Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Kristine D. Brenner - Director of Investor Relations

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

Lisa T. McNeely - Chief Financial Officer, Executive Vice President, Chief Financial Officer of Citizens Bank and Executive Vice President of Citizens Bank

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

Analysts

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

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

Citizens Republic Bancorp, Inc (CRBC) Q3 2012 Earnings Call October 26, 2012 10:00 AM ET

Operator

Good day, everyone, and welcome to today's program. [Operator Instructions] It is now my pleasure to turn the conference over to Ms. Kristine Brenner. Please go ahead.

Kristine D. Brenner

Thank you. Good morning, and welcome to the Citizens Republic Bancorp Third Quarter Conference Call. This call is being recorded and will be archived for 90 days on the Investor Relations page on our website, www.citizensbanking.com.

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'll open the line up for questions from research analysts.

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.

On September 13, 2012, Citizens and FirstMerit Corporation made an announcement regarding their intended merger. During today's call, we will not address any questions related to the merger due to applicable SEC and contractual restrictions. The information conveyed on today's call is not intended to be and should not be considered an offer of any securities for sale or the solicitation of proxies in connection with the merger. Investors are encouraged to read the joint proxy statement prospectus when it becomes available. This document will contain important information about the proposed transaction, including information regarding participants in the solicitation of proxies with respect to the proposed merger. When filed, the joint proxy statement prospectus will be available without charge from the SEC's website at www.sec.gov and from Citizens website at www.citizensbanking.com.

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 another quarter of solid results that reflect our continued success in executing on key strategic initiatives. Net income attributable to common shareholders for the third quarter was $15 million or $0.37 per share, which includes $4 million in expenses related to the FirstMerit transaction. Importantly, our strategic initiatives have not changed. We continue to focus on providing top-tier client service as we prudently rebuild our loan portfolio. We are mitigating the pressure on net interest margin as much as possible through disciplined relationship pricing. These efforts have allowed us to continue to deliver consistency in our results. Pretax pre-provision profit remains strong at $33 million for the quarter. Credit quality continued to improve leading to another quarter of reduced credit costs. And as expected, net interest margin was down slightly from last quarter, reflecting the prolonged low interest rate environment and the intense competitive pressure in the industry.

We continue to see good results from our strategic focus on C&I and consumer lending lines of business. Compared to the third quarter of last year, C&I balances have increased 10% and Indirect portfolio balances are up over 9%. As anticipated, income-producing commercial real estate and residential mortgage loan balances continue to decline. Core deposit balances continue to represent the most significant component of our total funding at 57%. Core deposits continued to grow this quarter, increasing 9% over last year. Now I'll turn the call over to Lisa and Mark to talk through the quarter in more detail. Lisa?

Lisa T. McNeely

Thanks, Cathy. As Cathy mentioned, we reported net income attributable to common shareholders for the quarter of $15 million, which includes $4.4 million in pretax merger-related expenses. Provision expense was consistent with last quarter at $5 million reflecting continued improvement in our credit metrics. The allowance as a percentage of portfolio loans was 2.25% at the end of the quarter. With sustained strong credit results, we would expect this ratio to continue to gradually move into closer alignment with our peers.

Net interest margin was 3.57% for the quarter, down 3 basis points compared to last quarter and 6 basis points compared the third quarter of last year. As we've mentioned in the past, we expect this environment of low interest rates and intense competition for quality earning assets to result in pressure on our net interest margin. To this point, we have significantly mitigated this pressure by aggressively managing funding costs through deposit relationship pricing, improving our funding mix by emphasizing low-cost deposits while reducing single service high-cost deposits and renegotiating some of our collateralized wholesale funding. As a result, our overall cost of funds decreased 4 basis points compared to last quarter and 24 basis points compared to the third quarter of 2011.

We continue to work diligently to offset the negative impact of regulatory changes on fee income by focusing on services and products that help support a stable base. Total noninterest income was up $1.4 million compared to last quarter, led by a 38% increase in brokerage and investment fees due to our success in executing focused sales efforts during the quarter. Deposit service charges and core-based fees were consistent with last quarter.

Noninterest expenses increased $5.7 million compared to last quarter, primarily due to the $4.4 million in merger-related expenses and a $1 million increase in the losses on other real estate, which was related to a significant write-down on one commercial OREO property. Excluding these 2 items, noninterest expenses would've been right in line with prior quarters.

We recorded a $1.3 million tax expense this quarter, which reflects the tax impact on a positive variance between our current view on earnings for the year compared to our forecast at the time we eliminated the valuation allowance against our deferred tax asset. Total portfolio loans at quarter end totaled $5.4 billion, down slightly compared to last quarter. Growth from the strategic focus on C&I and indirect loans was offset by several large C&I payoffs and the anticipated reductions in real estate-based loan categories. Our C&I portfolio has grown 10% or $158 million since last September, reflecting our focus on lending in our areas of expertise.

Indirect loans have grown 9% or $83 million since last September even though the continued low interest rate environment has accelerated prepayments in this asset class. Our bankers have continued to focus on relationship banking and providing high-quality client service, which has led to an increase in core deposits compared to last quarter and an increase of 9% over the same time last year. The mix of core deposits also continued to improve with an increase in non-interest-bearing deposits and a decrease in more rate-sensitive balances. This helped us lower our cost of funds and mitigate pressure on net interest margin. Time deposits continue to decrease this quarter, reflecting further reductions in single service, high-cost CD balances and the continued runoff of broker time deposits.

Since we started to focus in early 2011, we have reduced the single service CD balances by 41%. I'll turn it over to Mark now for more insight into credit.

Mark W. Widawski

Thanks, Lisa, and good morning. As Cathy and Lisa mentioned, our credit metrics showed further improvement this quarter. Total portfolio of 30- to 89-day delinquencies decreased slightly to 58 basis points, representing the fifth consecutive quarter of improving performance. Total consumer delinquencies dropped significantly from last quarter and were 47 basis points better than the seasonally comparable September 2011, which reflects the improved credit conditions in our markets.

The increase in commercial real estate delinquencies was primarily due to 1 $3.4 million relationship managed in special loans that has subsequently returned to under 30 days past due. C&I delinquencies of under 900,000, represent only 5 basis points of the C&I portfolio. Nonperforming loans fell to 1.18% of total loans. The problem asset formation has stabilized at significantly lower levels following steadily improving market conditions.

Commercial NPL inflows decreased significantly, totaling only $4.6 million for the quarter. The higher level of outflows this quarter was driven by payment in full of the ABL relationship that I discussed last quarter as the driver behind second quarter's increased inflow.

Consumer NPL levels increased by $3.6 million from prior quarter as residential mortgage NPLs continued to be impacted by protracted foreclosure timelines. Overall, new consumer NPL inflows were down versus the second quarter. Nonperforming loans held for sale increased by $15.8 million, reflecting the movement after charge down of 2 commercial relationships with note sale resolution strategies. Our early problem resolution and asset disposition strategy led to another $3 million reduction in other repossessed assets this quarter. Other repossessed assets are down 66% compared to last year. Net charge-offs of $19 million were down $3 million from the same second quarter and represented 1.39% of the total portfolio, which is the lowest charge-off percentage since 2007. Charge-offs included $3.9 million for one C&I credit with the remaining balance moved to held for sale and resolution to the third-party sale pending. All other charge-offs for the quarter were under $1 million.

The balance of the increase in the held for sale account was due to the repurchase of loans associated with one commercial relationship. The loans were part of our 2010 bulk sale and were sold pending legal resolution of a title claim. The matter is working its way through the courts but has taken longer than anticipated by the note buyer. Putback rights on all commercial and consumer bulk sales have expired with no remaining repurchase risk in the transactions.

We continued to see a decline in our commercial watch credit balances, which at 16% of total commercial loans, are at the lowest level since March 2008. Our higher risk-based capital combined with lower levels of adversely rated loans produced a bank level classified asset ratio of 26.9% at quarter end. The allowance for loan losses remained strong at 2.25% of loans and 191% of NPLs. As Cathy mentioned, our C&I book is up 10% over last year. Our core and corporate groups continue to show increased pipelines over prior-year levels. Our indirect lending business had strong late-season growth with third quarter production up 55% over last year. Originations from new states associated with our concentric expansion strategy accounted for 17% of the increased volume. Cathy, back to you.

Cathleen H. Nash

Thanks, Mark and Lisa. I'd like to take a moment to update you regarding the transaction with FirstMerit. As you know, on September 13, we announced the definitive merger agreement under which FirstMerit and Citizens will combine to create a unique, contiguous Midwest banking franchise. Since the announcement, we've had the opportunity to speak with a number of our analyst and investors, as well as our clients and employees and we appreciate the support we've received. Once completed, the combined company will have approximately $24 billion in total assets, $15 billion in loans, $19 billion in deposits, 415 branches, 452 ATMs and more than 5,000 employees across Western Pennsylvania, Ohio, Michigan, Illinois and Wisconsin. The Board and management team continue to believe that the combination with FirstMerit will deliver significant value for our shareholders, allowing them to participate in the potentially significant upside of a stronger bank with increased scale. Our clients benefit from the double branch network expanded across the upper Midwest and the access to enhanced suite of products and services.

The regulatory applications have been filed, and we remain on track to close early in the second quarter of 2013. Our integration team is working hard to ensure that our combination will be as seamless as possible for all clients, employees and the communities we serve, so that we will begin operating on day one in the strongest position possible.

I'd Like to take the opportunity to thank our dedicated employees for their continued hard work throughout this transformational time. Before we turn to Q&A, I'd like to reiterate that today's call about is our third quarter earnings. Therefore, we appreciate you focusing your questions on that topic. With that, Toya, we'll open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from the side of John Barber with KBW.

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

Mark, I was just curious, did the OCC Chapter 7 bankruptcy guidance have any impact on results this quarter?

Mark W. Widawski

John, it didn't this quarter. We were evaluating our bankruptcy situations from both a valuation perspective, as well as making sure that we've got the proper documentation around reaffirmations and are looking at what impact that will have for us in the fourth quarter.

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

Okay. And Lisa, do have the dollar amount of the DTA as of 9/30?

Lisa T. McNeely

Yes, I do. I think -- just a minute. I don't remember right that at the top of my head here, but I think I got that.

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

I can ask another one in the meantime if that helps.

Lisa T. McNeely

It's about $323 million is the value of the deferred tax, or is it deferred tax asset? I'm sorry, the net DTA is $268 million, sorry.

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

$268 million, okay. And then just turning to margins, your securities yields held up pretty well. It's actually up 3 basis points. Just wondering what you guys were buying this quarter.

Lisa T. McNeely

We've been consistent, John, with what we've been buying in the past, which is really a variety of the Ginnie Mae type securities, sort of a very conservative approach, again 0 risk weighted assets, not taking a lot of duration risk.

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

Okay. And I want to be respectful to your comment about not asking questions about FirstMerit. But you had $4.4 million of merger-related charges, is there an expectation of additional charges in the fourth quarter? If you can answer it.

Lisa T. McNeely

We'll continue to have some expenses related to the work that continues to be done on our side. So to tell you a number, I really -- I can't comment on that.

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

Okay, that's fine. And then just the last one I had. Could you just from a high level comment on the local economies in your markets and kind of the outlook for the next 6 to 12 months?

Cathleen H. Nash

Yes, John, it's Cathy. So I would say what our bankers would tell you is that we continue to see good opportunities out there. In my conversations with business owners, we actually have 2 big events coming up next week where we will see a lot of our business clients. My casual conversation with them is, I expect that they're going to see how the elections come out. What I mean by that is, I think they have plans. I think they're looking for the future. I think they see a little bit of uncertainty and in this election cycle. It's, what, 12 days away now I guess. So I have seen the kind of run to the finish line for loan demand sort of slow a little bit in this quarter as the business owners, it's the same. I just kind of want to see how things turn out in the election. Mark, you talk to a lot of our bankers as well. What's your perspective on that?

Mark W. Widawski

I think that's right on the mark. I think the thoughts as to what's going to happen in Washington, the word's fiscal cliff gets thrown around a lot and leads to people being less willing to commit their balance sheet long with additional borrowings. We've seen auto here in Michigan hold up extremely well this year. From the consumer side, our employment situation is helping to buoy our consumer lending both in indirect and our direct business. So it be nice to be able to get some answers for these folks out there.

Operator

[Operator Instructions] We'll move next to the side of Terry McEvoy with Oppenheimer.

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

Could you just talk about reserve levels, maybe by -- where you'd expected to be by the first quarter '12? I know you've said for the last couple of orders, you see them declining to peer levels. But do you think they'd get to peer levels by the end of Q1 2012?

Cathleen H. Nash

I'll give an answer to that, Jerry, and then let Lisa fill in any color. We've continued to see very good improvement or credit quality, so I have no reason to believe that the appropriate measures we're taking on the reserves wouldn't continue as we have continued to see that improvement in credit quality kind of moving us kind of write down the line, if you will. I think you can project where we ended this quarter and where you see our credit ending, and I think you can get to a pretty reasonable place by the end of the first quarter.

Lisa T. McNeely

That's right on, Cathy. I don't have anything to add.

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

And then just tax rate for the fourth quarter and first quarter where we continued to see a small tax is being paid.

Lisa T. McNeely

So in the fourth quarter, again, it's a full year look at our tax situation and right now, we feel pretty comfortable to be -- you could see a little small tax expense. And then as we get into 2013, you would see a more normal tax rate.

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

Okay. And then just a last question and if you can't answer that, I understand. But the largest, biggest question get is, is the Board of Citizens still committed to the FirstMerit transaction given the decline in stock price? Cathy, it sounds like from your prepared remarks that it's 100% the case, and should we really not follow what the stock price has done given your confidence and the upside that you mentioned to the pro forma company in the future.

Cathleen H. Nash

I think if you go back to my comments, Terry, you'll read that -- in the transcript that our Board is fully committed, yes.

Operator

There are no further questions in the queue.

Cathleen H. Nash

Great. Thank you, Toya. Thank you for your questions and your participation in today's call. It was another positive quarter for Citizens, demonstrating our committed success in executing on our strategies and our continuation in doing so. Thanks for joining us today and everyone, have a great weekend.

Operator

This concludes today's conference. You may disconnect at this time, and enjoy the rest of your day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Citizens Republic Bancorp, Inc Management Discusses Q3 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts