10-Q: Citizens Community Bancorp Reports Slight Dip in Q1 Net Interest Income Amid Rising Deposit Costs

Citizens Community Bancorp, Inc. reported a decrease in net interest income for the first quarter of 2024, primarily attributed to increased deposit costs and customer shifts to higher-cost certificates, despite a slight increase in net income.

Summary

• Citizens Community Bancorp, Inc. reported a decrease in net interest income for Q1 2024 compared to Q1 2023, primarily due to higher interest rates impacting deposit costs and increased borrowing expenses.
• The company's cost of interest-bearing liabilities rose from 2.00% in Q1 2023 to 3.11% in Q1 2024, resulting in a $3.9 million increase in interest expense.
• Despite the decrease in net interest income, higher interest income on assets and income from nonaccrual loan payoffs partially offset the decline.
• The provision for credit losses decreased from $0.05 million in Q1 2023 to a negative provision of $0.8 million in Q1 2024, mainly due to a decrease in reserves on individually evaluated loans and net loan recoveries.
• Non-interest income increased by $1.0 million in Q1 2024 compared to Q1 2023, driven by higher gains on the sale of loans and increased loan fees.
• Non-interest expenses rose by $0.7 million in Q1 2024, primarily due to a $0.4 million establishment of an SBA recourse reserve and inflationary increases in compensation and data processing costs.
• The company reported net income of $4.1 million, or $0.39 per diluted share for Q1 2024, compared to $3.7 million, or $0.35 per diluted share for Q1 2023.

Sentiment

Score: 6

Explanation: The sentiment is slightly positive due to the increase in net income and EPS, as well as the growth in deposits. However, the decrease in net interest income, the contraction in net interest margin, and the increase in non-interest expenses, along with the various risks outlined, temper the overall sentiment. The negative provision for credit losses, while positive in the short term, could also be viewed with caution. Overall, the company demonstrates resilience but faces challenges in the current interest rate environment.

Positives

• Net income increased to $4.1 million in Q1 2024 from $3.7 million in Q1 2023.
• Earnings per diluted share improved to $0.39 in Q1 2024 from $0.35 in Q1 2023.
• Non-interest income saw a significant increase of 42.41% in Q1 2024 compared to Q1 2023, primarily due to higher gains on the sale of loans and increased loan fees.
• The company reported a negative provision for credit losses, indicating an improvement in the expected credit quality of the loan portfolio.
• Total deposits grew by $8.4 million during the quarter, demonstrating the company's ability to attract and retain customer deposits.
• The company maintained a strong capital position, with the Bank categorized as 'Well Capitalized' under Prompt Corrective Action provisions.
• The company has ample liquidity, with on-balance sheet liquidity, collateralized borrowing capacity, and uncommitted federal funds availability totaling $696.8 million.
• The company's board of directors adopted a share repurchase program, and 50,000 shares were repurchased in Q1 2024.

Negatives

• Net interest income decreased by $0.9 million in Q1 2024 compared to Q1 2023, primarily due to higher deposit costs and increased borrowing expenses.
• The net interest margin decreased to 2.77% in Q1 2024 from 3.02% in Q1 2023.
• Non-interest expenses increased by $0.7 million in Q1 2024, driven by a $0.4 million establishment of an SBA recourse reserve and inflationary pressures.
• The loan portfolio decreased by $10.6 million during the quarter.
• The company experienced a shift in deposit composition, with customers moving from lower-cost savings and money market accounts to higher-yielding certificate accounts.

Risks

• Interest rate risk is highlighted as the most significant market risk, with potential adverse effects from material and prolonged increases in interest rates.
• The company faces lending risks associated with its commercial and agricultural banking activities.
• Cybersecurity risks are a concern.
• There is a risk of future pandemics impacting operations.
• The company is exposed to competitive pressures from other financial institutions.
• Changes in the fair value or ratings downgrades of securities could negatively impact the company.
• There is a risk of disintermediation, where customers move funds to higher-yielding alternatives outside the banking system.
• The company's ability to maintain or increase market share is uncertain.
• The company's ability to realize the benefits of net deferred tax assets is not guaranteed.
• Potential liquidity challenges may arise if the company is unable to obtain needed liquidity or raise capital to fund growth or meet regulatory requirements.
• The company faces risks related to attracting and retaining key personnel.
• The prevalence of fraud and other financial crimes poses a risk.
• There is a possibility that internal controls and procedures could fail or be circumvented.
• The company's acquisition growth strategy carries risks, including difficulties in integrating acquired businesses and realizing cost savings.
• The company is subject to legislative or regulatory changes, significant litigation, and changes in accounting principles that could adversely affect its financial performance.

Future Outlook

The document does not provide explicit forward-looking statements or guidance. However, it mentions that the company is attempting to strengthen customer relationships to attract additional non-rate sensitive deposits and that public deposits are expected to decrease modestly in the next quarters due to seasonal shrinkage.

Management Comments

• Management believes that the provision recorded for the current years three-month period is adequate in view of the present condition of our loan portfolio and the sufficiency of collateral supporting our non-performing loans.
• 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 announcement reflects broader industry trends of pressure on net interest margins due to rising interest rates and increased competition for deposits. The shift in customer preference towards higher-yielding deposit products is a common theme among regional banks. Additionally, the focus on maintaining strong capital and liquidity positions is consistent with industry-wide regulatory emphasis.

Comparison to Industry Standards

• Compared to industry averages, Citizens Community Bancorp's net interest margin of 2.77% is likely below the average for regional banks, reflecting the pressure from rising deposit costs.
• The company's loan-to-deposit ratio is not explicitly stated but can be inferred to be around 93.5% ($1.428 billion in net loans / $1.527 billion in deposits), which is a reasonable level compared to peers.
• The allowance for credit losses to total loans of 1.55% is within industry norms, although the adequacy can vary significantly based on loan portfolio composition and economic conditions.
• The company's capital ratios exceed regulatory minimums and are in line with well-capitalized peers. For example, the Tier 1 leverage ratio of 11.7% for the Bank is well above the 5.0% requirement for well-capitalized status.
• Compared to specific competitors like Associated Banc-Corp (ASB) and Old National Bancorp (ONB), which are larger regional banks, Citizens Community Bancorp's performance metrics may differ due to its smaller size and geographic focus. ASB and ONB may have different loan and deposit compositions, impacting their net interest margins and credit loss provisions. A direct comparison would require analyzing their respective Q1 2024 reports.

Management Changes

Legal Proceedings

• In the normal course of business, the Company and/or the Bank occasionally become involved in other various legal proceedings. In our 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: Potential impact from decreased net interest income and increased expenses, but offset by slight increase in net income and EPS. Share repurchases may positively impact shareholder value.
• Employees: Potential impact from cost control measures and changes in compensation and benefits. New employment agreements for CEO and CFO provide stability.
• Customers: Potential impact from changes in deposit rates and loan terms. Focus on attracting non-rate sensitive deposits may lead to new product offerings.
• Suppliers: No significant direct impact mentioned.
• Creditors: No significant direct impact mentioned, but the company's strong capital and liquidity position provide reassurance.

Next Steps

• The company is attempting to strengthen customer relationships to attract additional non-rate sensitive deposits.
• The company will continue to monitor non-performing loan relationships and adjust the provision for credit losses as necessary.
• The ALCO will continue to meet regularly to review economic conditions, liquidity needs, and interest rate risk exposure, and recommend strategy changes as appropriate.
• The company may repurchase additional shares under the existing share repurchase program, with 152,159 shares remaining available for repurchase as of March 31, 2024.

Key Dates

Keywords

regional banking, interest rate risk, net interest margin, loan portfolio, deposit growth, non-interest income, non-interest expense, provision for credit losses, capital adequacy, liquidity management, share repurchase, SBA lending, commercial real estate lending, agricultural lending, mortgage servicing rights, FDIC, OCC, Federal Reserve, FHLB advances, Wisconsin banking