Citizens Margin Compresses as Credit Deterioration Continues
Net interest income fell 1.6% sequentially to $25.7 million as NIM narrowed 5 bps.
Citizens Financial Services (CZFS), the commercial-lending-focused bank, recorded $25.7 million of second-quarter net interest income, up 8.7% YoY and down 1.6% QoQ. Tax-equivalent NIM compressed 5 bps QoQ to 3.67%, leaving net interest income below its fourth-quarter peak.
The margin remained 20 bps wider than a year earlier as funding costs declined faster than asset yields. The cost of interest-bearing liabilities fell 32 bps YoY to 2.41%, while the yield on interest-earning assets decreased 6 bps to 5.60%.
Commercial lending drove balance-sheet growth. Average commercial loans rose $148.3 million YoY to $1.44 billion, more than offsetting declines in construction loans and residential mortgages. Period-end loans increased 4.2% QoQ to $2.40 billion after contracting in the first quarter, with gains across commercial real estate, construction and consumer lending.
That acceleration tightened funding. Deposits rose 4.4% YoY to $2.39 billion, though they increased just 0.7% from year-end as noninterest-bearing balances declined. The loan-to-deposit ratio climbed to 100.02% from 98.89% at year-end, while borrowed funds increased $84.6 million to $394.0 million.
Fee income provided some support as noninterest income rose 9.5% YoY and 8.8% QoQ to $4.0 million, helped by higher bank-owned life-insurance income. Noninterest expense increased 4.8% YoY to $16.9 million as Citizens added staff and absorbed higher legal costs associated with nonperforming assets and fraud losses on customer credit lines.
Credit quality deteriorated further. Nonperforming assets rose $3.3 million QoQ to $43.4 million, or 1.81% of loans, compared with 1.24% at year-end. The quarterly credit-loss provision held at $500,000, though the loan provision climbed to $578,000 as Iran-related economic risks and higher specific reserves were partly offset by a release for off-balance-sheet exposures. The loan-loss allowance increased to $23.6 million, while recoveries exceeded charge-offs by $87,000.
Capital returns edged higher as Citizens raised its quarterly dividend to $0.51 a share from $0.49 a year earlier and kept its share count essentially flat. Annualized ROE declined to 11.64% from 12.03% QoQ, while tangible ROE fell to 15.54% from 16.15%.
The quarter ended with faster loan growth pressing against a deposit base that had shifted away from noninterest-bearing funding, leaving margin performance increasingly tied to liability costs as nonperforming assets continued to rise.