Citizens Community Bancorp Inc. (CZWI)

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain matters discussed in this report contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and the Company intends that these forward-looking statements be covered by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of forward-looking words or phrases such as “anticipate,” “believe,” “could,” “expect,” “estimates,” “intend,” “may,” “preliminary,” “planned,” “potential,” “should,” “will,” “would,” or the negative of those terms or other words of similar meaning. Similarly, statements that describe the Company’s future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are inherently subject to many uncertainties in the Company’s operations and business environment.

Factors that could affect actual results or outcomes include the matters described under the caption “Risk Factors” in Item 1A of our annual report on Form 10-K for the year ended December 31, 2025, filed with the SEC on March 5, 2026, (“2025 10-K”), Item 1A in Part II of this report, and the following:

•conditions in the financial markets and economic conditions generally;

•the impact of inflation on our business and our customers;

•geopolitical tensions, including current or anticipated impact of military conflicts;

•the impact of a prolonged U.S. government shutdown on our business and our customers;

•higher lending risks associated with our commercial and agricultural banking activities;

•future pandemics;

•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 our securities;

•the sufficiency of allowance for credit losses;

•competitive pressures from others in the financial services industry, including non-depository institutions;

•disintermediation risk (including the use of emerging financial technologies, such as cryptocurrencies);

•our ability to maintain our reputation;

•our ability to maintain or increase our market share;

•our ability to realize the benefits of net deferred tax assets;

•our ability to obtain needed liquidity;

•our ability to raise capital needed to fund growth or meet regulatory requirements;

•our ability to attract and retain key personnel;

•our ability to keep pace with technological change;

•prevalence of fraud and other financial crimes;

•the possibility that our internal controls and procedures could fail or be circumvented;

•our ability to successfully execute our 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 our ability to pay dividends;

•volatility of our stock price (including possible removal from the Russell 3000® Index and related indexes);

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•accounting standards for credit losses;

•legislative or regulatory changes or actions, or significant litigation, adversely affecting the Company or Bank;

•public company reporting obligations;

•costs and risks associated with responding to actions of activist stockholders;

•changes in federal or state tax laws; and

•changes in accounting principles, policies or guidelines and their impact on financial performance.

Stockholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this filing and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances occurring after the date of this report.

GENERAL

The following discussion sets forth management’s discussion and analysis of our consolidated financial condition as of June 30, 2026, and our consolidated results of operations for the three and six months ended June 30, 2026, compared to the same period in the prior fiscal year ended June 30, 2025. This discussion should be read in conjunction with the interim consolidated financial statements and the condensed notes thereto included with this report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes related thereto included in our 2025 10-K. Unless otherwise stated, all monetary amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than share, per share and capital ratio amounts, are stated in thousands.

PERFORMANCE SUMMARY

We reported net income of $1.1 million and $4.9 million, or $0.11 and $0.50 per diluted share for the three and six months ended June 30, 2026, compared to net income of $3.3 million and $6.5 million, or $0.33 and $0.65 per diluted share for the three and six months ended June 30, 2025, respectively.

The following is a summary of some of the significant factors that affected our operating results for the three and six months ended June 30, 2026, and June 30, 2025.

Compared to the second quarter of 2025, the second quarter of 2026 net interest income increased $0.2 million. The second quarter of 2026 increase from the same period in 2025 was largely due to: (1) a $0.7 million decrease in interest expense due to lower deposit costs; (2) the impact of the September 2025 subordinated debt redemption; and (3) the impact of higher portfolio yields which was partially offset by: (1) a $0.5 million decrease in interest income due to $1.1 million of loan payoff income recognized in the second quarter of 2025; (2) the impact of higher nonaccrual loan balances; and (3) the repurchase of delinquent government loans in the second quarter of 2026.

The total provision for credit losses for the second quarter ended June 30, 2026, was $4.325 million compared to a provision for credit losses of $1.350 million for the quarter ended June 30, 2025. The second quarter of 2026 provision was largely due to: (1) a net increase of $3.1 million in specific reserves on nonaccrual loans to $6.3 million and (2) charge-offs of $1.4 million. 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; (3) provision on new loans with longer contractual life outpacing previously established provisions on prepaying and maturing loans of $0.15 million; and (4) an increase in off-balance sheet commitments for new construction loan originations of $0.2 million.

Non-interest income decreased $0.2 million in the second quarter of 2026, compared to the second quarter of 2025, primarily due to lower gains on the sale of loans of $0.3 million.

Non-interest expense decreased $0.2 million in the second quarter of 2026 from $10.8 million in the second quarter of 2025. The decrease was primarily due to lower compensation costs and lower data processing costs.

Provision for income taxes decreased to $0.14 million in the second quarter of 2026, from $0.78 million in the second quarter of 2025, primarily due to lower pre-tax income and a lower effective tax rate.

For the six months ended June 30, 2026, net interest income increased $1.6 million from the same period in 2025. The impact of higher loan portfolio yields and lower deposit interest expense in the first quarter of 2026 compared to the first quarter of 2025 were the primary reasons for the change along with the second quarter of 2026 changes discussed above.

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The total provision for credit losses for the six months ended June 30, 2026, was $5.075 million compared to a provision for credit losses of $1.100 million for the six months ended June 30, 2025. The $3.0 million was attributable to the factors discussed above. The total provision for credit losses for the first quarter ended March 31, 2026, was $0.75 million compared to a negative provision for credit losses of $0.25 million for the quarter ended March 31, 2025. The first quarter of 2026 provision was largely due to: (1) a net increase of $0.4 million, with increases in reserves on impaired loans, partially offset by lower loss rates on collectively evaluated loans; (2) modest charge-offs of $0.2 million; (3) an increase in economic scenarios based on information provided by our third-party model provider of $0.1 million; and (4) the net impact of new loan growth, net of a decrease in the portfolio duration of $0.05 million. The total benefit, i.e., negative provision, for credit losses for the first quarter ended March 31, 2025, of $0.25 million was due to decreases in ACL related to a decrease in on-balance sheet ACL of $0.35 million, partially offset by an increase in off-balance sheet reserves to fund commitments of $0.1 million.

Non-interest income increased $0.3 million for the six-month period ended June 30, 2026, compared to the same period in 2025, primarily due to an increase in other income in the first quarter of 2026 due to the reversal of a $0.1 million lease liability and $0.1 million higher loan servicing income.

Non-interest expense increased slightly by $63 thousand in the six-month period ended June 30, 2026, compared to the same period in 2025, primarily due to higher second quarter other expense primarily due to higher nonperforming asset, higher compensation expense and higher professional services, partially offset by lower data processing expenses.

Provision for income taxes decreased by 0.5 million in the six months ended June 30, 2026, compared to the same period in 2025, due to a decrease in pre-tax income and a lower effective tax rate.

When comparing year-over-year results, changes in net interest income, provision for credit losses, non-interest income and non-interest expense are primarily due to the items discussed above. See the remainder of this section for a more thorough discussion.

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements have been prepared in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amount of assets, liabilities, revenue, expenses, and their related disclosures. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors that our management believes to be relevant at the time our consolidated financial statements are prepared. Some of these estimates are more critical than others. In addition to the policies included in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included as an exhibit in our annual report on our 2025 10-K, our critical accounting estimates are as follows:

Allowance for Credit Losses

We have selected a loss estimation methodology, utilizing a third-party model. See also Notes 1 and 3 to the unaudited consolidated financial statements for further discussion of our adoption of ASU 2016-13.

Allowance for Credit Losses - Loans. We maintain an allowance for credit losses to absorb probable and inherent losses in our loan portfolio. The allowance is based on ongoing quarterly assessments of the estimated lifetime losses in our loan portfolio. In evaluating the level of the allowance for credit losses, we consider the types of loans and the amount of

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The following discussion sets forth management’s discussion and analysis of our results of operations for the year ended December 31, 2025 and December 31, 2024, and our financial position as of December 31, 2025 and December 31, 2024, respectively. The MD&A should be read in conjunction with our consolidated financial statements, related notes, the selected financial data and the statistical information presented elsewhere in this Annual Report on Form 10-K for a more complete understanding of the following discussion and analysis. Unless otherwise noted, years refer to the Company’s fiscal years ended December 31, 2025 and December 31, 2024.

PERFORMANCE SUMMARY

The following is a summary of some of the significant factors that affected our operating results for the twelve months ended December 31, 2025, compared to the same 2024 period. In 2025, net interest income increased $4.7 million, due to: (1) the ongoing impact of lower short-term interest rates on the Bank’s liability-sensitive balance sheet which lowered liability costs; (2) higher asset yields; partially offset by (3) the impact of lower interest income due to a smaller sized balance sheet. The Company recorded a $1.950 million provision for credit losses largely due to the impact of changes in credit quality, largely due to an increase in reserves on individually evaluated loans. The $3.175 million of negative provision for credit losses in 2024 was largely due to the impact of improving forecasted future economic conditions, as forecasted by Moody’s, who the Company utilizes for economic forecasts and the impact of balance sheet optimization, which resulted in loan portfolio shrinkage. Non-interest income for the twelve months ended December 31, 2025, compared to the same period in 2024 increased approximately $1.0 million. This increase was largely due to: (1) higher gains on equity securities; (2) higher gain on sale of loans, due to an increase in SBA gains and mortgage gains, with SBA being about two thirds of the increase; partially offset by (3) lower fee income on deposit activity, due to lower activity; and (4) a decrease in loan fees and service charges primarily due to lower fees collected on loan payoffs. Non-interest expense increased approximately 1.5% or $0.6 million primarily due to a $1.1 million increase in compensation due to higher incentive compensation and merit increases, partially offset by a decrease in other expense due to lower SBA recourse expense.

When comparing year-over-year results, changes in net interest income, provision for credit losses, non-interest income and non-interest expense are primarily due to the items discussed above. See the remainder of this section for a more thorough discussion. Unless otherwise stated, all monetary amounts in the tables (but not the narrative) set forth in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than share, per share and capital ratio amounts, are stated in thousands.

We reported net income of $14.42 million for the twelve months ended December 31, 2025, compared to net income of $13.75 million for the twelve months ended December 31, 2024. Diluted earnings per share were $1.46 for the twelve months ended December 31, 2025, compared to $1.34 for the twelve months ended December 31, 2024. Return on average assets for the twelve months ended December 31, 2025, was 0.82%, compared to 0.76% for the twelve months ended December 31, 2024. The return on average equity was 7.89% for the twelve months ended December 31, 2025, and 7.84% for the comparable period in 2024.

The Company utilized a balance sheet optimization strategy in 2025, which resulted in the runoff of non-strategic loan relationships with the proceeds used to reduce all borrowings at the Bank and reductions in wholesale deposits.

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CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements have been prepared in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amount of assets, liabilities, revenue, expenses, and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. Some of these estimates are more critical than others. Below is a discussion of our critical accounting estimates.

Allowance for Credit Losses

We utilize a loss estimation methodology and third-party model to determine our allowance for credit losses, under the guidance of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), “Measurement of Credit Losses on Financial Instruments”. See also Notes 1 and 3 to the audited consolidated financial statements for further discussion of our adoption of ASU 2016-13.

Allowance for Credit Losses - Loans. We maintain an allowance for credit losses to absorb probable and inherent losses in our loan portfolio. The allowance is based on ongoing, quarterly assessments of the estimated lifetime losses in our loan portfolio. In evaluating the level of the allowance for credit losses, we consider the types of loans and the amount of loans in our loan portfolio, historical loss experience, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, prevailing economic conditions and other relevant factors determined by management. We follow all applicable regulatory guidance, including the “Interagency Policy Statement on Allowances for Credit Losses,” issued by the Office of the Comptroller of the Currency, Department of the Treasury, Board of Governors of the Federal Reserve, Federal Deposit Insurance Corporation, and National Credit Union Administration. We believe that the Bank’s Allowance for Credit Losses Policy conforms to all applicable regulatory requirements. However, based on periodic examinations by regulators, the amount of the allowance for credit losses recorded during a particular period may be adjusted.

Our determination of the allowance for credit losses - loans is based on: (1) an individual allowance for specifically identified and evaluated loans that management has determined have unique risk characteristics. For these loans, the estimated loss is based on likelihood of default, payment history, and net realizable value of underlying collateral. Specific allocations for collateral dependent loans are based on the fair value of the underlying collateral relative to the amortized cost of the loans. For loans that are not collateral dependent, the specific allocation is based on the present value of expected future cash flows discounted at the loan’s original effective interest rate through the repayment period; and (2) a collective allowance for loans not specifically identified in (1) above. The allowance for these loans is estimated by pooling loans with a similar risk profile and calculating a collective loss rate using the pool’s risk drivers, historical loss experience, and reasonable and supportable future economic forecasts to project lifetime losses. This collectively estimated loss is adjusted for qualitative factors.

Assessing the allowance for credit losses - loans is inherently subjective as it requires making material estimates, including the amount, and timing of future cash flows expected to be received on impaired loans, any of which estimates may be susceptible to significant change. In our opinion, the allowance, when taken as a whole, reflects estimated probable loan losses in our loan portfolio.

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STATEMENT OF OPERATIONS ANALYSIS

Twelve months ended December 31, 2025 vs. Twelve months ended December 31, 2024

Net Interest Income. Net interest income represents the difference between the dollar amount of interest earned on interest bearing assets and the dollar amount of interest paid on interest bearing liabilities. The interest income and expense of financial institutions are significantly affected by general economic conditions, competition, policies of regulatory authorities and other factors.

Interest rate spread and net interest margin are used to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest earning assets and the rate paid for interest bearing liabilities that fund those assets. Net interest margin is expressed as the percentage of net interest income to average interest earning assets. Net interest margin exceeds interest rate spread because non-interest-bearing sources of funds (“net free funds”), principally demand deposits and stockholders’ equity, also support interest earning assets. The narrative below discusses net interest income, interest rate spread, and net interest margin.

Net interest income was $51.2 million for 2025 compared to $46.5 million for 2024. The increase was largely due to the impact of lower short-term interest rates which, with the Company’s liability sensitive balance sheet (See Market Risk Section of the MD&A), resulted in lower deposit costs, a decrease in other borrowing expense due to lower balances and modestly higher net yield on assets. These increases to net interest income were partially offset by $61 million lower asset balances, including an $84 million decrease in average loan balances, partially offset by higher balances in lower yielding cash and cash equivalents.

The net interest margin for 2025 was 3.12% compared to 2.73% for 2024. The increase in the net interest margin was largely due to lower liability costs of 0.36%.

Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following table shows interest income from average interest earning assets, expressed in dollars and yields, and interest expense on average interest bearing liabilities, expressed in dollars and rates. Also presented is the weighted average yield on interest earning assets, rates paid on interest bearing liabilities and the resultant spread at December 31, 2025 and December 31, 2024. Non-accruing loans average balances are included in the table with the loans carrying a zero yield.

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