Citizens Republic Bancorp, Inc's CEO Discusses Q4 2011 Results - Earnings Call Transcript

| About: Citizens Republic (CRBC)

Citizens Republic Bancorp, Inc (NASDAQ:CRBC)

Q4 2011 Earnings Call

January 27, 2012 10:00 am ET


Lisa M. McNeely - Chief Financial Officer and Executive Vice President

Kristine D. Brenner - Director of Investor Relations

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

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


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

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

Jason A. O’Donnell - Boenning and Scattergood, Inc., Research Division


Good day, everyone, and welcome to the Citizens Republic Bancorp Fourth Quarter Conference Call. [Operator Instructions] Please note this call will be recorded, and I'll be standing by if you should need any assistance.

It is now my pleasure to turn the call over to Kristine Brenner. Please go ahead, ma'am.

Kristine D. Brenner

Thank you. Good morning, and welcome to the Citizens Republic Bancorp Fourth Quarter Conference Call. This call is being recorded and will be archived for 90 days on the Investor Relations page on our website, 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'll turn the call over to our President and Chief Executive Officer, Cathy Nash. Cathy?

Cathleen H. Nash

Thank you, Kristine. We are very pleased to report net income of $12 million or $0.31 per common share for the fourth quarter. This was another quarter of consistent pre-tax results.

Income before tax was $14 million in the second quarter, $20 million in the third quarter and $21 million in the fourth quarter. Net interest margin remained consistent with last quarter, and on a year-to-date basis, was up 27 basis points compared to last year.

We continued our disciplined loan-pricing process, reduced our high-cost funding and aggressively managed our excess cash and non-performers throughout 2011 to improve this margin.

Last quarter, we saw a nice increase in C&I loan balances, and the momentum carried -- continued into this quarter as we expected. Year-over-year, our C&I portfolio was up 5%. Our Indirect portfolio is seasonally lower in the fourth quarter, but it grew 6% compared to the end of last year. Of course, the commercial real estate and residential mortgage portfolios continued to decline as planned. Mark will talk more about our accomplishments in further decline -- reducing classified loans in a moment.

During the year, we strategically reduced our high-cost single service and brokered CDs while growing core deposits. Year-over-year, core deposits are up $319 million or 7% and represent 70% of total deposits. Single service and brokered CD deposits are down 25% from last year.

Our efforts to preserve fee income were successful throughout the year, and expense levels were down 8% compared to last year. The risk profile of the bank improved dramatically this year. Non-performing assets, non-performing loans and delinquencies are all less than half the level they were last year at this time, and capital levels are higher.

After Mark and Lisa -- Lisa and Mark, talk to the quarter in more detail, I'll conclude with comments about our strategic initiatives for 2012. Lisa?

Lisa M. McNeely

Thanks, Cathy. As Cathy mentioned, earnings were driven by consistent performance in net interest margin, fee income, expenses and a continued decline in credit cost. Provision expense of $15 million in the fourth quarter was $2.5 million less than last quarter as our credit metrics continued to improve.

Our credit models utilize assumptions that are supported by a look-back period of actual credit performance, such that the more challenging quarters of this credit cycle drop out with a lag. The reduction in portfolio risk during the fourth quarter, along with the significant improvements we've made over the last year, will likely justify an allowance for loan loss coverage that is more in line with our peers.

Net interest margin was consistent with last quarter at 3.62%. For the year, margin increased 27 basis points to 3.58% compared to 3.31% in 2010. Our cost of funds improved significantly this year. We've decreased deposit costs by maintaining focus on client relationship pricing and improving our funding mix by focusing on core deposits.

We have also benefited from the positive impact of lower levels of non-performing assets and reducing excess cash. These benefits have been partially offset by lower reinvestment yields on earning assets due to lower term rates and intense competition for loans.

For 2012, we anticipate reinvestment rates on earning assets to continue to be depressed and negotiated at lower yields. We will likely have limited opportunities to lower cost on the funding side, so we expect pressure on our net interest margin.

Noninterest income was $24 million for the fourth quarter. For the year, NII was up slightly from last year at $95 million. Our fee income from our banking products has been consistent, as we have overcome a significant amount of negative revenue impact attributable to regulatory changes. Our bankers proactively review products and services with our clients, offering the solutions that meet their financial needs.

In 2012, we will continue to focus on opportunities that help maintain a stable base of fee income in light of the changing regulatory environment and expect noninterest income to remain consistent to slightly down.

Noninterest expense was $67 million, up $1 million from the third quarter, primarily due to a couple of one-time beneficial items that were included in the third quarter as we've previously discussed.

Compared to last year, noninterest expenses were down 14%. Our run rate improvement reflects improved credit-related workout expenses and our success at keeping a consistent focus on internal efficiencies and vendor management.

Over the last 3 years, we have seen the benefits of tightly controlling expenses. Expense management will continue to be a part of our culture. In 2012, we expect noninterest expenses to be stable. Additional operating expense opportunities will be limited, with modest reductions in credit relay at workout and FDIC insurance cost, which will be offset with slight increases in operating cost.

We recorded a $3 million income tax expense this quarter as a result of changes in our other comprehensive income.

Taking a look at our balance sheet trends. Total portfolio loans at quarter end were $5.5 billion, a 2.5% decrease from the third quarter. Although C&I loans were up slightly at quarter end, the other categories decreased as anticipated. As Cathy mentioned, on a year-to-date basis, our C&I portfolio balance is up 5% from last year due to our lending initiatives in our areas of expertise.

Over the last several quarters, we've also talked about capitalizing on our Indirect, RV and marine lending competency. As we've mentioned in the past, this portfolio has seasonal trends and generally peaks in the third quarter. Accordingly, we saw a slight seasonal decrease in that balance this quarter. For the full year, our Indirect portfolio balance increased 6%. Compared to end of last year, our commercial real estate portfolio decreased 27%, and the residential mortgage portfolio was down 16%. These decreases reflect our successful execution of reducing stress loans.

We finished the year with strong loan production. During the fourth quarter, we provided credit of $88 million to retail clients and $636 million to our commercial clients.

Commercial production for the quarter increased 24% compared to the third quarter and 70% compared to the fourth quarter of last year.

Our deposits remained consistent with last quarter, and core deposits increased 7% compared to last year. Our bankers continued to focus on relationship banking, providing high-quality client service and acquiring new clients. We grew the number of new clients 8% in 2011. Growing and retaining client relationships will continue to provide a low-cost source of funding for future loan growth.

Time deposits decreased 5% from the third quarter and 25% from year end, reflecting our successful initiatives to reduce single service, high-cost retail CDs. During 2011, we reduced the number of single service CD clients almost 21%. In addition to meeting our goals, our bankers were successful in referring these clients to other products or our investment center.

Our positive results this year have led to enhanced capital levels across the board. We are growing capital organically, as evidenced by the 131 basis-point increase in our Tier 1 common ratio since we returned to profitability this year. Our capital ratios remain strong, and we will continue to build as we report positive results.

We continue to evaluate the optimal time and strategy to exit the TARP program. We believe that our shareholders have benefited greatly from our patient approach to TARP repayment, and we will continue to be extremely thoughtful in how we ultimately exit the program.

As of December 31, the valuation allowance against our deferred tax asset is estimated at $311 million. With each quarter of positive results, we continue to build our case to fully recognize our DTA.

I'll turn it over to Mark now for more insight into credit.

Mark W. Widawski

Thank you, Lisa, and good morning. Cathy highlighted the year-over-year significant improvement in our risk profile as demonstrated by across-the-board improvement in our credit metrics. Our plans to reduce classified assets, while maintaining appropriate reserve and prudent capital levels, have been successfully executed by our teams focused on this effort.

Year-over-year, classified assets are down $522 million. Since December 2009, classified assets were reduced by over $1 billion. And our classification ratio, the coverage of classified assets by combined Tier 1 capital and allowance for loan losses, was reduced from 96% to 35%. The significant work we've done related to credit and organic growth in capital this year, that Lisa mentioned, is also underscored in our improved Texas Ratio. At the end of this year, our Texas Ratio, based on tangible equity, was only 11.8%, compared to 28.6% at the end of 2010, and 44.2% at the end of 2009. Our Texas Ratio is now considerably less than our peer groups.

Our efforts were designed to improve our overall credit profile while reducing the risk of potential future losses and improving the stability of future earnings. Potential problem loan formation has been significantly reduced, as evidenced by substantial reductions in the quarterly classified asset inflows of commercial and residential mortgage loans and a substantial slowing in the formation of new NPLs, as well as the improvement in near-term delinquencies.

Commercial classified asset inflows for the quarter were $36 million, the second consecutive quarter below $40 million, and represent only 25% of the average quarterly inflows that we experienced in 2010.

New residential mortgage classified assets were 44% of the 2010 quarterly average inflow. Quarter-over-quarter reductions in commercial NPL formation were sequentially realized during 2011, ending with only $13 million of inflow during the fourth quarter. As Cathy noted, our 30- to 89- day delinquencies improved to 86 basis points of the portfolio, from 1.5% at December 2010, reflecting both the focused effort of all our teams and the stabilization of the credit environment in our markets.

We improved the stability of future earnings by reducing our exposure to the carrying costs associated with ORE and loans held for sale. The balances in these categories were reduced $51 million year-over-year and now represent less than 2% of Tier 1 capital.

Net charge-offs of $33 million were roughly flat to the third quarter and included the resolution of 3 CRE-related classified loans with balances of $31 million. The charges on these 3 loans were each in the $3 million to $4 million range, with all other charge-offs below $1.5 million.

MTAs were down $35 million from the linked quarter, as we completed the residential mortgage NPL sale that we announced last quarter and continued our focus on reducing commercial non-performers. Our restructured accruing loans were up $20 million from the prior quarter. This increase was comprised of the return to accrual after satisfactory performance of $8 million in residential mortgage loans and the $12 million balance after charge-off of one commercial relationship restructured using an AB note.

Our risk reduction and transition of the commercial portfolio from CRE to C&I loans led to a reduction in loans quarter-over-quarter. Balances declined during the quarter due to the resolution of $117 million of commercial classified assets, primarily in the CRE asset class. Additionally, execution of an exit strategy on a $31 million low-yielding ABL participation, the normal seasonal reduction in the Indirect portfolio, continued planned run-off of the residential mortgage portfolio and reductions in home equity balances as consumers continue to de-lever their real estate exposure, contributed to the overall quarterly reduction in the loan portfolio.

As Lisa detailed, we saw significant improvement in our C&I origination results year-over-year and quarter-over-quarter, due to the great work of our core, corporate and Citizens Bank Business Finance, or CBBF teams. CBBF booked $120 million in new loans during the quarter, with continued strength in both asset-based and leverage cash flow lending activity. The CBBF pipeline continues to be robust. Absent the planned exit of the $31 million ABL loan, our C&I lending grew at an 11% annualized rate in the fourth quarter.

Our consumer portfolio's credit metrics were stable and solid. The $3 million quarterly increase in Indirect delinquencies was seasonally driven as $1.4 million of the past dues cured in the first week of January.

Cathy, back to you.

Cathleen H. Nash

Thanks, Mark. Our results this year reflect our success in carrying out our strategies that we communicated throughout the year. For 2012, our focus will be to continue providing top-tier client service so that we can prudently rebuild our loan portfolio. To mitigate the pressure, we expect our net interest margin, as much as possible, through disciplined relationship pricing, to continue to evaluate our reserve levels and maintain an appropriate level given our improved risk profile and growth initiative. These strategies will allow us to deliver consistency in our results.

Additionally, we have a number of other key priorities, including exiting our written agreement, recapturing our deferred tax asset, catching up on our deferred trust preferred and TARP dividends and collaborating with our regulators to repay TARP. As I mentioned last quarter, our continued good results and consistency will allow us to end our formal agreement with our regulators. We continue to discuss this with them. And we're, quite frankly, disappointed that the agreement has not yet been lifted. We believe we have clearly demonstrated the results that our regulators need to see to end that agreement. And they have indicated that we are in compliance with the terms of the agreement. Ending that agreement puts us in the position to begin discussions about catching up on our TruPS and TARP dividends and also to consider options around our TARP repayment. Those discussions have begun.

As we think about our deferred tax asset recapture, we've been working closely with outside tax counsel to develop and prepare our case. That baseline work was completed at the end of the third quarter, and we have updated our information with our strong fourth quarter results. I have confidence in our ability to recapture the DTA.

And with those final comments, we'll open the line for questions. Alicia, you can go ahead and put the first question through. Thank you.

Question-and-Answer Session


[Operator Instructions] And we'll take our first question from Terry McEvoy with Oppenheimer.

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

I guess the question I'd like to ask is do you think the recapturing the DTA is a first quarter event? But the question I will ask is do you feel confident that, that's a 2012 event for the company? And then, I guess the second part of that question, maybe for Lisa is, after that event happens, what type of tax rate should we put in our earnings models?

Cathleen H. Nash

So I'll take the first part. I'm very confident the DTA is a 2012 event, Terry. Thanks for asking it that way. And I am hopeful that we can see it in the first quarter, certainly the second quarter makes sense to us. We are building our case. The team has done really good work here. Our auditors at E&Y have been very supportive of the work we've done. So as we've said before, it's a when, not an if. And I think, certainly in 2012, and I'd like sooner rather than later. And Lisa, I'll refer the tax rate question over to you.

Lisa M. McNeely

Thanks, Cathy. Terry, once the VA is reversed, we would expect our effective tax rate to be similar to what it was prior to establishing the VA, which is in the 30% to 35% range.

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

And then the second question, the last couple quarters, the charge-offs have been 33%, 34%. The provision's been roughly half of that. Do you think that relationship holds? And Lisa, can you just give a little bit more clarity on your coverage guidance? You talked about being in line with your peers, and peers can be defined in many different ways. And are you suggesting that the reserve at over 3% of loans is higher than your peer group, in telling us if that ratio should come down over time?

Lisa M. McNeely

Yes, Terry. The second part -- you're right. We -- at 3%, we're higher than our peers. And over time, as our models pick up the great improvements in the last year, we'll see that come back more in line with where we see our peer group at, a 2 to 2.25 range over time as those models roll through the good credit quality improvement we've seen. And I'm sorry, the first part of your question, I...

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

Just charge-offs and -- I'm sorry, loan loss provision relative to charge-offs, is it going to remain kind of at that 50% range, at least over the next few quarters?

Lisa M. McNeely

That's a good guide. And as the models work through our provisioning, and as we see the continued improvement, we would expect our charge-off levels to come down, and over the course of the year also. So I think that's a good guide.


And we'll take our next question from John Barber with KBW.

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

Lisa, maybe I'm oversimplifying this, but how far back does the calculation for your reserve look-back period go? I'm just trying to get a sense of what periods are rolling off each quarter.

Lisa M. McNeely

It's by portfolio. We have a very -- we evaluate each portfolio independently. It ranges over a 12- to 18-month time horizon, John.

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

Okay, thanks. And Cathy, you talked about, in 2012, you're expecting to go current on your TARP and TruPS dividends. I guess, what are kind of the main considerations for that to happen? And if it requires you to upstream cash from the bank to a holding company, when do you think you'd ask for permission for that?

Cathleen H. Nash

Yes. So, you kind of answered it, John, in your question. So for us to reinstate those dividends, we think we need to upstream from the bank to the holding company. If you look at our holding company cash, you can see that makes sense. So we've been talking and beginning to sort of set that stage with our regulators. These things we're starting to think about, and asking them to help us understand what they'd be looking for to give us that permission to do that upstreaming. So we're starting those conversations, but clearly, we see upstreaming as part of that strategy to get current on the dividends. The holding company cash and the coverage level that we'd want in terms of years coverage, there's a level we look for and that we'd be comfortable with. We want to make sure it's the same one our regulators are. So we're starting those discussions now.

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

All right. And how much kind of planned run-off is left in your CRE portfolio? And kind of when can we expect that to stabilize?

Cathleen H. Nash

I don't know that I know that off the top of my head, and Mark, do you have an answer for that? I don't know that off the top of my head.

Mark W. Widawski

John, it's Mark. As opposed to looking at the number overall, we're looking at the stressed assets in that portfolio and focusing on the reduced role rates to our classified status of -- those numbers are coming down and have come down over the last 2 years, quarterly. We have seen stabilization in the CRE markets in our footprint, from both a vacancy perspective as well as a lease rental rate perspective. And I think that what we will be looking at this quarter is something that is not as dramatic as the end of the year because we had an opportunity on, as I say, 3 of those larger stressed assets to deal with them. So it's going to be lumpy, but we're going to certainly be benefiting from the increase in C&I lending activity from an overall portfolio perspective to get our concentrations more in line with where we would like them to be, leaning towards C&I exposures as opposed to CRE.

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

Thanks, Mark. And last one, I know Terry already asked about the DTA, but I guess, what else does Ernst & Young need to see to be convinced that you've returned to sustainable profitability?

Cathleen H. Nash

Well, if they were on the phone, I'd maybe ask them to chime in and answer that question, John. We think -- we've been working with outside tax counsel to put our case together. We think -- we said pretty clearly last quarter that we didn't expect after 2 quarters of profitable earnings, we would get it back. That seemed reasonable to us not to expect that. We've now finished our third. Our forecasts are accurate. We're very consistent. So it's really the focus on the consistencies earned in earnings and the ability to continue to meet our forecasts as we have and demonstrating in the future. So we think we've got all the right elements in place, and that's been indicated to us, that we have the right elements in place. And now we just added the third quarter of profitability into that. So, indications of that we're clearly on the right track there. Lisa, I don't know if you would have anything you'd want to add to that.

Lisa M. McNeely

No, I think you summed it up pretty well, Cathy.


And we'll take our next question from Jason O’Donnell with Boenning and Scattergood.

Jason A. O’Donnell - Boenning and Scattergood, Inc., Research Division

You guys expressed confidence in getting the DTA re-recognized this year, and potentially even in the first half of 2012. I'm wondering how you would handicap the probability of getting the entire piece re-recognized effectively versus a piecemeal approach.

Cathleen H. Nash

We expect to get the entire thing back. And I've never handicapped anything because I don't bet. Because if I was that good, I would have been -- made a lot more money. I'd be in Las Vegas, Jason. But we expect when we get it back, we will get the entire amount back.


And there are no more questions in queue.

Cathleen H. Nash

Great. Thank you. So we appreciate those of you who've been on our call today. This is a pivotal year for our company, and our positive results demonstrated our success in executing our strategies. And we're proud of that. We'll continue to work hard this year, focusing on top line revenue growth and improving our shareholder value. Thank you very much for joining us. And as always, if you have any follow-up questions, please give us call. Have a good day.


This concludes today's teleconference. You may now disconnect, and enjoy the rest of your day.

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