Rhode Island-based Citizens plans to reduce its lending to multifamily real estate projects as part of a broader effort to shrink its commercial real estate loan book, executives said during the bank’s second-quarter earnings call.
The bank’s overall commercial real estate loan portfolio stood at $28.3 billion at the end of the second quarter, around 20 percent of its total book of loans, according to the company’s earnings presentation.
In total, the bank plans to reduce its commercial real estate lending by around 25 percent, CEO Bruce Van Saun said in response to a stock analyst’s question, but said that the bank specifically wants to reduce its exposure to office and multifamily assets, he said. General office and multifamily loans together make up 9 percent of the bank’s loans by dollar volume according to Citizens’ earnings presentation.
Part of the strategic shift is driven by distress in the office market and both the bank’s assessment and that of federal regulators that it needed to hold more capital in reserve.
The bank said it increased its allowance for credit losses in its commercial real estate portfolio from $734 million in the first quarter to $739 million, or 2.61 percent of its overall CRE portfolio. Half of that dollar amount is set aside for office loans.
Over the second quarter, Citizens managed to shrink its pool of non-current commercial real estate loans by 11 basis points, to only 3.13 percent of total CRE loans, although the dollar volume off loans in non-accrual status rose from 2.07 percent of commercial real estate loans to 2.39 percent over the quarter.
“This is a multi-quarter, probably a multi-year journey that we’re on. But given all the balance sheet strength, that we have with our capital position, we feel really confident that any uncertainties are expressed in the reserves,” Citizens CFO John Woods told analysts.
Van Saun chimed in, acknowledging that some of the reduction in criticized loan volumes was achieved through charge-offs – charge-offs on office loans rose from $236 million in the first quarter to $319 in the second according to the bank’s presentation – even as some was achieved through loan repayments and as any future Federal Reserve rate cuts may help some borrowers get back on a stable footing. However, Woods noted, “when it comes to extensions we’ve been able to extract better positioning and collateral” from borrowers.
The other primary reason Citizens is trying to run off a portion of its commercial real estate loan book, Van Saun said, is tied to its big bet on wealth management. The bank lured several prominent wealth manager teams from other lenders last quarter and like several other local lenders is trying to position itself to take advantage of market dislocation following last year’s failures of wealth management titans Silicon Valley Bank and First Republic Bank.
“We will make room for some CRE opportunities with the private bankers since it’s important part of their customer base,” Van Saun told analysts, after noting the bank wants to “further deeper relationships” with its customers.
That wealth management operation ended the second quarter with $4 billion of deposits and $3.6 billion in assets under management, Woods said, with Citizens’ earnings presentation noting its private bank is expected to hit break-even in the fourth quarter of this year..
Overall, the bank ended the second quarter with net income of $392 million, a net interest margin of 2.87 percent and earnings per share at $0.78. Deposits landed at $176 billion and assets at $195 billion.
