Citizens Republic Bancorp Announces Third Quarter 2009 Results
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FLINT, Mich., Oct. 22 /PRNewswire-FirstCall/ -- Citizens Republic Bancorp, Inc. (Nasdaq: CRBC) announced today a net loss of $56.9 million for the three months ended September 30, 2009, compared with a net loss of $347.4 million for the second quarter of 2009 and a net loss of $7.2 million for the third quarter of 2008. On September 30, 2009, Citizens completed its exchange offers to issue common stock in exchange for some of its outstanding debt, which generated approximately $198.0 million of Tier 1 common equity for Citizens. The second quarter of 2009 included a non-cash goodwill impairment charge of $266.5 million (which had no impact on regulatory capital ratios or Citizens' overall liquidity). After incorporating the $5.2 million dividend paid to the preferred shareholder, Citizens reported a net loss attributable to common shareholders of $62.1 million for the three months ended September 30, 2009. Diluted net loss per share was $0.48, compared with $2.81 for the second quarter of 2009 and $0.20 for the third quarter of 2008. Annualized returns on average assets and average equity during the third quarter of 2009 were (1.86)% and (18.40)%, respectively, compared with (10.91)% and (89.50)% for the second quarter of 2009 and (0.22)% and (1.84)% for the third quarter of 2008.
(Logo: http://www.newscom.com/cgi-bin/prnh/20050421/DETH014LOGO )
"We are encouraged with our core operating results this quarter: net interest margin improved, pre-tax pre-provision core earnings increased, and core deposits rose for the third straight quarter," said Cathleen H. Nash, president and chief executive officer. "As we continue to work through the economic challenges in our footprint, we are pleased by the considerable progress we made this quarter to further strengthen our balance sheet. We bolstered our loan loss reserve to 4.13% of total loans at September 30, 2009. In our recent exchange offers, holders of over 75% of the subject debt securities exchanged their securities for common shares. As a result of the completion of the recent exchange offers, our capital ratios improved during the quarter and continue to be well above the "well-capitalized" regulatory requirements. We are very focused on maintaining strong liquidity and capital levels as we manage through this recession," added Ms. Nash.
Key Highlights in the Quarter:
-- Net interest margin for the third quarter of 2009 was 2.97% compared
with 2.73% for the second quarter of 2009. The increase in net interest
margin over the second quarter of 2009 was primarily the result of
expanding loan spreads, declining deposit costs, and a decrease in
higher-cost brokered time deposit balances.
-- The pre-tax pre-provision core operating earnings for the third quarter
of 2009 totaled $30.5 million, an increase of $9.1 million or 42.4% over
the second quarter of 2009. The increase was primarily the result of a
$5.3 million improvement in net interest income.
-- Core deposits at September 30, 2009 increased $234.3 million or 4.8%
over June 30, 2009 to $5.1 billion and increased $544.7 million or 12.0%
over September 30, 2008.
-- Citizens continues to hold short-term (liquid) assets at September 30,
2009 of $533.5 million, a decrease of $27.2 million or 4.8% from June
30, 2009 and an increase of $531.0 million over September 30, 2008.
-- Total nonperforming assets at September 30, 2009 were essentially
unchanged from June 30, 2009 at $608.0 million.
-- The allowance for loan losses at September 30, 2009 increased to $339.7
million or 4.13% of portfolio loans, compared with $333.4 million or
3.96% at June 30, 2009. The provision for loan losses for the third
quarter of 2009 was $77.8 million, compared with $100.0 million for the
second quarter of 2009. The decrease in the provision for loan losses
was primarily due to more stable nonperforming loan levels. Net
charge-offs for the third quarter of 2009 totaled $71.5 million,
compared with $49.2 million for the second quarter of 2009.
-- On September 16, 2009, Citizens' shareholders voted to approve the
proposal to amend the company's Amended and Restated Articles of
Incorporation to increase the number of authorized shares of common
stock from 150 million to 1.05 billion shares.
-- On September 30, 2009 Citizens completed the settlement of its exchange
offers to issue common stock in exchange for its outstanding 5.75%
Subordinated Notes due 2013 (the "Subordinated Notes") and outstanding
7.50% Enhanced Trust Preferred Securities (the "Trust Preferred
Securities") of Citizens Funding Trust I (the "Exchange Offers"). In the
aggregate, approximately 268.2 million shares were issued in exchange
for approximately $107.8 million principal amount of its Subordinated
Notes and approximately $101.3 million aggregate liquidation amount of
the Trust Preferred Securities. The Exchange Offers generated
approximately $198.0 million of Tier 1 common equity and a non-cash net
loss on the early extinguishment of debt totaling $15.9 million.
-- Citizens' regulatory capital ratios increased during the third quarter
of 2009 due to the Exchange Offers and continue to exceed the
"well-capitalized" designation. As of September 30, 2009, Citizens'
estimated capital ratios were as follows:
-- Tier 1 capital - 12.77%
-- Total capital - 14.17%
-- Tier 1 leverage - 9.62%
-- Tier 1 common equity - 8.89%
-- Tangible common equity to tangible assets - 6.74%
-- Tangible equity to tangible assets - 9.02%
Balance Sheet
Total assets at September 30, 2009 were $12.1 billion, a decrease of $216.6 million or 1.8% from June 30, 2009 and a decrease of $1.0 billion or 8.0% from September 30, 2008. The declines were primarily due to reductions in total portfolio loans and the second quarter of 2009 goodwill impairment, partially offset by higher money market investments.
Money market investments at September 30, 2009 totaled $533.5 million, a decrease of $27.2 million or 4.8% from June 30, 2009 and an increase of $531.0 million over September 30, 2008. The decrease from June 30, 2009 was primarily the result of using portfolio cash flow to reduce short-term borrowings. The increase over September 30, 2008 was primarily the result of holding excess short-term funds with the Federal Reserve as a result of continued deposit growth, coupled with a lack of demand for loans from credit-worthy clients.
Investment securities at September 30, 2009 totaled $2.4 billion, essentially unchanged from June 30, 2009 and an increase of $213.9 million or 9.9% over September 30, 2008. The increase over September 30, 2008 was primarily the result of investing the proceeds from the fourth quarter of 2008 participation in the TARP Capital Purchase Program into securities that can be pledged as collateral for funding of future loans, partially offset by the effects of using portfolio cash flow to reduce short-term and long-term borrowings. Citizens did not have any other-than-temporary impairment charges during the third quarter of 2009.
The following table displays the total commercial loan portfolio by segment at quarter end for each of the last five quarters. The following definitions are provided to clarify the types of loans included in each of the commercial real estate segments identified in the table. Land hold loans are secured by undeveloped land which has been acquired for future development. Land development loans are secured by land undergoing infrastructure improvements to create finished marketable lots for commercial or residential construction. Construction loans are secured by commercial, retail and residential real estate in the construction phase with the intent to be sold or become an income producing property. Income producing loans are secured by non-owner occupied real estate leased to one or more tenants. Owner occupied loans are secured by real estate occupied by the owner for ongoing operations.
Commercial Loan Portfolio
(in millions) Sep 30 Jun 30 Mar 31 Dec 31 Sep 30
2009 2009 2009 2008 2008
-------- -------- -------- -------- --------
Land Hold $52.0 $54.9 $54.2 $45.0 $48.3
Land Development 129.7 123.1 121.2 132.7 125.0
Construction 214.8 230.4 257.7 263.5 364.2
Income Producing 1,509.7 1,534.5 1,558.2 1,556.2 1,533.2
Owner-Occupied 992.4 979.5 953.0 967.3 999.6
-------- -------- -------- -------- --------
Total Commercial
Real Estate 2,898.6 2,922.4 2,944.3 2,964.7 3,070.3
Commercial and
Industrial 2,099.8 2,198.3 2,394.4 2,602.4 2,703.7
-------- -------- -------- -------- --------
Total Commercial
Loans $4,998.4 $5,120.7 $5,338.7 $5,567.1 $5,774.0
======== ======== ======== ======== ========
The decreases in total commercial loans were primarily the result of a decline in customer demand from credit-worthy clients, normal paydowns as a result of client activity, and charge-offs.
Residential mortgage loans at September 30, 2009 totaled $1.1 billion, a decrease of $60.1 million or 5.3% from June 30, 2009 and a decrease of $194.8 million or 15.2% from September 30, 2008. The declines were primarily the result of normal paydowns as a result of client activity and new business not being retained in the portfolio due to Citizens' strategy of selling more than 90% of new mortgage originations into the secondary market.
Direct consumer loans, which are primarily home equity loans, were $1.3 billion at September 30, 2009, a decrease of $43.2 million or 3.2% from June 30, 2009 and a decrease of $173.1 million or 11.7% from September 30, 2008. The decreases were due to weaker consumer demand. Indirect consumer loans, which are primarily marine and recreational vehicle loans, totaled $825.3 million at September 30, 2009, essentially unchanged from June 30, 2009 and September 30, 2008.
Loans held for sale at September 30, 2009 were $61.4 million, a decrease of $16.7 million or 21.4% from June 30, 2009 and a decrease of $45.1 million or 42.3% from September 30, 2008. The decreases were primarily the result of a decline in commercial loans held for sale due to customer paydowns, writedowns to reflect market-value declines for the underlying collateral, and transfers to ORE.
Goodwill at September 30, 2009 was $330.7 million, unchanged from June 30, 2009 and a decrease of $266.5 million from September 30, 2008. The decrease was due to a non-cash and non-tax-deductible goodwill impairment charge recorded in the second quarter of 2009. Citizens performed an evaluation to determine if events or circumstances indicated additional goodwill impairment at September 30, 2009. As the key inputs and drivers remained consistent with those at June 30, 2009, Citizens concluded that no additional impairment was indicated. There can be no assurance, however, that future testing will not result in additional material impairment charges due to further developments in the banking industry or Citizens' markets.
Total deposits at September 30, 2009 were $8.8 billion, a decrease of $121.6 million or 1.4% from June 30, 2009 and a decrease of $214.2 million or 2.4% from September 30, 2008. Core deposits, which exclude all time deposits, totaled $5.1 billion at September 30, 2009, an increase of $234.3 million or 4.8% over June 30, 2009 and an increase of $544.7 million or 12.0% over September 30, 2008. The increases were primarily the result of clients holding higher balances in transaction accounts and recent changes in FDIC coverage thresholds. Time deposits totaled $3.7 billion at September 30, 2009, a decrease of $355.9 million or 8.7% from June 30, 2009 and a decrease of $758.9 million or 17.0% from September 30, 2008. The decreases in time deposits were primarily the result of planned reductions in brokered deposits and a shift in funding mix from customer time deposits to core deposits.
Other interest-bearing liabilities, which include federal funds purchased and securities sold under agreements to repurchase, other short-term borrowings, and long-term debt, totaled $1.7 billion at September 30, 2009, a decrease of $265.9 million or 13.3% from June 30, 2009 and a decrease of $740.0 million or 30.0% from September 30, 2008. The decreases were primarily the result of exchanging $209.1 million in long-term debt (approximately $107.8 million principal amount of its Subordinated Notes and approximately $101.3 million aggregate liquidation amount of the Trust Preferred Securities) for Citizens' common stock in the third quarter of 2009 and applying the proceeds from loan prepayments to reduce wholesale funding.
Capital Adequacy and Liquidity
Shareholders' equity at September 30, 2009 totaled $1.4 billion, an increase of $178.3 million or 14.6% over June 30, 2009 and a decrease of $133.3 million or 8.7% from September 30, 2008. The increase over June 30, 2009 was primarily the result of the issuance of common shares upon consummation of the Exchange Offers in the third quarter of 2009, partially offset by the net loss for the third quarter of 2009. The decrease from September 30, 2008 was primarily the result of the net losses incurred since the third quarter of 2008, partially offset by the capital raised during the fourth quarter of 2008 and the consummation of the Exchange Offers in the third quarter of 2009.
On September 30, 2009, Citizens completed the Exchange Offers, exchanging approximately 268.2 million shares of Citizens' common stock for an aggregate of $209.1 million in long-term debt (or approximately 76% of the outstanding securities that were subject to the Exchange Offers). The consummation of the Exchange Offers strengthened Citizens' capital base by raising approximately $198.0 million of Tier 1 common equity and also reduced the interest expense associated with the Subordinated Notes and the Trust Preferred Securities by approximately $13.8 million annually. The Exchange Offers generated a non-cash net loss on the early extinguishment of debt totaling $15.9 million, which represents the difference between the fair value of Citizens' common stock issued (as of the expiration date of the Exchange Offers) and the carrying amount of the retired debt.
Citizens continues to maintain a strong capital position, and its regulatory capital ratios are above "well-capitalized" standards, as evidenced by the following key capital ratios.
Regulatory
Minimum for Excess Capital
"Well- over Minimum
Capitalized" 9/30/09 6/30/09 3/31/09 (in millions)
----------- ------- ------- ------- -----------
Tier 1 capital
ratio* 6.00% 12.77% 11.81% 12.16% $601.0
Total capital
ratio* 10.00% 14.17% 13.91% 14.21% $370.2
Tier 1 leverage
ratio* 5.00% 9.62% 8.68% 9.32% $544.5
Tier 1 common
ratio* 8.89% 6.95% 7.52%
Tangible common
equity to
tangible assets 6.74% 5.14% 5.58%
Tangible equity
to tangible
assets 9.02% 7.39% 7.74%
* September 30, 2009 is an estimate
----------------------------------------
Like many financial institutions across the United States, Citizens has been impacted by deteriorating economic conditions. Recent events such as bankruptcy filings by significant automotive manufacturers and suppliers, as well as announced automotive plant and dealer closings, affect the national economy in general and the Michigan economy in particular. As a result, to withstand the effects of increased economic stress and uncertainty over the coming months and years, as described in its recent SEC filings, Citizens continues to evaluate a number of alternatives to raise additional Tier 1 common equity to maintain and strengthen its balance sheet.
Citizens maintains a strong liquidity position due to its on-balance sheet liquidity sources and very stable funding base comprised of approximately 73% deposits, 14% long-term debt, 12% equity, and 1% short-term liabilities. Citizens also has access to high levels of untapped liquidity through collateral-based borrowing capacity provided by portions of both the loan and investment securities portfolios. Additionally, money market investments and securities available-for-sale could be sold for cash to provide liquidity, if necessary.
Net Interest Margin and Net Interest Income
Net interest margin was 2.97% for the third quarter of 2009 compared with 2.73% for the second quarter of 2009 and 3.09% for the third quarter of 2008. The increase in net interest margin over the second quarter of 2009 was primarily the result of expanding loan spreads, declining deposit costs, and a decrease in higher-cost brokered time deposit balances.
The decrease in net interest margin from the third quarter of 2008 was primarily the result of deposit price competition, the movement of loans to nonperforming status, and an increase in short-term investments to provide additional on-balance sheet liquidity, partially offset by expanding commercial and consumer loan spreads and retail time deposits repricing to a lower rate. For the nine months ended September 30, 2009, net interest margin declined to 2.81% compared with 3.11% for the same period of 2008 as a result of the aforementioned factors.
Net interest income was $80.9 million for the third quarter of 2009, an increase of $5.3 million or 7.0% over the second quarter of 2009, and a decrease of $6.4 million or 7.4% from the third quarter of 2008. The increase over the second quarter of 2009 was due to the increase in net interest margin, partially offset by a $345.6 million decrease in average earning assets. The decrease in average earning assets was primarily the result of a decrease in loan portfolio balances due to lower demand in the current Midwest economic environment, and a decrease in investment securities balances due to maturing balances not being fully reinvested.
The decrease in net interest income compared with the third quarter of 2008 was due to the lower net interest margin and a $492.3 million decrease in average earning assets. The decrease in average earning assets was the result of a decrease in loan portfolio balances due to lower demand in the current Midwest economic environment, partially offset by an increase in investment securities and money market investments. For the nine months ended September 30, 2009, net interest income declined to $233.4 million compared with $263.2 million for the same period of 2008 as a result of the lower net interest margin and a $213.3 million decrease in average earning assets due to the aforementioned factors.
Credit Quality
The quality of Citizens' loan portfolio is impacted by numerous factors, including the economic environment in the markets in which Citizens operates. Citizens carefully monitors its loans in an effort to identify and mitigate any potential credit quality issues and losses in a proactive manner. Citizens performs quarterly reviews of the non-watch commercial credit portfolio focusing on industry segments and asset classes that have or may be expected to experience stress due to economic conditions. This process seeks to validate each such credit's risk rating, underwriting structure and exposure management under current and stressed economic scenarios while strengthening these relationships and improving communication with these clients.
The following tables represent four qualitative aspects of the loan portfolio that illustrate the overall level of quality and risk inherent in the loan portfolio.
-- Table 1 - Delinquency Rates by Loan Portfolio - This table illustrates
the loans where the contractual payment is 30 to 89 days past due and
interest is still accruing. While these loans are actively worked to
bring them current, past due loan trends may be a leading indicator of
potential future nonperforming loans and charge-offs.
-- Table 2 - Commercial Watchlist - This table illustrates the commercial
loans that, while still accruing interest, we believe may be at risk due
to general economic conditions or changes in a borrower's financial
status and therefore require increased oversight. Watchlist loans that
are in nonperforming status are included in Table 3 below.
-- Table 3 - Nonperforming Assets - This table illustrates the loans that
are in nonaccrual status, loans past due 90 days or more on which
interest is still accruing, restructured loans, nonperforming loans that
are held for sale, and other repossessed assets acquired. The
commercial loans included in this table are reviewed as part of the
watchlist process in addition to the loans displayed in Table 2.
-- Table 4 - Net Charge-Offs - This table illustrates the portion of loans
that have been charged-off during each quarter.
Table 1 -- Delinquency Rates By Loan Portfolio
30 to 89 days Past Due
Sep 30, 2009 Jun 30, 2009 Mar 31, 2009
------------ ------------ ------------
(dollars in % of % of % of
millions) $ Portfolio $ Portfolio $ Portfolio
- ---------- - --------- - ---------
Land Hold $1.4 2.61% $3.5 6.38% $3.7 6.83%
Land Development 12.0 9.29 1.3 1.06 11.1 9.16
Construction 12.1 5.64 1.7 0.74 16.7 6.48
Income Producing 44.9 2.97 50.0 3.26 64.2 4.12
Owner-Occupied 24.4 2.46 15.6 1.59 37.4 3.92
---- ---- ---- ---- ---- ----
Total
Commercial
Real Estate 94.8 3.27 72.1 2.47 133.1 4.52
Commercial and
Industrial 20.2 0.96 34.0 1.55 47.1 1.97
---- ---- ---- ---- ---- ----
Total
Commercial
Loans 115.0 2.30 106.1 2.07 180.2 3.38
Residential
Mortgage 30.3 2.80 27.7 2.42 25.9 2.14
Direct Consumer 24.5 1.87 23.3 1.72 20.4 1.45
Indirect
Consumer 16.3 1.98 14.6 1.81 14.7 1.83
---- ---- ---- ---- ---- ----
Total Consumer
Loans 71.1 2.21 65.6 1.98 61.0 1.79
Total
Delinquent
Loans $186.1 2.26% $171.7 2.04% $241.2 2.76%
====== ====== ======
Dec 31, 2008 Sep 30, 2008
------------ ------------
$ % of $ % of
Portfolio Portfolio
-- ---------- -- ---------
Land Hold $3.9 8.67% $7.3 15.11 %
Land Development 5.2 3.92 10.3 8.24
Construction 27.3 10.36 26.1 7.17
Income Producing 76.7 4.93 50.1 3.27
Owner-Occupied 37.5 3.88 21.3 2.13
---- ---- ---- ----
Total Commercial
Real Estate 150.6 5.08 115.1 3.75
Commercial and
Industrial 56.5 2.17 29.1 1.08
---- ---- ---- ----
Total Commercial
Loans 207.1 3.72 144.2 2.50
Residential Mortgage 39.5 3.13 37.7 2.95
Direct Consumer 25.5 1.76 19.5 1.32
Indirect Consumer 18.5 2.25 13.6 1.61
---- ---- ---- ----
Total Consumer
Loans 83.5 2.36 70.8 1.96
Total Delinquent
Loans $290.6 3.19% $215.0 2.29 %
====== ======
The increase in total delinquencies over June 30, 2009 was primarily the result of longer than anticipated renewal efforts on several large commercial real estate loans totaling $10.2 million (which have since been renewed in the fourth quarter), partially offset by a decrease in commercial and industrial delinquent loans. The decrease from September 30, 2008 was primarily due to enhanced administrative renewal efforts. However, the weak economy in the Midwest and particularly in Michigan, continues to significantly impact Citizens' commercial real estate portfolio.
As part of its overall credit underwriting and review process and loss mitigation strategy, Citizens carefully monitors commercial and commercial real estate credits that are current in terms of principal and interest payments but may deteriorate in quality as economic conditions decline. Commercial relationship officers monitor their clients' financial condition and initiate changes in loan ratings based on their findings. Loans that have migrated within the loan rating system to a level that requires increased oversight are considered watchlist loans (generally consistent with the regulatory definition of special mention, substandard, and doubtful loans) and include loans that are accruing (see Table 2) or nonperforming (see Table 3). Citizens utilizes the watchlist process as a proactive credit risk management practice to help mitigate the migration of commercial loans to nonperforming status and potential loss. Once a loan is placed on the watchlist, it is reviewed quarterly by the chief credit officer, senior credit officers, senior market managers, and commercial relationship officers to assess cash flows, collateral valuations, guarantor liquidity, and other pertinent trends. During these meetings, action plans are implemented or reviewed to address emerging problem loans or to remove loans from the portfolio. Additionally, loans viewed as substandard or doubtful are transferred to Citizens' special loans or small business workout groups and are subjected to an even higher level of monitoring and workout activity.
Table 2 -- Commercial Watchlist
Accruing loans only
Sep 30, 2009 Jun 30, 2009 Mar 31, 2009
------------ ------------ ------------
(dollars in
millions) $ % of $ % of $ % of
Portfolio Portfolio Portfolio
-- --------- -- --------- -- ---------
Land Hold $29.0 55.76% $18.1 32.97% $15.7 28.97%
Land
Development 93.6 72.12 83.6 67.91 62.4 51.49
Construction 90.4 42.10 90.3 39.19 86.6 33.60
Income
Producing 519.6 34.42 458.9 29.91 421.9 27.08
Owner-Occupied 277.3 27.94 274.4 28.01 224.2 23.53
----- ----- ----- ----- ----- -----
Total
Commercial
Real
Estate 1,009.9 34.84 925.3 31.66 810.8 27.54
Commercial and
Industrial 510.3 24.30 532.9 24.24 479.7 20.03
----- ----- ----- ----- ----- -----
Total
Watchlist
Loans $1,520.2 30.41% $1,458.2 28.48% $1,290.5 24.17%
======== ======== ========
Dec 31, 2008 Sep 30, 2008
------------ ------------
% of % of
$ Portfolio $ Portfolio
-- --------- -- ---------
Land Hold $18.5 41.11% $20.7 42.86 %
Land Development 49.3 37.15 51.8 41.44
Construction 74.8 28.39 104.8 28.78
Income Producing 401.0 25.77 290.3 18.93
Owner-Occupied 178.4 18.44 167.0 16.71
----- ----- ----- -----
Total Commercial
Real Estate 722.0 24.35 634.6 20.67
Commercial and
Industrial 436.8 16.78 431.2 15.95
----- ----- ----- -----
Total Watchlist
Loans $1,158.8 20.82% $1,065.8 18.46 %
======== ========
The increases in accruing watchlist loans over June 30, 2009 and September 30, 2008 were primarily the result of the aforementioned non-watch commercial credit reviews as signs of economic or business related stress indicate more credit oversight and review is warranted. Additionally, the increases were also impacted by continuing commercial real estate deterioration in Michigan and, as a way to help mitigate future losses, additional proactive downgrades as Citizens closely monitors borrowers' repayment capacity in this environment.
Table 3 -- Nonperforming Assets
Sep 30, 2009 Jun 30, 2009 Mar 31, 2009
---------------- -------------- -------------
(dollars in % of % of % of
millions) $ Portfolio $ Portfolio $ Portfolio
-- --------- -- --------- -- ---------
Land Hold $13.3 25.56% $13.1 23.86% $12.0 22.14%
Land
Development 13.7 10.52 15.1 12.27 14.6 12.05
Construction 33.7 15.70 36.0 15.63 26.5 10.28
Income
Producing 126.7 8.39 139.4 9.08 116.3 7.46
Owner-Occupied 70.2 7.07 72.0 7.35 66.5 6.98
---- ---- ---- ---- ---- ----
Total
Commercial
Real
Estate 257.6 8.89 275.6 9.43 235.9 8.01
Commercial
and
Industrial 111.5 5.31 91.8 4.18 83.7 3.50
----- ---- ---- ---- ---- ----
Total
Nonaccruing
Commercial
Loans 369.1 7.38 367.4 7.17 319.6 5.99
Residential
Mortgage 106.5 9.82 103.3 9.02 84.6 7.00
Direct
Consumer 20.4 1.56 20.3 1.50 21.0 1.49
Indirect
Consumer 2.6 0.31 1.4 0.17 2.0 0.25
--- ---- --- ---- --- ----
Total
Non-
accruing
Consumer
Loans 129.5 4.03 125.0 3.78 107.6 3.15
Total
Non-
accruing
Loans 498.6 6.07 492.4 5.84 427.2 4.88
Loans 90+
days
still
accruing 0.6 0.01 0.8 0.01 1.0 0.01
Restructured
loans 2.3 0.03 2.5 0.03 0.4 -
--- ---- --- ---- --- --
Total
Non-
performing
Portfolio
Loans 501.5 6.10% 495.7 5.88% 428.6 4.90%
Nonperforming
Held
for Sale 44.5 54.3 64.6
Other
Repossessed
Assets
Acquired 62.0 54.7 57.4
---- ---- ----
Total
Non-
performing
Assets $608.0 $604.7 $550.6
====== ====== ======
Dec 31, 2008 Sep 30, 2008
------------ ------------
% of % of
$ Portfolio $ Portfolio
-- --------- -- ---------
Land Hold $10.4 23.11% $11.0 22.77 %
Land Development 23.4 17.63 20.6 16.48
Construction 18.3 6.94 25.7 7.06
Income Producing 78.6 5.05 57.6 3.76
Owner-Occupied 31.8 3.29 17.7 1.77
---- ---- ---- ----
Total Commercial
Real Estate 162.5 5.48 132.6 4.32
Commercial and
Industrial 64.6 2.48 38.2 1.41
---- ---- ---- ----
Total Nonaccruing
Commercial Loans 227.1 4.08 170.8 2.96
Residential Mortgage 59.5 4.71 40.2 3.14
Direct Consumer 15.1 1.04 16.3 1.10
Indirect Consumer 2.6 0.32 2.1 0.25
--- ---- --- ----
Total Nonaccruing
Consumer Loans 77.2 2.18 58.6 1.63
Total Nonaccruing
Loans 304.3 3.34 229.4 2.45
Loans 90+ days
still accruing 1.5 0.02 1.6 0.02
Restructured loans 0.2 - 0.3 -
--- - ---
Total Nonperforming
Portfolio Loans 306.0 3.36% 231.3 2.47%
Nonperforming Held
for Sale 75.2 86.6
Other Repossessed
Assets Acquired 58.0 46.5
---- ----
Total Nonperforming
Assets $439.2 $364.4
====== ======
The increase in nonperforming assets over September 30, 2008 was primarily the result of continued deterioration in the real estate secured portfolios (particularly commercial) and general economic deterioration in the Midwest. Nonperforming assets at September 30, 2009 represented 7.34% of total loans plus other repossessed assets acquired compared with 7.13% at June 30, 2009 and 3.87% at September 30, 2008. Nonperforming commercial loan inflows were $94.2 million in the third quarter of 2009 compared with $133.3 million in the second quarter of 2009 and $102.6 million in the third quarter of 2008.
Nonperforming commercial loan outflows were $93.0 million in the third quarter of 2009 compared with $85.9 million in the second quarter of 2009 and $38.5 million in the third quarter of 2008. The third quarter of 2009 outflows included $7.3 million in loans that returned to accruing status, $29.6 million in loan payoffs and paydowns, $49.2 million in charged-off loans, and $6.9 million transferred to other repossessed assets acquired.
Table 4 -- Net
Charge-Offs
Three Months Ended
------------------
Sep 30, 2009 Jun 30, 2009 Mar 31, 2009
------------ ------------ ------------
% of % of % of
$ Portfolio $ Portfolio $ Portfolio
-- --------- -- --------- -- ---------
Land Hold $0.5 4.02% $0.6 4.37% $--- ---%
Land Development 1.4 4.19 2.4 7.80 6.3 20.79
Construction 0.9 1.63 5.8 10.07 2.0 3.10
Income Producing 24.5 6.50 12.6 3.28 7.8 2.00
Owner-Occupied 4.6 1.85 7.9 3.23 2.4 1.01
--- ---- --- ---- --- ----
Total Commercial
Real Estate 31.9 4.40 29.3 4.01 18.5 2.51
Commercial and
Industrial 20.1 3.84 6.8 1.24 8.0 1.34
---- ---- --- ---- --- ----
Total Commercial
Loans 52.0 4.16 36.1 2.82 26.5 1.99
Residential
Mortgage 10.0 3.67 2.2 0.77 0.8 0.26
Direct Consumer 6.3 1.92 6.5 1.92 4.4 1.25
Indirect Consumer 3.2 1.56 4.4 2.18 5.0 2.49
--- ---- --- ---- --- ----
Total Consumer
Loans 19.5 2.42 13.1 1.59 10.2 1.19
Total Net Charge-
offs $71.5 3.41% $49.2 2.30% $36.7 1.67%
===== ===== =====
** Represents
an annualized
rate.
-----------------------------------
Three Months Ended
------------------
Dec 31, 2008 Sep 30, 2008
------------ ------------
% of % of
$ Portfolio** $ Portfolio**
-- ------------ -- -----------
Land Hold $4.6 40.89% $1.7 14.08 %
Land Development 5.8 17.48 6.9 22.08
Construction 10.7 16.24 0.5 0.55
Income Producing 21.7 5.58 4.4 1.15
Owner-Occupied 3.1 1.28 1.3 0.52
--- ---- --- ----
Total Commercial
Real Estate 45.9 6.19 14.8 1.93
Commercial and
Industrial 21.9 3.37 0.4 0.06
---- ---- --- ----
Total Commercial
Loans 67.8 4.87 15.2 1.05
Residential Mortgage 1.6 0.51 0.5 0.16
Direct Consumer 5.9 1.63 3.3 0.89
Indirect Consumer 5.7 2.78 3.4 1.61
--- ---- --- ----
Total Consumer
Loans 13.2 1.49 7.2 0.80
Total Net Charge-
offs $81.0 3.48% $22.4 0.94 %
===== =====
** Represents an annualized rate.
-----------------------------------
The increase in net charge-offs over the second quarter of 2009 was primarily the result of charging off four large commercial real estate loans totaling $17.6 million and four large commercial and industrial loans totaling $16.2 million (one of which was related to real estate construction projects). Additionally, the increase in residential mortgage net charge-offs over the second quarter of 2009 was primarily due to charging off one loan totaling $2.1 million and an increase in the migration of nonperforming loans through the disposition process, which was expected. The increase over the third quarter of 2008 was primarily the result of continued deterioration in the real estate secured portfolios (particularly commercial) and general economic deterioration in the Midwest.
The allowance for loan losses was $339.7 million or 4.13% of portfolio loans at September 30, 2009, compared with $333.4 million or 3.96% at June 30, 2009 and $217.7 million or 2.32% at September 30, 2008. The increases were primarily the result of continued deterioration in commercial real estate loans and an increase in the loss migration rates and extended duration of residential mortgage and consumer loans. Based on current conditions and expectations, Citizens believes that the allowance for loan losses is adequate to address the estimated loan losses inherent in the existing loan portfolio at September 30, 2009.
After determining what Citizens believes is an adequate allowance for loan losses based on the risk in the portfolio, the provision for loan losses is calculated as a result of the net effect of the quarterly change in the allowance for loan losses and the quarterly net charge-offs. The provision for loan losses was $77.8 million in the third quarter of 2009, compared with $100.0 million in the second quarter of 2009 and $58.4 million in the third quarter of 2008. The decrease from the second quarter of 2009 was primarily due to more stable nonperforming loan levels in the third quarter. The increase over the third quarter of 2008 was primarily the result of higher net charge-offs and overall migration of loans to nonperforming status. This migration, and evaluation of the underlying collateral supporting these loans, caused an increase in the allowance for loan losses due to the higher likelihood that portions of these loans may eventually be charged-off.
Noninterest Income
Noninterest income for the third quarter of 2009 was $11.8 million, a decrease of $9.1 million or 43.5% from the second quarter of 2009 and a decrease of $16.2 million or 57.7% from the third quarter of 2008. Noninterest income for the first nine months of 2009 totaled $52.0 million, a decrease of $33.9 million or 39.5% from the same period of 2008.
The decrease in noninterest income from the second quarter of 2009 was primarily the result of the aforementioned net loss on the extinguishment of debt in connection with the Exchange Offers ($15.9 million), partially offset by lower losses on loans held for sale ($3.5 million), higher other income ($2.5 million), and higher service charges on deposit accounts ($0.7 million). The decrease in losses on loans held for sale was primarily the result of lower writedowns to reflect market-value declines for the underlying collateral. The increase in other income was primarily the result of receiving the proceeds for an insurance claim on a previous branch office, exiting the holding company's 2006 capital investment in a limited partnership, and a higher rate on bank owned life insurance. The increase in service charges on deposit accounts was primarily the result of higher customer transaction volume.
The decrease in noninterest income from the third quarter of 2008 was primarily due to the aforementioned net loss on the extinguishment of debt ($15.9 million) and, to a lesser extent, lower service charges on deposit accounts ($0.7 million) and trust fees ($0.6 million). The decrease in service charges on deposit accounts was primarily the result of a decline in customer transaction volume. The decline in trust fees was primarily the result of negative market conditions.
The decrease in noninterest income from the first nine months of 2008 was primarily due to the aforementioned net loss on debt extinguishment ($15.9 million), as well as higher net losses on loans held for sale ($7.9 million), lower other income ($3.7 million), lower trust fees ($3.1 million), and lower service charges on deposit accounts ($3.1 million) due to the aforementioned factors.
Noninterest Expense
Noninterest expense for the third quarter of 2009 was $83.6 million, a decrease of $271.8 million from the second quarter of 2009 and an increase of $9.3 million over the third quarter of 2008. The second quarter of 2009 included a non-cash non tax deductible goodwill impairment charge of $266.5 million. Noninterest expense for the first nine months of 2009 totaled $519.8 million, an increase of $107.7 million over the same period of 2008.
The decrease in noninterest expense from the second quarter of 2009 was primarily the result of the aforementioned goodwill impairment charge ($266.5 million), as well as lower other expense ($8.4 million), partially offset by higher salaries and employee benefits ($2.5 million) and other real estate (ORE) expenses ($1.2 million). The decrease in other expense was primarily the result of a $5.6 million FDIC insurance premium incurred in the second quarter of 2009 as a result of an industry-wide special assessment. The increase in salaries and employee benefits was primarily the result of higher severance expense and benefits related to those agreements. The increase in ORE expenses was primarily the result of higher carrying costs related to holding the ORE properties and mark-to-market charges related to additional declines in market value on ORE assets.
The increase in noninterest expense over the third quarter of 2008 was primarily the result of higher other loan expenses ($3.7 million), ORE expenses ($3.7 million) and other expense ($3.1 million), partially offset by lower salaries and employee benefits ($1.3 million), as well as a net decline in all other noninterest expense categories. The increase in other loan expense was primarily the result of higher foreclosure expenses associated with repossessing collateral underlying commercial and residential real estate loans. The increase in ORE expenses was primarily the result of the aforementioned factors. The increase in other expense was primarily the result of an increase in FDIC insurance premiums due to an industry-wide rate increase. The decrease in salaries and employee benefits was primarily due to lower staffing levels and suspending employer contributions to the 401(k) plan in 2009. The net decline in all other noninterest expense categories was primarily the result of various expense management initiatives implemented throughout the company.
Salary costs included severance expense of $1.5 million for the third quarter of 2009, compared with less than $0.1 million for the second quarter of 2009, and $2.0 million for the third quarter of 2008. Citizens had 2,173 full-time equivalent employees at September 30, 2009 compared with 2,157 at June 30, 2009 and 2,261 at September 30, 2008.
The increase in noninterest expense over the first nine months of 2008 was primarily the result of a higher goodwill impairment charge ($88.4 million), as well as higher other expense ($15.9 million), other loan expense ($11.3 million), and ORE expense ($8.9 million), partially offset by lower salaries and employee benefits ($12.7 million), and a net decline in all other noninterest expense categories due to the aforementioned factors.
Income Tax Benefit
The income tax benefit for the third quarter of 2009 was $11.7 million, compared with $11.4 million for the second quarter of 2009 and $10.2 million for the third quarter of 2008. For the first nine months of 2009, the income tax benefit totaled $26.6 million, a decrease of $2.0 million from the same period of 2008. The variances were primarily due to the effect of higher pre-tax losses and current period adjustments to other comprehensive income.
Reconciliation of Pre-Tax Pre-Provision Core Operating Earnings
Citizens presents pre-tax pre-provision core operating earnings in this release for purposes of additional analysis of our operating results. Pre-tax pre-provision core operating earnings, as defined by management, represents net income (loss) excluding income tax provision (benefit), the provision for loan losses, and any impairment charges or special assessments (including goodwill, credit writedowns, fair-value adjustments, and FDIC special assessments).
The following table reconciles consolidated net loss, which is presented in accordance with US generally accepted accounting principles ("GAAP"), to pre-tax pre-provision core operating earnings. GAAP is the principal and most useful measure of earnings and provides comparability of earnings with other companies. However, Citizens believes presenting pre-tax pre-provision core operating earnings provides investors with the ability to better understand Citizens' underlying operating trends separate from the direct effects of the impairment charges, net loss on debt extinguishment, credit issues, fair value adjustments, challenges inherent in the real estate downturn and other economic cycle issues and displays a consistent core operating earnings trend before the impact of these challenges. The credit quality section of this earnings release already isolates all of the challenges and issues related to the credit quality of Citizens' loan portfolio and its impact on Citizens' earnings as reflected in the provision for loan losses.
Pre-Tax Pre-Provision Core Operating
Earnings Three Months Ended
Sep 30 Jun 30 Mar 31 Dec 31 Sep 30
(in thousands) 2009 2009 2009 2008 2008
--------------- ------ ------ ------ ------ ------
Net Loss $(56,923) $(347,413) $(45,149) $(195,369) $(7,176)
Income tax provision
(benefit) (11,747) (11,415) (3,467) 99,634 (10,192)
Provision for loan
losses 77,783 99,962 64,017 118,565 58,390
Goodwill impairment --- 266,474 --- --- ---
Net loss on debt
extinguishment 15,929 --- --- --- ---
FDIC special assessment --- 5,565 --- --- ---
Fair-value writedown
on loans held for sale 859 4,350 6,152 5,865 1,261
Fair-value writedown
on ORE 3,934 3,306 7,985 602 675
Fair-value (write-up)/
writedown on bank
owned life insurance (360) --- 235 2,896 551
Loss on auction rate
securities repurchase --- --- --- 2,406 ---
Mark-to-market on swaps 1,018 583 (2,444) 2,414 (2,894)
Captive insurance
impairment charge --- --- --- 1,053 ---
--- --- --- ----- ---
Pre-Tax Pre-Provision
Core Operating
Earnings $30,493 $21,412 $27,329 $38,066 $40,615
======= ======= ======= ======= =======
Use of Non-GAAP Financial Measures
In addition to results presented in accordance with GAAP, this release includes non-GAAP financial measures such as those included in the "Key Highlights in the Quarter" section, the "Reconciliation of Pre-Tax Pre-Provision Core Operating Earnings" section, the "Non-GAAP Performance Ratios" table, and the "Non-GAAP Common Equity Ratios" table. Citizens believes these non-GAAP financial measures provide information useful to investors in understanding the underlying operational performance of the company, its business, and performance trends and facilitates comparisons with the performance of others in the banking industry. Specifically, Citizens believes the exclusion of restructuring and merger-related expenses, intangible asset amortization, and the goodwill impairment to create "core operating earnings" as well as the exclusion of related goodwill and other intangible assets, net of applicable deferred tax amounts, to create "average tangible assets" and "average tangible equity" facilitates the comparison of results for ongoing business operations. Citizens' management internally assesses the company's performance based, in part, on these non-GAAP financial measures. The tangible common equity ratio and Tier 1 common equity ratio have become a focus of some investors and management believes that these ratios may assist investors in analyzing our capital position absent the effects of intangible assets and preferred stock. Because tangible common equity and Tier 1 common equity are not formally defined by GAAP or codified in the federal banking regulations, these measures are considered to be non-GAAP financial measures. Because analysts and banking regulators may assess our capital adequacy using tangible common equity and Tier 1 common equity, we believe that it is useful to provide investors the ability to assess our capital adequacy on these same bases.
In accordance with industry standards, certain designated net interest income amounts are presented on a taxable equivalent basis, including the calculation of net interest margin and the efficiency ratio displayed in the "Selected Quarterly Information" and "Financial Summary and Comparison" tables. Citizens believes the presentation of net interest margin on a taxable equivalent basis allows comparability of net interest margin with our industry peers by eliminating the effect of the differences in portfolios attributable to the proportion represented by both taxable and tax-exempt investments.
Although Citizens believes the above non-GAAP financial measures enhance investors' understanding of its business and performance, these non-GAAP measures should not be considered a substitute for GAAP basis financial measures.
Other News
Citizens Receives Nasdaq Notice of Minimum Bid Price Non-Compliance
On September 25, 2009, Citizens announced that it received a notice from The Nasdaq Stock Market stating that the minimum bid price for Citizens' common stock was below $1.00 per share for 30 consecutive business days and that Citizens was therefore not in compliance with Nasdaq Marketplace Rule 5450(a)(1). To regain compliance, the closing bid price of Citizens' common stock must meet or exceed $1.00 per share for at least ten consecutive business days. Citizens has until March 22, 2010 to regain compliance with the minimum closing bid price requirement and is considering available options to regain compliance. The notification letter has no effect at this time on the listing of Citizens' common stock on The Nasdaq Global Select Market.
Citizens Names Treasurer and Principal Accounting Officer
On October 8, 2009, Citizens announced that Brian D. J. Boike was named senior vice president and treasurer and Joseph C. Czopek was named senior vice president and principal accounting officer. Boike will have responsibility for all treasury activities, including management of the company's balance sheet, capital, funding and liquidity. In addition to his responsibilities as corporate controller, Czopek will lead the daily activities of SEC reporting and SOX compliance for the company.
Analyst Conference Call
Cathleen H. Nash, president and CEO, Charles D. Christy, EVP and CFO, Mark W. Widawski, EVP and chief credit officer, and Brian D. J. Boike, SVP and treasurer, will review the quarter's results in a conference call for analysts and investors at 10:00 a.m. ET on Friday, October 23, 2009.
A live audio webcast is available on Citizens' investor relations page at www.citizensbanking.com or by calling (800) 862-9098 (conference ID: Citizens Republic). To participate in the conference call, please connect approximately 10 minutes prior to the scheduled conference time.
The call will be archived for 90 days at www.citizensbanking.com. In addition, a digital recording will be available approximately two hours after the completion of the conference call until October 30, 2009. To listen to the replay, please dial (800) 283-8486.
Corporate Profile
Citizens Republic Bancorp, Inc. is a diversified financial services company providing a wide range of commercial, consumer, mortgage banking, trust and financial planning services to a broad client base. Citizens serves communities in Michigan, Ohio, Wisconsin, and Indiana as Citizens Bank and in Iowa as F&M Bank, with 232 offices and 267 ATMs. Citizens Republic Bancorp is the largest bank holding company headquartered in Michigan with roots dating back to 1871 and is the 44(th) largest bank holding company headquartered in the United States. More information about Citizens Republic Bancorp is available at www.citizensbanking.com.
Safe Harbor Statement
Discussions and statements in this release that are not statements of historical fact, including without limitation statements that include terms such as "will," "may," "should," "believe," "expect," "anticipate," "estimate," "project," "intend," and "plan," and statements regarding Citizens' future financial and operating results, plans, objectives, expectations and intentions, are forward-looking statements that involve risks and uncertainties, many of which are beyond Citizens' control or are subject to change. No forward-looking statement is a guarantee of future performance and actual results could differ materially.
Factors that could cause or contribute to such differences include, without limitation, the following:
-- Citizens faces the risk that loan losses, including unanticipated loan
losses due to changes in loan portfolios, fraud and economic factors,
could exceed the allowance for loan losses and that additional increases
in the allowance will be required. Additions to the allowance for loan
losses would cause Citizens' net income to decline and could have a
negative impact on its capital and financial position.
-- Citizens capital raising initiatives contemplate raising a significant
amount of common equity from private and/or government sources over the
coming months and there is no assurance that Citizens will be successful
in its capital raising efforts.
-- The Holding Company may not have sufficient resources to make capital
contributions to its bank subsidiaries when required by bank regulatory
agencies, or when it might otherwise wish to do so, in order to maintain
their capital ratios at acceptable levels.
-- While Citizens attempts to manage the risk from changes in market
interest rates, interest rate risk management techniques are not exact.
In addition, Citizens may not be able to economically hedge its interest
rate risk. A rapid or substantial increase or decrease in interest rates
could adversely affect Citizens' net interest income and results of
operations.
-- Citizens' core lending and other businesses continue to be adversely
affected by the historic weakness in the national and regional economies
in which it operates, particularly Michigan. Citizens' ability to
generate earnings and maintain regulatory capital ratios at acceptable
levels at the Holding Company and its banking subsidiaries depends
substantially on developments in those economies.
-- Difficult economic conditions have adversely affected the banking
industry and financial markets generally and may significantly affect
Citizens' business, financial condition, and results of operations.
-- An economic downturn, and the negative economic effects caused by
terrorist attacks, potential attacks and other destabilizing events,
would likely contribute to the deterioration of the quality of Citizens'
loan portfolio and could reduce its customer base, its level of
deposits, and demand for its financial products such as loans.
-- If Citizens is unable to continue to attract and retain core deposits,
to obtain third party financing on favorable terms, or to have access to
interbank or other liquidity sources (as a result of rating agency
downgrades or other market factors), its cost of funds will increase,
adversely affecting its ability to generate the funds necessary for
lending operations, reducing net interest margin and negatively
affecting its results of operations.
-- Increased competition with other financial institutions or an adverse
change in Citizens' relationship with a number of major customers could
reduce its net interest margin and net income by decreasing the number
and size of loans originated, the interest rates charged on these loans
and the fees charged for services to customers. If Citizens lends to
customers who are less likely to pay in order to maintain historic
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