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Capital Resources.  Capital ratios applicable to the Bank as of December 31, 2007, and September 30, 2007, were as follows:

Capital Ratios
		Actual							For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2007 (Un-audited)
Total risk-based capital (to risk weighted assets)		$	45,109,000				17.3	%	$20,915,000  >=			8.0	%	$26,144,000 >=			10.0	%
Tier 1 capital (to risk weighted assets)		$	44,384,000				17.0	%	$10,458,000 >=			4.0	%	$15,686,000 >=			6.0	%
Tier 1 capital (to adjusted total assets)		$	44,384,000				11.0	%	$16,090,000 >=			4.0	%	$20,113,000 >=			5.0	%
Tangible capital (to tangible assets)		$	44,384,000				11.0	%	$6,034,000 >=			1.5	%	NA		NA
As of September 30, 2007 (Audited)
Total risk-based capital (to risk weighted assets)		$	44,416,000				18.0	%	$19,757,000 >=			8.0	%	$24,696,000 >=			10.0	%
Tier 1 capital  (to risk weighted assets)		$	43,709,000				17.7	%	$9,878,000>=			4.0	%	$14,817,000 >=			6.0	%
Tier 1 capital (to adjusted total assets)		$	43,709,000				11.5	%	$15,161,000 >=			4.0	%	$18,952,000 >=			5.0	%
Tangible capital (to tangible assets)		$	43,709,000				11.5	%	$5,685,000 >=			1.5	%	NA		NA

Management intends to maintain capital levels in the well-capitalized category established by regulatory authorities.  The Bank was categorized as “well-capitalized” under the regulatory framework for capital adequacy as of December 31, 2007, and September 30, 2007.

Results of Operations

Overview. For the first quarter of fiscal 2008, the Company continued to see strong loan demand with steady growth in both real estate and consumer loans. Citizens Community Federal manages its lending portfolio to minimize risk and maximize income, and as such, it does not participate in any sub-prime lending. Combined with loan growth, this management strategy helped drive income growth for the quarter. The Company continues to make traditional loans while maintaining its low delinquency and charge-off results.

Citizens Community Federal anticipates continued loan growth going forward. Additionally, the Company has announced plans to expand into select Wal-Mart retail locations in 2008. The Company believes that these new branches will offer excellent potential for additional core deposit and loan growth and are consistent with Citizens Community Federal’s targeted expansion strategy.

Net Income/Loss.  For the fiscal 2008 first quarter, the Company reported net income of $455,000, versus a net loss of ($115,000) for the prior-year first quarter.  The year-earlier results included a one-time, after tax charge of $370,000 ($610,000 pre-tax) related to agreements with two

 

 

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Citizens Community Federal executives who resigned.  Excluding the one-time charge, the Company would have reported fiscal 2007 first-quarter net income of $255,000.  On this basis, fiscal 2008 first-quarter net income increased 78.4 percent over fiscal 2007.  The improvement was primarily due to an increase in net interest income, partially offset by higher operating expenses (excluding last year’s one-time charge).

On a basic and diluted per-share basis, Citizens Community Bancorp, Inc., reported fiscal 2008 first quarter earnings of $0.07 per share, up from a loss of ($0.02) per share for the prior year first quarter.  Excluding the charge detailed above, the Company would have reported fiscal 2007 first-quarter basic and diluted per-share earnings of $0.04.

Net interest margin decreased to 3.02% for the three months ended December 31, 2007, from 3.72% for the three months ended December 31, 2006.  Interest spread decreased to 2.29% for the current period, compared to 3.15% for the prior three-month period, as a result of the cost of interest-bearing liabilities increasing at a faster pace than earning assets.  Contributing to the decrease in interest spread and net interest margin was the MBS portfolio being funded through FHLB advances.  The spreads produced from leveraged investments resulted in consistently lower interest margins than that earned from the loans receivable portfolio, and as a result, the overall interest spread and net interest margin were affected.

Total Interest Income.  Total interest and dividend income increased by $1.9 million for the three-month period ended December 31, 2007, to $6.3 million from $4.4 million for the comparable 2006 period.  The increase for the period was a result of an increase in the average balance of loans receivable attributed to strong loan demand due to marketing efforts and an increase in loan yield.  The average balance of loans receivable increased to $328.9 million for the three-month period ended December 31, 2007, from $263.3 million for the prior-year three-month period.  The yield on average loans receivable increased to 6.73% from 6.44%, reflecting higher-yielding new loans replacing payoffs on loans with lower interest rates.  In addition, interest and dividend income increased as a result of an increase in investments.  The increase in investments was a result of an increase in the average balance of securities available for sale.  The average balance of securities available for sale increased to $43.0 million for the three-month period ended December 31, 2007, compared to $770,000 for the prior-year three-month period.  This increase in investments was the primary reason for the increase in other interest and dividend income, from $95,00 0 for the three-months ended December 31, 2006, to $697,000 for the fiscal 2008 first quarter.

Total Interest Expense.   Total interest expense rose $1.4 million to $3.3 million for the quarter ended December 31, 2007, from $1.9 million for the comparable 2006 period.  The increase resulted from an increase in the average balance and costs of interest-bearing deposits.  The increase in interest expense resulted from an increase in cost of both deposits and notes payable as a result of an increase in the average deposit outstanding and an increase in advances from the Federal Home Loan Bank of Chicago.  The average balance of interest-bearing liabilities increased from $237.2 million for the three-month period ended December 31, 2006, to $316.8 million for the three months ended December 31, 2007.  The average balance of FHLB advances increased from $25.2 million for the three-month period ended December 31, 2006, to $99.3 million for the three-month period ended December 31, 2007.  Management used FHLB advances to fund MBS investments as well as using some FHLB advances to fund loan demand.  The average cost of interest-bearing liabilities increased from 3.63% for the quarter ended December 31, 2006, to 4.19% for the quarter ended December 31, 2007.

Net Interest Income.  Net interest income before provision for loan losses for the first quarter ended December 31, 2007, totaled approximately $2.9 million, an increase of $400,000 from $2.5 million for the prior-year period. The increase was a result of an increase in the average balance of loans receivable and the average loan yield, and an increase in the average balance of investments, partially offset by an increase in the average balance in interest-bearing liabilities and their costs.

 

 

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Provision for Loan Losses.  We establish the provision for loan losses, which is charged to operations, at a level management believes will adjust the allowance for loan losses to reflect probable incurred credit losses in the loan portfolio.  In evaluating the level of the allowance for loan losses, management considers the types of loans and the amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.  Based on our evaluation of these factors, we made provisions of $165,000 and $103,000 for the three-month periods ended December 31, 2007, and 2006, respectively.

Non-performing assets were 0.42% of total assets as of December 31, 2007, as compared to 0.43% of total assets as of September 30, 2007. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available, or as future events change.

The level of the allowance is based on estimates and the ultimate losses may vary from the estimates. Management assesses the allowance for loan losses on a monthly basis and makes provisions for loan losses as necessary in order to maintain the allowance.  While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in economic conditions or changes in individual account conditions.  In addition, various regulatory agencies, as an integral part in their examination process, periodically review the allowance for loan losses and may require us to recognize additional provisions based on their judgment of information available to them at the time of their examination.

Non-Interest Income. Non-interest income increased slightly to $428,000 for the first quarter ended December 31, 2007, from $408,000 for the prior-year period, primarily as a result of service charges on deposit accounts.

Non-Interest Expense. Non-interest expense decreased to $2.4 million for the fiscal 2008 first quarter, from $3.0 million for the fiscal 2007 first quarter.  The decrease was primarily due to the one-time, prior-year charge discussed earlier.

Income Tax Expense.   Income tax expense increased to $292,000, from a benefit of $104,000 for the three-month period ended December 31, 2007, compared to the three-month period ended December 31, 2006, primarily as a result of the improved earnings reported.

Forward-Looking Statements.   This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended.  We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and are including this statement for purposes of these safe harbor provisions.  “Forward-looking statements”, which are based on certain assumptions and describe future plans, strategies and expectations of Citizens Community Bancorp may be identified by the use of words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” and “potential”.  Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operation and business that are subject to various factors which could cause actual results to differ materially from these estimates and most other statements that are not historical in nature.  These factors include, but are not limited to, general and local economic conditions, changes in interest rates, deposit flows, demand for mortgage, consumer and other loans, real estate values, competition, changes in accounting principles, policies, or guidelines, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting our

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operations, pricing, products and services. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  Further information concerning Citizens Community Bancorp and its business, including additional factors that could materially affect our financial results, is included in our filings with the Securities and Exchange Commission.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our Risk When Interest Rates Change.  The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time.  Market interest rates change over time.  Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities.  The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.

How We Measure Our Risk of Interest Rate Changes.  As part of our attempt to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor our interest rate risk.  In monitoring interest rate risk we continually analyze and manage assets and liabilities based on their payment streams and interest rates, the timing of their maturities, and their sensitivity to actual or potential changes in market interest rates.

In order to manage the potential for adverse effects of material and prolonged increases in interest rates on our results of operations, we adopted asset and liability management policies to better align the maturities and repricing terms of our interest-earning assets and interest-bearing liabilities.  These policies are implemented by the asset and liability management committee.  The asset and liability management committee is comprised of members of senior management.  The asset and liability management committee establishes guidelines for and monitors the volume and mix of assets and funding sources, taking into account relative costs and spreads, interest rate sensitivity and liquidity needs.  The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk and profitability goals.  The asset and liability management committee generally meets on a weekly basis to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate risk exposure limits versus current projections pursuant to net present value of portfolio equity analysis.  At each meeting, the asset and liability management committee recommends strategy changes, as appropriate, based on this review.  The committee is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the board of directors on a monthly basis.

In order to manage our assets and liabilities and achieve the desired liquidity, credit quality, interest rate risk, profitability and capital targets, we have focused our strategies on:

·	originating shorter-term consumer loans;

·	originating prime-based home equity lines of credit;

·	managing our deposits to establish stable deposit relationships;

·	using FHLB advances to align maturities and repricing terms;

·	attempting to limit the percentage of long-term, fixed-rate loans in our portfolio which do not contain a payable-on-demand clause; and

·	originating first mortgage loans, with a clause allowing for payment on demand after a stated period of time.

 

 

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At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the asset and liability management committee may determine to increase Citizens Community Federal's interest rate risk position somewhat in order to maintain or improve its net interest margin.

As of December 31, 2007, $149.6 million of loans in our portfolio included a payable-on-demand clause.  We have not utilized the clause since fiscal 2000 because, in management's view, it has not been appropriate.  Therefore, the clause has had no impact on our liquidity and overall financial performance for the periods presented. The purpose behind the payable-on-demand clause is to provide Citizens Community Federal with some protection against the impact on net interest margin of sharp and prolonged interest rate increases.  It is Citizens Community Federal’s policy to write the majority of its real estate loans with a payable-on-demand clause.  The factors considered in determining whether and when to utilize the payable-on-demand clause include a significant, prolonged increase in market rates of interest; liquidity needs; desire to restructure the balance sheet; an individual borrowers unsatisfactory payment history; and the remaining term to maturity.

As part of its procedures, the asset and liability management committee regularly reviews interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and market value of portfolio equity.  Market value of portfolio equity is defined as the net present value of an institution's existing assets, liabilities and off-balance sheet instruments, and evaluating such impacts against the maximum potential changes in net interest income and market value of portfolio equity that are authorized by the board of directors of Citizens Community Federal.

The following table sets forth, at September 30, 2007, (the most recent date for which information is available) an analysis of Citizen Community Federal's interest rate risk as measured by the estimated changes in NPV resulting from instantaneous and sustained parallel shifts in the yield curve (up 300 basis points and down 200 basis points, measured in 100 basis point increments).  As of September 30, 2007, due to the current level of interest rates, the OTS no longer provides NPV estimates for decreases in interest rates greater than 200 basis points.

Change in Interest Rates in Basis Points ("bp") (Rate Shock in Rates)(1)	Net Portfolio Value			Net Portfolio Value as % of Present Value of Assets
	Amount	Change	Change	NPV Ratio	Change
(Dollars in thousands)
+300  bp	$36,641	$(7,080)	(16)%	10.01%	(148) bp
+200  bp	39,118	(4,603)	(11)	10.55	(95)
+100  bp	41,514	(2,207)	( 5)	11.05	(44)
+50  bp       0 bp    -50 bp	42,631 43,721 44,689	(1,090) 968	(2) 2	11.28 11.50 11.68	(22) 19
-100  bp	45,442	1,721	4	11.81	32
-200  bp	46,445	2,724	6	11.96	46

________________

(1)	Assumes an instantaneous uniform change in interest rates at all maturities.

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For comparative purposes, the table below sets forth, at September 30, 2006, an analysis of Citizen Community Federal's interest rate risk as measured by the estimated changes in NPV resulting from instantaneous and sustained parallel shifts in the yield curve (up 300 basis points and down 200 basis points, measured in 100 basis point increments).  As of September 30, 2006, due to the current level of interest rates, the OTS no longer provided NPV estimates for decreases in interest rates greater than 200 basis points.

Change in Interest Rates in Basis Points ("bp") (Rate Shock in Rates)(1)	Net Portfolio Value			Net Portfolio Value as % of Present Value of Assets
	Amount	Change	Change	NPV Ratio	Change
(Dollars in thousands)
+300  bp	$14.290	$(6,749)	(32)%	5.41%	(226) bp
+200  bp	16,590	(4,449)	(21)	6.20	(147)
+100  bp	18,862	(2,177)	(10)	6.96	(71)
0  bp	21,039	---	---	7.66	---
-100  bp	23,005	1,966	9	8.29	62
-200  bp	24,778	3,739	18	8.83	116

___________

(1)	Assumes an instantaneous uniform change in interest rates at all maturities.

The OTS uses certain assumptions in assessing the interest rate risk of savings associations.  These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others.

ITEM 4. CONTROLS AND PROCEDURES

An evaluation of the Company’s disclosure controls and procedures (as defined in Section 13(a)-15(e) under the Securities Exchange Act of 1934 (the “Act”) as of December 31, 2007, was carried out under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer and several other members of our senior management.  The Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2007, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports the Company files or submits under the Act is (i) accumulated and communicated to management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  There have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Act) that occurred during the quarter ended December 31, 2007, that have materially affected, or are reasonably likely to materially effect, our internal controls over financial reporting.

The Company does not expect that its disclosure controls and procedures will prevent all errors and all fraud.  A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met.  Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any control procedure is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions;

 

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over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies and procedures may deteriorate.  Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and annually report on their systems of internal control over financial reporting.  In addition, our independent accountants must report on management’s evaluation.  We are in the process of evaluating, documenting and testing our system of internal control over financial reporting to provide the basis for our report that will, for the first time, be a required part of our annual report on Form 10-K for the fiscal year ending September 30, 2008.  Due to the ongoing evaluation and testing of our internal controls, there can be no assurance that if any control deficiencies are identified they will be re-mediated before the end of the 2008 fiscal year, or that there may not be significant deficiencies or material weaknesses that would be required to be reported.  In addition, we expect the evaluation process and any required remediation, if applicable, to increase our accounting, legal and other costs and divert management resources from core business operations.

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PART II – OTHER INFORMATION

Item 1.   LEGAL PROCEEDINGS

In the normal course of business, the Company occasionally becomes involved in various legal proceedings.  In the opinion of management, any liability from such proceedings would not have a material adverse effect on the business or financial condition of the Company.

Item 1A. RISK FACTORS

There are no material changes from the risk factors disclosed in the Company’s Form 10K for the fiscal year ended September 30, 2007.

Item 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table summarizes our share repurchase activity during the three months ended

December 31, 2007.

Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans	Maximum Number of Shares That May Yet be Purchased Under the Plan
October 1, 2007 through    October 31, 2007	NA	NA	NA	NA
November 1, 2007 through     November 30, 2007	227,176	9.37	227,176	127,824
December 1, 2007 through     December 31, 2007	75,933	9.22	75,933	51,891
Total	303,109	9.34	303,109	51,891

On September 24, 2007, the Company announced a stock repurchase program to purchase up to 355,000 shares. Subsequent to the December 31, 2007, quarter, the stock repurchase program was completed.

Item 3.    DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

Item 5.    OTHER INFORMATION

Not applicable.

Item 6.    EXHIBITS

(a)

Exhibits

31.1                 Rule 13a-15(e) Certification of the Company’s President andChief Executive Officer

31.2	Rule 13a-15(e) Certification of the Company’s Chief Financial Officer

                      32.0                 Certification

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

CITIZENS COMMUNITY BANCORP, INC.

 

 

 

Date:	February 11, 2008	By:	/s/ James G. Cooley
			President and Chief Executive Officer

 

 

Date:	February 11, 2008	By:	/s/ John Zettler
			Chief Financial Officer

                                                                                                           

 

Community Bancorp and its business, including additional factors that could materially affect our financial results, is included in our filings with the Securities and Exchange Commission.

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