Photo by James Sanna | Banker & Tradesman Staff

Citizens saw its profitability drop in both the fourth quarter of 2023 and for the entire year due to lower loan originations, higher funding costs and an effort to increase its capitalization amid an uncertain and high-interest rate economy. But executives are forecasting commercial loan activity will pick up in the second half of 2024.

Executives held a conference call to discuss the bank’s quarterly earnings report Wednesday morning.

The bank’s fourth-quarter net income was down to $189 million, from $430 million in the third quarter and $828 million in the fourth quarter of 2022. Full-year 2023 net income also dropped by 22 percent on a year-over-year to $1.6 billion, from $2.073 billion in 2022.

Net interest income was down 2 percent quarter-on-quarter mostly due to lower loan volume, while its net interest margin of 2.91 percent decreased by 12 basis points due to increased liquidity costs and higher funding costs. Interest-bearing deposit costs were up by 19 basis points, to 279 basis points.

Loan volume was down to $148 billion in the fourth quarter, from $150.8 billion a quarter prior, while deposits were relatively stable at $177.1 billion. Year-over-year, average loan volume was up 2 percent to $152.2 billion, from $149.3 billion in 2022, while average deposits also increased by 2 percent to $175.3 billion, from $172.1 billion a year ago.

The bank’s commercial office lending portfolio of $3.6 billion was down by $100 million, or 3 percent, quarter-on-quarter due to paydowns and charge-offs. ACL coverage, or funds to be used for non-paid obligations, was increased for its office portfolio to 10.2 percent from 9.5 percent while absorbing $148 million in net charge-offs – or debt that will not likely be paid by borrowers – in the second, third and fourth quarters, which comprised 4 percent of loans.

Non-interest income was up 2 percent from a quarter ago as capital markets and wealth fees were higher despite reduced mortgage banking fees on lower lending, card fees and foreign exchange and derivative products.

The bank said it was focused on a selection of key areas: the Citizens Private Bank, its newly-acquired HSBC branches in New York, operations and expense optimization and balance sheet optimization.

Citizens Private Bank brought in $1.2 billion in deposits since its launch in late October 2023 and executives said they see the business unit as a good growth driver for the bank. Citizens’ executive said that the Private Bank will reach break-even by the second half of the year.

The bank reported growth in its HSBC branches particularly in capturing private capital, commercial payments fees and deposit growth.

Executives also said the bank was cutting costs by utilizing automation and AI and simplifying its organizational structures, and had exited its wholesale mortgage and auto loans businesses and reduced its workforce by 650 employees, while tightening certain expense categories.

The bank maintained “highly selective” loan originations, focusing on generating higher-return accounts, and exited $6 billion commercial credit-only client relationships in 2023, executives said.

This year, bank executives said they expect net interest income to go down further, by 6 percent to 9 percent, leading to a future net interest margin of 2.8 percent to 2.85 percent. Average loans are expected to go down, they said, but spot loans – coming from Citizens Private Bank and a pick-up in commercial activity in the second half of 2024 – are expected to grow between 3 percent and 5 percent.

The executives said during Citizens earnings call that they believe Federal Reserve interest rate cuts may start as early as the first quarter, but will likely have a “very close to neutral”  effect on deposits.