M
Revenue (net interest income and non-interest income)
$
1,433
Net income attributable to common stockholders
$
402
The following table summarizes the preliminary amounts recorded on the consolidated balance sheet as of the acquisition date in conjunction with the acquisition discussed above:
F&M
Fair value of consideration paid
$
23,894
Fair value of identifiable assets acquired:
Cash and cash equivalents
15,757
Other interest bearing deposits
992
Securities available for sale “AFS”
37,069
Other investments
2,413
Loans receivable, net
126,562
Office properties and equipment, net
2,654
Core deposit intangible
1,582
Cash value of life insurance
4,719
Other assets
1,503
Total identifiable assets acquired
$
193,251
Fair value of liabilities assumed:
Deposits
$
148,637
Other borrowings
20,122
Other liabilities
965
Total liabilities assumed
169,724
Fair value of net identifiable assets acquired
23,527
Goodwill recognized
$
367
20
NOTE 3 – INVESTMENT SECURITIES
The amortized cost, estimated fair value and related unrealized gains and losses on securities available for sale and held to maturity as of September 30, 2019 and December 31, 2018, respectively, were as follows:
Available for sale securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
September 30, 2019
U.S. government agency obligations
$
53,405
$
184
$
211
$
53,378
Obligations of states and political subdivisions
27,648
301
12
27,937
Mortgage-backed securities
54,979
741
62
55,658
Corporate debt securities
18,793
131
90
18,834
Corporate asset based securities
27,756
—
607
27,149
Total available for sale securities
$
182,581
$
1,357
$
982
$
182,956
December 31, 2018
U.S. government agency obligations
$
46,215
$
13
$
930
$
45,298
Obligations of states and political subdivisions
35,162
22
456
34,728
Mortgage-backed securities
42,279
10
939
41,350
Agency Securities
104
49
5
148
Corporate debt securities
6,577
—
272
6,305
Corporate asset based securities
18,928
8
40
18,896
Total available for sale securities
$
149,265
$
102
$
2,642
$
146,725
Held to maturity securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
September 30, 2019
Obligations of states and political subdivisions
$
980
$
2
$
—
$
982
Mortgage-backed securities
2,685
103
—
2,788
Total held to maturity securities
$
3,665
$
105
$
—
$
3,770
December 31, 2018
Obligations of states and political subdivisions
$
1,701
$
—
$
3
$
1,698
Mortgage-backed securities
3,149
42
17
3,174
Total held to maturity securities
$
4,850
$
42
$
20
$
4,872
As of September 30, 2019, the Bank has pledged U.S. Government Agency securities with a market value of $5,974 and mortgage-backed securities with a market value of $13,710 as collateral against specific municipal deposits. At September 30, 2019, the Bank has pledged U.S. Government Agency securities with a market value of $1,703 as collateral against a borrowing line of credit with the Federal Reserve Bank. However, as of September 30, 2019, there were no borrowings outstanding on this Federal Reserve Bank line of credit. As of September 30, 2019, the Bank also has mortgage backed securities with a carrying value of $760 pledged as collateral to the Federal Home Loan Bank of Des Moines.
21
The estimated fair value of securities at September 30, 2019 and December 31, 2018, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities on mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Expected maturities may differ from contractual maturities on certain agency and municipal securities due to the call feature.
September 30, 2019
December 31, 2018
Available for sale securities
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
Due in one year or less
$
3,984
$
3,986
$
2,177
$
2,172
Due after one year through five years
19,572
19,806
22,296
22,043
Due after five years through ten years
40,350
40,437
43,014
42,081
Due after ten years
63,696
63,069
39,395
38,931
Total securities with contractual maturities
$
127,602
$
127,298
$
106,882
$
105,227
Mortgage backed securities
54,979
55,658
42,279
41,350
Securities without contractual maturities
—
—
104
148
Total available for sale securities
$
182,581
$
182,956
$
149,265
$
146,725
September 30, 2019
December 31, 2018
Held to maturity securities
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
Due in one year or less
$
680
$
680
$
680
$
679
Due after one year through five years
300
302
1,021
1,020
Total securities with contractual maturities
$
980
$
982
$
1,701
$
1,699
Mortgage backed securities
2,685
2,788
3,149
3,173
Total held to maturity securities
$
3,665
$
3,770
$
4,850
$
4,872
Securities with unrealized losses at September 30, 2019 and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows: