Citizens Republic Bancorp Q1 2008 Earnings Call Transcript

Apr.21.08 | About: Citizens Republic (CRBC)

Citizens Republic Bancorp, Inc. (NASDAQ:CRBC)

Q1 2008 Earnings Call

April 17, 2008 9:00 am ET

Executives

Kristine D. Brenner – Director, Investor Relations

William R. Hartman - Chairman of the Board, President & Chief Executive Officer

Charles D. Christy - Chief Financial Officer & Executive Vice President

John D. Schwab - Executive Vice President & Chief Credit Officer

Martin E. Grunst - Senior Vice President & Treasurer

Analysts

Jon Arfstrom – RBC Capital Markets

Scott Siefers – Sandler O’Neill & Partners, L.P.

Terry Mcevoy – Oppenheimer & Co.

Lee Calfo – Boenning & Scattergood, Inc.

Eileen Rooney – Keefe, Bruyette & Woods

Operator

Welcome to today’s teleconference. At this time all participants are in a listen only mode. Later you will have the opportunity to ask questions during the Q&A session. And please note this call may be recorded. I would now like to turn the call over to Miss Kristine Brenner. Please go ahead, ma’am.

Kristine D. Brenner

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 April 25th. This call is also being simulcast live on our website, www.CitizensBanking.com where it will be archived for 90 days. With me today is Bill Hartman, Chairman, President and Chief Executive Officer; Charlie Christy, Chief Financial Officer; John Schwab, Chief Credit Officer; and Marty Grunst, Treasurer.

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 the company’s 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’ll turn the call over to our CEO, Bill Hartman.

William R. Hartman

Good morning everyone and welcome to our call. Obviously we saw more deterioration in the credit environment than we in the markets anticipated in January and February and based on our dividend decision we’re highly committed to taking the necessary steps to ensure we have a strong balance sheet to support us as we manage through this currently difficult credit environment. This morning I’d like to let John lead the call off with a credit update followed by Charlie’s update on the financials. I’ll then conclude with a discussion around capital and our strategy for managing the company for success as we look to get through and emerge from this credit cycle with the ability to build stronger shareholder value for the future.

So John, we’ll let you start off this morning with credit quality.

John D. Schwab

I believe our release discloses clearly the credit quality dynamics with which we are dealing in an increasingly challenging economic environment in our markets. In our January conversation with you we did not fully anticipate the accelerating deterioration of real estate values in the Midwest and the impact this deterioration would have on our portfolio. While our earlier guidance on charge offs was accurate the increase in commercial real estate non-performings was more than anticipated. I would like to take a few minutes providing some color on credit quality which may not be readily visible in the earnings release.

Net charge-offs for the quarter are again concentrated in the land development segment of the commercial real estate portfolio. One charge off represented over 75% of the $6.6 million land development charge offs for the quarter. Charge offs in the more granular consumer and residential mortgage portfolios remained essentially flat with the last quarter but are up from the second and third quarters of 2007 suggesting that slipping residential real estate values are impacting these portfolios as well. Commercial real estate non-performing loans increased $57.7 million or 525 over year end principally due to the deterioration in Federal land development or income-producing properties. In fact $17 million or 30% of the increase in commercial real estate non-performings is attributable to two relationships, one income producing, the other land development. Both were part of the quarterly watch process and transferred to our special loans group before going non-accrual. Both carry specific reserves at March 31. Over the past three quarters every commercial loan which has slipped non-performing was previously part of the watch process.

I mention this because while I believe a process of identification and strategizing is working the difficult environment has taken many to non-performing anyway. Nearly all of the $7.6 million or 60% increase in C&I non-performings is attributable to the ongoing collateral liquidation of one credit in our asset based lending unit on which we expect full liquidation without loss by June 30. We do not see any material deterioration in the residential and home equity portfolios. Loans in our home equity portfolio carry an average FICO score of 740. Within our commercial portfolio we segregate small business lending as a distinct portfolio because it is generally scorecard approved based significantly on the credit score of the principal running the business. Non-performings in this segment have increased nominally in the past four quarters. Notably the average FICO score in this portfolio is 755.

In light of these comments on the consumer and small business portfolios our credit risk management strategies are being focused primarily on the commercial portfolio. You will recall that we manage a quarterly watch process in the commercial portfolio reviewing the financial performance of watch rated credits affirming an obligor and facility ratings, ensuring that appropriate action plans are in place for each credit to secure the bank’s position further, increase collateral and personal guarantees, set financial and covenant performance step ups, all to manage risks proactively. You will also note in our release that watch credit exposure in commercial real estate has trended down slightly over several quarters as these credits are downgraded, pushed to non-accrual, transferred to the work out unit and some charged off.

The C&I watch list has been increasing over the last several quarters but we should note that our asset based lending unit which has grown over the past two years to over $390 million in outstandings generally books a number of credits which, under our common risk rating system, would qualify as watched. In fact, C&I watch increases over the past five quarters are on a net basis attributable to the growth in this unit while other C&I watch has been stable. Behind the watch numbers disclosed are a few hopeful facts. In each of the last four consecutive quarters the watch process has reviewed fewer credits and less dollars and transferred fewer credit and less dollars to work out. I believe this process is an important credit risk management practice that allows us to manage weaker credits proactively. Of the total watch credits of $974 million at March 31, 395 is in our special loans group, 372 still carried in the markets and 167 in the asset based unit.

Separately you will recall that we have been conducting in-depth reviews credit by credit of the investment commercial real estate loans rated passed, in other words not watched. In each of three successive reviews we have conducted since merger with the last completed just last month less dollars were downgraded to watch, $10.5 million in the first quarter. One credit of $1.1 million was transferred to special loans. As with the watch process I believe this quarterly exercise while time consuming for both the markets and credit is another means for us to identify deteriorating situations early and deal with them. Delinquencies, a sometimes leading indicator of developing problems, are down quarter-over-quarter across all loan segments.

A final comment on reserve levels, while Charlie will cover detail in his comments I emphasize that our disciplined analysis of the portfolios and the potential losses embedded in our non-performing assets confirm that we are more than adequately reserved. Our additional provision in the quarter will help us deal with any issues resulting from the quarter’s run up in non-performings. As I defer next to Charlie I observe that Citizens Republic has been dealt a commercial portfolio that has been and will continue to be stressed by a difficult economic environment, declining real estate values and borrowers’ inability to keep loans current for sustained periods. We are committed to working through these portfolios and working them aggressively over the next several quarters keeping a watchful eye on the consumer mortgage and small business portfolios for any signs of slippage.

Charles D. Christy

Key financial highlights for the quarter include our net income for the quarter was $11.1 million down $16.9 million from the fourth quarter and down $20.4 million from the first quarter a year ago. Earnings per share for the quarter was $0.15 down $0.22 from the fourth quarter and down $0.26 from the first quarter a year ago. Our return on assets was 0.33% down 50 basis points from the fourth quarter and our return on equity was 2.83% down 428 basis points from the fourth quarter. Our net interest margin was 3.12% down 14 basis points from the fourth quarter.

A few key highlights for the quarter before I get into the key drivers include on an end of period basis total loans increased $72 million from the fourth quarter and are up $395 million from the first quarter a year ago. Good customer demand for commercial and industrial loans and very select commercial real estate loans across all of our markets has increased total commercial loans by $174 million from the fourth quarter. From the first quarter a year ago total commercial loans are up $677 million or 13%. Offsetting our good commercial loan growth were decreases in our consumer loan balances of $102 million which is in line with normal industry trends due to the lack of demand. Total deposits were up $185 million driven by an increase of $326 million in core deposits as a result of creating a new on balance sheet suite product and migration of time deposits to a high rate savings product while our time deposits were down by $141 million from the fourth quarter.

A number of revenue initiatives continue to show some great progress. To highlight a couple, Treasury management sales are up 87% from a year ago and our SBA loan bookings increased 6.5% over the fourth quarter and is up 126% from the first quarter of last year. Key drivers for the quarter really relate to two areas, decreases in our management income and increases in our loan loss provision. And interest income was down $3.9 million from the fourth quarter due to three key factors. We continue to see positive migration from low cost deposits to high cost deposits, deposit price competition within our markets continue to prevent us from fully driving the Federal Reserve Rate reductions into our deposit pricing which also results in lower spreads and the continued movement of loans to non-performing status. These key factors drove our margin down 14 basis points to 3.12%.

Looking forward in the second quarter we anticipate net interest income will be slightly lower than the first quarter due to the same three factors. As John articulated our credit quality issues continue to drive higher provision expenses than we in the markets expected. Charge offs of $17.4 million were in line with our expectations. Provision expense was $30.6 million and was not in line with our expectations. This was due to the higher than expected increases in non-performing loans, specifically in commercial real estate and the identification of needed specific reserves related to the higher charge off expectations for the upcoming second quarter. With the over provisioning which helped bolster our loan loss reserve we believe that our current level of loan loss reserve adequately reflects the inherent risk in the overall loan portfolio due to a number of factors. Over 85% of our non-performing loans are real estate related and still have collateral value. Our consumer portfolio continues to operate at a low delinquency level as well a low loss rate. Both our delinquency rate and watch lists declined during the quarter. This doesn’t necessarily indicate that we are seeing a stabilizing trend but it may indicate that the growth in our non-performing loan inventory may be slowing. Of the $188 million in commercial non-performing loans only 44 loans make up 60% of the balances. The remaining 40% of the roughly 400 commercial non-performing loans have a $200,000 average balance which is very granular in nature.

We continue to allocate significant resources to evaluate the commercial real estate portfolio and make sure we have rated the loans property, have obtained updated appraisals where needed, have charged down loans to their current share values and have been prudent to reflect the need of specific reserves when evident. These factors along with our credit risk underwriting, monitoring and proactive loss mitigation processes help us gain the comfort that we are adequately reserved. We anticipate that net charge offs for the second quarter of 20008 will almost double the first quarter charge off levels. However the specific reserves already identified in the loan loss reserves should align with the anticipated commercial loan charge offs. Provision expense is expected to be more consistent with net charge offs as we anticipate the need to align with the continued trends in non-performing loans.

Non-interest income was $30.9 million an increase of $1.6 million or 6% from the fourth quarter of 2007. The increase was primarily the result of our $2.1 million gain on redemption of Visa stock. It should be noted we still have Class A shares that we must hold for three years. Mortgage and other loan income was better by $1.2 million primarily due to better gains in sale mortgages in the secondary markets due to current interest rate trends. These increases in non-interest income were partially offset by $0.9 million in lower deposit service fees and $0.4 million in lower trust fees. Deposit service charges were down due to seasonality and trust fees were down due to lower performance in the financial markets. We anticipate total non-interest income for the second quarter 2008 will be consistent with or slightly higher than the first quarter of 2008 due to an increase in mortgage and other loan income as a result of our alliance with PHH Mortgage and higher brokerage fees.

Non-interest expense for the quarter was $76.6 million a decrease of $2.3 million or 3% from the fourth quarter of 2007. The decrease was primarily the result of lower salaries and employee benefits of $1.4 million and additional reductions in professional services, equipment and other loan expenses. These were partially offset by higher advertising and public relations and data processing services. The first quarter of 2008 included $1 million in employee severance and selected benefits associated with expanding the PHH Mortgage alliance to include servicing of the entire mortgage portfolio. We also released $0.9 million liability accrued in the fourth quarter of 2007 in connection with Visa’s recent litigation which was our proportionate share at the time.

We anticipate total non-interest expense for the second quarter 2008 will be slightly higher than the first quarter of 2008 due to higher expenses associated with repossessed commercial and residential real estate. We anticipate that effective tax rate for 2008 will be approximately 18 to 22%. However the effective tax rate for the first quarter of 2008 is 7.7% because of favorable developments on the Federal tax issue prevalent in the banking industry. Due to these developments Citizens was able to recognize the discreet tax item of $1.5 million from previously unrecognized tax benefits.

And lastly our capital ratios continue to remain strong and it should be noted that the tier one total capital leverage ratios are estimates until we complete our call reports. Our tier one ratio was 9.04%, our total capital ratio was 11.5%, our tangible common equity was 6.07% and our leverage ratio was 7.39%.

Back to you, Bill.

William R. Hartman

As we mentioned this morning in our comments we were disappointed to see more credit quality deterioration in non-performing loans than we or the markets had expected in January and February. We do however continue to have great confidence in our ability to manage through this portfolio well due to a variety of factors. First of all the processes and the talent and the culture we have built there we think are enabling us to have our arms around that portfolio very well. The deterioration we’re seeing in commercial real estate loans is due primarily to continued deterioration in the Michigan economy. To step up for this we’ve increased our work out unit staffing by 90% and feel very good that we have both the quantity and the quality of people in that unit to get the job done well.

At this point our number one priority given the challenge of the environment is capital and a strong balance sheet. Our decision to spend the dividend was a painful one for the Board and for management, particularly after our February announcement that were cutting to $0.14. But given the additional deterioration beyond our expectations we’re convinced it’s absolutely the right thing to do to protect our shareholders’ investment. It’s the most cost efficient means of improving capital and will better position us for the balance of the year. To those of our investors who look to that cash flow we apologize for being in a position to have to do this. But at the same time we believe protecting your investment is the most important decision criterion at this particular time.

Michigan’s economy just hasn’t stabilized yet and given our credit quality forecast for charge offs and provision expense for the second quarter we also thought it important to over provide this quarter and to increase our loan loss reserve from 1.72% to 1.84%. We now feel much more comfortable with our balance sheet for the second quarter. We will continue to evaluate our capital position as we manage through the cycle but have made no further decisions about capital at this time.

Second, we’re putting a much stronger emphasis on expense management in the company. We’re already making good progress in this area by decreasing expenses $2.3 million from the fourth quarter of 07 and by decreasing expenses $7.1 million from the first quarter of 07. We are now embarking on a major cost initiative in the company and will announce our new expense reduction target in addition to the $34 million already achieved by no later than our second quarter earnings release. We intend to no leave stone uncovered.

Third, we’re placing an increased level of priority on the profitability and quality of our volume and revenue in addition to the volume of our revenue. We’ve introduced tools to our bankers enabling them to price for shareholder value on loans in addition to making sure that the quality is there. All of the loans that we’re underwriting now do meet Citizens positionally high credit quality standards.

Fourth, we’re focusing on improving the fundamentals of execution in every area of the company both on the front line and in the back office. Our new organizational structure introduced in August of 2007 was designed to do that and is providing a much more disciplined profitability approach to the management of our six geographical regions and is developing stronger support to the regions from the back office. We recently completed training of 2,000 employees in how they can best make a difference in the company’s performance by improving execution and team work in these areas.

Fifth, over the last several months we’ve strengthened our senior leadership group with the outside hires of a new Chief Auditor, a new head of Wealth Management and a new head of Human Resources. Our team is strengthened, highly motivated and engaged in leading the profitability improvement initiatives. To set the right tone at the top all 12 of us will take no salary increases or stock awards in 2008. In addition to saving our corporation significant dollars this year we think it also sets an important tone and example as we lead our initiatives. Compensation programs for individuals below the leadership group level will remain unchanged.

Despite the economy we’re showing revenue improvement in a number of areas that Charlie mentioned today and I think it’s important that we continue to stay focused on those areas. We’ve grown our commercial loans with good quality, we’ve improved credit pre-management sales and improved our brokerage and investment fees. In addition to working on the core businesses we’re also exploring new sources of revenue as we pursue our profitability initiatives. We’re working hard to improve the company so the benefits of our initiatives flow to the bottom line as the environment improves. Charlie reviewed with you the drivers of earnings in our release and based on the higher level of provision expense we do expect earnings in the second quarter to be at a reduced level from the first quarter while we do expect to remain profitable for the second quarter.

As you can imagine predicting third and fourth quarter earnings in this environment is more challenging. However based on how we see the markets at this time and our current watch list and delinquency trends we would expect the third quarter provision expense to be less than the first quarter’s and the fourth quarter provision expense to be less than the third quarter’s.

So those are our prepared comments this morning. We’ll be happy to open it up at this point for additional questions.

Question-And-Answer Session

Operator

(Operator Instructions) Looks like our first question will come from Jon Arfstrom with RBC Capital Markets. Please go ahead.

Jon Arfstrom – RBC Capital Markets

Bill, in your comments you talked about the deterioration in January and February and I’m just curious what happened between the time when you cut the dividend and the end of the quarter? What did that period look like in terms of the portfolio performance?

William R. Hartman

Well, I think Jon it’s a good question. First of all, and I think a lot of banks said that they saw some things in March in the form of deterioration that was a little bit more than they had expected and we were in the same boat. We had expected charge offs to come in about where they did and so there were no surprises there, but we did not expect the growth in non-performing loans to be as high as they actually were. It’s a little harder to predict some of the future actions in some of these commercial real estate loans due to the nature of the environment right now and that was really where the surprise was. It was all centered in commercial real estate loans.

Jon Arfstrom – RBC Capital Markets

John, would you say that the increase in NPAs is a natural migration or did you accelerate anything or do a deeper dive in the first quarter?

John D. Schwab

Well, we did dives but the increase in the non-performing assets is running its normal course. As we take one of these properties into our work out unit, Jon, we update our appraisals and try to work with the principals involved and I would, as an aside, add that a couple of these have slipped into non-performing we felt that we were going to be able to work through with the principals to keep them current and they were not able to and those I mentioned in my remarks, a couple of those were quite chunky. So the increase in NPAs is when we get to the point where we say, okay it is appropriate for us to take possession of the property, we discount below what is our market appraisal and move it into our REO anticipating that we will work through these over a period of time.

Jon Arfstrom – RBC Capital Markets

The other question I had was on the income producing NPA increase. Obviously that’s beyond construction and development with I think everybody expects but can you talk a little bit about what drove that?

John D. Schwab

The increases in the commercial real estate non-performing, Jon, there were 36 loans that tipped. About half of them were what I’m going to call much smaller income producing properties where these are retail strips where there is vacancies where the cash flows are no longer supporting the currency of loans. The chunkier ones happen to be as I mentioned both land development and income producing. But as I look at the list, a lot of the smaller ones are these income producing properties.

Operator

Our next question comes from Scott Siefers with Sandler O’Neill. Please go ahead.

Scott Siefers – Sandler O’Neill & Partners, L.P.

Charlie, you ran through some of the regulatory capital ratios and it sounds like you’ve got a pretty decent cushion on all of the beyond the minimum to be well capitalized, but having said that there are a number of companies that are in similar spots and have gone ahead and raised additional capital be it common preferred, convertible, what have you, just given the magnitude of uncertainty in the environment. And then, Bill, you made the comment that you haven’t made any further decisions on capital at this time. I guess what are the kinds of things that you’re thinking about? Would you be willing to consider a capital rate and if not, why should we think that’s off the table, etcetera?

William R. Hartman

Good line of questioning, Scott, and I think you hit the nail on the head when you indicated that the reason other banks are looking at this is the uncertainty of the environment and I think that that’s what we want to continue to monitor at this point. And you’re right. Our tier one right now is just over 9%, it’s 9.04%. We want to continue to monitor that tier one capital ratio. We want to continue to monitor the environment and expectations for it so additional capital is not off the table at this point, but by the same token we’ve made no decision at this point to get additional capital. I think we’re going to evaluate that, we’re going to evaluate the economy and the environment, our expectation and really ensure that we do have the balance sheet properly positioned because we do think that protecting our investors’ equity is very, very important and that’s obviously the reason behind the dividend suspension and we think that that is the first step to take because it’s the most cost efficient way of bolstering and preserving capital. But we’re just continue to monitor the capital position to see whether additional capital is necessary to preserve our equity investment of our investors for the long run.

Scott Siefers – Sandler O’Neill & Partners, L.P.

And then if I can switch over, John, maybe one or two questions just on the reserve. As you look and think about things, you made the comment that the current reserve appears to be more than enough for the losses you see inherent in the portfolio. What would have to happen to real estate specifically and just more broadly for you to believe that a further reserve boost might be necessary?

John D. Schwab

If we decided, Scott, to move some of these properties out of OREO which we’re not planning to do in the near term. If we were to move the stuff into the current economic environment through both sale of these assets there would be additional reserves needed to support that.

Charles D. Christy

I would say from an accounting perspective and how we work through our loan loss reserve methodology, if the inventory of non-performing loans continues to grow at a pace that we’ve seen you’re going to have to eventually build some to cover that because that’s one factor. The other factor would be if you continue to see the market values drop in the marketplace and you see potential losses inherent in the portfolio where you’re going to have to continue to increase your specific reserves against those new identified losses. So those are things that we could see that could cause it to go up. At this point we feel we’re reserved adequately. We feel that we’ve got the specifics in the reserve that we need that actually align well with the charge offs we’re expecting in the second quarter. You get up to the third and fourth quarter, a lot of that depends on if you have continued deterioration or not and then the pace of when it comes at you.

Scott Siefers – Sandler O’Neill & Partners, L.P.

And then switching over to the margins, it’s been under pretty significant pressure for some time. Some of that’s inevitable due to the inflow of NPAs but what kind of strategy do you guys have in place to try to get that level off if possible?

Martin E. Grunst

Let me give you a little context around that. As we look to the second quarter, you look at the three drivers that we see that will negatively impact the margin percentage there, each of those drivers we expect will be a little bit smaller going from first quarter to second quarter. The positive mix shift should be smaller since the first quarter has got the seasonal low point and the demand balances and that will recover a bit in the second quarter. With just the absolute level of rate being lower that mix impact will be smaller. We expect very limited compared to the first quarter much smaller decrease in Fed funds rates so that should have less of an impact on the pricing component. And then we actually see reason for some support in the margin later in the year as we’ve got some intermediate term liabilities that will be re-pricing downwards and we would expect to see some of the credit leverage in loan pricing manifest then as well.

Scott Siefers – Sandler O’Neill & Partners, L.P.

Last question out of curiosity on the decision to suspend the dividend as some other companies have gone too just $0.01 a share effectively suspending the dividend but still keeping one so that the institutional investor base can still remain in the stock, what drove the decision to suspend it completely as opposed to say just take it down to $0.01 or a much more nominal amount?

Martin E. Grunst

That’s a good question because you worry about some of the mutual funds that require income in their stock. We looked at the top 25 investors that we have and we had a few in there but we didn’t feel it was of the size level that would be too impactful. We would hate to lose those investors if they do decide to move out or if they have to but we still felt it was important for us to do whatever we can to bolster our capital.

Operator

Our next question comes from Terry Mcevoy of Oppenheimer & Company. Please go ahead.

Terry Mcevoy – Oppenheimer & Co.

I guess it’s Friday so I’m looking to focus on something good. If I look at the delinquent loans they were down $74 million. Was that simply just moving loans into NPAs and how are you looking at the remainder of the year for delinquency trends? Is it basically going got fill back up again in Q2?

John D. Schwab

That is probably one of the most volatile precursors of potential problems going forward, Terry, in my personal view. And I guess I’m comfortable observing the ups and downs of this over the course of a year. Really one needs to get behind where the delinquencies are. We do pick up here 30 days and over and as we track the movement of 30 to 60 and then into 90 which we do track I think is probably going to be relatively stable, maybe up a little bit second quarter and then hopefully down. It just depends on individual projects but we are on delinquencies like a retch.

Terry Mcevoy – Oppenheimer & Co.

And then looking back at the second quarter 07 review which triggered call it a $31, $32 million provision, were the loans that moved into NPA status in the first quarter of 08, were those looked at in the second quarter and it was simply further deterioration within that borrower in the first quarter moved that into NPA status or were those loans not looked at in the second quarter of last year?

John D. Schwab

You’re referring to the ones that moved into non-performance?

Terry Mcevoy – Oppenheimer & Co.

Exactly.

John D. Schwab

Not all of them would have been looked at in the second quarter of 07, some were, some were as a result of that dive got onto the watch list and we had been working with them for some time to see whether they were going to be able to get through this. We pretty well scrubbed this commercial real estate portfolio that is what I call of past status. I’m not saying that there will not be further deterioration in individual loans, it’s just I think I used the word sustained, the borrower’s ability to sustain keeping loans current. The longer this economic environment continues I think there will be others who are not able to keep it up.

Terry Mcevoy – Oppenheimer & Co.

Just one last quick question for Charlie, if Q2 expenses are going to be potentially higher than the first quarter because of expenses associated with repossessed commercial and residential real estate, what was the dollar amount in the first quarter? I can’t find that number. If that’s going to trigger the increase, could you just quantify what it was in the first quarter?

Charles D. Christy

I don’t have that in front of me either. Marty, do you have a –

Martin E. Grunst

It was a little over $1 million.

Charles D. Christy

Yeah, it was a little over $1 million in the first quarter. But we anticipate that to go. We’ve got, what, $50 million in NPA and if that grew $10 million from one quarter to another, you’ve got to be prudent to expect that that’s just going to increase and you can proportion that around that level.

Operator

Our next question comes from Lee Calfo with Boenning & Scattergood. Please go ahead.

Lee Calfo – Boenning & Scattergood, Inc.

Question on the commercial real estate. I know we talked about a lot of things here, but I was curious if the increase there had any commonalities either geographically or legacy Republic versus Legacy Citizens?

John D. Schwab

It’s commercial real estate and, Lee, I’ll answer it – I’m not trying to be cute here – in bringing these two companies together 15 months ago one was primarily commercial real estate, one was primarily C&I. The run up in the non-performings is commercial real estate.

Lee Calfo – Boenning & Scattergood, Inc.

And geographically any concentrations or commonalities that –

John D. Schwab

Primarily Michigan. To a lesser extent, a few from Ohio thrown in.

Lee Calfo – Boenning & Scattergood, Inc.

And then for your work outs on those, John, have you gotten to the process yet where you’ve had to try to bid out a lot of that real estate? Do you think that from a work out timing perspective there’s going to be a real problem getting bids if you’re not able to work with the current borrower to get them to be current on the loan or is it too soon to see that type of experience yet?

John D. Schwab

We have gotten some indications from some of the folks with whom we work in doing sales earlier and have decided that bulk is not the way to at this point in time. We are, however, on an individual loan basis exploring sales to some investors who actually do have some cash and see the long term value of particular properties that we have in this OREO portfolio and we have pursued a couple of one off deals. I see that to be more of our future in dealing with this OREO than any near term sale of loans in bulk.

Lee Calfo – Boenning & Scattergood, Inc.

I had one question for Charlie, then Charlie you talked about pricing pressure a little bit and really not evading, you’re not able to pass through some of the savings that you otherwise would with the deposits from interest rates coming down. Have there been any change competitively locally given that a lot of your peers in your marketplace is suffering as well or do you anticipate that you might be able to work more through in the future? Because I’m not sure that I think the competition is still intense but you think it’s going to remain as intense as it is or has it changed during the quarter?

Martin E. Grunst

I’d say that it’s still pretty intense and we’re not planning on that lessening over the next couple quarters.

Lee Calfo – Boenning & Scattergood, Inc.

So that’s not part of the margin increase that you would hope to receive later in the year?

Martin E. Grunst

Right.

Charles D. Christy

We have a number of competitors in a couple of our markets that are troubled banks that are still keeping – trouble with liquidity and still keeping rates very, very high.

Operator

Our next question comes from Eileen Rooney with KBW. Please go ahead.

Eileen Rooney – Keefe, Bruyette & Woods

Most of my questions have already been answered, but if you could just talk a little bit about your asset based lending business? I know that they went non-performing. It sounds like you’re working it out. But just how you feel about the portfolio overall and maybe generally speaking was it mainly equipment finance, how many people do you have working in this group and how often do you monitor the borrowing base?

John D. Schwab

We very much like this unit. As you may recall, we formed this unit approximately two years ago with people we knew well and who are highly experienced in this business. The business has fallen into a couple different niches one which may surprise is the automobile supplier network and a number of these are working with suppliers that have entered bankruptcy so some of the financing is post petition that are in possession. The loans are monitored sometimes on a daily basis for collateral. It is almost entirely short term collateral receivables and inventory and the one that I refer to is basically the receivables that we have as remaining collateral. We were liquidating this company together with the other lender in this credit and we’ve sold equipment, we’ve sold inventory, we’re liquidating the receivables which are guaranteed outside of our formula advances by a major manufacturer. The scheduled payments run through the 25th of June and we expect full pay out on this credit. I personally love the asset based lending business. It is collateral lending up close and personal and I would much rather work through one of these credits than a regular C&I that gets a borrowing base every month or three months.

Eileen Rooney – Keefe, Bruyette & Woods

So this is all pretty much in footprint?

John D. Schwab

Yes, for the most part.

Operator

It appears we have no further questions in the queue.

William R. Hartman

That being the case, I thank you all very much. Feel free to call us at any time with questions on the company and I hope you’ll have a great weekend.

Operator

This concludes today’s teleconference. You may now disconnect your lines. Thank you and have a great day.

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