First Citizens BancShares in Raleigh, North Carolina, is blaming an uptick in problem credit on certain office loans it acquired in last year's
Company executives said Thursday that increases in both net charge-offs and nonaccrual loans were largely related to a handful of office loans in CIT's commercial real estate book. The loans were tied to Class B buildings, which typically have less attractive locations and fewer amenities than Class A real estate, but charge higher rents than Class C buildings.
Like many banks, First Citizens has been closely watching the performance of its office loan portfolio. The company stopped originating Class B office loans last fall, as some 30-day delinquencies in small business leasing started to become 60-day delinquencies.
"You may remember, we discussed potential concerns in this portfolio last quarter, and some of these changes have now pushed through to the portfolio," Chief Financial Officer Craig Nix told analysts Thursday during the company's fourth-quarter earnings call.
He said that First Citizens is "continuing to see market disruption due to hybrid work models, which impact vacancy and leasing rates."
The future of office loans has been something of a question mark since the early days of the pandemic, when large-scale remote and hybrid work policies went into place. At many employers, those policies remain in place.
Broadly speaking, losses on commercial real estate loans in the banking industry haven't yet materialized, though some experts have noted that office-related loan losses could be realized at a slower pace, since office tenants tend to sign multi-year leases.
In August, the Federal Deposit Insurance Corp. said it would do more to
First Citizens wasn't the only bank to talk Thursday about growing scrutiny of office loans. Webster Financial in Stamford, Connecticut, is also watching its portfolio closely.
Webster is paying closest attention to Class B and Class C credits, CEO John Ciulla told analysts during the company's fourth-quarter earnings call. The $71.3 billion-asset company reduced the size of its office loan portfolio during the fourth quarter — from about $1.7 billion to about $1.5 billion — as part of an ongoing review of the portfolio, he said.
Webster is "trying to think about whether or not there is a particular vulnerability" in any of its existing Class B and Class C loans, which represent about half of its office loan book, and "then seeing whether or not we can exit those credits … before maturity," Ciulla said.
While Webster hasn't seen any "material deterioration" in its portfolio, Ciulla said, the bank is "like everyone else, concerned about the long-term nature of that asset class."
"We still are in a pretty good position in terms of risk ratings there," Ciulla said. "So we're not at all panicked."
At First Citizens, net charge-offs during the fourth quarter rose by $6 million to $24 million, or 0.14% of average loans. Three months earlier, net charge-offs sat at 0.10% of average loans.
During the first quarter, net charge-offs are projected to rise to 0.15%-0.25% of average loans, the company said. And for the 2023 fiscal year, the company is forecasting net charge-offs of 0.20%-0.30%.
Nonaccrual loans climbed to $627 million, representing 0.89% of total loans. During the third quarter, nonaccrual loans were 0.65% of total loans.
The increase in net charge-offs contributed to a larger provision during the fourth quarter. The company's $79 million provision followed a benefit of $5 million during the year-ago period.
First Citizens' provision was higher than the consensus estimate of $51 million, Brian Foran, an analyst at Autonomous Research, noted Thursday in a report.
First Citizens has about $1.3 billion of office loans in its commercial bank. Office loans inside its general bank segment, which includes businesses such as wealth and mortgages, are not showing signs of deterioration, executives said.
Still, as more office loans move into nonaccrual status, the bank's credit and special assets teams will continue to evaluate them for impairments, said Marisa Harney, chief credit officer at First Citizens.
"We feel comfortable that we've done our job in terms of determining where we need specific reserve," Harney said. "But it is … a portfolio that we're watching closely."
