Citizens Community Bancorp Inc. - 10-Q Summary (Q3 2011)
Business Context and Reporting Period
This report covers the quarterly period ended December 31, 2010 for Citizens Community Bancorp Inc., a Maryland corporation operating Citizens Community Federal, a federal mutual savings bank. The Company operates 26 full-service offices in Wisconsin, Minnesota, and Michigan, focusing on residential and consumer loans. The Company is classified as a smaller reporting company and is currently operating under a Memorandum of Understanding (MOU) with the Office of Thrift Supervision (OTS) regarding asset quality, liquidity, and capital planning.
Key Financial Metrics
| Metric | Q3 2011 (Dec 31, 2010) | Q3 2010 (Dec 31, 2009) | Q2 2011 (Sep 30, 2010) |
|---|---|---|---|
| Net Income (Loss) | $(239,000) | $175,000 | Not provided (Retained Earnings decreased) |
| Earnings Per Share (Basic/Diluted) | $(0.05) | $0.03 | N/A |
| Total Assets | $580.3 million | N/A | $594.4 million |
| Total Loans Receivable | $450.7 million | N/A | $456.2 million |
| Total Deposits | $482.4 million | N/A | $476.3 million |
| FHLB Advances (Debt) | $42.8 million | N/A | $64.2 million |
| Stockholders' Equity | $51.8 million | N/A | $49.9 million |
| Cash and Cash Equivalents | $67.3 million | N/A | $72.4 million |
| Net Interest Margin | 3.73% | 3.62% | N/A |
| Efficiency Ratio | 70.15% | 70.53% | N/A |
Material Changes vs. Prior Periods
- Profitability: The Company reported a net loss of $239,000 for the quarter, a reversal from the $175,000 net income reported in the same period in 2009. This was primarily driven by a significant increase in the provision for loan losses.
- Loan Loss Provision: The provision for loan losses increased to $1.6 million from $760,000 in the prior year quarter. Net loan charge-offs rose to $1.333 million (0.98% of total loans) from $398,000 (0.51%) in the prior year, attributed to higher unemployment and depressed collateral values.
- Asset Quality: Non-performing loans (NPLs) increased by 79.9% to $9.146 million from $5.084 million at the end of the previous quarter. This increase was partly due to a change in the definition of NPLs to include troubled debt restructurings (TDRs) that were 91+ days delinquent at the time of restructuring.
- Securities Portfolio: The Company recognized $620,000 in other-than-temporary impairment (OTTI) losses on non-agency mortgage-backed securities (MBS). Total investment securities decreased slightly to $40.9 million.
- Liquidity and Funding: FHLB advances decreased by $21.4 million as the Company paid down a maturing note, reducing reliance on higher-cost borrowed funds. Deposits increased by $6.1 million.
Guidance, Outlook, and Risks
- Outlook: Management anticipates that actual charge-off experience will stabilize throughout the fiscal year ended September 30, 2011, as local and national unemployment rates improve slightly. However, elevated levels of loan charge-offs are expected to continue due to economic conditions.
- Regulatory Status: The Company remains "well capitalized" under Prompt Corrective Action provisions. However, it is subject to an MOU with the OTS which prohibits declaring dividends or issuing debt without prior consent. The MOU addresses business planning, asset quality, liquidity, and credit concentrations.
- Risks: Key risks include deteriorating credit quality, further write-downs in the MBS portfolio, and the impact of low interest rates on net interest margin. The Company faces litigation from a former CEO regarding wrongful discharge and breach of contract, though management believes the claims are without merit.
- Subsequent Event: On February 2, 2011, the Bank sold four agency and ten non-agency MBS securities for a net realized gain of approximately $150,000 to reduce credit risk exposure and improve risk-based capital positions.
Investor Verification Checklist
- Asset Quality Trends: Verify the trajectory of non-performing loans and the adequacy of the Allowance for Loan Losses (ALL) given the 80% increase in NPLs.
- Securities Valuation: Review the remaining $25.3 million non-agency MBS portfolio for potential future OTTI charges, as $16.1 million of the portfolio has been downgraded to below investment grade.
- Regulatory Constraints: Confirm the status of the MOU with the OTS and any restrictions on capital distributions or strategic initiatives.
- Litigation Exposure: Monitor the status of the lawsuit filed by former CEO James G. Cooley for potential financial impact.
- Liquidity Position: Assess the sustainability of the liquidity ratio (18.87%) and the reliance on core deposits versus brokered deposits.