Citizens munity Bancorp(CZWI) - 2025 Q2 - Quarterly Report

Filing Information Details the Form 10-Q filing for Citizens Community Bancorp, Inc., including registrant information, filer status, and common shares outstanding General Filing Details Provides essential filing details for the Form 10-Q, including registrant, trading symbol, filer status, and common shares outstanding - The filing is a Quarterly Report on Form 10-Q for the period ended June 30, 2025[2] - The registrant is Citizens Community Bancorp, Inc., trading under the symbol CZWI on the NASDAQ Global Market[2][4] - The company is classified as a non-accelerated filer and a smaller reporting company[5] Common Stock Outstanding | Date | Shares Outstanding | | :------------- | :----------------- | | August 7, 2025 | 9,870,287 | Part I – FINANCIAL INFORMATION Presents the unaudited consolidated financial statements and management's discussion and analysis for the company Item 1. Financial Statements Presents the unaudited consolidated financial statements, including balance sheets, statements of operations, comprehensive income, equity changes, and cash flows, with condensed notes Consolidated Balance Sheets Details the company's financial position, showing slight decreases in assets and liabilities, and an increase in stockholders' equity Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :--------------------------- | :------------ | :---------------- | | Total Assets | $1,735,164 | $1,748,519 | | Total Liabilities | $1,551,702 | $1,569,435 | | Total Stockholders' Equity | $183,462 | $179,084 | | Cash and cash equivalents | $67,454 | $50,172 | | Loans receivable, net | $1,324,273 | $1,348,432 | | Deposits | $1,478,416 | $1,488,148 | Consolidated Statements of Operations Presents financial performance, showing increased net interest income due to lower interest expense, but decreased net income from higher credit loss provisions Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total interest and dividend income | $22,502 | $22,463 | $43,605 | $45,142 | | Total interest expense | $9,191 | $10,887 | $18,700 | $21,661 | | Net interest income before provision for credit losses | $13,311 | $11,576 | $24,905 | $23,481 | | Provision for credit losses | $1,350 | $(1,525) | $1,100 | $(2,325) | | Net income attributable to common stockholders | $3,270 | $3,675 | $6,467 | $7,763 | | Basic earnings per share | $0.33 | $0.35 | $0.65 | $0.75 | | Diluted earnings per share | $0.33 | $0.35 | $0.65 | $0.75 | Consolidated Statements of Comprehensive Income (Loss) Details comprehensive income, which increased for both periods in 2025, driven by net income and positive other comprehensive income Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :--------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income attributable to common stockholders | $3,270 | $3,675 | $6,467 | $7,763 | | Other comprehensive income (loss), net of tax | $81 | $633 | $1,536 | $(69) | | Comprehensive income | $3,351 | $4,308 | $8,003 | $7,694 | Consolidated Statement of Changes in Stockholders' Equity Outlines changes in stockholders' equity, primarily increasing due to net income and other comprehensive income, offset by dividends Stockholders' Equity Changes (Six Months Ended June 30, 2025, in thousands) | Item | Amount | | :--------------------------------------- | :---------- | | Balance, December 31, 2024 | $179,084 | | Net income | $6,467 | | Other comprehensive income, net of tax | $1,536 | | Surrender of restricted shares for taxes | $(190) | | Common stock options exercised | $61 | | Stock based compensation expense | $102 | | Cash dividends paid | $(3,598) | | Balance at June 30, 2025 | $183,462| Consolidated Statements of Cash Flows Summarizes cash flows, showing less cash from operations, more from investing, and less used in financing, leading to a net cash increase Consolidated Statements of Cash Flows Highlights (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2025 | 2024 | | :--------------------------------------- | :---------- | :---------- | | Net cash from operating activities | $1,207 | $14,270 | | Net cash from investing activities | $34,534 | $44,442 | | Net cash from financing activities | $(18,459) | $(58,964) | | Net increase (decrease) in cash and cash equivalents | $17,282 | $(252) | | Cash and cash equivalents at end of period | $67,454 | $36,886 | Condensed Notes to Consolidated Financial Statements Provides essential details and explanations for the financial statements, covering business, accounting policies, and financial instrument disclosures NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Outlines the company's banking business, significant accounting policies for consolidation, estimates, securities, ACL, revenue, and recent accounting pronouncements - Citizens Community Bancorp, Inc. (Company) and its wholly-owned subsidiary, Citizens Community Federal N.A. (Bank), provide traditional community banking services primarily in Wisconsin and Minnesota through 21 branch locations[27][29] - Investment securities are classified as Available for Sale (AFS) at fair value (unrealized gains/losses in OCI) or Held to Maturity (HTM) at amortized cost, based on management's intent and ability to hold[36] - The Allowance for Credit Losses (ACL) is measured for AFS, HTM, and Loans, based on expected credit losses over the contractual term, adjusted for prepayments and considering historical loss experience, current conditions, and reasonable and supportable forecasts[37][38][49] - Revenue recognition primarily stems from interest income on an accrual basis using the effective interest method, with non-interest income recognized when performance obligations are satisfied or transactions occur[78][79][80][82] - Recent accounting pronouncements adopted include ASU 2020-04/2021-01 (Reference Rate Reform), ASU 2023-06 (Disclosure Improvements), and ASU 2023-07 (Segment Reporting), none of which had a material impact on the company's financial condition or results of operations[94][95][96] - ASU 2023-09 (Income Taxes – Improvements to Income Tax Disclosures) and ASU 2024-03 (Expense Disaggregation Disclosures) are recently issued but not yet effective, with the company currently evaluating their impact[97][98] NOTE 2 – INVESTMENT SECURITIES Details the investment securities portfolio, showing decreases in AFS and HTM values, pledged securities, and no credit loss allowance due to high quality Available-for-sale securities (AFS) (in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :------------------------ | :------------ | :---------------- | | Amortized Cost | $155,503 | $165,604 | | Estimated Fair Value | $134,773 | $142,851 | | Gross Unrealized Losses | $20,834 | $22,935 | Held-to-maturity securities (HTM) (in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :------------------------ | :------------ | :---------------- | | Amortized Cost | $83,029 | $85,504 | | Estimated Fair Value | $65,012 | $65,622 | | Gross Unrecognized Losses | $18,023 | $19,886 | - At June 30, 2025, the Bank pledged $33,158 thousand of mortgage-backed securities as collateral to the Federal Reserve Bank (no outstanding borrowings), $284 thousand of U.S. Government Agency securities and $1,719 thousand of mortgage-backed securities against specific municipal deposits, and $444 thousand of mortgage-backed securities to the Federal Home Loan Bank of Des Moines[99] - No Allowance for Credit Losses (ACL) was established for available-for-sale or held-to-maturity securities, as they are guaranteed by the U.S. government or highly rated, with no expected credit losses[103] NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES Provides a comprehensive overview of the loan portfolio and ACL activity, noting an increased provision for credit losses due to delinquencies and macroeconomic factors Loan Portfolio Composition (Amortized Cost, in thousands) | Loan Type | June 30, 2025 | % of Total | December 31, 2024 | % of Total | | :------------------------------ | :------------ | :--------- | :---------------- | :--------- | | Commercial/Agricultural real estate | $1,069,639 | 79.5% | $1,078,600 | 78.8% | | C&I/Agricultural operating | $140,943 | 10.5% | $146,552 | 10.7% | | Residential mortgage | $127,804 | 9.5% | $134,848 | 9.9% | | Consumer installment | $7,234 | 0.5% | $8,982 | 0.6% | | Total loans receivable | $1,345,620| 100% | $1,368,981 | 100% | Allowance for Credit Losses (ACL) - Loans Activity (in thousands) | Metric | 3 Months Ended June 30, 2025 | 6 Months Ended June 30, 2025 | | :------------------------------------ | :--------------------------- | :--------------------------- | | ACL - Loans, at beginning of period | $20,205 | $20,549 | | Charge-offs | $(74) | $(156) | | Recoveries | $58 | $147 | | Additions to ACL via provision | $1,158 | $807 | | ACL - Loans, at end of period | $21,347 | $21,347 | Provision for Credit Losses (in thousands) | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :---------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Loans | $1,158 | $(1,262) | $807 | $(1,787) | | Unfunded Commitments | $192 | $(263) | $293 | $(538) | | Total provision for credit losses | $1,350 | $(1,525) | $1,100 | $(2,325) | - The increase in Q2 2025 provision for credit losses was largely due to: (1) $0.7 million from three 30-89 days delinquent commercial relationships; (2) $0.3 million from modestly worsening macro-economic assumptions; (3) $0.15 million from provisions on new loans with longer contractual life; and (4) $0.2 million from an increase in off-balance sheet commitments for new construction loan originations[210][248] - Loan modifications for borrowers experiencing financial difficulty during the three months ended June 30, 2025, included term extensions for $164 thousand in commercial real estate loans (weighted average 2 months added) and payment delays for $4,263 thousand in commercial real estate loans (weighted average 3 months deferred) and $200 thousand in agricultural real estate loans (weighted average 9 months deferred)[134][135] NOTE 4 – MORTGAGE SERVICING RIGHTS Details MSR activity and valuation, showing a slight decrease in net value due to amortization exceeding new transfers, with fair value estimated by a model Mortgage Servicing Rights (MSRs) Activity (in thousands) | Metric | 3 Months Ended June 30, 2025 | 6 Months Ended June 30, 2025 | | :------------------------------------ | :--------------------------- | :--------------------------- | | Mortgage servicing rights, beginning of period | $3,583 | $3,663 | | Increase from transfers of financial assets | $113 | $173 | | Amortization during the period | $(148) | $(288) | | Mortgage servicing rights, end of period | $3,548 | $3,548 | - The fair value of mortgage servicing rights was $5,099 thousand at June 30, 2025, compared to $5,425 thousand at June 30, 2024[142] - MSR fair value is determined using discount rates ranging from 9.5% to 12.5% at June 30, 2025, along with other assumptions like prepayment speeds, servicing costs, and default rates[143] NOTE 5 – LEASES Details operating lease arrangements, showing decreased lease costs, increased lease income, and supplemental balance sheet information for lease assets and liabilities - The company has operating leases for 1 corporate office, 2 bank branch offices, 2 former bank branch offices, and 1 ATM location, with remaining lease terms from approximately 0.25 to 3.00 years[145] Lease Costs and Income (Three Months Ended June 30, in thousands) | Metric | 2025 | 2024 | | :----------------- | :--- | :--- | | Total lease cost | $246 | $295 | | Operating lease income | $43 | $21 | Supplemental Balance Sheet Information Related to Leases (in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :-------------------------- | :------------ | :---------------- | | Operating lease right-of-use assets | $629 | $815 | | Operating lease liabilities | $864 | $1,076 | NOTE 6 – DEPOSITS Summarizes deposits by type and maturity, noting a slight decrease due to reduced brokered deposits and significant upcoming certificate account maturities Deposits by Type (in thousands) | Deposit Type | June 30, 2025 | December 31, 2024 | | :---------------------------- | :------------ | :---------------- | | Non-interest bearing demand | $260,248 | $252,656 | | Interest bearing demand | $366,481 | $355,750 | | Savings accounts | $159,340 | $159,821 | | Money market accounts | $357,518 | $369,534 | | Certificate accounts | $334,829 | $350,387 | | Total deposits | $1,478,416| $1,488,148 | - Brokered deposits decreased from $19,125 thousand at December 31, 2024, to $5,092 thousand at June 30, 2025[150] - Approximately 99% ($331,797 thousand) of the total certificate accounts ($334,829 thousand) are scheduled to mature within the next 12 months (by December 31, 2026)[149] NOTE 7 – FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS Details FHLB advances and other borrowings, noting FHLB repayment, stable other borrowings, significant unused capacity, and a scheduled subordinated note redemption Borrowings Summary (in thousands) | Borrowing Type | June 30, 2025 | December 31, 2024 | | :---------------------------- | :------------ | :---------------- | | Federal Home Loan Bank advances | $0 | $5,000 | | Senior Notes | $12,000 | $12,000 | | Subordinated Notes | $50,000 | $50,000 | | Unamortized debt issuance costs | $(278) | $(394) | | Total other borrowings | $61,722 | $61,606 | - There were no FHLB borrowings outstanding as of June 30, 2025[153] - The Board of Directors approved the redemption of the entire $15,000 thousand balance of the 6% subordinated debentures due September 1, 2030, with redemption scheduled for September 1, 2025[155] - As of June 30, 2025, the Bank had available and unused borrowing capacity of approximately $424,392 thousand under the FHLB arrangement, $24,665 thousand from the Federal Reserve Bank, and $70,000 thousand from unsecured federal funds purchased lines of credit[152][159][160] NOTE 8 - CAPITAL MATTERS Presents regulatory capital requirements and ratios, confirming both the Bank and Company are "Well Capitalized" and exceed minimum thresholds Bank Capital Ratios (June 30, 2025) | Capital Ratio (Bank) | Actual Ratio | Minimum for Capital Adequacy | Minimum for Well Capitalized | | :------------------- | :----------- | :--------------------------- | :--------------------------- | | Total Capital | 15.7% | >= 8.0% | >= 10.0% | | Tier 1 Capital | 14.4% | >= 6.0% | >= 8.0% | | Common Equity Tier 1 | 14.4% | >= 4.5% | >= 6.5% | | Tier 1 Leverage | 12.2% | >= 4.0% | >= 5.0% | Company Capital Ratios (June 30, 2025) | Capital Ratio (Company) | Actual Ratio | Minimum for Capital Adequacy | | :---------------------- | :----------- | :--------------------------- | | Total Capital | 16.3% | >= 8.0% | | Tier 1 Capital | 11.6% | >= 6.0% | | Common Equity Tier 1 | 11.6% | >= 4.5% | | Tier 1 Leverage | 9.8% | >= 4.0% | - The Bank was categorized as 'Well Capitalized' under Prompt Corrective Action Provisions at both June 30, 2025, and December 31, 2024[162] NOTE 9 – STOCK-BASED AND OTHER COMPENSATION Details stock-based compensation plans, showing decreased expense and new phantom stock plans linking cash awards to share price and performance Stock-Based Compensation Expense (in thousands) | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Stock based compensation expense | $34 | $158 | $102 | $316 | - A phantom stock plan was approved on January 23, 2025, allowing certain employees to earn future cash awards linked to the company's common share price for time and performance-based awards, vesting over a three-year period (January 2025 through December 2027)[173] - A similar phantom stock plan was approved on January 25, 2024, with awards vesting over a three-year period (January 2024 through December 2026)[174] - The related liability for the phantom stock plan was $222 thousand at June 30, 2025, compared to $190 thousand at December 31, 2024[175] NOTE 10 – FAIR VALUE ACCOUNTING Explains the fair value hierarchy and presents assets measured at fair value, with most investment securities using Level 2 and certain assets using Level 3 inputs - The fair value hierarchy categorizes inputs into Level 1 (quoted prices in active markets), Level 2 (significant other observable inputs), and Level 3 (significant unobservable inputs)[176][177][178] Assets Measured on a Recurring Basis at Fair Value (June 30, 2025, in thousands) | Asset Type | Fair Value | Level 1 | Level 2 | Level 3 | | :-------------------------- | :--------- | :------ | :------- | :------ | | Investment securities | $134,773 | $0 | $134,773 | $0 | | Farmer Mac equity securities| $557 | $557 | $0 | $0 | | Preferred equity | $1,362 | $0 | $0 | $1,362 | Assets Measured on a Nonrecurring Basis at Fair Value (June 30, 2025, in thousands) | Asset Type | Carrying Value | Level 1 | Level 2 | Level 3 | | :-------------------------------- | :------------- | :------ | :------ | :------ | | Foreclosed and repossessed assets, net | $895 | $0 | $0 | $895 | | Collateral dependent loans | $5,915 | $0 | $0 | $5,915 | - Level 3 inputs for foreclosed and repossessed assets and collateral-dependent loans primarily include estimated costs to sell, ranging from 10% to 15%[189] NOTE 11—EARNINGS PER SHARE Provides basic and diluted EPS calculations, showing a year-over-year decrease for both periods, reflecting lower net income Earnings Per Share (in thousands, except per share data) | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income attributable to common stockholders | $3,270 | $3,675 | $6,467 | $7,763 | | Weighted average common shares outstanding | 9,989 | 10,370 | 9,989 | 10,405 | | Basic earnings per share | $0.33 | $0.35 | $0.65 | $0.75 | | Diluted earnings per share | $0.33 | $0.35 | $0.65 | $0.75 | NOTE 12 – OTHER COMPREHENSIVE INCOME (LOSS) Details tax effects and changes in other comprehensive income (loss), showing net unrealized gains on securities in 2025, a reversal from 2024 losses Other Comprehensive Income (Loss), Net of Tax (in thousands) | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net unrealized gains (losses) arising during the period | $81 | $503 | $1,536 | $(199) | | Reclassification for net loss on exchanged security | $0 | $130 | $0 | $130 | | Total Other Comprehensive Income (Loss) | $81 | $633 | $1,536 | $(69) | Accumulated Other Comprehensive Income (Loss) (in thousands) | Metric | December 31, 2023 | December 31, 2024 | June 30, 2025 | | :------------------------------------------- | :---------------- | :---------------- | :------------ | | Ending Balance, Accumulated Other Comprehensive Income (Loss), net of tax | $(17,328) | $(16,420) | $(14,884) | NOTE 13 – SEGMENT INFORMATION Clarifies the company operates as a single "Banking Operations" segment, with performance evaluated on consolidated net income and key revenue/expense streams - The company has a single reportable operating segment: Banking Operations, which includes lending, deposit, and investment activities[202] - The Chief Operating Decision Maker evaluates financial performance and allocates resources on a company-wide basis, using consolidated net income as a benchmark[202] Total Consolidated Revenues (in thousands) | Period | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :-------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total consolidated revenues | $25,338 | $24,376 | $49,034 | $50,319 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's analysis of financial condition and operations, covering forward-looking statements, performance, critical estimates, and detailed balance sheet and income statement analysis FORWARD-LOOKING STATEMENTS Highlights the presence of forward-looking statements, subject to uncertainties and risks, advising caution and noting no obligation for public updates - Forward-looking statements are identified by words such as 'anticipate,' 'believe,' 'expect,' 'estimates,' 'intend,' 'may,' 'will,' or similar phrases[204] - Key risk factors include conditions in financial markets, inflation, geopolitical tensions, lending risks, cybersecurity, interest rate risk, competitive pressures, liquidity, capital, and regulatory changes[205] - The company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances[206] GENERAL Introduces management's discussion and analysis of financial condition and operations, specifying that monetary amounts are in thousands - The discussion covers the consolidated financial condition as of June 30, 2025, and results of operations for the six months ended June 30, 2025, compared to the same period in 2024[207] - All monetary amounts, except share, per share, and capital ratio amounts, are stated in thousands[207] PERFORMANCE SUMMARY Summarizes operating results, noting increased net interest income, higher credit loss provisions, increased non-interest income, and higher non-interest expense, leading to decreased net income - Net interest income for Q2 2025 increased by $1.7 million compared to Q2 2024, primarily due to $0.7 million from nonaccrual loan payoffs, $0.4 million accretion, and improved net interest margin[209] - The total provision for credit losses for Q2 2025 was $1.350 million, a significant change from a negative provision of $1.525 million in Q2 2024, driven by delinquent commercial relationships, worsening macro-economic assumptions, and provisions on new loans and off-balance sheet commitments[210] - Non-interest income increased by $0.9 million in Q2 2025, mainly due to $0.8 million higher gain on equity securities and $0.5 million higher gain on sales of loans[211] - Non-interest expense increased by $0.5 million in Q2 2025, primarily due to higher compensation expenses (annual pay raises, incentive accruals, medical costs)[212] Net Income Attributable to Common Stockholders (in millions) | Period | 2025 | 2024 | | :------- | :--- | :--- | | Q2 | $3.3 | $3.7 | | 6 Months | $6.5 | $7.8 | CRITICAL ACCOUNTING ESTIMATES Highlights critical accounting estimates, focusing on the Allowance for Credit Losses (ACL) and its subjective estimation process for expected credit losses Allowance for Credit Losses Details the Allowance for Credit Losses (ACL) as a critical estimate, involving subjective judgment, models, individual evaluations, and qualitative adjustments for loan losses - The company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), on January 1, 2023[223] - The ACL is maintained to absorb probable and inherent losses in the loan portfolio, based on ongoing quarterly assessments of estimated lifetime losses[224] - The ACL determination uses a third-party model for collective evaluation and individual evaluation for loans with unique risk characteristics[225][226] - Qualitative adjustments are made to the collectively evaluated ACL to incorporate factors not included in the model, such as lending policies, staff experience, and problem credit volume[226] - Assessing the ACL is inherently subjective, requiring material estimates that are susceptible to significant change[227] STATEMENT OF OPERATIONS ANALYSIS Analyzes the Statement of Operations, detailing changes in net interest income, credit loss provision, non-interest income/expense, and income taxes, driven by rates and operations Net Interest Income Net interest income increased due to nonaccrual loan payoffs, accretion, and improved net interest margin from lower liability costs Net Interest Income (in millions) | Period | June 30, 2025 | June 30, 2024 | | :------- | :------------ | :------------ | | 3 Months | $13.3 | $11.6 | | 6 Months | $24.9 | $23.5 | - The increase in net interest income for the three months ended June 30, 2025, was due to $0.7 million from nonaccrual loan payoffs, $0.4 million in accretion, and improved net interest margin from 33 basis points lower liability costs[229] Net Interest Margin | Period | June 30, 2025 | June 30, 2024 | | :------- | :------------ | :------------ | | 3 Months | 3.27% | 2.72% | | 6 Months | 3.06% | 2.75% | Average Balances, Net Interest Income, Yields Earned and Rates Paid Analyzes average balances, yields, and rates, showing decreased interest-earning assets but higher yields, and decreased interest-bearing liabilities with lower rates, improving margins Net Interest Income Analysis (3 Months Ended June 30, in thousands, except rates) | Metric | 2025 Average Balance | 2025 Yield/Rate | 2024 Average Balance | 2024 Yield/Rate | | :------------------------------------ | :------------------- | :-------------- | :------------------- | :-------------- | | Total interest earning assets | $1,633,427 | 5.53% | $1,709,627 | 5.28% | | Total interest-bearing liabilities | $1,299,732 | 2.84% | $1,380,745 | 3.17% | | Net interest income | | $13,311 | | $11,576 | | Interest rate spread | | 2.69% | | 2.11% | | Net interest margin | | 3.27% | | 2.72% | Net Interest Income Analysis (6 Months Ended June 30, in thousands, except rates) | Metric | 2025 Average Balance | 2025 Yield/Rate | 2024 Average Balance | 2024 Yield/Rate | | :------------------------------------ | :------------------- | :-------------- | :------------------- | :-------------- | | Total interest earning assets | $1,642,761 | 5.35% | $1,718,312 | 5.28% | | Total interest-bearing liabilities | $1,311,436 | 2.88% | $1,386,965 | 3.14% | | Net interest income | | $24,905 | | $23,481 | | Interest rate spread | | 2.47% | | 2.14% | | Net interest margin | | 3.06% | | 2.75% | Rate/Volume Analysis Breaks down net interest income changes into rate and volume impacts, showing positive rate effects largely offset negative volume impacts for both periods Net Interest Income Change (3 Months Ended June 30, 2025 vs. 2024, in thousands) | Component | Volume Change | Rate Change | Net Change | | :------------------ | :------------ | :---------- | :--------- | | Interest income | $(1,062) | $1,101 | $39 | | Interest expense | $(849) | $(847) | $(1,696) | | Net interest income | $(213) | $1,948 | $1,735 | Net Interest Income Change (6 Months Ended June 30, 2025 vs. 2024, in thousands) | Component | Volume Change | Rate Change | Net Change | | :------------------ | :------------ | :---------- | :--------- | | Interest income | $(2,087) | $550 | $(1,537) | | Interest expense | $(861) | $(2,100) | $(2,961) | | Net interest income | $(1,226) | $2,650 | $1,424 | Provision for Credit Losses Provision for credit losses significantly increased due to delinquent commercial relationships, worsening macroeconomic assumptions, new loans, and off-balance sheet commitments Total Provision for Credit Losses (in millions) | Period | June 30, 2025 | June 30, 2024 | | :------- | :------------ | :------------ | | 3 Months | $1.350 | $(1.525) | | 6 Months | $1.100 | $(2.325) | - The Q2 2025 provision expense was largely due to: (1) $0.7 million from three 30-89 day delinquent commercial relationships; (2) $0.3 million from modestly worsening macro-economic assumptions; (3) $0.15 million from provisions on new loans with longer contractual life; and (4) $0.2 million from an increase in off-balance sheet commitments for new construction loan originations[248] - Management believes the provision recorded is adequate given the current loan portfolio condition and the sufficiency of collateral supporting non-performing loans[252] Non-interest Income Non-interest income increased due to higher gains on equity securities and loan sales, partially offset by lower service charges and loan fees Non-interest Income (in thousands) | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | % Change | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | % Change | | :-------------------------------- | :--------------------------- | :--------------------------- | :------- | :--------------------------- | :--------------------------- | :------- | | Service charges on deposit accounts | $432 | $490 | (11.84)% | $855 | $961 | (11.03)% | | Loan servicing income | $565 | $526 | 7.41% | $1,124 | $1,108 | 1.44% | | Gain on sale of loans | $699 | $226 | 209.29% | $1,419 | $1,246 | 13.88% | | Net gains (losses) on equity securities | $99 | $(658) | N/M | $109 | $(491) | N/M | | Total non-interest income | $2,836 | $1,913 | 48.25% | $5,429 | $5,177 | 4.87%| - The increase in gain on sale of loans was primarily due to higher gains on SBA loan sales for the three-month period and higher residential gains on sale for the six-month period[257] - The increase in net gains on equity securities was due to positive mark-to-market impacts, contrasting with unrealized losses in the prior year[258] Non-interest Expense Non-interest expense increased due to higher compensation and data processing costs, partially offset by decreases in other expenses from prior year one-off items Non-interest Expense (in thousands) | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | % Change | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | % Change | | :-------------------------------- | :--------------------------- | :--------------------------- | :------- | :--------------------------- | :--------------------------- | :------- | | Compensation and related benefits | $6,008 | $5,675 | 5.87% | $11,605 | $11,158 | 4.0% | | Data processing | $1,753 | $1,525 | 14.95% | $3,472 | $3,122 | 11.2% | | Professional services | $432 | $347 | 24.50% | $940 | $913 | 2.9% | | Other | $649 | $756 | (14.15)% | $1,313 | $1,824 | (28.0)% | | Total non-interest expense | $10,750 | $10,299 | 4.38%| $21,213 | $21,076 | 0.6% | - Compensation expense increased due to annual employee pay raises, higher incentive accruals, and increased medical costs[260] - Data processing expense increased due to inflationary pressures and new software implementation costs[261] - The decrease in 'Other' non-interest expense was primarily due to branch closure costs in Q2 2024 and the establishment of an SBA valuation reserve in Q1 2024[262] Income Taxes Income tax provision decreased due to lower pre-tax income and a more favorable effective tax rate from higher permanent tax deductions Provision for Income Taxes (in millions) | Period | June 30, 2025 | June 30, 2024 | | :------- | :------------ | :------------ | | 3 Months | $0.8 | $1.0 | | 6 Months | $1.6 | $2.1 | - The decrease in income tax provision was primarily due to lower pre-tax income and a lower effective tax rate, driven by higher permanent tax deductions in 2025[263] BALANCE SHEET ANALYSIS Analyzes balance sheet components, highlighting changes and trends in cash, investments, loans, ACL, NPAs, MSRs, deposits, borrowings, equity, liquidity, and off-balance sheet items Cash and Cash Equivalents Cash and cash equivalents significantly increased, primarily due to net proceeds from loan shrinkage, enhancing on-balance sheet liquidity Cash and Cash Equivalents (in millions) | Date | Amount | | :------------ | :----- | | June 30, 2025 | $67.5 | | Dec 31, 2024 | $50.2 | - The increase was primarily due to net proceeds from loan shrinkage, which increased on-balance sheet liquidity and growing interest-bearing cash[265] Investment Securities Investment securities decreased in both AFS and HTM categories due to repayments and maturities, with certain securities remaining pledged as collateral Available-for-sale securities (AFS) (in millions) | Metric | June 30, 2025 | December 31, 2024 | | :------------------- | :------------ | :---------------- | | Fair Value | $134.8 | $142.9 | | Amortized Cost | $155.5 | $165.6 | | Unrealized Loss (net)| $(20.7) | $(22.8) | Held-to-maturity securities (HTM) (in millions) | Metric | June 30, 2025 | December 31, 2024 | | :------------------- | :------------ | :---------------- | | Amortized Cost | $83.0 | $85.5 | | Fair Value | $65.0 | $65.6 | - At June 30, 2025, the Bank pledged $33.2 million of mortgage-backed securities as collateral to the Federal Reserve Bank, $0.3 million of U.S. Government Agency securities and $1.7 million of mortgage-backed securities against specific municipal deposits, and $0.4 million of mortgage-backed securities to the Federal Home Loan Bank of Des Moines[268] Loans Total loans decreased to $1.35 billion, with commercial/agricultural real estate as the largest segment, and detailed CRE portfolio characteristics provided Total Loans Outstanding (in billions) | Date | Amount | | :------------ | :----- | | June 30, 2025 | $1.35 | | Dec 31, 2024 | $1.37 | Loan Portfolio Composition (June 30, 2025, in millions) | Loan Type | Amount | Percent | | :------------------------------ | :------- | :------ | | Commercial/Agricultural real estate | $1,071.6 | 79.6% | | C&I/Agricultural operating | $141.1 | 10.5% | | Residential mortgage | $128.2 | 9.5% | | Consumer installment | $7.2 | 0.5% | Commercial Real Estate (CRE) Portfolio Characteristics (June 30, 2025, in millions) | CRE Type | Loan Balance | Avg Loan Size | Avg LTV | Criticized Loans | % of Total Criticized | | :------------------------ | :----------- | :------------ | :------ | :--------------- | :-------------------- | | Non-Owner Occupied CRE | $453 | $0.6 | 52% | $7.2 | 1.6% | | Owner-Occupied CRE | $241 | $0.6 | 50% | $8.2 | 3.4% | | Multi-family CRE | $239 | $1.9 | 62% | $9.0 | 3.8% | | Construction & Land Dev. | $70 | $0.8 | 70% | $0.0 | 0.0% | - The geographical distribution of the CRE portfolio at June 30, 2025, shows Wisconsin as the dominant market across most CRE types, followed by Minnesota[271] Allowance for Credit Losses - Loans ACL for loans increased to $21.3 million (1.59% of total loans) due to provisions, partially offset by net charge-offs, with ACL for unfunded commitments also rising Allowance for Credit Losses (ACL) - Loans (in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :------------------------------------ | :------------ | :---------------- | | ACL - Loans, end of period | $21,347 | $20,549 | | ACL - Loans to loans, end of period | 1.59% | 1.50% | ACL - Loans Roll Forward (Six Months Ended June 30, 2025, in thousands) | Item | Amount | | :---------------------------------- | :----- | | ACL - Loans, at beginning of period | $20,549| | Net loan recoveries/(charge-offs) | $(9) | | Additions to ACL via provision | $807 | | ACL - Loans, at end of period | $21,347| Allowance for Credit Losses (ACL) - Unfunded Commitments (in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :------------------------------------ | :------------ | :---------------- | | ACL - Unfunded Commitments, end of period | $627 | $334 | Nonperforming Loans, Potential Problem Loans and Foreclosed Properties NPAs decreased to $13.0 million due to payoffs, but criticized loans significantly increased from weaker commercial and multi-family relationships Nonperforming Assets (NPAs) (in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :------------------------------------ | :------------ | :---------------- | | Total nonaccrual loans | $11,609 | $13,168 | | Accruing loans past due 90 days or more | $521 | $186 | | Total nonperforming loans (NPLs) | $12,130 | $13,354 | | Other real estate owned | $876 | $891 | | Other collateral owned | $19 | $24 | | Total nonperforming assets (NPAs) | $13,025 | $14,269 | - Nonaccrual loans to total loans decreased to 0.86% at June 30, 2025, from 0.96% at December 31, 2024[285] Criticized Loans (in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :-------------------------- | :------------ | :---------------- | | Special mention loan balances | $23,201 | $8,480 | | Substandard loan balances | $17,922 | $18,891 | | Criticized loans, end of period | $41,123 | $27,371 | - The increase in criticized loans was primarily due to one forestry services credit moving to substandard in Q3 2024, and new special mention commercial loans (C&I and multi-family) in Q1 2025 due to weaker cash flow and slower leasing activity[289] Mortgage Servicing Rights MSR fair value slightly decreased to $5.1 million, representing 1.07% of the $475.2 million servicing portfolio Fair Market Value of MSR Asset (in millions) | Date | Amount | | :------------ | :----- | | June 30, 2025 | $5.1 | | June 30, 2024 | $5.4 | - The MSR asset as a percentage of its servicing portfolio was 1.07% at June 30, 2025, compared to 1.09% at December 31, 2024[291] - The unpaid balances of one-to-four family residential real estate loans serviced for others were $475.2 million at June 30, 2025, down from $479.6 million at December 31, 2024[291] Deposits Total deposits decreased to $1.48 billion due to reduced brokered deposits and commercial cash, with stable composition and ample liquidity coverage for uninsured deposits Total Deposits (in millions) | Date | Amount | | :------------ | :----- | | June 30, 2025 | $1,478.4 | | Dec 31, 2024 | $1,488.1 | - The decrease in deposits was largely due to a reduction in brokered deposits and commercial customers decreasing their cash balances[292] - At June 30, 2025, the deposit portfolio composition was 58% consumer, 27% commercial, 13% public, and 2% brokered deposits[292] - Uninsured and uncollateralized deposits were $263.2 million (18% of total deposits) at June 30, 2025[293] - On-balance sheet liquidity, collateralized borrowing, and uncommitted federal funds borrowing availability totaled $730 million, covering 277% of uninsured and uncollateralized deposits at June 30, 2025[294] Federal Home Loan Bank (FHLB) advances and Other Borrowings FHLB advances were repaid, other borrowings remained stable, and the company maintains substantial unused borrowing capacity, with a $15 million subordinated note redemption scheduled Borrowings Summary (in millions) | Borrowing Type | June 30, 2025 | December 31, 2024 | | :---------------------------- | :------------ | :---------------- | | Federal Home Loan Bank advances | $0.0 | $5.0 | | Senior Notes | $12.0 | $12.0 | | Subordinated Notes | $50.0 | $50.0 | | Total other borrowings | $61.7 | $61.6 | - The Board of Directors approved the redemption of the entire $15.0 million balance of the 6% subordinated debentures due September 1, 2030, with redemption scheduled for September 1, 2025[298] - As of June 30, 2025, the Bank had available and unused borrowing capacity of approximately $424.4 million under the FHLB arrangement, $24.7 million from the Federal Reserve Bank, and $70.0 million from unsecured federal funds purchased lines of credit[300][301][302] Stockholders' Equity Stockholders' equity increased to $183.5 million, driven by net income and reduced unrealized losses, partially offset by dividends, with a new share repurchase program authorized Stockholders' Equity (in millions) | Date | Amount | | :------------ | :----- | | June 30, 2025 | $183.5 | | Dec 31, 2024 | $179.1 | - The increase was attributable to net income of $6.5 million and a $1.5 million decrease in net unrealized losses from AFS securities, partially offset by $3.6 million in cash dividends paid[304] - On July 24, 2025, the Board of Directors authorized a new stock repurchase program for 5% of outstanding shares, or 499,000 shares[305] Liquidity and Asset / Liability Management The company actively manages liquidity, with an increased ratio, diverse funding sources, and significant access to external credit lines, ensuring robust coverage for uninsured deposits - The liquidity ratio increased by 0.42% to 12.17% at June 30, 2025, from December 31, 2024[306] - Primary sources of funds include deposits, amortization, prepayments and maturities on investment and loan portfolios, and funds provided from operations[310] - On-balance sheet liquidity, collateralized new borrowing capacity, and uncommitted federal funds borrowing availability totaled $730 million, covering 277% of uninsured and uncollateralized deposits at June 30, 2025[309] - The company maintains access to additional funds through FHLB borrowings ($424.4 million available), Federal Reserve Bank lines of credit ($24.7 million available), and $70 million in uncommitted federal funds purchased lines with correspondent banks[312] Off-Balance Sheet Liabilities Off-balance sheet liabilities primarily include increased unused loan commitments ($166.5 million) and $2.0 million in capital contribution commitments Off-Balance Sheet Liabilities (in millions) | Item | June 30, 2025 | December 31, 2024 | | :------------------------ | :------------ | :---------------- | | Unused loan commitments | $166.5 | $137.0 | | Capital contribution commitments | $2.0 | $2.9 | Capital Resources Reaffirms that both the Bank and Company are "Well Capitalized," with all regulatory capital ratios exceeding minimum requirements Bank Capital Ratios (June 30, 2025) | Capital Ratio (Bank) | Actual Ratio | Minimum for Well Capitalized | | :------------------- | :----------- | :--------------------------- | | Total Capital | 15.7% | >= 10.0% | | Tier 1 Capital | 14.4% | >= 8.0% | | Common Equity Tier 1 | 14.4% | >= 6.5% | | Tier 1 Leverage | 12.2% | >= 5.0% | Company Capital Ratios (June 30, 2025) | Capital Ratio (Company) | Actual Ratio | Minimum for Capital Adequacy | | :---------------------- | :----------- | :--------------------------- | | Total Capital | 16.3% | >= 8.0% | | Tier 1 Capital | 11.6% | >= 6.0% | | Common Equity Tier 1 | 11.6% | >= 4.5% | | Tier 1 Leverage | 9.8% | >= 4.0% | - Both the Bank and the Company were categorized as 'Well Capitalized' under Prompt Corrective Action Provisions at June 30, 2025, and December 31, 2024[316] Item 3. Quantitative and Qualitative Disclosures about Market Risk Discusses the company's primary market risk, interest rate risk, and its management through ALCO policies and quantification via EVE and NII shock analyses Our Risk When Interest Rates Change Changes in market interest rates significantly affect financial results, representing the company's most substantial market risk due to fixed-period contractual rates - Interest rate risk is the company's most significant market risk, impacting results of operations due to changes in market interest rates[318] - The company's interest income and expense are affected by general economic conditions and regulatory policies, including those of the Federal Reserve[318] How We Measure Our Risk of Interest Rate Changes Measures interest rate risk through ALCO-managed asset and liability policies, quantifying potential impacts using EVE and NII shock analyses for hypothetical rate shifts - The company monitors interest rate risk through third-party reporting software and manages it via asset and liability management policies implemented by the ALCO[319][320] - Strategies include originating shorter-term/variable rate loans, selling longer-term fixed-rate residential loans, managing core deposits, and utilizing various borrowings and investment securities[321] Percent Change in Economic Value of Equity (EVE) (June 30, 2025) | Change in Interest Rates (bp) | % Change in EVE | | :---------------------------- | :-------------- | | +300 bp | 6% | | +200 bp | 4% | | +100 bp | 2% | | -100 bp | (2)% | | -200 bp | (5)% | Percent Change in Net Interest Income Over One Year Horizon (June 30, 2025) | Change in Interest Rates (bp) | % Change in NII | | :---------------------------- | :-------------- | | +300 bp | (5)% | | +200 bp | (3)% | | +100 bp | (2)% | | -100 bp | 1% | | -200 bp | 2% | - The projected changes in net interest income are largely due to the impact of growth in short-term certificates of deposits, which reprice faster and at a higher rate than other deposit products[327] Item 4. Controls and Procedures Addresses disclosure controls and internal control over financial reporting, confirming effectiveness and no material changes during the quarter Evaluation of Disclosure Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2025, ensuring timely and accurate SEC reporting - Disclosure controls and procedures are designed to ensure that information required for Exchange Act reports is recorded, processed, summarized, and reported within specified time periods[328] - As of June 30, 2025, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective at reaching a level of reasonable assurance[330] Changes in Internal Control over Financial Reporting No material changes occurred in the company's internal control over financial reporting during the most recently completed fiscal quarter - No material changes in the company's internal control over financial reporting occurred during the most recently completed fiscal quarter[331] Part II – OTHER INFORMATION Presents other information, including legal proceedings, risk factors, equity sales, defaults, mine safety, other disclosures, and exhibits Item 1. Legal Proceedings The company is involved in normal course legal proceedings, with management believing no material adverse effect on business or financial condition - The company and/or the Bank occasionally become involved in various legal proceedings in the normal course of business[332] - Management believes any liability from such proceedings would not have a material adverse effect on the business or financial condition of the Company[332] Item 1A. Risk Factors Directs readers to the 2024 10-K and this 10-Q's "Forward-Looking Statements" for a comprehensive understanding of risk factors - Readers should refer to the 'Risk Factors' in Item 1A of the 2024 10-K and the 'Forward-Looking Statements' in this Form 10-Q for a comprehensive understanding of risks[333] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased under the 2024 program, but a new program for 499,000 shares was authorized in July 2025 - No shares were repurchased under the 2024 share repurchase program during the quarter ended June 30, 2025[334] - As of June 30, 2025, 238,769 shares remained available for repurchase under the 2024 program, which expires in July 2025[334] - On July 24, 2025, a new stock repurchase program was authorized for 5% of the outstanding shares (499,000 shares)[334] Item 3. Defaults Upon Senior Securities This item is not applicable to the company - This item is not applicable[335] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[336] Item 5. Other Information No Section 16 officers or directors adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter - No Section 16 officers or directors adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arran