An Exclusive Look At Citizens Community Bancorp With CEO Ed Schaefer

Shares of Citizens Community Bancorp Inc. CZWI are up 94 percent over the last three years. Expert community bank investor Tim Melvin believes there is additional upside in the small Midwestern bank.

To gain a deeper understanding of Citizens' strategy, Melvin recently spoke with CEO Ed Schaefer in an exclusive interview.

Market Conditions

Citizens headquarters are located in Wisconsin and branches are located in Minnesota and Michigan. How are conditions in these regions as we come out of the great recession?
Being in smaller communities, we don't see the big ups and downs like you've seen on the coasts. So, in the recession, which was extremely large, we didn’t see as big of an impact going down or coming back. Business is very solid right now.
How about the real estate markets? Have they held up fairly well as well in the region?
Yeah, they’ve come back. Like I said earlier, we don’t have the big ups and downs and swings in real estate prices. It’s not up dramatically, it’s back to normal levels from around the recession time.

Financials

Citizens has an extraordinarily low amount of non-performing assets. The bank has less than one-third of the national average of banks your size. How are you accomplishing that? Is it just good old sensible Midwestern values, or have you guys done something special as far as underwriting?
Well, I’m part of a new management team that came in 2010 and we really placed our emphasis on developing that foundation. You really can’t have consistent earnings until you have a foundation. That foundation would always in my mind be the basis on policies and procedures and most importantly, credit.

We had significant write-offs in credit when I first got here and we totally overhauled our lending practices and policies. We have had very good results.

Strategy

You have a lot of branches that are located in Wal-Mart stores. How is that relationship, given their discussions of moving into banking?
Our [the new management team] focus is more of a community-based model and Wal-Marts are very complimentary. Previous management took on 17 Wal-Marts in 18 months. Some make a lot of sense with our consumer focus… But Wal-Marts are complimentary, basically driving the deposit side of the bank. The new focus by Wal-Mart is so new that we have not seen it affect us yet.
They’re going after just a segment that really ties more into the under bank or the non-bank side. We do have products in the Wal-Marts to serve that, but we don’t have the prepaid cards. Most of the products just take time to put on because we’re in a regulatory environment.
You spoke recently about your bank rationalization process and have closed a couple of branches. But, you are looking to expand in other areas. Can you tell us about those plans?
Our focus as a company is to look at markets. So, being spread out due to previous acquisitions made by prior management [means] we really need to look at what markets we can grow in.

Rice Lake, Wisconsin, is a great example. We had a very successful Wal-Mart, a lot of the employees are active in Rice Lake. We put on a commercial team that’s very active and we built a traditional branch. We’re growing nicely in that market, exceeding our budget and expectation.
Citizens had a fantastic third quarter. I’ve reviewed a couple hundred community bank reports this quarter and yours was exceptionally strong. Can you tell us a little bit about the quarter and some of the developments?
Again, good old banking. Procedures and policies are in place. In our previous press releases, as well as 10-Qs and 10-Ks, we’ve talked about credit, policies, procedures and foundation.

In February of 2013, our regulatory orders disappeared. March of 2014, our legacy investments of non-agency team mortgage backed securities were all sold and taken off our balance sheet, which has really allowed us to focus on what needs to happen -- profitable growth.
I noticed that you just opened an agricultural lending division. How has that been performing so far?
The market makes a lot of sense, especially with our outlying Minnesota banks. We are able to bring on some agricultural expertise in our Rice Lake market and we’ll just expand those capabilities as we expand our commercial footprint in other markets. Right now, we only have commercial in our Chippewa Valley market and we’ve seen results. We’ll expand commercial based on our ability to hire quality people.

Loan Portfolio

There was also an impressive increase in multi-family lending, which of course is one of the more lucrative lending markets right now. Was that intentional or did Citizens stumble upon that business?
I think part of the previous management, their portfolios were very strong on portfolio-typed mortgages that they’d hold on their books, and have a really good understanding of the multi-family or a non-owner occupied business. So, I think we have that expertise throughout the company. Again, we want to add that and diversify. You don’t want to grow too rapidly in any one concentration sector, so we like that market; we’re growing in that market and we’re seeing… not a lot of people are buying homes anymore, they are renting. So, this market is growing nicely nationally and we’re conservatively adding to that portfolio.
Forty percent of the loan portfolio is made up of consumer loans that are non-credit card and non-residential. What type of loans are those?
We have a very nice indirect lending business. It’s a niche. Our business model, being purely consumer before the new management team came in, did indirect lending nationally. We really concentrated that in our three state regions.

There are two reasons we like it. We do have the niche industries: boat, RV, used car, power sports, and then we cross sell in market, and we do very well cross-selling those loans. We are trying to get the customer at a point where they’ll consider moving a bank.

For example, when you go buy a boat and you get a loan through the dealership, we make that loan for that dealership. Then, once it’s on the books we start calling you and telling you about all the other great things and capabilities we have or that we’ve added. So we’re really congesting on developing relationships, not just doing car loans for people in outstate markets where they’ll [have] no other ability to do business.
Right in your service area, you’ve got a bunch of the big banks. These include Wells Fargo, BMO Harris and Chase. Do you have specific plans or strategies to market against these guys, given their kind of distaste for the bigger banks that’s out there among the consumer today?
I think that’s even more relevant in smaller communities like ours; because we focus on the local community and local decision making, some of the larger banks are just not structured to operate in that capacity. This is especially true on the authority levels and decision-making capability. We’re just quicker than they are.

Shareholders

Citizens has very little Wall Street coverage. Is that a concern? Do you have any plans to reach out to Wall Street analysts, or are you just content to let the results speak for themselves?
We do various conferences and we have done one-on-one at investor conferences with some of the various investment banks that cover our size of market. We will be planning on attending a Sterne Agee conference to do one-on-ones. I did it the last two years and you can look at those presentations that we gave and you can see that, how we do what we say we’re going to do.
There are a couple of well-known activists and a bunch of bank stock-specific investing funds on your shareholder list. Do you have a pretty good relationship with those guys?
I have no issues with any activists in terms of calls or attendance at shareholder meetings. I would say we have had a pretty good relationship over the last three years. Our stock rise has gone up 20 to 30 percent every year for the last three years, so I think they’re happy.

M&A

Looking forward for Citizens and community banks in general, what do you see for the industry? Many are predicting a wave of M&A activity.
I can't disagree. With the compliance costs we talked about, you have to spread those costs. With declining margins, I think banks that don’t have a niche or are not efficient are going to make the decision to be a part of a consolidation wave. I think the recession had a lot to do with it, but I think there are a lot of tired bankers and a lot of tired boards.

We know we can drive value, that’s why in our last press release we used the word "independent." We think we can drive it faster than being part of that consolidation wave in the short run. Our focus is to really invest on the key part of banking and technology and people that make us as efficient as possible, because you’re going to have to be competitive going forward. Our branch network is just too large based on the Wal-Marts and that’s why we consistently comment in our press releases, that we continually look at branch rationalization.