UPDATE: This article includes quotes from an interview with CEO Bruce Van Saun and details shared during Citizens' earnings call.
Citizens Financial Group's third-quarter earnings results were a mix of positives and negatives.
On one hand, the Providence, Rhode Island, regional bank continued to build out its year-old private bank, grew its deposits in the New York metropolitan region and cut expenses by 3%.
On the other hand, its net income declined 11% from the prior-year quarter, its earnings per share came in a touch lower than analysts' projections and it continued to work through challenges in its general office loan book.
In an interview Wednesday, CEO Bruce Van Saun was upbeat, saying the $219.7 billion-asset company "certainly made good progress across a number of fronts" during the three-month period that ended Sept. 30. He ticked off several areas, starting with the year-old private bank, which is on track to achieve profitability in the fourth quarter and recently opened two more offices in California, with three more expected to open by the middle of next year.
Van Saun also made positive comments about Citizens' efforts in New York, where deposits rose 7% year over year; its position as a middle-market lender; its strong balance sheet; and its plans to roll out another expense reduction plan, which will aim to cut costs by at least $100 million next year.
Still, the company, which recently celebrated the 10th anniversary of the initial public offering that separated Citizens from its former U.K.-based parent, had a few thorny areas to address. It once again bolstered its allowance for credit losses on general office loans, increasing the reserve ratio to 12.1% during the third quarter, up from 11.1% in the second quarter and 10.6% in the first. The bank has increased its reserve coverage for office loans in every quarter since early 2023.
The caution came as nonaccrual loans at Citizens ticked up 30% year over year. The spike was largely tied to general office loans and "workout actions on a handful" of them, Chief Financial Officer John Woods told analysts during the company's third-quarter earnings call.
Citizens continues to reduce its exposure to general office loans, which it defines as loans on office buildings with multiple tenants. As of Sept. 30, the portfolio totaled $3.2 billion, down about 5% from the prior quarter as a result of paydowns and charge-offs, Woods said on the call.
In total, general office loans account for about 4% of Citizens' lending portfolio. Over the past 18 months, the bank has reduced office loans by about $1 billion.
Both Van Saun and Woods have acknowledged that the office sector will likely continue to struggle in a hybrid work environment where companies don't need to lease as much space as they did before 2020.
Van Saun said Wednesday that Citizens is appropriately reserved for any trouble spots.
"It's a multi-quarter workout that commenced in 2023," he said on the call. "It's with us all through 2024. It'll be with us for a good chunk of 2025, and we think we've got our arms fully around that."
For the third quarter, Citizens' net income was $382 million, down from $430 million in the prior-year quarter, in part because of a 10% year-over-year reduction in net interest income and the fact that some fees were pushed into the fourth quarter, Van Saun said on the call.
Overall, diluted earnings per share missed expectations, totaling 77 cents for the period. Analysts polled by S&P had predicted that Citizens' earnings per share would be 79 cents.
The bank's third-quarter revenue totaled $1.9 billion, down 6% year over year.
Provisions for credit losses totaled $172 million for the period, down from $182 million in the prior quarter, but the same as what was set aside in the third quarter of last year. Noninterest expenses declined 3% year over year, reflecting lower headcount and lower marketing-related costs. That was partially offset by hiring costs related to the private bank.
Citizens' "core third-quarter results were in line with expectations," RBC Capital Markets analyst Gerard Cassidy wrote Wednesday in a research note. Still, "the deterioration in commercial real estate credit quality needs to be monitored carefully in upcoming quarters, in our view," Cassidy said.
The private bank remains a key focus for Citizens as the third leg of a business strategy that also includes consumer and commercial banking. Through the end of September, the private bank had raked in $5.6 billion of deposits, up from $4 billion in the second quarter, and reached $4.1 billion of assets under management, up from $3.6 billion through the end of June.
Citizens recently opened two private banking offices in the San Francisco Bay area — one in Mill Valley and another in downtown San Francisco — that join locations already opened in San Francisco, Boston and Palm Beach, Florida. Three more California offices — one each in San Diego, Newport Beach and Silicon Valley — should be open by the middle of next year.
Citizens also recently added a private banking team in Southern California to serve San Diego and Newport Beach. The team is led by Victor Mena, a longtime managing director at First Republic Bank who briefly worked for New York-based Flagstar Bank after First Republic failed last year.
The focus for Citizens is now on lifting out wealth management teams from other companies to work with the private banking teams, Van Saun said during the interview.
"We're trying to make sure each private bank team has its own wealth unit co-located" in the same geography, "so they can do joint calls," he said.
