Overview

For the first quarter of 2025, Citizens Bank reported net earnings of $51.1 million, up from $48.6 million in the same period last year. Diluted earnings per share were $0.36, compared to $0.35 a year ago. The bank’s return on average equity was 9.31% and return on average tangible common equity was 14.51%. Its net interest margin was 3.31% and efficiency ratio was 46.69%.

The increase in net earnings was driven by higher noninterest income, which offset a slight decline in net interest income. Noninterest income rose 15% to $16.2 million, boosted by a $2.2 million gain on the sale of other real estate owned (OREO) properties. Noninterest expense decreased 1% to $59.1 million.

Net Interest Income

Net interest income, the bank’s primary source of revenue, was $110.4 million, down 1.79% from a year ago. This decline was due to a $1.1 billion decrease in average earning assets, as the bank continued to deleverage its balance sheet in the second half of 2024. However, the net interest margin expanded by 21 basis points to 3.31%, as the cost of funds decreased by 27 basis points to 1.04%.

The yield on the loan portfolio decreased from 5.30% to 5.22%, as the Federal Reserve lowered interest rates in 2024. Yields on the investment securities portfolio increased by 17 basis points to 2.63%, as the bank sold lower-yielding securities and reinvested in higher-yielding assets. Interest expense on borrowings declined by $17.1 million as average borrowings decreased by $1.5 billion.

Provision for Credit Losses

The bank recorded a $2.0 million recapture of credit losses in the first quarter, compared to no provision a year ago. This was primarily due to improved credit quality in the dairy and livestock loan portfolio. The allowance for credit losses as a percentage of total loans remained stable at 0.94%.

Noninterest Income

Noninterest income increased 15% to $16.2 million, driven by a $2.2 million gain on the sale of OREO properties. Trust and investment services revenue grew 5.8% to $3.4 million, while bank card services income increased 63.6% to $630,000. These gains were partially offset by a 21.2% decline in BOLI income.

Noninterest Expense

Noninterest expense decreased 1.05% to $59.1 million. This included a $500,000 provision for unfunded loan commitments in the first quarter of 2025, compared to no such provision a year ago. Regulatory assessments declined $2.4 million, as the prior year period included an additional FDIC special assessment. These savings were partially offset by higher software, occupancy, and equipment expenses.

Balance Sheet

Total assets increased 0.68% to $15.26 billion, driven by a $290.3 million increase in interest-earning balances with the Federal Reserve. This was partially offset by declines in the loan and investment securities portfolios.

Total loans decreased 2.02% to $8.36 billion, primarily due to a $167.8 million decline in dairy and livestock loans. This was partly seasonal, as line utilization in this portfolio typically peaks at the end of the year. Commercial real estate loans decreased $16.8 million, while commercial and industrial loans increased $17.1 million.

The investment securities portfolio declined 0.56% to $4.89 billion, as the bank continued to shrink this portfolio. Held-to-maturity securities decreased $20.5 million, while available-for-sale securities declined $7.0 million. The pre-tax net unrealized loss on the AFS portfolio improved from $447.7 million to $388.4 million.

Total deposits increased 0.35% to $11.99 billion, with noninterest-bearing deposits rising 2.09% to $7.18 billion. Interest-bearing deposits declined 2.15% to $4.81 billion. Borrowings remained flat at $776.2 million, consisting of $500 million in FHLB advances and $276.2 million in customer repurchase agreements.

Stockholders’ equity increased $42.1 million to $2.23 billion, driven by $51.1 million in net earnings and a $34.8 million increase in other comprehensive income, partially offset by $27.9 million in dividends. The bank repurchased 782,063 shares of common stock for $15.3 million during the quarter.

Capital and Asset Quality

The bank’s capital ratios remained well above regulatory requirements, with a Tier 1 leverage ratio of 11.81% and a common equity Tier 1 ratio of 16.52%.

Nonperforming loans declined from $27.8 million to $25.6 million, or 0.31% of total loans. Classified loans increased $4.6 million to $94.2 million, primarily due to higher classified dairy and livestock loans. The bank sold four OREO properties during the quarter, reducing the OREO balance from $19.3 million to $495,000.

Outlook

Citizens Bank continues to navigate a challenging economic environment marked by rising interest rates, high inflation, and uncertainty around the broader economic outlook. The bank’s focus on balance sheet management, cost control, and prudent risk management has helped it maintain strong profitability and capital levels.

However, the bank faces headwinds in its loan portfolio, particularly in the dairy and livestock sector, which has seen increased stress. Additionally, the decline in the investment securities portfolio and the resulting impact on net interest income will be an ongoing challenge.

To address these issues, the bank will need to closely monitor credit quality, optimize its funding mix, and continue to explore opportunities to improve efficiency. Successful execution of these strategies will be crucial for Citizens Bank to navigate the current economic environment and position itself for long-term success.