10-Q: Citizens Community Bancorp Q3 2025 Net Income Rises

Citizens Community Bancorp reports increased net income for Q3 2025, driven by lower interest expenses and higher loan sale gains, despite a decrease in interest-earning assets.

Summary

• Net income for Q3 2025 was $3.682 million, up from $3.286 million in Q3 2024.
• Diluted EPS for Q3 2025 was $0.37, up from $0.32 in Q3 2024.
• Net interest income for Q3 2025 increased by $1.9 million to $13.214 million, primarily due to 50 basis points lower cost of funds.
• Net interest margin for Q3 2025 increased to 3.20% from 2.63% in Q3 2024.
• Total assets decreased to $1.727 billion at September 30, 2025, from $1.749 billion at December 31, 2024.
• Loans receivable, net, decreased to $1.301 billion at September 30, 2025, from $1.348 billion at December 31, 2024.
• Total deposits decreased by $7.6 million to $1.481 billion at September 30, 2025.
• Nonperforming assets increased to $16.661 million at September 30, 2025, from $14.269 million at December 31, 2024, largely due to a $9 million multi-family loan moving to nonaccrual.
• Allowance for Credit Losses (ACL) Loans increased to $22.182 million at September 30, 2025, from $20.549 million at December 31, 2024.
• The company repurchased 135,252 shares of common stock during Q3 2025 for $2.0 million.

Sentiment

Score: 4

Explanation: While Q3 net income and NIM improved, the year-to-date net income and EPS declined. More importantly, the significant increase in provision for credit losses and nonperforming assets, particularly the $9 million multi-family loan moving to nonaccrual, signals deteriorating asset quality and increased credit risk. The shrinkage in the loan and deposit portfolios also indicates headwinds.

Positives

• Net income for the three months ended September 30, 2025, increased to $3.682 million from $3.286 million in the prior year period.
• Diluted earnings per share for the three months ended September 30, 2025, increased to $0.37 from $0.32 in the prior year period.
• Net interest income for the three months ended September 30, 2025, increased by $1.9 million to $13.214 million, driven by a 50 basis point lower cost of funds.
• Net interest margin for the three months ended September 30, 2025, improved to 3.20% from 2.63% in the prior year period.
• Non-interest income increased by $0.1 million in Q3 2025, primarily due to higher gains on sale of loans.
• Gain on sale of loans increased by 31.91% to $992 thousand in Q3 2025 compared to $752 thousand in Q3 2024.
• Stockholders' equity increased to $186.8 million at September 30, 2025, from $179.1 million at December 31, 2024.
• The Bank was categorized as "Well Capitalized" under Prompt Corrective Action Provisions at September 30, 2025.
• On-balance sheet liquidity, collateralized new borrowing capacity, and uncommitted federal funds borrowing availability was $741 million, or 267% of uninsured and uncollateralized deposits at September 30, 2025.

Negatives

• Total assets decreased to $1.727 billion at September 30, 2025, from $1.749 billion at December 31, 2024.
• Loans receivable, net, decreased to $1.301 billion at September 30, 2025, from $1.348 billion at December 31, 2024.
• Total deposits decreased by $7.6 million to $1.481 billion at September 30, 2025, primarily due to a reduction in brokered deposits.
• Nonperforming assets increased to $16.661 million at September 30, 2025, from $14.269 million at December 31, 2024.
• Nonaccrual loans increased to $15.614 million at September 30, 2025, from $13.168 million at December 31, 2024.
• A $9 million multi-family loan moved to nonaccrual status in Q3 2025 due to slower than expected leasing activity.
• The provision for credit losses for Q3 2025 was $0.650 million, compared to a negative provision (benefit) of $0.400 million in Q3 2024, indicating a deterioration in credit quality expectations.
• Net income for the nine months ended September 30, 2025, decreased to $10.149 million from $11.049 million in the prior year period.
• Diluted earnings per share for the nine months ended September 30, 2025, decreased to $1.02 from $1.07 in the prior year period.
• Interest and dividend income decreased for both the three and nine months ended September 30, 2025, compared to the same periods in 2024.
• Service charges on deposit accounts decreased by 12.48% in Q3 2025 and 11.53% for the nine months ended September 30, 2025, due to lower customer activity.
• Loan fees and service charges decreased by 24.72% for the nine months ended September 30, 2025, due to lower customer activity.
• Other non-interest income decreased by 25.50% in Q3 2025 and 13.50% for the nine months ended September 30, 2025, due to changes in annual debit card incentives from lower customer spending.

Risks

• Conditions in the financial markets and economic conditions generally.
• Impact of inflation on business and customers.
• Geopolitical tensions, including current or anticipated impact of military conflicts.
• Impact of a prolonged U.S. government shutdown on business and customers.
• 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 in which we operate.
• Interest rate risk.
• Lending risk.
• Changes in the fair value or ratings downgrades of securities.
• 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.
• 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 the acquired business operations or fully realizing the cost savings and other benefits.
• Restrictions on ability to pay dividends.
• 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.
• A $9 million multi-family loan moved to nonaccrual in Q3 2025 due to slower than expected leasing activity, indicating potential risk in the commercial real estate portfolio.

Future Outlook

The company anticipates that continued stable economic conditions in its markets, evidenced by unemployment rates below the national average in its two largest population centers, will result in positive overall economic trends for businesses. However, the third-party model used for economic conditions in computing the ACL level incorporates the impact of higher interest rates and an inverted yield forecast. The company also notes that future adjustments to Mortgage Servicing Rights (MSR) valuation may be necessary if future economic conditions differ substantially from current assumptions.

Management Comments

• Management believes that the provision recorded for the current years threeand nine-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 regional banking industry faces ongoing challenges from higher interest rates, which can impact loan demand, deposit costs, and asset valuations. The inverted yield curve forecast, mentioned in the filing, suggests potential pressure on net interest margins for banks. The company's focus on managing interest rate risk through asset and liability management policies, including originating shorter-term and variable-rate loans and selling longer-term fixed-rate residential loans, aligns with broader industry efforts to mitigate interest rate sensitivity. The increase in nonperforming assets, particularly the multi-family loan, could reflect broader softening in certain commercial real estate segments, a trend being closely watched across the banking sector.

Comparison to Industry Standards

• The Bank's "Well Capitalized" status under Prompt Corrective Action Provisions (Tier 1 leverage ratio of 12.2% vs. >=5.0% required) indicates strong capital health, generally exceeding regulatory minimums and often outperforming some peers who may be closer to minimums.
• The increase in nonperforming assets (NPAs to total assets at 0.96% from 0.82%) and nonaccrual loans (1.18% from 0.96%) suggests a slight deterioration in asset quality, which warrants close monitoring. While specific industry benchmarks are not provided in the filing, an increase in NPAs is generally a negative trend compared to banks maintaining stable or improving asset quality.
• The net interest margin (NIM) improvement to 3.20% in Q3 2025 from 2.63% in Q3 2024 is a positive development, especially in a challenging interest rate environment. This suggests effective liability cost management, potentially outperforming some peers struggling with rising deposit costs.
• The increase in the provision for credit losses from a negative provision in the prior year indicates a more conservative stance or a deterioration in credit quality expectations, which could be a lagging indicator compared to banks that saw earlier increases in provisions.

Corporate Governance

Legal Proceedings

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

Stakeholder Impact

• Shareholders: Positive impact from increased Q3 net income and EPS, and the ongoing share repurchase program. Negative impact from decreased YTD net income and EPS, and potential concerns over increasing nonperforming assets and credit loss provisions.
• Customers: Lower service charges on deposit accounts and loan fees/service charges due to lower customer activity suggest reduced engagement or competitive pressures.
• Employees: Annual employee pay raises, higher incentive accruals, and higher medical costs contributed to increased compensation expense. Phantom stock plans are in place for certain employees as long-term incentives.
• Creditors/Depositors: Total deposits decreased, primarily due to brokered deposits. However, the Bank maintains strong liquidity and capital ratios, categorized as "Well Capitalized," which should reassure depositors and creditors.
• Regulators: The Bank remains "Well Capitalized" and is subject to ongoing regulatory oversight and examinations.

Next Steps

• Monitor the performance of loans that have been modified to borrowers experiencing financial difficulty.
• Management will determine the timing and amount of any share repurchases under the July 2025 5% share repurchase authorization (363,748 shares remaining).
• The company is evaluating the impact of new disclosure requirements from ASU 2023-09 (Income Taxes) and ASU 2024-03 (Income Statement Expenses).
• The $5.0 million line of credit, maturing August 1, 2026, was renewed for a term of one year on August 1, 2025.
• The subordinated note entered into in March 2022 will have its fixed interest rate reset quarterly to SOFR plus 329 basis points in April 2027, and will be callable by the Bank anytime after the floating rate is initially set.

Key Dates

Recommendation

While the company showed improved net interest income and margin in Q3, the year-to-date performance saw a decline in net income and EPS. The most significant concern is the notable increase in nonperforming assets and the provision for credit losses, particularly the $9 million multi-family loan moving to nonaccrual, which signals potential asset quality deterioration. The overall shrinkage in the loan and deposit portfolios also indicates a challenging growth environment. The strong capital position and share repurchase program offer some support, but the rising credit risk and declining YTD profitability suggest a cautious "hold" stance until there is clearer evidence of asset quality stabilization and sustained earnings growth.

Keywords

Banking, Financial Services, Regional Bank, Community Bank, SEC Filing, 10-Q, Earnings, Net Interest Income, Loan Portfolio, Deposits, Credit Quality, Capital Adequacy, CZWI, Wisconsin, Minnesota