10-Q: Citizens Community Bancorp Q2 2025 Earnings

Citizens Community Bancorp reports a decrease in net income for Q2 2025 and the first half of 2025, despite improved net interest margin and higher gains on equity securities.

Summary

• Net income for the three months ended June 30, 2025, was $3.27 million, down from $3.675 million in the same period of 2024.
• Net income for the six months ended June 30, 2025, was $6.467 million, down from $7.763 million in the same period of 2024.
• Diluted earnings per share for Q2 2025 was $0.33, compared to $0.35 in Q2 2024.
• Diluted earnings per share for H1 2025 was $0.65, compared to $0.75 in H1 2024.
• Net interest income increased by $1.7 million to $13.311 million in Q2 2025 and by $1.4 million to $24.905 million in H1 2025, compared to the respective prior year periods.
• Net interest margin improved to 3.27% in Q2 2025 (from 2.72% in Q2 2024) and to 3.06% in H1 2025 (from 2.75% in H1 2024).
• Provision for credit losses was $1.350 million in Q2 2025 and $1.100 million in H1 2025, a significant change from negative provisions (benefits) of $1.525 million and $2.325 million in the prior year periods, respectively.
• Total assets decreased to $1.735 billion at June 30, 2025, from $1.748 billion at December 31, 2024.
• Loans receivable, net, decreased by $0.02 billion to $1.324 billion at June 30, 2025, from $1.348 billion at December 31, 2024.
• Total deposits decreased by $9.7 million to $1.478 billion at June 30, 2025, from $1.488 billion at December 31, 2024.
• Stockholders equity increased to $183.5 million at June 30, 2025, from $179.1 million at December 31, 2024.
• Allowance for credit losses (ACL) on loans increased to $21.347 million at June 30, 2025, from $20.549 million at December 31, 2024.
• Nonperforming assets decreased to $13.025 million at June 30, 2025, from $14.269 million at December 31, 2024.
• Criticized loans increased to $41.123 million at June 30, 2025, from $27.371 million at December 31, 2024.

Sentiment

Score: 4

Explanation: While net interest margin improved, the significant increase in provision for credit losses, decrease in net income, and rise in criticized loans indicate deteriorating credit quality and profitability challenges. The stock repurchase program and strong capital ratios are positive, but the overall financial performance for the period is weaker year-over-year.

Positives

• Net interest income increased by $1.7 million in Q2 2025 and $1.4 million in H1 2025, driven by improved net interest margin.
• Net interest margin improved significantly to 3.27% in Q2 2025 and 3.06% in H1 2025, primarily due to lower liability costs.
• Non-interest income increased by $0.9 million in Q2 2025, largely due to $0.8 million higher gain on equity securities and $0.5 million higher gain on sales of loans.
• Total stockholders equity increased to $183.5 million at June 30, 2025, reflecting net income and a decrease in net unrealized losses on available-for-sale securities.
• The Bank is categorized as 'Well Capitalized' under Prompt Corrective Action Provisions, with strong capital ratios (e.g., Tier 1 capital ratio of 14.4% for the Bank).
• Nonperforming assets decreased to $13.025 million at June 30, 2025, from $14.269 million at December 31, 2024, due to loan payoffs and payments.
• On-balance sheet liquidity and borrowing capacity totaled $730 million at June 30, 2025, representing 277% of uninsured and uncollateralized deposits, indicating strong liquidity.
• The Board approved the redemption of $15 million in 6% subordinated debentures due September 1, 2030, which were scheduled to reprice to SOFR plus 591 basis points, reducing future interest expense.

Negatives

• Net income decreased for both the three and six months ended June 30, 2025, compared to the same periods in 2024.
• Provision for credit losses increased significantly to $1.350 million in Q2 2025 and $1.100 million in H1 2025, compared to benefits in the prior year, driven by three 30-89 days delinquent commercial relationships ($0.7 million) and modestly worsening macroeconomic assumptions ($0.3 million).
• Total loans receivable decreased by $0.02 billion from December 31, 2024, indicating a shrinking loan portfolio.
• Total deposits decreased by $9.7 million from December 31, 2024, largely due to a reduction in brokered deposits.
• Service charges on deposit accounts decreased by $58 thousand in Q2 2025 and $106 thousand in H1 2025 due to lower customer activity.
• Loan fees and service charges were lower due to decreased customer activity.
• Compensation and related benefits increased due to annual employee pay raises, higher incentive accruals, and higher medical costs.
• Data processing expense increased due to inflationary pressures and new software implementation costs.
• Professional services increased due to higher legal and audit expenses.
• Criticized loans increased to $41.123 million at June 30, 2025, from $27.371 million at December 31, 2024, primarily due to a forestry services credit moving to substandard and a new multi-family loan experiencing slower leasing activity.

Risks

• Conditions in the financial markets and economic conditions generally.
• The impact of inflation on the business and customers.
• Geopolitical tensions, including current or anticipated impact of military conflicts.
• Higher lending risks associated with commercial and agricultural banking activities.
• Future pandemics (including new variants of COVID-19).
• Cybersecurity risks.
• Adverse impacts on the regional banking industry and the business environment.
• Interest rate risk.
• Lending risk.
• Changes in the fair value or ratings downgrades of securities.
• The sufficiency of allowance for credit losses.
• Competitive pressures among depository and other financial institutions.
• Disintermediation risk.
• Ability to maintain reputation.
• Ability to maintain or increase market share.
• Ability to realize the benefits of net deferred tax assets.
• Ability to obtain needed liquidity.
• Ability to raise capital needed to fund growth or meet regulatory requirements.
• Ability to attract and retain key personnel.
• Ability to keep pace with technological change.
• Prevalence of fraud and other financial crimes.
• The possibility that internal controls and procedures could fail or be circumvented.
• Ability to successfully execute acquisition growth strategy.
• Risks posed by acquisitions and other expansion opportunities, including difficulties and delays in integrating acquired business operations or fully realizing the cost savings and other benefits.
• Restrictions on ability to pay dividends.
• The potential volatility of stock price.
• Accounting standards for credit losses.
• Legislative or regulatory changes or actions, or significant litigation, adversely affecting the Company or Bank.
• Public company reporting obligations.
• Changes in federal or state tax laws.
• Changes in accounting principles, policies or guidelines and their impact on financial performance.

Future Outlook

The company expects continued stable economic conditions in its markets, evidenced by unemployment rates below the national average in its two largest population centers. It monitors the impact of higher interest rates and an inverted yield forecast on its Allowance for Credit Losses (ACL) level. The company plans to redeem $15 million in subordinated debentures on September 1, 2025, and has authorized a new stock repurchase program of 499,000 shares.

Management Comments

• The second quarter of 2025 provision was largely due to: (1) the impact of three 30-89 days delinquent commercial relationships resulting in a $0.7 million provision; (2) the impact of modestly worsening macro-economic assumptions used by our third party provider of $0.3 million; and (3) provisions on new loans with longer contractual life outpacing previously established provisions on prepaying and maturing loans of $0.15 million and an increase in off-balance sheet commitments for new construction loan originations of $0.2 million.
• Management believes that the provision recorded for the current years three and six month periods is adequate in view of the present condition of our loan portfolio and the sufficiency of collateral supporting our non-performing loans.
• We continually monitor non-performing loan relationships and will adjust our provision, as necessary, if changing facts and circumstances require a change in the ACL.
• Management believes that our liquidity is adequate, and to managements knowledge, there are no known events or uncertainties that will result or are likely to reasonably result in a material increase or decrease in our liquidity.

Industry Context

The filing reflects a regional bank operating in Wisconsin and Minnesota. The discussion of interest rate risk, net interest margin improvements due to lower liability costs, and increased provision for credit losses due to worsening macroeconomic assumptions and specific delinquent relationships aligns with broader trends in the banking sector facing higher interest rates and potential credit quality deterioration. The focus on core deposits and managing liquidity is also a common theme for regional banks in the current environment.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or global benchmarks for direct assessment against industry standards. It states that the Chief Operating Decision Maker uses consolidated net income to benchmark the Company against competitors, but no specific benchmarks or comparable companies are listed.

Corporate Governance

Legal Proceedings

• In the normal course of business, the Company and/or the Bank occasionally become involved in other various legal proceedings. In management's opinion, any liability from such proceedings would not have a material adverse effect on the business or financial condition of the Company.

Stakeholder Impact

• Shareholders: Experienced decreased net income and EPS, but benefited from an increase in stockholders' equity and a new share repurchase authorization. Cash dividends of $0.36 per share were paid.
• Employees: Received annual pay raises, higher incentive accruals, and higher medical costs. A new phantom stock plan offers future cash awards linked to company performance.
• Customers: Faced lower service charges on deposit accounts and loan fees/service charges due to lower customer activity. Loan modifications were offered to borrowers experiencing financial difficulty.
• Creditors: The planned redemption of $15 million in subordinated debentures on September 1, 2025, will reduce future interest expense.

Next Steps

• Redemption of $15 million 6% subordinated debentures on September 1, 2025.
• Potential share repurchases under the new authorization of 499,000 shares.
• Continued monitoring of non-performing loan relationships and adjustment of provision for credit losses as necessary.
• Evaluation of the impact of new accounting standards ASU 2023-09 (Income Taxes) and ASU 2024-03 (Income Statement Expenses).

Key Dates

Recommendation

While the company demonstrated improved net interest margin and strong capital ratios, the decline in net income and EPS, coupled with a significant increase in the provision for credit losses and a rise in criticized loans, signals potential headwinds in asset quality. The reduction in total loans and deposits also indicates a shrinking balance sheet. The planned redemption of high-cost debt and the new share repurchase program are positive steps, but the overall picture suggests a cautious approach until credit quality trends stabilize and loan growth resumes.

Keywords

Banking, Financial Services, Regional Bank, Community Bank, Commercial Real Estate, Agricultural Lending, Mortgage Servicing, Deposits, Loans, Credit Quality, Interest Rates, Capital Adequacy, Wisconsin, Minnesota