Citizens Republic Bancorp Q4 2008 Earnings Call Transcript

Jan.23.09 | About: Citizens Republic (CRBC)

Citizens Republic Bancorp (NASDAQ:CRBC)

Q4 2008 Earnings Call

January 23, 2009 10:00 am ET


Kristine D. Brenner – Director Investor Relations

William R. Hartman – Chairman, Chief Executive Officer

Cathleen H. Nash, President, Chief Executive Officer

Charles D. Christy – Chief Financial Officer, Executive Vice President

John D. Schwab – Chief Credit Officer

Martin E. Grunst - Treasurer


Eileen Rooney – Keefe, Bruyette & Woods

Greg Ketron – Citigroup

Terry Mcevoy – Oppenheimer & Co.

Jason O'Donnell – Boenning & Scattergood

John Pancari – J.P. Morgan

Scott Siefers – Sandler O'Neill & Partners


(Operator Instructions) It is now my pleasure to turn the conference over to Kristine Brenner. Please go ahead.

Kristine Brenner

Welcome to the Citizens Republic Bancorp fourth quarter conference call. This call is being recorded and a telephone replay will be available through January 30th. This call is also being simulcast live on our website where it will be archived for 90 days.

This morning we issued a news release announcing the retirement of Bill Hartman as President and CEO and the appointment of his successor, Cathy Nash. So with me today are Bill Hartman and Cathy Nash, as well as Charlie Christy, Chief Financial Officer, John Schwab, Chief Credit Officer and Marty Grunst, Treasurer. After management concludes their prepared remarks, we will open the line up for questions from research analysts.

Before we begin, I would like to point out that during today’s conference call statements will be made that are not historical facts. These forward-looking statements involve risks and uncertainties, which include but are not limited to those discussed in Citizens filings with the SEC. Forward-looking statements are not guarantees of future performance and actual results could differ materially from those contained in the forward-looking information. These forward-looking statements reflect management’s judgment as of today and we expressly disclaim any obligation to update and/or revise information contained in these statements in the future.

Now I’d like to turn the call over to Bill Hartman. Bill.

William R. Hartman

The continued economic decline is obviously having a material impact on bank earnings throughout the country this quarter and at Citizens Republic we were obviously similarly affected. Michigan State unemployment rate is now the highest in the nation and we are seeing the impact of a deepening recession on our loan portfolio, therefore, we are going to begin our call with Chief Credit Officer, John Schwab, providing an update on our credit quality trends and results and the risk management practices we’re using to address our portfolio.

Chief Financial Officer, Charlie Christy, will review our financial results and outlook for the next quarter. Lastly, I’ll make some closing remarks and introduce Cathy Nash who will succeed me as CEO at the end of this month. So, John, let’s begin the call with our credit quality.

John D. Schwab

The distressed economic environment in our primary markets continues to stress our various loan portfolios, especially those collateralized by declining value real estate both commercial and residential. While our release fully discloses through several credit quality tables the trends resulting from this economic stress, I will take a few minutes here to provide you some color around the numbers and to highlight some of the credit risk management practices we have implemented in an effort to be in front of the deteriorating situations as much as possible.

Let’s start with commercial. This portfolio has as a whole remained relatively flat over the past 12 months with notable decreases in the riskier commercial real estate loan types, namely land hold, land development and construction as we have been proactively working these portfolios. Income producing outstandings have increased over the year as various loans in the construction phase have been completed and become income-producing properties.

Analysis of our delinquency table discloses a delinquency uptick quarter-over-quarter in income producing and owner occupied commercial real estate as well as C&I. The increase in income producing reveals, we believe, that the growing impact a stressed economic environment is having upon occupancy rates in these properties with resulting increased attention being directed at principals and guarantors ability to shore up deteriorating cash flows from rent rolls.

Further, you will note that both income producing watch list and nonperforming numbers are up in the fourth quarter, and while income producing charge-offs were up 17.3 million quarter-over-quarter, 100% of that increase is attributable to one credit that had move into nonperforming at September 30, 2008. Being proactive, we charged that credit to a conservative floor in the fourth quarter.

Delinquency increases in both owner occupied commercial real estate and C&I may or may not be representative of an emerging trend in these portfolios as the economic environment makes a broader impact on a portion of the commercial portfolio that has been comparatively spared from what has affected commercial real estate for the past two years.

Being proactive, we are monitoring and analyzing movements from delinquency into watch and nonperforming then eventually to charge-off. Of the $21.9 million fourth quarter C&I charge-off, $19.3 is attributable to one auto related credit. While this recessionary environment will impact this portfolio, we believe we are experiencing a gradual rather than a steep decline.

You will recall that one of our risk mitigation strategies in the commercial portfolio is our quarterly watch review. During the fourth quarter, we reviewed 263 credits aggregating $483 million. In that review we downgraded 34 credits, $137 million, and transferred 38, or $68 million, to our workout units. Eighty-seven percent of the credits and 72% of the dollars retained their existing ratings. This review was generally consistent with prior quarters.

Total watch list exposure increased $93 million quarter-over-quarter with the largest increase being income producing, or $111 million income producing commercial real estate, at least partially offset by the decreases in the riskier commercial real estate loan types land hold, land development and construction. Of the accruing watch list total of $1 billion $159 million, over 60% of the dollars are managed in our workout units, $564 million, and the asset-based unit $111 million, both of which subject these loans to even closer scrutiny on a daily basis.

Our most recent review this month of our investment commercial real estate past credits resulted in three credits or $6.8 million being downgraded to watch status and none transferred to a workout unit. In the previous quarter, 40 credits aggregating $96 million were transferred to watch.

We have referenced from time to time our ongoing analysis of the commercial auto related portfolio, which we have been tracking for over three years. You will recall that our auto related definition includes companies, which have 25% or more of their sales to the OEMs or the supply tiers. Because we believe auto related to be one of the riskier portions of our C&I portfolio, we have initiated two additional strategies.

One, to conduct in conjunction with senior management face-to-face meetings with larger auto related clients to review current financials and cash flow forecasts and two, hold credit by credit past credit review of all exposures in excess of $1.5 million to validate risk ratings based on current financials and cash flows, and to affirm exposure management strategies.

We believe this process allows us to work closely with our commercial customers in a collective manner to minimize future risk. We will continue these quarterly past credit reviews in both investment commercial real estate and C&I in industries, which we believe are more vulnerable to the affects of a protracted stressed economic environment.

In reviewing commercial nonperforming loans quarter-over-quarter, the larger increases occurred in income producing commercial real estate, owner occupied commercial real estate and C&I. Increases to income producing commercial real estate nonperforming included a large credit collateralized by a group of parking structures in the Cleveland market and on an apartment complex in Columbus.

Owner occupied increases are more broadly spread with most exposures tied to related nonperforming C&I credits. While C&I increases included one asset-based credit now in liquidation, by the way on which we expect no loss, several automotive suppliers and a small product specific leasing company with collateral disbursed across a broad footprint. The deterioration is not widespread.

Commercial charge-offs for the fourth quarter aggregated $67.8 million, $36.8 million or 54% of which was comprised of two credits, one commercial real estate, one C&I. Of the largest ten commercial charge-offs for the quarter, the remaining eight were all commercial real estate exposures. We expect commercial real estate to continue to dominate commercial charge-offs over the next several quarters.

As we have noted before, our smallest concentration, commercial land hold, land development and construction continues to represent our largest stress factor including delinquencies, nonperforming and charge-offs.

Turning next to the consumer portfolio, we note that the 30 to 89 delinquencies on all three loan segments, residential mortgage, direct consumer, indirect consumer were up for the third quarter of ’08 but in line with a year ago. While the indirect portfolio, mainly marine and RV typically contained some seasonal delinquency in the fourth quarter, nonperformings and charge-offs have increased over the last several quarters suggesting a gradual deterioration in this shrinking portfolio of what I refer to as big toys.

Direct consumer largely home equity delinquencies have grown nominally over the past several quarters. We note, however, that delinquencies remain under 2% and that compares favorably with industry levels.

While LTV ratios have deteriorated in all of our markets, especially Michigan, Citizens has historically underwritten this portfolio with a heavier emphasis on credit score than LTV. Credit losses on this portfolio for 2008 were less than 1% though increasing throughout the year to reach 1.63%.

We regularly rescore this portfolio and while scores have been decreasing over the past year, we anticipate losses on this portfolio to remain under 1.5% throughout 2009. During the second half of 2008 we tightened our score cutoffs for new credit, essentially restricting approvals to A paper only.

Residential mortgage delinquencies continue to increase somewhat, particularly in the arm segments and, as the tables disclose, are translating into increases in both nonperformings and charge-offs. Working with our third-party service provider, we understand our portfolio is performing consistently with other Michigan portfolios they service.

More than half our past due borrowers report a serious loss of income, mostly due to unemployment. We are working with our service provider to streamline the modification process to mitigate foreclosures more effectively going forward. Following the credit metric trends in this residential portfolio, we expect credit losses to rise through 2009.

In summary, commercial and residential real estate continue to dominate our balance sheet credit risk, income producing properties are showing signs of stress as vacancies rise, and C&I loans are feeling the effects of the protracted recessionary environment. Amidst all this turmoil, we continue to ratchet up credit risk management practices to position us proactively to deal with developing and continuing credit issues.

We believe adding to our loan loss reserve in the fourth quarter was absolutely the right thing to do keeping our ratios sound. Our continued conservative view of collateral values will, we believe, enable us to work through the economic stress in our markets successfully. Charlie.

Charles D. Christy

John has done a great job articulating key factors underlying our credit issues, especially the areas that continue to show stress. What I want to do today is focus on the key drivers of our loss and the top line portion of our financial that continue to show strength and consistency.

Moving onto the key financial highlights for the quarter, our net loss for the quarter was $195.4 million and our net loss attributable to common shareholders was $195.6 million or $200,000 were caused by our TARP capital proceeds, which were $300 million.

The preferred stock was recorded at a fair value of $265.9 million while the ten-year warrant issued with the preferred stock was recorded at $34.1 million. The preferred stock will be accreted up to the $300 million par value over the estimated term of five years. Decreasing on the preferred stock is not available to the common shareholder so the fourth quarter amount of $200,000 is the difference between the net loss and the net loss attributable to common shareholders.

There were two major drivers of our loss, the provision for loan losses of $118.6 million and recording a non-cash valuation allowance of $155.7 million against our deferred tax assets, which increased our income tax expense by $136.6 million. I’ll spend a little more time on these later in my comments.

From balance sheet perspective and on an end of period basis, total loans were down by $276 million from the third quarter. The majority of the decrease from the third quarter was driven by a decrease of $101 million in C&I loans, $106 million in commercial real estate loans and a decrease of $69 million in our consumer loan portfolios.

Key drivers of the loan decreases include reduction of balances on approximately $85 million of certain asset-based net other large commercial participator loans, which generally had very thin spreads, less demand especially in consumer loans and less credit worthy borrowers as this economic downturn is showing its effects. Despite the lower loan demand, we approved $135 million of new commercial loans, renewed over $300 million of commercial loans and approved over $170 million of consumer loans during the fourth quarter.

Total deposits were up $46 million from the third quarter primarily driven by an increase of $151 in time deposits while we experienced a net decrease in our interest-bearing DDA and savings deposits of $92 million driven by the migration of existing customers from low cost to higher cost deposits.

We continue to see many successes from our action plans initiated during 2008. These include a continued focus on driving household retention and expansion, stealing market share and gaining deeper share of wallets through an increased focus on cross sales in target and marketing campaigns in the retail delivery channels, increased focus in training on full relationship banking in our commercial business lines and our ability to show strong expertise in all of our branches that we fully understand the different FDIC insurance programs available to all of our clients.

Moving onto our pre-tax pre-provision core operating earnings table included in our release, as defined by management this represents net income or loss excluding the income tax provisional benefit, the provision for loan losses and any impairment charges caused by this economic cycle. These charges include items like goodwill, credit write-downs and fair value adjustments.

During the fourth quarter of 2008, our pre-tax pre-provision operating earnings were $38.1 million down $2.5 million from the third quarter. For the past four quarters our pre-tax pre-provision operating earnings were over $161 million, which illustrates our strong top line earnings capability before the credit related effects from this economic downturn and non-cash accounting treatments.

Net interest income was down $1.6 million from the third quarter and net interest margin was down six basis points to 3.03%. These decreases were primarily driven by continued deposit price competition, increases in nonperforming loans, partially offset by expanded commercial and consumer loan spreads.

Looking forward to the first quarter, we anticipate net interest income will be slightly lower than the fourth quarter due to continued deposit priced competition and continued migration of certain loans to nonperforming status.

As noted by John, total charge-offs were $81 million while our provision for loan loss was $118.6 million. Consumer net charge-offs, which included residential mortgage, home equity, direct consumer and indirect consumer loans increased to $13.2 million this quarter.

Interestingly, the total dollar delinquencies for the consumer were $86.6 million in the fourth quarter of 2007 while they were down slightly in the fourth quarter of 2008 $83.5 million. Not sure yet if this is an indicator of increased severity, but the increase in charge-offs was somewhat expected as recession continues to [inaudible].

C&I net charge-offs were $21.9 million, excluding the one loan which equated to $19.3 million, the C&I portfolio continues to show some consistency. Commercial real estate net charge-offs continues to be where we see the majority and volatility of our credit issues ranging from $10 to $46 million per quarter.

Provision for loan loss at $118.6 million was $37 million more than our net charge-offs. The key drivers for the additional provision included an increase in specific reserves, historical loss migration models and increases in the general portion of our loan loss reserve.

As we noted in our earnings release, it has become very difficult to give a narrow range of qualitative guidance for net charge-offs and the resulting provision expense. Due to the uncertainties in the Midwest economy, continued downturn in the real estate markets and the volatility we now see in borrower capacities.

For the first quarter we anticipate the net charge-offs in provision for loan losses will be less than the fourth quarter. All of this of course depends on the level of loans migrating to nonperforming status and the continued challenges from the economic trends in our markets.

Non-interest income for the quarter was $15.8 million, a decrease of $12.3 for the third quarter. Our non-interest income we had three key events that were the primary drivers of the decrease from the third quarter, $5.9 million from fair value write-downs or loans held for sale, $2.9 million fair value write-down on our Bo Lee funds and a $2.4 million FAS-157 mark-to-market adjustment on swaps.

For the first quarter we anticipate total non-interest income will be higher than the fourth quarter of 2008 due to the net loss of loans held for sale. Our interest expense for the quarter was $78.6 million, $4.3 million more than the third quarter.

There were three key drivers for the increase in expenses, $2.6 million in higher foreclosure expenses, $2.4 million loss on the auction-rate securities repurchases. This loss was related to the repurchase of $8.8 million par value of auction-rate securities, which represents all of the auction-rate securities that our wealth management business invested for a few clients, and a $1.1 million impairment charge from an agreement made years ago on an insurance pool for mortgage loan losses. We determined that it was less costly to exit the agreement versus continuing to fund pools, and a $600,000 share value write-down on our ORE.

For first quarter, we anticipate that our NIE will be higher than the fourth quarter's increases in FDIC premiums, ORE expenses, and advertising are expected to offset current savings initiatives.

Income taxes, despite have a pre-tax loss for the quarter, we had a $100 million income tax expense. This was due to a $155.7 million valuation allowance we established on our net deferred tax assets due to the significant pre-tax loss of the full year of 2008. This was comprised of two components, $136.6 million income tax expense and a $19.1 million reduction recognized through the OCI or other comprehensive income component of our equity.

Not withstanding the valuation allowance, these assets remain available to offset future taxable income. We have 20 years to use these. As we have positive future earnings we will be able to reduce the future taxes by that valuation allowance, which would mean additional income.

Capital adequacy and liquidity, as we have noted before we began to implement strategies in early 2008 that helped position our bank with excess capital and better liquidity than we had three or four years ago. At the same time we remain a very conservative bank as we recognized losses early, mark our riskiest assets to liquidation values, build and maintain a strong loan loss reserve and are willing to spend current earnings to preserve capital and enhance our liquidity.

All of these strategies have clearly put us ahead of our peers and has put us in a solid position to withstand these turbulent times and to navigate through this financial crisis. Our estimated Tier 1 capital is one of the highest amongst our peers at 12.3% and is $616 million above well-capitalized minimums. Estimated total capital at the end of the quarter was $14.6 million, while our tangible common equity was 5.8%.

As we have noted before, these levels of capital paired with our solid pre-tax pre-provision earnings allow us to remain well capitalized after stress testing our portfolio at peak industry and worst at peak industry levels for the next three years.

Let me clarify my last comment. From a regulatory perspective, we feel very comfortable with our capital levels going forward with our peak industry and worst scenarios. However, recently many in the industry are very focused on tangible common equity levels, ours is now at 5.8%. So let's talk some numbers.

If you count 2008 as year one, where our provision expense was $282 million, peak industry losses over a three-year period starting today would add another $550 to $600 million more. So that equals a cumulative loss over four years of over $850 million. In that scenario, our tangible common equity remains above 4%.

If we stretch past the peak, which means we take another $100 million or $700 million over the next three years, which means if you include 2008, that equals a four-year cumulative loss of almost $1 billion, our tangible common equity goes slightly below 4% at the end of year three and beginning of year four.

We continue to maintain a strong liquidity position and stable funding base due to our on balance sheet liquidity sources. This is comprised of 69% of deposits, 17% long-term debt, 12% equity, and a very low level of short-term liabilities at 2%.

For the fourth quarter, we increased our total deposits by $46 million, which is the fifth consecutive quarter of total deposit growth. We see TARP funding of $300 million and participated in a TLGP program which we are eligible for FDIC guaranteed unsecured debt up to approximately $230 million.

As for our parent company, cash resources we currently have $261 million of cash resources and no maturing debt in three years. The parent company's annual fixed expenses increased due to the TARP funding and are now approximately $35 million per year. If you do the math, our parent company clearly has adequate long-term liquidity. Back to you, Bill.

William R. Hartman

As Charlie indicated, we've made managing our capital and liquidity positions a major priority. We're pleased with our Tier 1 capital position and our liquidity and our holding company cash positions. Our deposit initiatives, which have resulted in five consecutive quarters of total deposit growth despite operating in a very difficult deposit environment, are defiantly working.

Although our expenses were $4.3 million more than the third quarter, this was largely due to some one-time events. The results of our expense efforts can defiantly be seen by looking at salaries and benefit expense, which were lower than the fourth quarter of 2007 by $6 million $450,000 and lower than the third quarter of 2008 by $2 million $534,000. We'll continue to be very focused on expense management to help offset FDIC premiums and ORE expense, which will be a continued challenge throughout 2009.

In addition to capital and liquidity, we have the people and processes to manage through the credit environment. This is evidenced in part by our consistent pre-tax pre-provision core operating earnings of nearly $40 million per quarter.

So with the banks well positioned to navigate through the current environment, I've decided that this is the right time for our company, for my family and for me personally to retire from Citizens Republic and to turn the reigns over to a leadership team that is very capable and one that I am very proud of.

One of the things that I've placed a major importance on during my seven years as CEO is attracting, retaining and developing a strong team of leaders. I'm not only confident that we have the right team in place I think it's one of the strongest teams at any financial institution of similar size throughout the country. I am particularly pleased that through our board's regular management succession planning process, the board has selected and elected Cathy Nash to succeed me.

Cathy joined us as head of consumer banking in July of 2006 after an extensive nationwide search bringing to us a strong and successful background in leading SunTrust’s branch banking efforts. She did a terrific job of re-energizing our consumer banking business and was subsequently named head of regional banking in July of 2007.

She's brought great financial discipline and tactical execution to our commercial and consumer banking businesses and I'm extremely confident in her ability to lead our company as CEO. The board, Cathy, and I are all committed to a seamless CEO transition and in that regard I'll be staying on as non-executive chairman through our annual meeting in April to assist in the process. I thought it would be appropriate to introduce you to Cathy this morning and to let her share some of her preliminary ideas about our company, Cathy.

Cathleen H. Nash

I'm excited to be in this new role and I'm committed to our company, our shareholders and our clients. Citizens Bank will not only survive these economic conditions but we can be very successful. Our company’s priorities remain the same, preserve capital, maintain and enhance our liquidity position, work quickly through the credit issues with the focus on helping our clients, manage our expenses during a time of rising costs and strategically seeking to grow our business focusing first on our current clients and then seeking new opportunities.

Our capital position is strong, as Charlie had noted. We're appropriately focused on maintaining and enhancing our liquidity position. In gathering and maintaining deposits, we've seen success despite the shrinking deposit market and we'll continue to strategically price and advertise.

We'll remain diligent about working through our credit issues. We have a culture of recognizing issues quickly and working with our clients to seek resolution and that will continue. We've been strategically examining our expense base and making long-term sustainable improvements. Two examples of that in the last year include the outsourcing of mortgage operations and servicing and the launch of our in-branch image capture project.

We are currently working to support our credit worthy clients and we look for opportunities for new clients as well. As Charlie mentioned, in the fourth quarter we approved $600 million of new credit in both business and consumer. There's no question we have challenges in front of us but we are well positioned with the right bankers to get through these times and I'm excited by the challenge and the opportunity. Bill.

William R. Hartman

Since this is my last conference call as CEO of Citizens Republic, I'd like to take a minute to thank the analysts who cover us for their professional and objective coverage of our company. I have enjoyed working with you very much, and I'd also like to thank all of our shareholders, investors for their support through this very challenging economic and bank operating environment. That does conclude our prepared comments for this morning and the team and I would now like to open it up for any questions that our analysts may have.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Scott Siefers – Sandler O'Neill & Partners.

Scott Siefers – Sandler O'Neill & Partners

Cathy and Bill congratulations. The first question I had I just wanted to try to drill down just to the extent possible on the credit side. Maybe just starting at the very top level, I know you suggest that provisions and charge-offs should be down in the first quarter, still there's a pretty significant gap between what people might have expected and the way things actually flushed out this quarter. Are you able to give some form of narrowed down sense for the magnitude of that reduction?

John D. Schwab

We mentioned in our comments or I know in the release there were four credits that comprised $45 million of that charge in the fourth quarter in the commercial portfolio, actually two credits made up $36 million of that total. There is nothing of that magnitude, of what I call chunky, that is on the near-term horizon that is going to have to be dealt with, and in fact I think that this is probably a good point just to talk about the granularity in this loan portfolio.

We have over 13,000 commercial relationships in our portfolio and only 156 of those are over $5 million in exposure. So if one looks at the profile of this bank our loan portfolio really averages less than $500 thousand alone. So we've flushed these big ones through and we will keep an ever vigilant eye on any others that may be deteriorating.

Scott Siefers – Sandler O'Neill & Partners

This goes with the comment about economic downturn assuming the economic downturn doesn’t worsen, in your estimation what sort of magnitude or deterioration might it take to require this kind of provisioning level again in future quarters?

Charles D. Christy

I think what we're basically saying is, we see Michigan has been on a downward slide for five plus years. We don’t see it falling of the cliff but we did have four loans that made up $45 million in charge-offs and we did see some growth especially in our income producing and our nonperforming, which is going to drive the provision.

If we see some stabilizing or maybe a slower growth in the nonperforming, we would have the ability to book less provision over the charge-off level, but again with the uncertainty in the marketplace it's very hard because you can see the swing between quarters it's been pretty significant. So it's our best guess at this point. As John said, he doesn’t see any big loans looming in the future but they could turn around the corner on us at anytime in this environment.

William R. Hartman

I would add, Scott, the way we have underwritten the C&I portfolio I believe that the level of charge on this one big credit in the fourth was an aberration, I hope it is. The granularity in the C&I portfolio and the way we have underwritten the collateral values there, we see a decline but it's not a steep one and frankly to survive in the Michigan economy in this day and age I'd put our balance sheet up against most.

Scott Siefers – Sandler O'Neill & Partners

Charlie, I guess one more question just switching over to fee income, I'd be curious to hear your thoughts on what you think sort of a run rate level of fee income was. I guess I was a little surprise by the magnitude of decline and then but sort of drilling down into the moving parts. There are a lot of them that you could consider unusual, but some of them are credit related by the same token, so what do you what think an appropriate run rate is, dollar value?

Charles D. Christy

Well, I think the previous quarter was around 28 or so and clearly we had the three items that equated to what, 6, 9, 11 plus, almost $12 million. We would anticipate that we're going to be closer to that 28 but that's going to probably be down a little bit depending on the wealth management fees because of the market.

Obviously, the value of our assets under administration are going to be the ones that drive that and we expect that to continue to be expressed. Mortgage fees, we expect those to be down also. Service charges and [Inaudible] we seem to be holding our own kind of in that 11.5 to 12.5 kind of range. So we would expect it to go definitely up from the 15 maybe not as high as a 28.

Let me make a comment on that, unless we see some continued deterioration from some updates on some help for sale loans, because we update the appraisals on those because those can go through mark-to-market those kinds of things. So that could occur, but either way at this point we don't see any looming issues there at this point.


Your next question from Terry Mcevoy – Oppenheimer & Co.

Terry Mcevoy – Oppenheimer & Co.

I've enjoyed working with you, Bill, over the last seven years, best of luck and congratulations to Cathy. I guess Bill, just in terms of the timing of this morning's announcement with the earnings announcement yesterday and clearly a challenging year for Citizens Republic, could you just give us kind of a time frame of when you started to think about leaving the company and was it simply something that just happened recently or has this been in the back of your mind and the planning behind the scenes has really been in place now for quite a few quarters?

William R. Hartman

Yes. That's a good question, Terry, and I appreciate you bringing it up. First of all, on a regular basis I have had management succession discussions with the Board of Directors and it's something that we talk about, not only from the standpoint of management succession for the CEO, but we really go a little deeper than that and talk about management succession actually below the CEO ranks, and so we have been talking about that on an ongoing basis.

I have been considering this for some period of time but haven't really focused on the exact date, of course until last year, and then once I really started focusing in with the board on what I thought would be the right timing for me, the board simply updated its management succession process and selected Cathy.

Frankly, it may appear more sudden externally than it really was internally because we've been developing Cathy since she's arrived with increasing responsibilities, and in her position as Regional Banking Head she in essence was operating as a de facto Chief Operating Officer. So the board and I feel that she's really fully prepared to step in the role and provide very strong leadership to the company at this time.

Terry Mcevoy – Oppenheimer & Co.

John, in terms of the resources within your area, you're taking a closer look at more pieces of the loan portfolio. Is it simply taking people and resources that last year were looking at land development, land holding, etc, and moving them over to CRE C&I or do you think this year you're going to have to beef up your staff, so to speak?

William R. Hartman

I think most of the build that we did, Terry during 2008 was when we focused the group on the portfolio management group for the commercial real estate and centralized that under credit administration. That is now populated with 28 people who are experienced in servicing real estate credits.

The area that we may have to add to over the year is our special loans, the larger corporate workout group. We have added experienced bankers to that group as that portfolio has grown, but I feel quite comfortable with the people and the processes we have in place.

What I mentioned in terms of our now adding the commercial and industrial credit review, the heavy lifting and preparation of the write-ups on these will be done by the market bankers, and so there will be a prudent review done and all of our senior credit officers will participate in that, actually we're leading the auto discussion on Monday and Tuesday of next week.

Terry Mcevoy – Oppenheimer & Co.

The $2.4 million expense for auction-rate securities, I know over the years you've outsourced a lot of those types of businesses, whether it's trust, investment management, mortgage. Could you just update us, was that something directly done by Citizens and is there further potential losses within that area going forward?

John D. Schwab

Well the auction-rate securities actually came out of our wealth management and they basically were investments that our clients were pretty much instructing us to purchase and what we chose to do was go ahead and purchase those at par, and then as we put those on our balance sheet we marked those down to a fair market value that made sense. So those were the only things we had in auction-rate securities, which were with wealth management clients. We did not have any of those in our existing investment portfolio.


Your next question comes from Eileen Rooney – KBW.

Eileen Rooney – Keefe, Bruyette & Woods

Just a couple of questions, the first, the auto related portfolio that you were talking about, could you just quantify that for us again?

William R. Hartman

We have auto exposure, Eileen, in both the bank as well as the asset-based unit. The combination of auto exposure as we defined for you is around $630 million, $500 of which is held outside the asset-based unit. And as we work through this auto related review, we have engaged the asset-based unit expertise, as you will know these people thoroughly understand the auto supply business. And so we're leveraging their expertise and working with out bankers who have auto related exposure in the other markets.

Eileen Rooney – Keefe, Bruyette & Woods

Then I was wondering on the foreclosed properties the other real estate owned, are you having any success in moving properties out of that?

William R. Hartman

Yes we are. We're not doing it in blocks, we're slugging through them one by one.

Eileen Rooney – Keefe, Bruyette & Woods

Could you give us a sense of what moved out this quarter?

Charles D. Christy

You're talking about the other real estate owned properties, right, which would be mostly the residential, some commercial?

Eileen Rooney – Keefe, Bruyette & Woods


Charles D. Christy

I don't have that number off the top of my head. That's managed by PHH]. Less than 10 properties were moved I think, something like that. I don't have that in here.

Eileen Rooney – Keefe, Bruyette & Woods

Any change in your stance on the bulk sale of nonperformers? You've been a little hesitant in the past just given the…

William R. Hartman

There's not a really great market for Michigan based property these days. We believe we have marked that stuff down. We will consider a bulk sale at some point, based on the indicative pricings that we've received, Eileen a bulk sale is not the preferred way to go. I think we are prepared to continue to value these nonperforming loans and those in the held for sale and continue to work with some of the principles who have been involved with these projects to see if we can reach some kind of an appropriate settlement.

Charles D. Christy

Eileen, another way to look at that is many of those properties we hold down in held for sale and we update those regularly for appraisals and things like that. Many of the appraisal values are holding, then we had some that moved on us this quarter, and when you kind of look at that and then you see a bulk sale kind of pricing that has multiple middle people that take lots of profits out of that.

We see that that's just trying to make optics look better versus hanging on to the property as it is because they continue to hold their value somewhat, and not throw away the capital just to try to make an optic look better.

Eileen Rooney – Keefe, Bruyette & Woods

Then I just had one last question related to the deferred tax asset. I think, Charlie, you said that would be available for use for against income for the next 20 years. So the line in your press release where you talk about during 2009 that you don't anticipate recording an income tax provision or benefit during 2009. So, if you actually had, if there was positive income you would be able to use that benefit in '09?

Charles D. Christy

Yes you get to write-up the asset back up to the amount of the tax expense against that profit and, therefore, that pre-tax income goes down to net income, and vice versa. If it's a loss you just continue to build that deferred tax asset on your tax books.

Eileen Rooney – Keefe, Bruyette & Woods

I wanted to wish you the best of luck, Bill, and look forward to working with you, Cathy.


Our next question comes from John Pancari - J.P. Morgan.

John Pancari – J.P. Morgan

First of all, best of luck to you, Bill, and congratulations, Cathy.

John Pancari – J.P. Morgan

Charlie, I apologize if I missed this I hopped on late, but can you just talk a little bit about the stability of your deposit base and any increasing depositor anxiety as a result of [inaudible] and as the economy has worsened? And which deposit areas, or funding areas, you view as the greatest risk at this point?

Martin E. Grunst

Hey, John, let me talk to that a little bit. If you look over the last year or two, the trends in our deposit book have been very stable with a decent amount of growth, particularly on the consumer side. This quarter we saw a little bit of balance per account decline in some of the business accounts. As business activities slowed a little bit you see some of the businesses just shrinking their balance sheets a bit, but other than that, that portfolio's very stable.

The way we use marketing and price is our strategies are all designed to make sure that we attract relationship deposits. We're not the high price point out there, so we're not attracting the kind of funding that doesn't stick around for very long. So, that's all part of the way we gather deposits and what has delivered for us a very stable deposit base over time.

John Pancari – J.P. Morgan

Yes. I guess what I was really getting at is just gauging depositor anxiety if you're seeing any tendency for sizeable outflows of your public funds or anything as depositors are getting worried about the performance of the company.

Cathleen H. Nash

John, I can answer that question. I have a lot of interaction with the local branch teams, and we did extensive training last summer, actually, after IndyMac went with our line bankers regarding how insurance coverage works, how to maximize it, what we can offer. And we continue on a monthly basis in meetings that we call team performance meetings to concentrate on that to make sure our bankers are fully equipped.

We then went out and did some sampling and some surveying of both clients and our branch bankers to see how we did against those goals and we scored very high versus our competition. In fact, the Council on Financial Competition has noted ours is the best practice out there.

We then ask our line bankers to give sometimes daily but usually weekly reports as to what their clients are saying, where their concerns are to make sure that the message is we're helping our bankers deliver to their clients are not only consistent and correct, but help them to answer their questions, and we've seen a lot of success there.

We have very good client deposit retention. On average on the consumer side we have retained 13% of our consumer households, which is a very strong number in our marketplace.

John Pancari – J.P. Morgan

I'm sorry I'm just digging a little deeper for clarification, then how about on the public fund side? Are any larger commercial deposits, outside of non-interest bearing, that may be a risk of outflow?

Martin E. Grunst

Yes, we think pretty much the same thing and that's all been fairly stable. The municipal area through today has remained pretty stable. There certainly are a small decline in tax receipts in the municipalities and our footprints so that’s flowed through a bit, but the additional FDIC coverage really helps with a lot of those operating accounts. So we feel pretty comfortable with that and besides which the on balance sheet on liquidity coverage we have is very significant.

William R. Hartman

Just to reiterate what Cathy and Marty said, our bankers have done just an excellent job of learning how to sell the strong capital position, the strong liquidity position and the safety and the soundness of our company. We’ve done an excellent job, I think, of training them. They feel very confidant, they feel very comfortable when their talking to their clients, and I think that has gone a long way in enabling us to have the five consecutive quarters of total deposit growth and the deposit stability that we have. So we’re optimistic about that for the future.

John Pancari – J.P. Morgan

One last question, it’s kind of higher level. Cathy, if you could talk to I guess does your appointment with your history of the regional banking expertise, and I guess more geared towards the consumer, is there indicated any type of shift in strategy? And then also, how well equipped are you to still deal with the intense risk management issues that are plaguing the company, not that you’ve had lacks underwriting per say, but in terms of the credit issues in terms of overseeing all of that?

Cathleen H. Nash

I’ll answer them in order. I would tell you we need to consistently and constantly look at our strategies, who we are, how do we deliver, how do we compete, are we maximizing our revenue and are we minimizing our risk and doing it cost effectively. So we’ve undertaken a fair amount of work and will continue to do that to make sure we are meeting those strategies, and I anticipate more of that work this year.

In terms of the credit side, I come from a very conservative credit culture and was very comfortable with the culture we have here at Citizens in that regard, and I’m very confident in our bankers and the processes we have in place that keep, quite frankly, tight reigns on credit. We are interested in loaning money. We’re interested in building strategically our business, but we want to do it to credit worthy customers that we want for the long-term.


Our next question comes from of Jason O'Donnell – Boenning & Scattergood.

Jason O'Donnell – Boenning & Scattergood

Congratulations, Bill on your retirement and to you, Cathy on your promotion. With respect to your federal home loan bank stock position, do you have any concerns relating to pera risk on those assets?

Martin Grunst

The FHLB that we used are Indianapolis and Iowa and we feel very comfortable with the circumstances there.

Jason O'Donnell – Boenning & Scattergood

My second question, in the event that the treasury resurrects the asset purchase provisions of the

TARP, would you guys be likely to participate in the program, or does that not represent an opportunity for the company?

Martin Grunst

Yes. We would certainly take a look at that and if that makes sense for us we would avail ourselves of that opportunity.


Our next question comes from Greg Ketron - Citigroup.

Greg Ketron – Citigroup

Congratulations, Bill and the best of luck to you, and congratulations, Cathy and I look forward to working with you again. A lot of my questions have been answered, just had a couple of questions around credit. One, when you look at the nonperforming assets and the commercial real estate situation in Michigan and how you’ve written those assets down, any sense on the direction on the commercial real estate valuation say over the past few months and where you expect that to go this year and how we should think about the valuations of the lends in that portfolio and how they may be impacted by that.

William R. Hartman

Greg, we took a fairly aggressive write-down when we moved the commercial real estate nonperforming loans down into a held for sale status, and our reading of that is that we’re very comfortable with the carrying value that we have on the balance sheet of the company, for now. The answer to the future question is what happens to the Midwest economy, especially Michigan, and how long will real estate values stay depressed, how much lower can they go and we could each put a number on the table.

Greg Ketron – Citigroup

Have you seen any stabilization in those trends recently?

William R. Hartman

We believe the deterioration is not accelerating the way it was throughout 2007 and 2008. The question is how low can one go but there is no uptick, let’s put it that way.

Greg Ketron – Citigroup

When you look at C&I lends from a collateral content standpoint, any sense that you can give us in terms of how much collateral supports the outstanding balances?

William R. Hartman

That’s a global question. We have in our underwriting of C&I credit adhered to our Citizens underwriting guidelines now for well over five years, and those advance rates are advances of 80% against under 90-day receivables, 50% on inventory. We constantly look at those we’ve engaged the asset-based unit to help us with that, so we take a very close look at the collateral values.

When we went through this turnaround, Greg, in 2003 and 2004, I think the advance rates that we had on, what I’m going to call short-term collateral, stood us very well. We were able to work through any C&I deterioration, I think, pretty effectively, and as I have said on this forum earlier, real estate is different and it’s a longer work through.

Charles D. Christy

We implemented a number of years ago to a two-tier rating process on loans. We have an obligor rating and a facility rating. John’s brought to this organization, we’ve said this a number of times, the old MVD style of lending, which is more obligor rated type lending versus reliance on just the collateral loan, and so the reason we kind of acted funny with the question is because when it comes to C&I money we really look at equity cash low versus the collateral itself.


We have no further questions at this time.

Charles D. Christy

We had a question about some of the ORE properties and so on, so we have a crack group in our finance team that kind of pulled some of this together, so let me give you guys a couple of numbers. Year-to-date, now remember the ORE properties are after write downs, after foreclosed, so on, so the dollar value amount is the bottom number of that, year-to-date for the year, I think 2008 was $15.2 million that we worked at. That was 230 properties.

In the fourth quarter, it was 46 properties that we worked out of so about $1.5 million in ORE, so it seems like small dollar amounts but lots of properties are moving.

John D. Schwab

Thank you all very much. We really appreciate the good questions and the interest in our company and all your support and we’ll look forward to continue to work with you.


This concludes your teleconference for today, thank you for you participation and have a great day.

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