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Citizens Republic Bancorp, Inc (NASDAQ:CRBC)

Q4 2012 Earnings Call

January 22, 2013 12:00 pm ET

Executives

Kristine D. Brenner - Director of Investor Relations

Cathleen H. Nash - Chief Executive Officer, President, Director, Chief Executive Officer of Citizens Bank, President of Citizens Bank and Director of Citizens Bank

Lisa T. McNeely - Chief Financial Officer, Executive Vice President, Chief Financial Officer of Citizens Bank and Executive Vice President of Citizens Bank

Mark W. Widawski - Chief Credit Officer, Executive Vice President, Chief Credit Officer of Citizens Bank and Executive Vice President of Citizens Bank

Brian D. J. Boike - Senior Vice President, Treasurer, Senior Vice President of Citizens Bank and Treasurer of Citizens Bank

Analysts

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

John Barber - Keefe, Bruyette, & Woods, Inc., Research Division

Operator

Good day, everyone, and welcome to today's program. [Operator Instructions] It is now my pleasure to turn the conference over to Ms. Kristine Brenner. Please go ahead, ma'am.

Kristine D. Brenner

Thank you. And good morning, and welcome to the Citizens Republic Bancorp Fourth Quarter Conference Call. This call is being recorded and will be archived for 90 days on the Investor Relations page on our website, www.citizensbanking.com.

The format of our call today will be Cathy Nash, President and Chief Executive Officer, providing highlights for the year. Lisa McNeely, Chief Financial Officer; and Mark Widawski, Chief Credit Officer, will provide details of the quarter. Cathy Nash will share some concluding remarks, then we'll open the line up for questions from research analysts. And Brian Boike, our Treasurer, is also here to answer questions.

During this conference call, statements may be made that are not historical facts, such as those regarding Citizens' future financial and operating results, plans, objectives, expectations and intentions. Such forward-looking statements are subject to risks and uncertainties, which include but are not limited to, those discussed in Citizens' annual and quarterly reports filed with the SEC.

Forward-looking statements are not guarantees of future performance and actual results could differ materially. These forward-looking statements reflect management's judgment as of today, and we expressly disclaim any obligation to update or revise information contained in these statements in the future.

On September 13, 2012, Citizens and FirstMerit Corporation made an announcement regarding their intended merger. The information conveyed on today's call is not intended to be and should not be considered an offer of any securities for sale or the solicitation of proxies in connection with the merger. Investors are encouraged to read the joint proxy statement prospectus when it becomes available. This document will contain important information about the proposed transaction, including information regarding participants in the solicitation of proxies with respect to the proposed merger. When filed, the joint proxy statement prospectus will be available without charge from the SEC's website at www.sec.gov and from Citizens' website at www.citizensbanking.com.

Now I'll turn the call over to our President and Chief Executive Officer, Cathy Nash. Cathy?

Cathleen H. Nash

Thank you, Kristine. We are very pleased to finish the year with another quarter of solid earnings that reflect our continued success in executing on key strategic initiatives. Net income attributable to common shareholders for the fourth quarter was $17 million or $0.42 per share. For the year, net income was $348 million or $8.61 per common share.

We continue to focus on providing top-tier client service as we prudently rebuild our loan portfolio targeting our proven competencies of C&I and indirect consumer lending. C&I balances were up 7% compared to last year and our Indirect portfolio was up 11%. Net interest margin was 3.56% for the year, down 2 basis points from last year. We were able to mitigate margin pressure by improving our deposit mix and by improving funding costs through a disciplined relationship pricing model. Core deposit balances were up 5% compared to last year and now represents 76% of total deposits, compared to 70% a year ago.

We continue to demonstrate strong credit quality metrics, which led to reduced credit costs this year. We have created a lower risk profile balance sheet through our continued strong credit quality and core deposit funding base. These efforts have allowed us to continue to deliver consistent results. Pretax preprovision profit remained strong at $32 million for the quarter and $128 million for the year.

Now I'll turn the call over to Lisa and Mark to talk through the details of the quarter. Lisa?

Lisa T. McNeely

Thanks, Cathy. As Cathy mentioned, we reported net income attributable to common shareholders for the quarter of $17 million. Provision expense was $4.3 million reflecting continued improvement in our credit metrics. The allowance as a percentage of portfolios loans was 2.1% at the end of the quarter. Net interest margin was 3.5% in the fourth quarter, down 7 basis points compared to the last quarter and 12 basis points compared to the fourth quarter of last year. As Cathy mentioned for the year, net interest margin was 3.56%, only a 2 basis point decrease from last year. This speaks volumes to the success we've had in mitigating margin pressure in this interest rate environment and given the intense competition for quality earning assets.

We aggressively manage our funding costs through a relationship deposit pricing framework. We also prudently lower rates when we can, improving our funding mix by emphasizing core low-cost deposits while reducing single-service, high-cost time deposits and renegotiating some of our collateralized wholesale funding. As a result, our overall cost of funds decreased 25 basis points for the year compared to 2011.

Noninterest income was down $1.7 million from the third quarter, primarily the result of a $2.7 million writedown related to 1 commercial held for sale relationship. Excluding the net loss on loans held for sale, noninterest income was consistent with last quarter. Noninterest expenses decreased $6.9 million compared to the last quarter, due to a $4 million reduction in merger-related expenses and an overall recovery in ORE during the quarter compared to a loss last quarter. Throughout the year, we remain vigilant in managing expenses and had an efficiency ratio of 65.8% for the year.

Taking a look at our balance sheet trends. Total portfolios loans at quarter end totaled $5.3 billion, down $172 million compared to last quarter driven by several large C&I payoffs and anticipated reductions in real estate-based loan categories. This runoff was partially offset by strong production in C&I and indirect consumer lending, where we have strategically focused. As Cathy mentioned, compared to last year, our C&I portfolio has grown 7% or $113 million, reflecting our focus on lending in our areas of expertise. Indirect loans have grown 11% or $98 million since last December. Even though the continued extreme low interest rate environment resulted in a meaningful increase in customer refinancing activity in this portfolio.

Core deposits decreased slightly this quarter as a result of expected seasonal reductions in public funds balances. Our bankers' continued focus on relationship banking and providing high-quality client service led to a 5% increase in core deposits compared to last year. Time deposits continue to decrease this quarter, reflecting further reductions in single-service, high-cost retail CD balances and continued runoff of brokered time deposits. Since we started this focus in early 2011, we've reduced the amount on single-service CD balances by 42%. I'll turn it over to Mark now for more insight into credit.

Mark W. Widawski

Thank you, Lisa, and good morning. As Lisa mentioned, our credit metrics improved this quarter reflecting further strengthening of economic conditions in our markets and our ongoing focus on credit quality. Last quarter, we commented that we were reviewing recent regulatory guidance on the treatment of non-reaffirmed obligations for Chapter 7 cases. As a result of this review and enhancing our procedures, we incurred fourth quarter additions to consumer nonperforming loans of $3.4 million and one-time charges of $3.6 million. These additions accounted for the quarterly increases in consumer NPLs and charge-offs.

Problem asset formation has stabilized at significantly lower levels. Excluding the impact of the bankruptcy review, quarterly consumer NPL inflows were below $19 million for the first time since 2008. Commercial NPL inflows were below $5 million for the second consecutive quarter. Commercial watched credits continued to decline, and at 15% of total commercial loans, are at the lowest level in over 5 years. Compared to last year, watchlist loans are down 28%. We continued our diligent resolution of stressed credit. As a result, nonperforming loans dropped to 1.12% of total loans. At 92 basis points, this was the first time non-accruing commercial loans were below 1% of the portfolio in over 5 years.

Nonperforming assets fell to 71 basis points of total assets with other repossessed assets essentially flat at a low $5.8 million. Nonperforming loans held for sale decreased $13.5 million. We successfully executed the sale of several assets including the $10 million relationship that was moved to held for sale in the third quarter. Net charge-offs of $16 million were down $3.2 million from the third quarter and represented 1.2% of the total portfolio, which is the lowest charge-off percentage since 2007. Excluding the one-time consumer bankruptcy-related charges, the charge-off rate was 93 basis points. As a result of conservative consumer policy revisions and diligent commercial collection procedures, we recorded recoveries of $19.7 million in 2012, a 57% increase over 2011.

Total portfolio of 30- to 89-day delinquencies was 64 basis points at year end. Total commercial delinquencies were only 14 basis points of the portfolio at quarter end, a decrease of 8 basis points from last quarter and the eighth consecutive quarter below 50 basis points. Total consumer delinquencies were higher this quarter compared to last quarter primarily as a result of 2 borrowers. Direct consumer was impacted by a maturing home equity loan for $2.3 million and residential mortgage delinquencies were up due to 1 loan of $1.2 million. Compared to last year, consumer delinquencies improved 42 basis points.

Our residential mortgage and direct consumer, primarily home equity, portfolios continued to decline as expected. The indirect marine and RV portfolio was essentially flat to the third quarter as our concentric expansion strategy extended our lending season beyond the historically cold weather-limited third quarter. Fourth quarter production was almost double the fourth quarter of last year. For the year, indirect production was up 42%, compared to 2011.

Originations from new states accounted for 18% of 2012's volume. The commercial portfolio declined $126 million, the largest reduction occurred in income-producing investment commercial real estate with a $77 million decrease. Our strategy to reduce the exposure in the ICRE [ph] asset class continued as approximately 30% of the reduction represented criticized and classified loans. We continue to not pursue new client originations in this asset class. Our C&I loan balances decreased $32.7 million compared to the third quarter. Approximately 2/3 of the reduction is a result of reduced line utilization by seasonal credits in the asset-based lending portfolio and contractual annual principal reductions.

The Citizens Bank business finance middle-market leverage loan portfolio was very active in the fourth quarter due to tax-driven financing events. The fee acceleration on payoffs and fees associated with new CBBF originations drove the average yield on the C&I portfolio higher for the quarter. The market remains very competitive for stronger, larger deals. The remainder of our C&I decrease is due to the loss of 1 relationship that was very aggressively priced by the competition.

As Cathy and Lisa mentioned, our C&I book is up 7% over last year as we focused on leveraging our expertise in CBBF, health care and education units as well as reenergizing our core banking efforts. Core banking, which handles lending relationships generally under $3 million and pub funds, delivered increasing quarterly originations throughout 2012 including over $75 million in the fourth quarter.

Our core and corporate segments both have strong first quarter pipelines. Cathy, back to you.

Cathleen H. Nash

Thanks, Mark and Lisa. In addition to successfully executing on our strategic initiatives this year, we also completed other significant corporate priorities. We terminated our written agreement with our regulators in April, we recaptured our deferred tax asset in June. In December, we began the process to pay the accrued dividend on our trust preferred securities and our TARP obligation will be repaid in conjunction with the pending acquisition by FirstMerit.

Speaking of the acquisition, we are still on target to close early in the second quarter subject, of course, to regulatory and shareholder approvals. Integration teams from both line of business and staff are working hard to ensure that our combination will be as seamless as possible for all clients, employees and those communities that we serve. We believe that the combination with FirstMerit will deliver significant value for our shareholders, allowing them to participate in the potentially significant upside of a stronger bank with increased scale. Our clients will benefit from doubled branch network expanded across the Upper Midwest and the enhanced -- the asset, excuse me, from enhanced suite of products and services. With that, now we'll open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to the side of Terry McEvoy with Oppenheimer.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

The commercial loan fees that were mentioned, Lisa, or I think Mark just mentioned, could you just run through what type of impact that had on the margin? And it sounds like that's more of a one-time event just for the fourth quarter.

Brian D. J. Boike

Terry, this is Brian. Yes, it is a one-time event. Increase in fees over the third quarter was a little more than $1 million. That benefited margin by about 5 basis points. As Mark mentioned, there was sort of 2 types of fees that were collected there. Some were repayment fees, others were restructuring fees related to credits that we retained. Going forward, with respect to the business that we retained, that business was retained at a lower rate, which was what the fee was related to so that would have a negative impact on margin.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Sure. And just any comments on the quarter-over-quarter decline in noninterest-bearing deposits? Just looking at the industry there, continued to be growth in the fourth quarter at the industry. That wasn't the case at Citizens. Any commentary there?

Brian D. J. Boike

Yes. That is related to public funds balances at the seasonal decline, and it was expected.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Okay. And then the consumer delinquencies, there was 2 specific loans. Did I hear that correctly? There wasn't anything beyond that?

Mark W. Widawski

That's right, Terry. The rest of the portfolio continued to show improvement overall.

Operator

[Operator Instructions] We'll go to the side of John Barber with KBW.

John Barber - Keefe, Bruyette, & Woods, Inc., Research Division

Mark, you mentioned you lost a large on commercial client due to very aggressive pricing. I was just wondering if you'd talk about the competition you're seeing, whether it's coming more from the large regionals or community banks or both.

Mark W. Widawski

John, it's certainly both. On the real estate front, especially investment commercial real estate, where we aren't active with adding new client names, we're seeing a lot of competition from smaller community banks and the regional banks. For C&I deals, definitely at the top end of the market from the money centers, who are located here, as well as regional banks, they're kind of driving the pricing on those transactions. And we've done a pretty good job defending relationship-based assaults on our larger names in our portfolio over the last couple of years. This one was really a very specific instance that was, I think, Brian, probably the most aggressive instance that we've seen in the last, forever.

Cathleen H. Nash

And then in this case, John, as Mark mentioned, this was a significant borrower. We met as a team and we chose not to meet the aggressive deal that was laid out in front of them by a competitor. We simply didn't want to play at that level. It would not have been appropriate for us.

John Barber - Keefe, Bruyette, & Woods, Inc., Research Division

And also in the loan portfolio, I was wondering if you had the dollar amount of new originations this quarter versus last quarter. And if you don't have that, maybe just if you could talk about bigger picture about it, it'd be great.

Mark W. Widawski

Kind of generally, the core banking number I quoted at $75 million was really a record quarter for that group. I mean, everyone, did just a spectacular job. And that would be up from under $50 million in the third quarter. And as I said, that group's been increasing throughout the year so we felt really good about that. The CBBF originations, it was a very noisy quarter there, to Brian's point on the margin. There were plenty of opportunities in leveraged and some ABL deals because of the year-end tax-driven events that people were taking advantage of. So we chose to stay with our direction in terms of that portfolio and not over-weight opportunities there, stay close to our credit metric requirements. And there will be opportunities in the first quarter again in that business. And with some more clarity after the election and changes here in the outlook, I think we will probably be looking at reenergizing that a bit in the first quarter.

John Barber - Keefe, Bruyette, & Woods, Inc., Research Division

Great. And the last one I had, and Cathy, you already talked a little bit about this. But the deal to close, it needs regulatory approval and shareholder approval. Is that from both companies? I guess, is there a date set for that yet?

Cathleen H. Nash

Yes, it's from both companies and no, there's not a date for it set. But we are still targeting early in the second quarter, John. I don't have any reason yet to believe that, that would be anything different than what we've already said.

Operator

We have no further questions in queue.

Cathleen H. Nash

Thank you. We appreciate your questions and thank you for your participation in our call. It was another positive quarter for Citizens Bank and continued to demonstrate our success in executing on the strategies we have set forth. Thank you, and have a good day.

Operator

This concludes today's conference. You may now disconnect, and have a wonderful day.

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