Citizens Community Bancorp Inc. (CZWI) stock intrinsic value fair value estimate & owner earnings analysis

WHAT THE BUSINESS IS Citizens Community Bancorp owns Citizens Community Federal N.A., a community bank with 21 branches serving Wisconsin and Minnesota. Its main markets are the Chippewa Valley region of Wisconsin, the Twin Cities and Mankato in Minnesota, and nearby rural communities. It lends to businesses, farmers and households (commercial real estate, business and agricultural loans, home mortgages) and funds those loans mainly with local deposits. At June 30, 2026 it had about $1.81 billion of assets, $1.38 billion of loans and $1.55 billion of deposits. Deposits grew from $1.20 billion at the end of 2019 to $1.52 billion at the end of 2025. It earns money mainly on the gap between what its loans earn and what it pays depositors, plus some fees and gains from selling home mortgages. HOW WE MEASURED EARNING POWER We start from the cash the business generates each year and make four adjustments. First, we strip out short-term swings, such as the stock of home mortgages the bank makes and then sells. Second, we deduct stock-based pay as a real cost. Third, we deduct the capital spending needed to keep branches and systems running. Fourth, and specific to banks: the accounting charge for expected loan losses does not use cash, so we add it back and instead deduct the loans the bank actually wrote off, net of recoveries. We also add back amortization of the deposit relationships the bank acquired, because it is a non-cash accounting charge; it was only about $0.6 million in 2025 and is shrinking. On that basis, owner earnings per share were $1.64 (2020), $1.80 (2021), $1.83 (2022), $1.62 (2023), $1.34 (2024) and $1.61 (2025). Acquisitions between 2016 and 2019 more than doubled the bank (total assets rose from $0.70 billion in September 2016 to $1.53 billion at the end of 2019), and 2019 carried integration costs. So we measure the current business from 2020 to 2025. That period covers both near-zero rates and the 2023-2024 squeeze on funding costs. The median, $1.63 per share, is our starting level. Owner earnings ran slightly above reported profit through this period, mainly because actual loan write-offs were tiny. Over the ten years to 2025 they totaled only about $3.2 million, and 2023-2025 brought small net recoveries. WHAT CHANGED IN 2026 Two things are moving in opposite directions. The core business is improving. Net interest income rose 10% in 2025 (to $51.2 million), and it was up another 6.5% in the first half of 2026 ($26.5 million versus $24.9 million) as deposit costs fell. Operating expenses stayed flat at about $21.3 million per half-year. The company reported a margin of 3.22% in the second quarter, up from 3.18% in the first. Credit, however, turned. In the second quarter of 2026 the bank set aside $4.3 million for loan losses, and earnings fell to $0.11 per share. The company's July 27, 2026 earnings release named the problem loans: a $4.2 million owner-occupied commercial real estate loan whose borrower stopped operating ($1.2 million already written off), a $5.7 million relationship secured by two campgrounds, and a $2.7 million multi-family/retail loan. Nonperforming loans rose to $31.6 million (2.28% of loans), and the bank now holds $6.3 million of reserves against specific problem loans. Two concentrations in the annual report matter here. Campground loans totaled $149 million at the end of 2025, about 11% of all loans. Owner-occupied commercial real estate totaled $240 million, of which $19.0 million was already rated criticized. Our most recent full year of owner earnings grew about 20% (from $1.34 to $1.61 per share). We do not carry that forward. The base case's first year assumes owner earnings fall to about $1.46 per share, because we expect the specific reserves to turn into actual write-offs. BASE CASE - $28.28 per share The improvement in core earnings seen in the last two reported quarters mostly holds: earnings before credit costs of about $1.80 per share. The $6.3 million of specific reserves is written off over roughly the next two years, leaving owner earnings of about $1.46 in year one and $1.56 in year two. After that, credit costs settle at about 0.07% of loans a year. That is higher than the bank's own 2016-2025 record, to reflect the lumpiness shown in 2026. Owner earnings then level off at about $1.72 per share and stay flat through year ten. We assume no growth. Deposits and assets have grown, but owner earnings per share were flat from 2020 to 2025, so growth has not reached shareholders. Beyond year ten we assume that level continues indefinitely. The reason is structural: a base of local deposits across 21 branches that pays for the bank's lending and keeps renewing itself. We assume no expansion. BEAR CASE - $17.49 per share Write-offs are much larger than the reserves now set aside: about $12 million before tax over three years, drawn from the nonperforming loans, the campground book and the criticized owner-occupied real estate. Core margins also give back part of the recent gain. Earnings before credit costs return to about $1.50, between the 2024 low of $1.34 and the $1.63 starting level. Normal credit costs run about double the base case (roughly 0.15% of loans). Owner earnings are about $1.10 in years one and two and then about $1.34 through year ten. After year ten earnings shrink 3% a year as deposit competition erodes the franchise. This bank has already closed branches (2022-2023) and saw deposits fall in 2024, from $1.52 billion to $1.49 billion. A bank runs with about ten dollars of assets per dollar of equity, and that leverage is why credit losses weigh so heavily in this case. BULL CASE - $33.01 per share The first-half 2026 improvement continues. Annualizing first-half 2026 results gives earnings before credit costs near $1.95 per share. The three problem relationships are resolved mostly through their collateral, with about $3 million of total write-offs. Loans then grow about 2% a year through year ten, consistent with the 4% annual deposit growth since 2019. To support that growth the bank keeps back about a fifth of its earnings as capital, and owner earnings reach about $2.21 per share by year ten. After that they hold flat, with no further growth assumed. WHAT THE SHARES APPEAR TO BE WORTH AND THE MARGIN-OF-SAFETY PRICE We discount every case at a flat 6%. On that basis the shares are worth about $17.49 in the bear case, $28.28 in the base case and $33.01 in the bull case. The range tilts to the downside, as it should for a leveraged lender with a credit problem still unfolding. The margin-of-safety price is $17.00, roughly the bear-case value and about 40% below the base case. That margin reflects three things: a bank's leverage, a sharp rise in nonperforming loans still being worked out, and a campground concentration unusual among community banks. WHAT WOULD MAKE THIS WRONG The estimate would be too high if the second-quarter problem loans spread to more of the campground or owner-occupied real estate books, or if deposit costs rise again and reverse the recent margin gains. It would be too low if the problem loans are repaid from collateral with little loss and margins keep widening. NOTES The fiscal year changed from September to December in 2018, so earlier years are September years. The 2026 loan details come from the company's July 2026 earnings release; the quarterly filing's reported provision and earnings figures agree with it.