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Citizens Republic Bancorp Inc. (NASDAQ:CRBC)

Q3 2009 Earnings Call

October 23, 2009; 10:00 am ET

Executives

Cathy Nash - President and Chief Executive Officer

Charlie Christy - Chief Financial Officer

Mark Widawski - Chief Credit Officer

Brian Boike - Treasurer

Kristine Brenner - Director of Investor Relations

Analysts

Scott Siefers - Sandler O’Neill

Terry McEvoy - Oppenheimer

Greg Ketron - CitiGroup

Eileen Rooney- KBW

Jason O'Donnell - Boenning & Scattergood Inc.

Operator

Welcome to today’s teleconference. (Operator Instructions). It’s now my pleasure to turn the program over to Kristine Brenner. Please begin

Kristine Brenner

Thank you and good morning. Welcome to the Citizens Republic Bank Corp third quarter conference call. This is call is being recorded and a telephone replay will be available through October 30th. This call also being simulcast live on our website Citizensbanking.com where it will be archived for 90 days.

I have with me Cathy Nash, President and Chief Executive Officer, Charlie Christy Chief Financial Officer, and Mark Widawski Chief Credit Officer all who have come to share with you this morning. Brian Boike our Treasurer is also here to answer question. After management concludes their prepared remarks we will open the line up for questions from research analyst.

During this conference call statements will be made that are not historical facts such as those regarding Citizens future financial and operating result, plans, objective, expectations and intention. Such forward-looking statements are subject to risk and uncertainties which include but are not limited to those discussed in Citizens annual and quarterly report 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, judgment as of today and we expressly disclaim any obligation to update or revise information contained in these statements in the future.

Now, I’ll turn the call over to our President and CEO, Cathy Nash. Cathy.

Cathy Nash

Thank you, Kristine. Thank you for joining us on our call today. As you can see from our earnings release our results show noteworthy improvement from the second quarter. Although we posted a loss compared to last quarter we improved our performance by $24 million when you exclude the impact of goodwill.

Our net interest margin improved 24 basis points from 2.73% to 2.97%. Our pre-tax pre-provision earnings are up 42% from $21.4 million to $30.5 million, and our core deposits increased by 4.8% from last quarter. As of September 30th our tier one capital ratios stand at 12.77% compared to 11.81% at the end of June and our tangible common equities ratio increased to 6.74%.

I am pleased to report positive operational trends as well. Earlier this week we announced that Citizens Bank was named the number one SBA lender in Michigan for the second year in a row. We have been a leading SBA lender for many years and this demonstrates our commitment and our consistent commitment to supporting small businesses across Michigan.

We have added over 25,000 new clients year-to-date, and as I mentioned earlier our core deposits which excludes all of our time deposits increase and those core deposits represent 58% of total deposits.

One of our key strategies in managing through the cycle is to make sure we remain focused on our customers. I think these positives trends are evidence that we have been successful in that endeavor and will continue to be the market leader once we get through these recessionary time.

Now, I’m going to turn the call over to Charlie Christy, our CFO, who’ll take us through the detail of our results. Charlie.

Charlie Christy

Thanks Cathy. The key financial highlights for the quarter include our net loss for the quarter was $56.9 million, and as Kathy mentioned our results improved $24 million over last quarter.

The key drivers for the quarter were, for the first time in a number of quarters, total non-performing loans remain relatively flat. Provision expense was $77.8 million or $22 million less than the previous quarter.

Our net interest income was up by $5 million, our non-interest income was bettered by $7 million after adjusting for cost associated with our debt exchanges. Our NIE remained relatively flat quarter over quarter excluding the goodwill impairment charge.

From a balance sheet perspective total loans were down by $209 million from the second quarter, total commercial loans are – meaning commercial real-estate and C&I were down by $122 million while the total consumer loans mortgage, direct and indirect, were down by $87 million. Total average earning assets were down by $346 million primarily due to decreases in a loan portfolio and on a lesser extent decreases in investment portfolio.

We continue to hold short term liquid assets over $500 million reflecting our focus on liquidity and maintaining the strong cash cushion during these uncertain economic times. It should also be noted that this cash balance is sold to the Fed on a daily basis at 25 basis point rate versus during good times when cash would be deployed and the loans earning much higher yields.

The key driver behind the loan portfolio decreases as we continue to see less demand from creditworthy customers. Despite the slower loan demand we approved over $300 million of new commercial loans, we renewed over $550 million of commercial loans and we improved over $175 million of consumer loans during the third quarter.

Total deposits were down a $122 million from the second quarter, core deposits continue to show good growth, again an increase of $234 million or 5% from the previous quarter, and our core deposits were up by 12% from a year ago. Time deposits were down $356 million due to planned reductions in brokerage fees and a shift in funding mix from time to core.

Moving on to our pre-tax, pre-provisions, our operating earnings table included in our release during the third quarter of 2009 of pre-tax pre-provision earnings were $30.5 million up $9.1 from the previous quarter. Key drivers to that were basically higher net interest income due to increases in our overall spread and increased non-interest income from higher service charges and lower held for sale charges and higher other income.

Let’s review the components of the income statement, let’s start off with net interest income that was up $5.3 million from the second quarter, and our net interest margin came in very strong at 2.97% up 24 basis points from previous quarter and then, interest margin increase is driven by higher, I am sorry calling higher rate brokerage CD, continued increases in our loan spread and having large block of time deposits re-price.

Total net charge offs were $71.5 while our provision was for net loan loss was $77.8 million. Total net charges were up from the second quarter by $22.3 million, C&I and residential mortgage were the key drivers in the increase of $21.1 million more in net charge-offs on a combined basis.

While, our consumer loans, direct and indirect, were down to $1.4 million commercial real estate net charge-offs were up slightly by $2.6 million.

Total delinquencies were up slightly $14.4million from the second quarter, the second quarter of 2009 was a loss quarter in total delinquencies since the second quarter of 2007. Our third quarter delinquencies, although up slightly from the previous quarter are still down from the total delinquency peak levels experienced in the fourth quarter of 2008 by $105 million.

Total non-performing loans were up slightly by $5.8 from the second quarter while total commercial real estate non-performing loans were actually down to the first time since June of 2008. The non-performing loans were relatively flat, we did not need to add much to the allowance for loan loss.

Non-interest income for the quarter was down $9.1 million from the previous quarter to $11.8 million, however our non-interest income included the net loss of $15.9 million from our debt exchange transaction completed on September 30th.

Non interest income adjusted for the net loss was up by $6.8 million due to $0.7 million improvement in our deposit service charges, $3.5 million less than losses of loan held for sale and a $2.5 million increase in other income.

Non interest expense for the quarter was $83.6 million and when compared to the previous quarter which included at $216 million of goodwill impairment charge total NIE was down slightly. However, this quarter’s NIE also included a $1.5 million of severance cost.

I would like to take a minute to talk about the very successful debt exchanges we completed on September 30th. This is where we offered the issue common stock and exchange for a 5.75 sub debt due 2013 of which we had a $125 million outstanding and are 7.5% enhanced plus preferred security of which we had a $150 million outstanding.

The exchange offers were very successful with over 75% or $209 million of securities being exchanged. We raised a $198 million in common equity by issuing $268.2 million new shares.

The sub debt holders received par value for the securities and trust preferred stockholders were paid a discounted price of 90% or 85% depending on when they tender. Since the exchange with at par or at a discount under normal circumstances we would expect to see a gain on the exchange. However, we booked a non-cash net loss of $15.9 million on early extinguishment of debt.

So, simply stated we are showing a loss on the exchange because the closing price of our stock on the last exchange offer was significantly higher than the volume weighted average price, or the VWAP as we call it, used to determine how many shares were to be issued in this transaction.

So, remember that the exchange price was determined based on the VWAP price for the five day leading up to the last day the exchange. The VWAP price was $73.75 per share or about a $197.3 million in new stock based on the VWAP price.

So, the stock closed on Friday the 25th at $73.75% per share we would have shown a small gain about $7 million due to the discount on the trust preferred. Over the stock actually closed at $0.82 a share and for fair value accounting purposes they had the stock issued at $0.82 or approximately $220 million.

The difference between the fair value and the stock issued was $220 million, and net book value of the securities retired $204 million resulted in book accounting loss of almost $60 million.

A few of the key points that should be noted, recorded loss was not a cash loss and it didn’t reduce our common equity. Secondly this loss was accredited by a rise in our stock price from the last day, on the day the last day of exchange, and had very little or no impact on the economics of the exchange. Lastly, the exchange also benefits neutral period, as we now have approximately $15 million annual of less cost related to interest, dividends and non-amortized cost.

That leads us to our capital adequacy and liquidity. With the completion of the debt exchanges our estimated share volume capital is one the highest amongst our peers at 12.77% and $600 million above well capitalized minimum.

Our estimated total capital at the end of the quarter was 14.17% while our tangible common equity was 6.74% up from 5.14% and our deal on common ratio was 8.89 up from 6.95%. We continue to maintain a strong liquidity position and stable funding base due to our on balance sheet liquidity sources. This is comprised of 73% of deposits, 16% long term debt, 10% equity on very low levels, short term liability is at 1%.

I will turn it over to Mark now so he can give us more insight on the credit quality. Mark?

Mark Widawski

Thank you Charlie and good morning. As Charlie indicated, compared to the second quarter our third quarter non-performing asset levels and delinquencies were relatively flat. Our provision for loan losses was down and our net charges offs up.

We continue working our way though the challenging economic environment by recognizing deterioration in our credits as early as possible, and move quickly to mitigate losses once problems are identified.

Charlie noted that our NPLs were up $5.8 million from the second quarter, overall our non-performing assets were up $3.3 million in the third quarter as we conservatively marked our held for sale portfolio to updated appraised values.

The Q3 increase represents the lowest quarterly growth rate in NPAs in the past four quarters. The reduced growth rate of NPLs was positively influenced by third quarter commercial inflows to NPL being $39 million lower than the second quarter inflows. Further, our third quarter commercial NPL payments and payoffs of $30 million exceeded the second quarter total of $26 million.

Total commercial real estate NPLs were down $18 million, commercial real estate continues to be the largest asset class component of both NPLs and watch lists. CRE NPL inflows did not exceed CRE of charge-offs this quarter. We have been closely monitoring our CRE portfolio since 2007, when we recognized the stress in the land development and construction segments.

We will continue our thorough quarterly watch and past credit review process to affirm risk ratings, evaluate current cash flow and collateral coverages, determined potential impairments and assess the appropriateness of action plans for each credit. The $20 million increase in CNI NPLs included three metal service industry related credits totalling $11 million. All of these credits have either been charged down or carry a specific reserve based on estimated collateral liquidation values.

We conservatively move on to NPL status at 90 days past due. This is evidenced by the small and decreasing amount of our loans over 90 days delinquent and still accruing. Third quarter residential mortgage NPLs were up $3 million versus a $19 million increase in the second quarter. The consumer direct and indirect NPLs were relatively flat with the second quarter.

Net charge-offs of $72 million were up from $49 million in the second quarter. Total CRE charges offs were up $3 million. Income producing loan charge offs of $25 million included four relationships totalling $18 million. The largest of these was an $11 million dollar exposure consisting of nine separate projects.

CNI charge offs of $21 million were $11 million higher than the second quarter. Four CNI lines totalling $16 million accounted for a significant portion of the quarterly result. Included in the $16 million was one loan at $8 million that based on the use of proceeds was real estate related, however it is classified as a CNI loan based on the assigned collateral code.

Residential mortgage charge offs of $10 million were taken based on recent evaluations of properties where the redemption period had expired thus enabling us to market these properties. It should be noted that the deterioration in these loans was captured in our previous quarter’s reserve analysis. Direct and indirect consumer charge offs totalled $10 million down from $12 million in the second quarter.

The commercial watch list grew by $62 million in the third quarter. This was the lowest increase we experienced in the past four quarters. Third quarter past credit reviews of CNI and income producing commercial real estate portfolios looked at over $1 billion in credit exposure an amount in line with that reviewed in the second quarter. During the third quarter our reviews resulted in $113 million less in down grades than in the second quarter. The income producing launch category however increased $61 million.

Michigan based retail related properties exhibited those greatest stress. We are taking appropriate action to mitigate our loss potential in these cases to enhance underwriting, obtaining additional collateral or increasing our guarantor’s code. Total delinquent loans were up $14 million in the third quarter.

I mentioned last quarter that our market teams were focused on engaging their clients in advance of renewals and intervening early should payment trends show signs of deterioration. The efforts have produced fine results. The third quarter increase in commercial delinquencies was tied to loans in our special loans group managed under workout strategies.

These situations naturally have elongated resolution timeframes, and since the end of the quarter the special loans team have successfully completed negotiations and documentation on $10 million of the near term delinquencies. The consumer portfolios, third quarter delinquencies were up $6 million but continued to perform well given the economic environment with a 2.21% overall delinquency rate.

Our third quarter loan loss provision was $6 million above our net charge offs. The provision was $23 million below the second quarter provision, and it certainly indicated this was due to our relatively flat NPLs, which included lower CRE NPLs and no spike in near term delinquencies.

Each non performing commercial loans cash flow and collateral position is reviewed quarterly to determine probable losses and the specific portion of the allowance for loan losses.

In the third quarter this accounts for $66 million of the $340 million total allowance. The remaining $274 million is the general risk associated allowance, which represents 178% of the remaining underlying non-performing loans at the end of the third quarter, which is in line with our 177% coverage at the end of the second quarter.

We continue to monitor our automotive industry related exposure conservatively using a 25% auto related revenue threshold for clients directly dealing with the industry, and I have included service and real estate related business with close proximity to auto plans in our reviews.

Our automotive related outstandings increased to 8.4% of the total portfolio from 8.1% in the second quarter. As client’s working capital borrowing needs increase due to the OEM’s inventory rebalancing co-incident with higher release schedules after the run off of the cash for clunkers program.

The auto suppliers in our portfolio were not materially affected by tier one bankruptcies in the third quarter, and generally we are able to win additional business from weaker competitors. Overall, the risk profile of our major auto supplier clients improved during the quarter.

Cathy back to you.

Cathy Nash

Thank you Mark. We are encouraged with our core operating results this quarter and we are cautiously optimistic about the future. We expect to continue trust in the Midwest economy but we are seeing results from Citizens focused rigor and discipline around pricing, around core deposit management and around credit management.

This concludes our prepared remarks. Now we will open up the lines for questions.

Question-and-Answer Session

Operator

(Operator Instruction) Your first question comes from Scott Siefers - Sandler O'Neill.

Scott Siefers - Sandler O’Neill

I guess the first question on capital. I mean obviously the exchange was very, very successful, but you note in the release still looking at additional alternatives to boost up the capital base. I guess we know about the Cap application kind of -- maybe if you can help frame how you guys are looking at the capital level. What else you might look at and maybe how much do you think would be appropriate that kind of thing.

Charlie Christy

Scott this is Charlie. You didn’t mention that as we already have our number of proxy we continue to explore a number of alternative, and from the capital strategy standpoint though we always need to keep in mind, the Michigan economy two-three years out and its continued impact on our balance sheet, and that’s always top on our mind.

Secondly, we got to think about over time what the regulatory environment is going to be like and whether rhetoric comes from DC about bank capital levels and how that evolves, and that’s a constant changing perspective, but then lastly somewhere down the road we need to think about our plans over time in regards to exiting the entire program.

So those are the factors that we would take into consideration as we do explore a number of alternatives. When it comes to the cap application we continue to answer questions related to that but at this time we have nothing else to report on that.

Scott Siefers - Sandler O’Neill

I guess I was curious a little about M&A. I mean obviously Michigan is pretty stressed and I had imagined as we move forward here there will be a number of smaller names that might come up for kind of FDIC assisted deals, and the way you can do it bargain purchase that can actually help their acquirers capital base as well. I wonder if you guys could talk a little bit about your interest in that kind of dynamic as well.

Charlie Christy

We do recognize the potential opportunities that are out there, but not stated just in the past, we do normally openly discuss our acquisition strategy, and if you think about it that’s in line with how the FDIC is now handling things today anyway, but we do see that there maybe a number of opportunities in the future that we may or may not consider as we look at it in our footprint.

Scott Siefers - Sandler O’Neill

I guess just final question. I guess one thing I was a little, it’s probably that was just the pace of reserve builds flowing so much, maybe if you could discuss or give a bit more color around the major drivers of the reserve build, if it’s going to be, for example, if non performers stayed basically level if that will be the main driver of continued abatement in the need to build a reserve or do you look more at delinquency trends or macro factors, etc.

Charlie Christy

Real good question. Really, we’ll call three components of the loan loss reserve. I would see the specific reserve Mark mentioned. Our specific reserve seen at $66 million, and those are things we know that are going to translate into probably loss right down the road into the next quarter or quarter after that, and then you have the formula aspect of it.

The formula has two components, it has the quantitative component and it has the qualitative. Obviously, the quantitative component of that the feeder of that -- or the drivers are historical losses and the rule rates of those things, and so depending on when you look at your non-performing loans that’s the first indicator to say should you really start over providing or not, but it depends on which portfolio was growing in non-performing or not.

And then secondly which you mentioned which is the qualitative aspect, as we look at what’s going on within certain markets or certain type industries and things like that, to make sure that if we may not see the stress either in the delinquency or whatever, but it’s obvious as ever that you are going to have something that’s going to occur down road due to that cold industry, say trucking or something like that that might -- that is already starting to show some stress, we might have some things related to that, we might put a little more side to be prepared for that future impact.

Operator

Your next question comes from Terry McEvoy - Oppenheimer.

Terry McEvoy - Oppenheimer

The question is on the same type of issue that Scott talked about that, but first off there’s been a few FDIC assisted transactions within Michigan, were you able to look at those deals, did you look at those opportunities and just simply decide to pass on those or were those done, were those more of a surprise to you?

Charlie Christy

Yes, again that's a fair question and I appreciate that. Again, as I said before, we really don’t like to talk about that and then secondly, as you know the FDIC is not giving alpha bidding and all that related to it. So we are trying to stay very much in line with that thinking from an internal perspective, it might get into how much. Should you, could you, why not, and so on, it’s better for us at this stage focus on what’s right for us from a strategic rationale perspective, and as I said before, we expect to see more opportunities in the future and we may or may not consider this.

Terry McEvoy - Oppenheimer

I can respect that, and then the second question. In the past you provided a slide availability of capital under stressed conditions, and I’m sure you will use it again in the fourth quarter, and as you updated that slide internally. So how do you feel about what those numbers look like, kind of post the exchange offer and with that signal may be less of a need to raise capital than was indicated in prior quarters or do you think your feel is the same today as it was three months ago and also, the improvement in the pre-tax pre-provision earnings margin, etcetera, that we saw in Q3 as well.

Charlie Christy

Yes. So that’s a table that we normally include or we used to include in our investment package for other listeners, and we will be having our package I assume, but we have not included that hopefully for a number of quarters because of the uncertainty related to what's going on in the market place and so on, but the way that table works is it just basically took the regulatory minimum, and the spread difference between those and then added what we saw, basically just said here is the amount that with the current run rate of PPP.

We saw that that’s not as good a presentation of what’s out in the future as it used to be, and lot of that is because you don't know what the regulatory minimums are going to be in the future, there is rhetoric coming from DC that something is going to change you just don’t know what that is, and so we felt, well, okay, if everybody is still focused on the all minimum, the industry knows that some macro change is going to occur, we don't know what that is, we felt it was inappropriate for us to continue to have that table.

Cathy Nash

Terry, its Cathy. I would add maybe one other comment to Charlie's and that is, I use the word cautiously optimistic, our end case and delinquencies are relatively flat, we are not seeing a spike up in near term delinquencies. We do see the stress within mortgage portfolio and continued, although I’ll be at less within the CRE portfolio.

Some others would say those are trends I am not quite that optimistic as I think you know from our conversations, but a lot will factor our thinking as we move through these quarters and see good strong improvement in margin and all the work that we’ve done around, the rigor in discipline around pricing paying off there and improvement in our pre-tax pre-provision.

The more quarters we get comfortable that those are solid versus temporary, the better we begin to feel about where our capital level stand, and how much more we might have to consider doing. So, one of the reasons we haven't kind of put that stress scenario in is because we've now seen a second quarter where it's just not as bad as it has been.

Terry McEvoy - Oppenheimer

Just one last question, I thought it would be direct, but this is the place to ask. Have you been told that the cap program is no longer in place and has been kind of killed essentially?

Cathy Nash

No, we have not.

Operator

Your next question comes from Greg Ketron - CitiGroup.

Greg Ketron - CitiGroup

Charlie, this is probably a question for you. On the balance sheet, as we look at the dynamics that have kind of unfolded over the last year and maybe the last six months, one portfolio has run down, I think you have held the investment security portfolio relatively flat and have looked at a liability side to unwind things like CDs and borrowings.

As this point out in future quarters, will it be at some point a stage where you want to if the one demand continues to drop we want to start buying investment securities and maybe stabilized in size of the balance sheet, but how do you see that playing out.

Charlie Christy

I don’t know, I don’t have anything else to add to this, but I think from the investment securities portfolio perspective we use that as an additional portion for wholesale strategy and manage interest risk to a neutral position, and managing the ratio and things like that on an overall basis, and I don’t think there is a whole lot of opportunities out there at this point, but I would say that the fact that our balance sheet has shrunk some we see that as a good thing.

It’s basically allowing us to protect some and preserve that capital that’s precious as ever as all of us know, and it also continues to things renew, and you have heard the numbers that we gave were very active in our communities and so on, the hard part is it’s the creditworthy customer stepping up to the plate. So, Brian do you have anything you want to add on, are we pretty set on that?

Brian Boike

No.

Greg Ketron - CitiGroup

Cathy for you, as we move forward you talked about the customer inflows being very strong, lot of discussion in the administration about supporting small business, lending, you guys are very prominent on that front, how do you see that playing out going forward. Have you had any discussions with people on the FBA lending programs or do you see something that can benefit your area?

Cathy Nash

Yes, we absolutely do Greg. We are a preferred lender within the FBA program and we do a lot of work with the FBA directly in terms of what our program is and how it can grow. We really support any of the government movement on the FBA front, recently read about looking at raising the maximum from $2 million to $5 that would be eligible for FBA with the government guarantee, and that’s just a great move as far as we are concerned, because it allows more small businesses access to working capital and other types of capital they need.

So, those programs in the expansion of FBA is nothing but a positive for our company. We manage that very carefully to make sure our guarantees are strong and will hold and we ordered ourselves on a regular basis to confirm that information, but we see small business as a real opportunity within our footprint not just within Michigan although we are the largest FBA lender in Michigan but we see it through our footprint as well.

Operator

Your next question comes from Eileen Rooney - KBW.

Eileen Rooney- KBW

I just had a question on the deferred tax asset. I understand the following exchange, but you may not be able to use your deferred tax asset due to the change of control, but I was just wondering does that kind of restart this quarter with the loss that you have this quarter and let’s start accruing going forward.

Charlie Christy

Where that works is since we did take the impairment charge on that a year ago, the fourth quarter of ’08 it basically the NOL would continue to grow off balance sheet I’ll call it, and then what you have to do is once you have had a new set of shared issued, we have a $106 million outstanding before we’ll call that the old shareholders, and the new shareholders at $268 million.

You got to start reading through the sections really two rules related to that and change of control, and there is multiple, call it phases and steps you work through. So it is not at -- a 100% gets limited, but a big chunk of it would have potential to be limited, and we are still working through that with tax strategist and so on, but we just want to make sure but understand that the NOL that we have built and continue to build, we may not be able to use all of that in the future.

Then I think when you come to the deferred tax asset itself, you need to show a number of quarters, say two or three quarters in a row profit before you could write that back up off your balance sheet and take a gain. When we did write that off a very small portion of that, and this is in the 10-K, a 155 I’ll call it 20 of that was related to NOL, the rest was a number of other things and some of these other things we may be able to get to use again. It all depends on how it really works its way through our balance sheet.

Cathy Nash

I would add one more thing Eileen, more and more banks are looking at having to take deferred tax asset as we did, last year I think we were unfortunately one of the first to go, but others have gone as well and those are the same banks that are also are raising capital.

So, it may ridiculously optimistic for me to hope that there might be pass code change relief for those banks, and there is that discussion going on around, it’s kind of a double penalty, you are making this deferred tax asset allowances that you’re forced to, but it hurts you when you come out the other side of it and it’s very much a qualitative view.

So, we do have some hope that there are as more and more banks states this, there might be some release there as well. We’ve got a couple of quarters to get a profitability before it ever becomes something anyone would talk to us about, that’s for sure.

Eileen Rooney- KBW

Then my next question, I was just wondering what the impact on the margin, how many basis points of the margin is depression is due to the non-performers. I guess I’m looking at your pre-tax pre-provision earnings chart and I’m just wondering how depressed the spread number would be from non-performers?

Charlie Christy

So you are trying to figure out what the overall drive would be.

Eileen Rooney- KBW

The basis point impact from credit in the margin.

Charlie Christy

Yes, so I mean if you are looking at the whole piece, because you always will have some non performings on your book. So, it’s probably in the, what would you say by 20 basis point rates somewhere in there.

Mark Widawski

Right, 25 or 30.

Charlie Christy

Okay.

Charlie Christy

As a drag?

Eileen Rooney- KBW

Right.

Charlie Christy

That’s how we are answering that.

Eileen Rooney- KBW

Yep, that’s perfect. Okay, and then one other question just in terms of credit. Could you give us some sense of how much you charged down non-performers as a percentage of the original face value?

Charlie Christy

Yes. So, this is Charlie again. This is things that I have said probably a number of times. I think when you look at the different loan portfolios, when we look at the land development and construction portfolios, we’re seeing, we’ll call it a 50% to 70% severity level there. I think when you start getting into the income produced it’s going to be at about 20% to 30% severity.

And then, when we have, let’s say the residential mortgage, which is probably the other portfolio that’s been pretty heavy headed. We have, if you remember, a year ago second quarter of ’08 we moved to budget that down to held for sale, and basically took a 45% share cut on those loans and as those loans worked through the whole foreclosure process, we’re not really doing better than that where the haircuts are more like a $0.35 to $0.40 haircut.

I think I’m answering your question as kind of because when it comes to non-performing it depends on the asset and depends on appraisal and then certain loans have different collaterals than just real estate.

Eileen Rooney- KBW

That’s great and does that also include, those percentages, does that also include allocated, specifically allocated reserves or is that actual charge off that you have taken already?

Mark Widawski

Eileen its Mark. Yes. No that would include the whole thing in terms of the charge, whether it was previously taken as a specific and then rolled to charge or just a direct charge, all encompassing.

Operator

Your final question comes from Jason O'Donnell - Boenning & Scattergood Inc.

Jason O'Donnell - Boenning & Scattergood Inc.

Going back to the margin you have obviously are benefiting from a lower cost and time deposits, I was just wondering if you give us some more color on your ability to the price those down further in the fourth quarter?

Brian Boike

Yes, Jason, this is Brian. In the third quarter, we had a larger than normal amount of time deposits reprice, and that kind fell into two categories. We called a significant number of brokerage CDs where we own the option, and retired a significant amount of those, and others were able to reissue at a much lower rate.

And then, the retail time deposits, we had a higher than normal amount reprice. That happens towards the end of the quarter. So we’re going to see a full quarter benefit to that in the fourth quarter.

In addition in the fourth quarter we continue to have higher than normal levels of retail time deposit maturities. So we will get a benefit there as well.

Jason O'Donnell - Boenning & Scattergood Inc.

Okay, great and then just assuming some non-performers remained stable. So, overall we should be looking for sort of continued expansion in the fourth quarter.

Charlie Christy

As far as the margin percentage?

Jason O'Donnell - Boenning & Scattergood Inc.

Yes

Charlie Christy

Yes. If the non-performers stayed relatively flat that we -- one you are going to get the bump, it’s like $3.8 million related to the debt exchange alone, and those will translate to, I don’t know, I was talking with another agency, they calculated about 13 basis points which I think is about right.

So, that could be offset by your additional non-performing changes and things like that. So, that’s a good start, and I think we just got to wait and see how it plays out with the rest of the balance sheet.

Cathy Nash

Yes, Jason if you go back to my very cautious optimism.

Jason O'Donnell - Boenning & Scattergood Inc.

Okay, great.

Cathy Nash

A couple of quarters doesn’t make a trend. So we are watching it carefully.

Operator

We have no further questions in queue. I will turn the call back to our speakers

Cathy Nash

Wonderful. Thank you all for the time you spend with us today, if you have further questions I’m available as is Charlie, Mark or Brian to answer to those questions and please feel free to call us directly and with that we will end the call and have a great fourth quarter, thank you.

Operator

This concludes today’s conference have a great day and you may disconnect at any time.

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