Citizens Republic Bancorp, Inc (NASDAQ:CRBC)
Q1 2011 Earnings Call
April 29, 2011 10:00 am ET
Lisa McNeely - Chief Financial Officer and Executive Vice President
Mark Widawski - Chief Credit Officer, Executive Vice President, Chief Credit Officer of Citizens Bank and Executive Vice President of Citizens Bank
Kristine Brenner - Director of Investor Relations
Cathleen Nash - Chief Executive Officer, President, Director, Chief Executive Officer of Citizens Bank and President of Citizens Bank
John Barber - Keefe, Bruyette, & Woods, Inc.
Good day, everyone, and welcome to today's program. [Operator Instructions] Please note, this call may be recorded. It is now my pleasure to turn the conference over to Ms. Kristine Brenner. Please go ahead.
Thank you. Good morning, and welcome to the Citizens Republic Bancorp First Quarter Conference Call. This call is being recorded and a telephone replay will be available through May 6. This call is also being simulcast live on the Investor Relations page of our website, www.citizensbanking.com, where it will be archived for 90 days.
The format of our call today will be Cathy Nash, President and Chief Executive Officer, providing highlights for the quarter; 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 will 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.
Now I'd like to turn the call over to our President and Chief Executive Office, Cathy Nash.
Thank you, Kristine. We are very pleased with our execution of the problem asset resolution plan that we announced 6 months ago. The results of that plan were right in line with our expectations. We resolved $460 million of problem assets in the first quarter with net charges of $161 million.
Over the last 2 quarters, we have resolved $926 million and have completed the accelerated disposition activities. That work is reflected in our dramatically improved credit metrics. Our watch list is down 45% from the first quarter last year, and nonperforming assets are down 66% for the same time frame. We continue to see improving credit trends in general.
At less than 1% of total loans, our 30 to 89 day delinquencies were at their lowest level in over 4 years and down 64% from the first quarter 2010. New commercial loan NPA inflows were less than $30 million this quarter, which is the lowest level since 2006. We also continued to see strong performance in our consumer and our indirect portfolios.
While our special loans team have been hard at work improving our credit metrics, our bankers continue to focus on activities that will drive future revenue growth. Our loan pipelines are up dramatically, and we have tremendous amounts of both on and off balance sheet liquidity ready to fund this activity.
Pretax pre-provision profit was $31 million, driven by continued solid operating performance. Net interest margin expanded again by 11 basis points to 3.53% this quarter. It's up 39 basis points compared to the first quarter of last year. Noninterest income remains solid, reflecting our focus on driving core revenue toward our return to profitability. And we also continue to maintain tight expense control.
Now I'll turn the phone over to Lisa and Mark to walk through the details of the quarter. Lisa?
Thanks, Cathy. The net loss for the quarter was $69 million, which is a decrease from last quarter's net loss of $106 million. The decrease in provision expense was the primary reason for the decreased loss compared to the prior quarter.
Provision expense was $89 million for the quarter compared to net charge-offs of $161 million. The lower provision expense was reflective of the improved credit performance of our loan portfolios. The successful execution of our problem asset resolution plan should continue to benefit loan portfolio asset quality metrics going forward.
As I mentioned last quarter, the allowance for loan loss is driven by a quantitative historical-looking models. As the risk profile of our portfolio continues to improve, the level of reserves will trend downward.
The net interest margin increased 11 basis points over last quarter to 3.5%. The increase was primarily a result of a reduced cost of funds with wholesale funding, the repricing to lower rates and a reduction in the higher cost deposits from our relationship banking strategy.
Going forward, we expect our margin to remain stable. Noninterest income was $23 million for the first quarter, down $1 million from last quarter. In the first quarter, we experienced lower revenue in most of our deposit-base fees and services, as client transaction patterns traditionally are lower in the first quarter. Compared to the first quarter of last year, we saw improvement in trust, brokerage and mortgage fees, which reflects the consistent focus by our bankers to improve revenue opportunities through the services we offer our clients.
During the first quarter, we realized lower losses on loans held for sale. Noninterest expense was $82 million, a $4 million increase from the fourth quarter, primarily due to higher losses on other real estate owned, reflecting the increase in activity in the property disposition. The increase in losses was partially offset by a decline in almost all other expense categories compared to last quarter, which reflects the tight control we've continued to maintain.
Taking a look at our balance sheet trends. Our total average earning assets continue to decrease primarily due to decreases in the loan portfolio compared to last quarter. At quarter end, total loans of $5.7 billion were down 112 -- I'm sorry, $512 million from the fourth quarter. With the exception of indirect consumer loans, all of our loan portfolios declined primarily as a result of our asset resolution activities and in pay downs from normal client activity.
Indirect consumer loans were up compared to last quarter, and Mark will tell you more about that business in a moment.
In total for the quarter, we approved and renewed 125 -- $129 million in consumer loans and 300 -- $234 million in commercial loans. Our pipeline activity is reenergized and increases in C&I, indirect and branch-originated consumer loans.
We continue to focus on relationship banking and have a very stable core deposit base. At the end of March, core deposits were $5 billion, up 3% from the fourth quarter. As a result of planned reduction and single service, high costs, retail CD clients and broker deposits, time deposits decreased 6% from the fourth quarter of $2.7 billion.
Our deposit mix has improved with the reduction of noncore CDs. Our core deposits are 65% of total deposits and 58% of total funding compared to 57% and 49%, respectively over a year ago. Since the end of 2007, we have increased core deposits 27%. Our bankers have stayed focused on client growth, with an annual acquisition rate of over 8%.
We continue to maintain strong liquidity with substantial liquid assets and unused secured borrowing capacity. Citizens' funding base is very stable with 79% of the base supported by deposits.
Short term liquid assets, as of March 31, were $496 million. As Cathy mentioned, our strong liquidity position will provide a good source of growth. Our regulatory capital levels remain strong and at the end of the quarter, total capital is 13.24% and Q1 capital was 11.9%.
At March 31, 2011, tangible common equity was $337 million and the TCE to TA ratio was 3.59%. The significant reduction in problem assets, improving credit trends, strong level of loan loss reserve and solid core earnings are all factors that will be considered as we determine when we can recognize the value of our deferred tax asset. This asset has meaningful value for our common shareholders and will continue to be monitored as we watch the status of others in our industry and determine the appropriate timing of this realization.
The DTA was valued at the $293 million at 12/31/2010. Just to note, that the DTA will change. And one of the primary drivers of that change is the loan loss reserve level.
I'll turn it over to Mark now for more insight on our credit.
Thanks, Lisa, and good morning. As Cathy and Lisa indicated, we successfully completed our 2-quarter accelerated problem asset plan. We met our goals to substantially improve our overall credit profile, enhance the transparency on our asset quality, reduce the risk of potential future losses and improve the stability of future earnings.
Last quarter, we detailed our approach, starting last September, with a loan level review of our stressed assets and determining a course of action for each loan that balanced accelerated resolution with asset value realization. Resolutions were nearly equally split between the 2 quarters: $460 million and $466 million in the first and fourth quarters, respectively.
Our special loans teams did great work executing the individual loan restructuring and resolution strategies that represented 77% of the $926 million in problem asset resolutions accomplished over the last 2 quarters. The most severely stressed commercial assets, where a synergistic solution was untenable, were resolved through the 2 bulk sales.
Over the 2 quarters, special loans teams efforts to restructure and negotiate third-party sales resulted in a 34% severity on dispositions. Their execution provided significantly better outcomes than the pooled distressed asset pricing, where the disposition severity was 52%. The 2 bulk sales provided us a path to efficiently resolve the smaller portion of our problem assets, where valuation recovery has faced significant market challenges and resolution time frames, would have been considerably elongated.
The portfolio level improvements and asset quality metrics, that Cathy and Lisa noted as outcomes of the accelerated resolution plan, are reflected in each of the asset classes metrics. Some highlights for the commercial portfolios are: the land development and construction asset classes, which have exhibited the highest severity through this cycle, have had balances reduced to $63 million or 1% of the total portfolio with the remaining $23 million in construction activity predominantly related to owner occupied, not investment commercial real estate projects.
Nonperforming assets related to these portfolios totaled $1.7 million at quarter end, down from $67 million at March 31, 2010. Income producing properties continue to face market headwinds of tenant vacancies and lower rental rates versus original underwriting parameters.
Appropriately, we have identified the credits experiencing such stresses, and the class continues to be the largest segment of our watch list. The acceleration initiative reduced income-producing NPLs by 81% from the September 2010 level.
First quarter NPAs at 2.72% of this portfolio represent the lowest level since June 2008. Near term delinquencies are sub-50 basis points, also a historical low, highlighting our focused efforts to reduce our risk in this segment.
Over the course of the initiative, owner occupied and C&I watch credit balances were reduced by $255 million. NPAs in this segment were reduced by 62% from September to March.
In addition to resolutions, operating improvement in automotive-related service businesses and resulting upgrades from watch status contributed to the reduction. The continued strengthening of the manufacturing and auto-related sectors support our plans to grow these segments through the efforts of our specialty, commercial and branch banking teams.
We were successful in reducing our exposure to sizable, commercial nonperforming loans. At quarter end, there were 12 nonperforming relationships greater than $1 million, representing 48% of commercial NPAs, with the largest NPA at $7 million.
By comparison, March 2010 NPAs included 77 nonperformers greater than $1 million, or 73% of commercial NPAs, with the largest NPA at $17 million.
First quarter commercial inflows to nonperforming status totaled $30 million, significantly below prior quarter's run rates and represent the lowest inflow total since 2006. The inflows have also become more granular, with the largest new nonperformer at $2.6 million. Potential near-term problem commercial asset formation, in terms of loans, 30 to 89 days past due, totaled $13.5 million, 71% lower than the 2010 average quarterly inflow run rate.
Commercial net charge-offs for the first quarter of $149.8 million were essentially flat to the fourth quarter's $143.2 million, with both totals directly tied to our accelerated resolution effort and in line with our plan.
Turning to the consumer portfolios. Near term delinquencies and charge-offs, excluding bulk sale activity, improved in all of the portfolios over the seasonally comparable March 2010 results.
NPAs were better in the direct and indirect segments with residential mortgage NPAs showing an increase, which was expected as we continue to individually work through the low level of late-stage foreclosures left in this portfolio after our 2 bulk sales last year.
We mentioned last quarter that we plan to continue the geographic expansion of our indirect RV and marine lending business to states that are contiguous to our existing indirect footprint.
Lisa noted the increase in the indirect portfolio this quarter, which represents our team's initial success in executing their plans. Our efforts have been well received in the market as our new dealer additions are ahead of expectations, and we have added resources to support the team's efforts. Cathy, back to you.
Thanks, Mark. The successful execution of our accelerated problem asset resolution plan has positioned us to focus more on growth opportunities. We have a very solid core operating franchise with proven competencies in C&I and indirect lending, and we're seeing strong momentum in our pipeline.
On the commercial side, we've hired 12 new bankers this quarter. We were recently recognized as Michigan's Preferred SBA Lender of the Year for the third year in a row. And we have strong building pipelines and are excited about the near term growth potential.
On the consumer side, our overall application volume's up 37%, year-over-year. We've been running home equity campaigns and are seeing a significant increase in home equity applications and approvals. In addition, we're also seeing an increase in mortgage applications, with purchased mortgages being a larger part of the mix now compared to refis.
As Mark mentioned, we've been judiciously expanding our indirect business in the Midwest, outside of Michigan, Wisconsin and Ohio, where we've traditionally been. Our indirect portfolio has performed very well throughout the cycle, and our application volume is up 50% year-over-year.
We feel very good where we are positioned. And we look forward to reporting profitable quarterly results to our shareholders later this year.
Finally, I want to mention the press release we issued last night, announcing the addition of Ken Ross to our team as Assistant General Counsel and Director of Government Relations. Ken was most recently the commissioner of Michigan's Office of Financial and Insurance Regulation. Ken is a proven leader and his rich background and experience in government, legal and regulatory affairs will serve our company well. We're very excited to have Ken join our team.
With those final comments, we'll now open up the line for questions.
[Operator Instructions] And we'll take our first question from John Barber with KBW.
John Barber - Keefe, Bruyette, & Woods, Inc.
My first question is probably for Lisa. In your prepared remarks, you mentioned you expect reserves will start to trend downward. I mean you guys have a 4% reserve to loan ratio. I guess what would you consider a more normalized level longer term?
John, longer term, I think our reserves will obviously trend downward. And through the rest of this year, we will see that reserve moving back down. Our traditional levels, relative to our portfolio and the markets in which we serve, will not get back to where we've seen things in the past for quite a while. We do expect at some point to get down to a 2% level, but that would be further out in our cycle. It won't be a hard come down the curve.
John Barber - Keefe, Bruyette, & Woods, Inc.
I guess my next question, you guys have 2 issuances of trust preferreds outstanding. I think they total $74 million. Could you speak to your appetite to convert those securities to common equity?
We will continue to evaluate opportunities as they come up relative to that. We do plan through things pretty thoughtfully, so we haven't had those issues really come up, but we'll be looking at those as they do materialize.
John Barber - Keefe, Bruyette, & Woods, Inc.
And my last question. In the 10-K, you mentioned that you had to require -- or you're required to submit a modified capital plan to your regulators, and that was associated with your written agreement. And that you guys were awaiting response. Have you heard back from regulators?
John, its Cathy. And our plan is accepted by our regulators.
And it appears we have no further questions at this time.
We appreciate everyone who's been on the call today. And as usual, if you have follow up, please contact us directly, and we'd be happy to answer your questions, if you have them. Thank you very much and have a great rest of the day.
This concludes your conference. Thank you for your participation. You may now disconnect.
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