For a company that has struggled with credit-quality problems in the past, Citizens Banking Corp. of Flint, Mich., has no reservations about moving into the risky business of asset-based lending.
John D. Schwab, the $7.7 billion-asset company’s chief credit officer, said it formed an asset-based lending unit last month to keep customers it might have needed to refer elsewhere because of their credit risk.
Asset-based loans are viewed as less safe than conventional loans, but Mr. Schwab said that Citizens has learned from the mistakes that led to more than $200 million of chargeoffs from 2002 through 2004. The unit will fill a hole in the company’s product line, boost revenue, and diversify its customer base, he said.
“We’ve had some other things within our company that held our attention for the last several years, and now that we are where we are, we can take this initiative,” Mr. Schwab said.
In 2002, Citizens charged off $102 million and had a return on assets of 0.37%. By the end of last year chargeoffs had fallen to $28.7 million, and the ROA had risen to 1.22%.
He attributed the improvement largely to a credit approval structure it put in place in late 2002. Previously, credit officers reported to local market presidents, who made the credit decisions. An automated system is now used to make decisions on loans of less than $500,000. Decisions on larger loans are made by credit officers who report directly to Mr. Schwab.
Credit officers with the new unit, Citizens Bank Business Finance, will also report to Mr. Schwab, he said.
Kevin K. Reevey, an analyst with BankAtlantic Bancorp’s Ryan Beck & Co. Inc., said the unit will give Citizens another tool to penetrate the business banking market and complement the treasury management, cash management, and wealth management businesses it started in 2004.
Asset-based lending is a logical extension of the strategy that William R. Hartman put in place when he became the company’s president, chairman, and chief executive officer, Mr. Reevey said. “When Bill Hartman came on board in 2002, one of the things he said is that they are looking to launch products to retain and strengthen ties to small and middle-market businesses.”
Asset-based loans typically use short-term receivables and inventory as collateral. The company said it created a separate unit for the business because asset-based lending is specialized and requires lenders with an expertise in it.
Mark Widawski, the unit’s managing director, said asset-based lending is traditionally considered something for troubled companies, but Citizens will focus on companies going through some kind of transition, such as launching a product line or undergoing rapid growth or a corporate restructuring. The goal is to convert the asset-based customers into traditional banking customers, he said.
Citizens is targeting companies throughout the Midwest with $15 million to $150 million of annual revenue, primarily those in the manufacturing, distribution, and service sectors.
In targeting these firms, Citizens will have an advantage over the competition, Mr. Widawski said. “This segment of the market is too big for many of the independent companies and not focused on by people at the larger commercial banks.”
Terry J. McEvoy of Oppenheimer & Co. said Citizens’ aggressive marketing to small businesses over the past two years should help it expand its asset-based lending business.
Because of the sluggish economy in the Midwest, particularly in Michigan, starting the asset-based unit makes good business sense — as long as Citizens does not try to expand it too fast, he said.
“If they grew the business rapidly, then it would be a red flag on my end. I would like to see steady growth, so they prove to their investors the profitability and their ability to manage the credit risk,” Mr. McEvoy said.
