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Filing pursuant to Rule 425 under the
Securities Act of 1933, as amended
Deemed filed under Rule 14a-12 under the
Securities Exchange Act of 1934, as amended |
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Filer: Citizens Banking Corporation |
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Subject Company: Republic Bancorp Inc. |
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Exchange Act File Number of Subject Company: 000-15734 |
Citizens Banking Corp. CBCF Q2 2006 Earnings Call Jul. 21, 2006
Company_ Ticker_ Event Type_ Date_
www.CallStreet .com 212.931.6515 Copyright © 2005 CallStreet
MANAGEMENT DISCUSSION SECTION
Operator:
Greetings ladies and gentlemen and welcome to the Citizens Banking Corporation
Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. A
brief question-and-answer session will follow the formal presentation. If anyone should require
operator assistance during the conference, please press star zero on your telephone keypad. As a
reminder, this conference is being recorded and will be available for replay until August 7. You
may access the replay by dialing 877-660-6853 or 201-612-7415 for international callers. Enter
account number 286 and conference number 207186.
It is now my pleasure to introduce your host, Ms. Kathleen Miller with Investor Relations. Thank
you Ms Millar, you may now begin.
Kathleen Miller, Investor Relations
Thank you, Donna. Good morning everyone and thank you for joining us. With me today is William
Hartman, Chairman, President and Chief Executive Officer; Charlie Christy, Chief Financial Officer,
John Schwab, Chief Credit Officer, and Martin Grunst, Treasurer.
Before we begin I would like to point out that the presentation today contains forward-looking
statements that are subject to risks and uncertainties that could cause the companys actual future
results to materially differ from those discussed. Risks and uncertainties include but are not
limited to those which are discussed in the companys second quarter press release dated July 20,
2006, and in the companys filings with the Securities and Exchange Commission.
Other factors not currently anticipated by management may also materially and adversely affect
Citizens results of operations. Citizens does not undertake and expressly disclaims any obligation
to update its forward-looking statements except as required by law.
I will now turn the presentation over to Bill Hartman.
William Hartman, Chairman, President, Chief Executive Officer
Thank you Kathy. Good morning everybody. Thanks for joining us. Were pleased to report another
strong quarter for Citizens, particularly in light of what we all agree to be a challenging
operating environment for our industry. We continue to be able to grow both our commercial and our
commercial real estate loans, while maintaining the high-credit quality standard we have been
known for. Our markets, in both Michigan and Wisconsin are contributing to this quality growth with
southeast Michigan continuing that strong trend.
We feel that growth over 4.1% over last quarter is strong performance, particularly given the high
quality of the business being written. This is our seventh consecutive quarter of quality commercial
loan growth after completing the rationalization of the credit quality of our portfolio several
years ago. We do believe that we have effectively combined our rigorous sales culture with a highly
disciplined credit culture and do expect continued quality growth
next quarter. As weve indicated to you previously, we have implemented a number of deposit growth initiatives and while those
initiatives are not fully matured, they are in various early stages, we did see some growth in both
DDA and savings accounts for the quarter. We do plan to continue to push our deposit business with
a focus on the core and we also continue to focus on our service quality initiative, which is very
closely related to our deposit initiatives, and this whole thing is the number one priority of our
new head of consumer banking Cathleen Nash, who joined us from
SunTrust on July 3, and she is
quickly assessing where our best opportunities lie.
Our fee-based business has performed well, particularly in the service charges on deposit accounts
and our brokerage business, which grew from the last quarter. Exclusive of the gain on the sale of
our Royal Oak branch, in the first quarter of 06, our non-interest income is up by one million
over the first quarter of 2006, and were very pleased with that. As we face these margin pressures
that is so prevalent in our industry, our strong bottom line focus is leading us to do everything
we can to manage our expenses, prudently and intelligently. And despite continuing to invest in
revenue generating initiatives in both Wisconsin and Michigan, we were able to reduce our expenses
2.5% from the first quarter of 06 and 1.5% from the second quarter of 05. We intend to continue
to look for ways to improve our companys efficiency, while we examine and improve our ability to
generate loans, deposits and fee-based income. Credit quality, which is certainly one of our core
competencies and key corporate value continues to improve, both in terms of non-performing loans
and charge-offs. Our philosophy of disseminating credit authority to regional senior credit
officers with strong accountability is enabling us to grow competitively while maintaining high
credit quality.
On
balance, when we look at our loan growth, deposit growth and key income performance
combined with our expense control, strong credit quality we feel it was a solid quarter. Ill now
turn
the discussion over to our Chief Credit Officer, John Schwab, to further discuss our credit quality
improvement after which Charlie Christy, CFO will further review the operating performance and
then, I will make a few closing comments.
John Schwab, Chief Credit Officer
Thank you, Bill. We can all recall that, about three and a half years ago Citizens, undertook a
number of credit process changes to deal with what was then a troubled loan portfolio and an
underdeveloped credit culture. Approval authority became vested with credit, underwriting, demand
and structure, regular servicing, frequent financial reporting, proactive management of developing
problems and a loan loss reserve methodology practice and execution that would position the company
among the most sound in any market or peer group. Our second-quarter 2006 credit metric results
well illustrate the outstanding results which those credit practices have helped us achieve. The
credit culture we outlined then, is here today, alive and well. Net charge-offs for the second
quarter were $2.0 million our lowest level since recorded time. Commercial charge-offs for the
quarter are in net recovery. Net charge-offs at 14 basis points of the portfolio is the lowest rate
since before 2002. Non-performing assets at quarter-end totaled $34.8 million, down 1.7 million
from the first quarter in the lowest in over four years. Non-performing loans are down over 3
million since the first quarter, partially offset by an increase in OREO in the second quarter. Our
largest non-performing loan is $2.9 million and is adhering appropriately to our forbearance
agreement. The second-largest NPL is under $1 million.
I will take a minute to put these numbers in perspective. Three years ago for the second quarter of
2003, net charge-offs were $12 million or 92 basis points. Non-performing assets were $96.5
million, provision expense was 25.6 million, and our loan loss reserve to non-performing assets was
127%. Non-performing assets represent 61 basis points of total loans and leases, but loan loss
reserves today represent 420% of the NPLs and 330% of non-performing assets. These reserve levels
relative to problem loans will enable us to continue provision expense in the third quarter at a
level similar to the second.
During the second quarter, our commercial portfolio watch list decreased $30 million from the first
quarter of 06. A 380 million watch list portfolio represents 11.8% of commercial loans the lowest
since [indiscernible], and an update of our auto-related exposure. Using the conservative sort
criteria, we have shared with you previously, our commercial and consumer auto exposure of $762
million, thats exposures not just outstandings, is less than 10% of the loan portfolio and only
1.8 million or 34 basis points is carried as non-performing. Small business delinquencies remain
flat as a percentage of outstandings. New businesses within this
portfolio is scoring at higher
application, at higher soaring rates than in earlier periods. Delinquencies in the consumer
portfolio are down 15 basis points from last quarter, principally through improvements in the
indirect, which is Marine and RV portfolio.
Bureau scores in the consumer portfolio averaged 740 in the second quarter, sustaining our high
quality underwriting. Our philosophy has been to recognize evolving problem credits in the
portfolio early and then deal proactively in mitigating and resolving identified risks. This
approach coupled with our loan loss reserve methodology and practice supports a strong Citizens
credit balance sheet. This culture has served us well over the past several years bringing us to
the strong asset quality position we enjoy today. We feel good, as our credit culture prepares to
move into the next chapter of our corporate growth. Potentially to answer a question before anyone
needs to ask it, we have discussed credit culture and credit risk management practices with our
associates at Republic Bancorp. The Company sets similar views on early recognition and
conservative underwriting suggesting that integration will be relatively seamless. Charlie?
Charles Christy, Chief Financial Officer
Thanks John. From a financial perspective, results for this quarter were very good in spite of the
difficult operating environment. Net income for the quarter was 20.9 up 0.1 million from the first
quarter of 06 and up 0.3 million from the second quarter of 2005. Earnings per share was equal to
$0.49, $0.01 better than last quarter and $0.02 better than the
second quarter of 05. Return on assets was 1.09 down one basis point from the previous quarter and up 3 basis points from
second quarter of 2005. Current equity was equal to 12.96%, up 10 basis points from the previous
quarter and up 34 basis points from the second quarter of 2005. Total loans increased this quarter
due to strong commercial loan growth; core deposits were down on an average basis but were up at
the end of the period specifically on non-interest bearing and savings deposits. Non-interest
income showed good growth especially in service charges and brokerage fees. And we continue to show
good control of our operating expenses.
However,
mirroring industry trends our net interest margin was down 13 basis points from the previous
quarter or down eight basis points from the second quarter of 2005. I plan to discuss these major
components in a few minutes.
Key
drivers for the quarter, net interest income was down by 1.5 million when compared to the first quarter
and down 2.8 million compared to the second quarter of last
year. These decreases occurred in spite
of having good loan and deposit growth for the quarter. From the last quarter end, our securities
portfolio decreased by 53 million as a result of using portfolio cash flow to reduce shortterm
borrowings. Commercial loans increased 126 million; home equity loans were slightly down by 6
million better than previous last two previous quarters. And indirect loans were up by 18
million. In total loans were up a 136 million.
Additionally, non-interest-bearing deposits were up 55 million; interest-bearing demand was down by
72 million, while our savings were up 84 million. Therefore in total, core deposits were up 67
million. Time deposits also increased by 93 million causing our total deposits to be up by 161. In
actuality, broker CDs were down by 16 million so all other CDs were up 109 million.
On the other hand our net interest margin percentage was down 13 basis point from the first quarter
was down eight basis points from the second quarter 2005. This highlights the tremendous challenges
we and the rest of the banking industry managing deposits mix changes in the slight yield curve.
Some of the key components of the margin compression were changes in our deposit mix and the impact
of competitive pressures on pricing spread equated to approximately six to seven basis points of
the compression. Additionally we have 120 million of low-cost FHLB debt, repriced to current rates
in the quarter, which equated to approximately 3 basis point from the compression. Normally we try
to spread out any wholesale repricing in dollar amounts that we can offset with earnings and
repricing. However, this was the last remaining piece of low-cost funding related to our
first-quarter 2003 increase in our securities portfolio. So in any event in comparison to the first
quarter the three basis-point changes in cost is now in our run-rate.
Lastly the first quarter as did the fourth quarter of 2005 included prepayment penalty interest
income from called Investment Securities, which added two basis points to the first quarter net
interest margin percentage. As we look to the third quarter we anticipate that our net interest
income will be consistent with but slightly lower than this quarter as we anticipate good earning
and asset growth offset by continued price margin compression.
Provision expense for the quarter was down 1.9 million from the first quarter and down 0.3 million
from the second quarter of 2005. Net charge-offs came in at a lowest level in six years at 2.0
million or 14 basis points, and down 2 million or 15 basis points from the first quarter and down
0.04 million or three basis-points from the second quarter 2005.
It should be noted that net charge-offs for the direct and indirect consumer loans is keeping a low
each year in the second quarter. These net charge-offs to down from the first quarter by 1.8
million but were actually only 100,000 higher then the second quarter 2005. Based on a seasonable
trends and the overall risk in the portfolio we anticipate our third quarter net charge-offs to be
higher than this quarter and our provision expense to be consistent with this quarter.
Non-interest income decreased 1.8 million from the first quarter, was 0.6 million better than the
second quarter of 2005. Excluding the deferred gain of 2.9 million recognized in the first quarter,
non-interest income was up by 1.1 million in the second quarter. Key drivers for these results as
compared with first quarter includes, higher service charges up 0.6 million, an additional BOLI
income of 0.3 million. Brokerage fees increased 0.2 million from the first quarter but is down from
the second quarter 05 by 0.6 million.
We are very pleased with the progress the investment brokerage group has made in the
implementation of their new strategy of sourcing new business on their own and not relying on
referrals nor specific brokerage campaigns to more reach out delivery. This strategy was
implemented in January this year where we continue to see great progress in the team.
As a comparison in the second quarter 2005, retail delivery system the retail delivery system
stores an average of 55% of brokerage business, whereas today, that average is less than 13%.
We anticipate that total non-interest income for next quarter to be consistent with or slightly
higher
than this quarter due to anticipated increases in deposit service charges and brokerage fees.
Non-interest expense, control initiatives that were implemented in 2004 has continued to offset
initiatives in southeast Michigan and Wisconsin. Total NIE was down from previous quarter by 1.5
million less and than last years quarter by 0.9 billion. Salaries and benefits were up slightly
over the first quarter by 0.4 million and up 0.3 million over the second quarter 2005, offsetting
these slight increases were lower marketing costs, lower professional fees, lower occupancy and
property management costs, and lower other expenses. Anticipate that our non-interest expenses for
the third quarter will be consistent with or slightly higher than this quarter.
Income tax provision was relatively flat when compared to the first quarter and decreased 1.4
million from the second quarter of 2005. The effective tax rate for the quarter was 26.7% a
decrease of 38 basis points from the first quarter and a decrease of 366 basis points from the
second quarter of 05. If you remember in the second quarter of
05, we completed the charter
consolidation of a Wisconsin entity and reduced a deferred tax asset in that quarter, which
contributed to the higher taxes in that quarter. We anticipate our income tax provision for the
third
quarter be consistent with or slightly lower than this quarter.
And lastly, our capital ratios continue to remain very strong. Tier 1 ratio was 9.96%, our total
capital ratio was 13.2%, tangible common equity was 7.56%, our leverage ratio was 8.22%.
Back to you, Bill.
William Hartman, Chairman, President, Chief Executive Officer
Thank you Charlie. As we looked at the balance of 2006, we do plan to continue to emphasize
profitable growth in our balance sheet while maintaining sound credit quality and proactive expense
management to help price the margin compression headwinds. Based on the trends of our key earnings
drivers as reviewed by Charlie, we would expect our third quarter earnings to be in a similar range
to slightly higher than the second quarter and that of course will be based on the performance of
our margin.
Id also like to comment that I am pleased with the planning process for our merger integration,
which has now begun. And we think that combining our strong execution capabilities with the best
practices of Republic Bank will enable us to build a strong profitable Midwest banking franchise
and were very much looking forward to the process and the
consummation of the combination.
At this
point, wed be delighted to answer any questions that you have.
QUESTION AND ANSWER SECTION
Operator: Ladies and gentlemen, we will now be opening the floor for questions from analysts.
If
you would like to ask a question, please press star one on your telephone keypad. A confirmation
tone will indicate your line is in the question queue. You may press star two if you would like to
remove your question from the queue. For participants using speaker equipment, it may be
necessary to pick up your handset before pressing the star key. Once again, that this star one to
register your questions at this time. One moment please while we poll for questions. Thank you.
Our first question is coming from Wilson Smith of Boenning. Please proceed with your question.
<Q Wilson Smith>: Good morning gentlemen.
<A William Hartman>: Good morning, Wilson.
<Q Wilson Smith>: Bill, can you give us a little color, or Charlie, on the deposit growth?
Because even though it was up period end, it looked like the averages were down, especially in the
DDA, the non-interest side of it. Can you give us a little color on that?
<A Martin Grunst>: Hi Wilson, this is Marty. Let me give you a little background on that.
We did have some better performance at the end of the quarter, certainly. Were hoping that that
continues into the third quarter on the DDA side. That was driven more by the commercial and small
business side with some good numbers posted at the end of the quarter.
<Q Wilson Smith>: With that say that is it fair to say that, that would lead us to
believe then
that the commercial initiatives continue to gain strength and the loan pipelines are continuing to
improve?
<A
William Hartman>: Yes, I think it would, Wilson. I think that first of all, one thing
weve gotten
very good at is cross-selling and taking a holistic approach to commercial relationships. One of
the things weve done is to dramatically broaden our product suite of non-credit products, not just
treasury management products but interest-rate risk management products and so forth. And what we
do is when we lead with credit, we use credit as the hook to get the rest of the relationship. And
yes, the pipelines are good and were taking share and when we do that, we do try to make sure that
we get a full banking relationship and not just a loan relationship.
<Q Wilson Smith>: I was trying to see that the growth was coming from commercial this time
and is there any concentration in terms of your type of business or geography in that?
<A
William Hartman>: Well, what was good to see Wilson was that it was pretty broad and that
was encouraging to me because we got it not just from southeast Michigan but we got it from our
traditional Michigan markets, and Wisconsin had another good quarter of loan growth as well. So,
at this point, the seeding of the company with the right people in the right jobs and our client
experience and sales management models that we had in place are, I think, enabling us to get a
little bit more than our share of the business. And we managed that very closely and do feel good
about our ability to be able to grow this business.
<Q
Wilson Smith>: Good. On the other side, on the
consumer side, it looked as though there was
some that was a little softer there. Is that do you think thats seasonal or is that really due
to the kind of the continued weakness of the Midwest economy there?
<A
William Hartman>: Well, I think that there may be a little seasonality in there. I think
the other
thing as I mentioned in my opening comments, Wilson, weve put a lot of initiatives in place around
deposit growth and they are not fully matured and fully implemented but were seeing some benefits
from them and one thing that has been really good is that as
weve seen this disintermediation happen,
our branches have done an excellent job of keeping that money within our company as opposed to
having this disintermediate outside of Citizens. The initiatives that weve put in place are designed
to capture more of the wallet share of those clients through, what I would call, very efficient and
effective profiling models and cross-selling models. So, thats what were trying to do. We think
that from a retention standpoint, we think were doing very well and now as we
focus more on capturing more of our clients business, we do think that we have the potential to
move the numbers.
<Q Wilson Smith>: One last question here and then I will let other people get in. In terms
of
rate competition and your expectations for that over the next quarter
or two, what are you seeing out
there and do you expect to see that the rates continue to move up at
this kind of pretty
accelerated pace?
<A Martin Grunst>: Hi, Wilson, its Martin again. On the pricing competition, its been
relatively
steady on both the commercial loans front and pretty much across the board on deposits for the last
several quarters, I mean, certainly very competitive, but the degree to which its competitive has
not increased yet.
<Q Wilson Smith>: Very good. Thank you. Operator: Thank you. Our next question is coming
from Kevin Reevey of Ryan Beck. Please proceed with your question.
<Q Kevin Reevey>: Good morning, guys. How are you?
<A Martin Grunst>: Good, Kevin. Good morning.
<Q Kevin Reevey>: This question is for Martin or for Charles. Do you have any more
FHLB borrowings coming due in the second half of the year and if so how much, and what is
the rate along that?
<A Martin Grunst>: Hi, Kevin, this is Marty. We have got a normal amount that comes due
every quarter. So, the third and fourth quarters are pretty normal relative to what they have been
for the last several quarters. So something like in the $60 million neighborhood. But the key is
that the rate on that, 60 million in the third quarter is over 100 basis points higher than what
that second quarter chunk was; that was just a older or very low rate chunk. So, youre not going
to see that kind of flow through happening in the next quarter.
<Q Kevin Reevey>: So the bottom line is, it shouldnt have any impact on the margin?
<A Martin Grunst>: Negligible, right.
<Q Kevin Reevey>: Right. And then Bill, could you talk a little bit about some of your
efficiency
initiatives and do you have any milestones and targets put in place to measure success?
<A William Hartman>: Well, yes, Kevin, it something what we have been working on for a long
time and it really relates to primarily the process of improvement. We have got a tremendous
amount of process improvement initiatives that we have been implementing in the company for
some period of time, and we have right now a couple of Six Sigma Black Belts and Greenbelts and we
are training a lot more to attack that issue. And you did see in the quarter the evidence of some
of that. And a good example would be the consolidation of our loan operations into our operation
center and process improvements there. So, that to me tells us that is a continuous improvement
project. In other words, we are continually working on those and we are trying to reduce NIE every
place we can. And however at the same time though, we dont want to do that at the expense of
investing in initiatives that are going to help us grow our loans, deposits and our fee-based
businesses because we want to make sure that we are able to create long-term shareholder value by
revenue generation. So, I think what you saw this quarter was, despite the fact that were out
hiring good people who can generate revenue for us, were still able to bring the expenses down.
So, were going to continue to focus on this and rationalize the delivery system in a way that we
think is going to be very beneficial to us. Its an ongoing effort really and one that we aim to
continue.
<Q Kevin Reevey>: And looks like you have about 1.9 million shares realized in your share
repurchase program. Are you going to continue to buy back stock despite your pending acquisition
of Republic?
<A Charles Christy>: The one thing that we want always stay ahead of are options that are
being exercised and we always like to try to have our share counts down from the previous quarter
end share count especially, at year-end from the previous year-end. Youre right we do
have to be prudent in how we manage that capital going into the closing on the transaction and so
we will be weighing all those factors, to make sure we balance them out.
<Q Kevin Reevey>: Great, thank you.
Operator: Thank you, the next question is coming from Terry McEvoy of Oppenheimer & Co.
Please proceed with your question.
<Q Terry McEvoy>: Good morning.
<A William Hartman>: Good morning Terry.
<Q Terry McEvoy>: I was pleased to see the commercial growth in the quarter and also
pleased to see it is coming from new relationships. Is that growth occurring just because Citizens
is offering the best rate as they are coming from maybe some of the new lenders you have hired, or
is it that just got a big picture because of the rebranding that has occurred in those markets?
<A William Hartman>: Well, yes, it is a good question, Terry and this is Bill and I guess
what I
would say is were not out competing on price. Now it is a brutally price competitive market in the
Midwest as you certainly will know. But frankly were out we cover the market very well, we have
lenders who are well-connected, well-known in the market and who have market influence and clout
and we are out trying to demonstrate that we can A. understand their businesses and B.
Taylor and engineer financial packages, of a holistic nature that can meet their needs. So, we are
trying to compete really based on the value-added, the advice we can provide, the product line and
tailoring it there. Now, in order to get relationships we will be competitive on price so that we
can win them, but we dont lead with price really. Its really I would attribute it to the
disciplined,
organized efforts to cultivate the markets.
<Q Terry McEvoy>: Okay, and then the growth initiatives that you mentioned in the front
page,
we have heard a lot about southeast Michigan and you mentioned Wisconsin in todays press
release, could you just update us on specifically what you have done and what youre doing there?
<A William Hartman>: Absolutely, Terry, its a good question and Im really pleased with
the
progress that were making in Wisconsin and was delighted to call Randy Peterson, a few days ago
who is our regional chairman for Wisconsin and congratulate him on a good quarter. Because I know
we have gotten a lot of questions over the years about our Wisconsin franchise and how well its
been doing. And under Randys excellent leadership we have really made a tremendous amount of very,
very good hires in Wisconsin. Primarily in the Green Bay, Appleton and Fox Valley markets. Very,
very high-quality people who buy into our culture, who buy into our vision who have the skills, who
have the market knowledge and the market clout. So, we have been investing there Terry, and we have
been doing that now for a number of years with the confidence that as weve got the team built and
weve got the processes in place that those efforts would bear
fruit. And now were seeing that. We
have had two good quarters in a row in Wisconsin in growth in loans and actually they are doing a
great job on the deposits and the cross-selling as well. So, we do intend to continue to invest in
Wisconsin because of our ability to be successful there.
<Q Terry McEvoy>: And just one last question for Charlie or Marty. Margin down 13 basis
points, I fully understand that the macro forces that are pressing compressing the margin, but it
is a little bit more, it was a lot more than I expected and more than some of your peers that Im
looking at. Can you just run through specifically what Citizen is doing maybe the top one or two
things to really support the margin to give me comfort in the outlook there?
<A
Martin Grunst>: Why dont I give you a little bit of how were thinking about the
numbers
around the margin in the third quarter and maybe Charles talk about
some of the drivers. But, a lot of the earning asset growth, the loan growth, that we saw in the second quarter came in at the back
end of the quarter. So that will give the third quarter a nice boost
in terms of earning assets and
then add to that a little bit of growth in the third quarter. So, that will give us a little bit of
a running start. And then you can see from Charlies comments that you can kind of peel away the
portion of that 13 basis points that is attributable to these ongoing trends that are going to
continue into the third quarter to give you a sense for how much
thats going to take out in terms of the
spread compression. If we see some improvement in the trends there
that will balance out to a
something that is similar to this quarter, thats kind of how we get there.
<A Charles Christy>: And Terry, this is Charlie. With the initiatives that we implemented
beginning in the first quarter, probably the latter part of the first
quarter, were starting to
see a
number of those with some of our different products to try to get in some mid-tier and things like
that. And also managing, making sure that we have some go to products when people try to, I
guess, move to a higher rate and things like that. And we would see some of those things continue.
We have spent a lot of time on our onboarding process, our touches to our customer and a lot of that is
cultural changes that if you remember we started back
in 2002, we just put branch managers back
into our branches and so we have been training the retail delivery a lot over the last couple of
years and we have moved into really probably the next level of retail delivery and we are already
starting to see some pickup from those initiatives. We hope to see more in the third and fourth
quarter. And we clearly can tell Cathleen Nash will have a nice impact also as she brings even more
experience and a high consumer competence to our organization.
<Q Terry McEvoy>: Great, thank you for everything and definitely great job on the
credit side.
Thank you.
Operator: Thank you. Our next question is coming from Eric Grubelich of KBW. Please proceed
with your question.
<Q Eric Grubelich>: Yes, good morning.
<A William Hartman>: Good morning, Eric.
<Q Eric Grubelich>: Just to go back to the stock buyback. That issue, are you guys
effectively
out of the box between now and the end of the year because of Republic, or can you buy your
stock back?
<A Charles Christy>: We were allowed to buy the stock back, is that the question?
<Q
Eric Grubelich>: No, Im going forward can you or not?
<A
Charles Christy>: We can buy it. This is whether or not we would choose to as we balance
what our capital needs are going forward, and what exercised options will occur and we just try to
balance all these things.
<Q
Eric Grubelich>: Okay. I would imagine at some point of proxy solicitation period youre
technically boxed out, but right now you can?
<A
Martin Grunst>: I believe we can. Yes.
<Q Eric Grubelich>: Okay. The other question was on the margin and deposit. I was a little
bit
surprised too with the size of the margin compression this quarter. And Charlie, I got a little bit
distracted on something, but did you say that FHLB re-pricing was three basis points of it?
<A Charles Christy>: Yes, thats what it was.
<Q
Eric Grubelich>: ...and the rest of it was just
general loan and deposit pricing pressures nothing else.
<A
Charles Christy>: Well, Ill tell you what. Ill
go through that again since weve had a number of
people
ask that question. So, if you think if you look at the deposit mix and the competitive
pressures
on the pricing spread and roll that together, that equates about six or seven basis points of the
compression. Repricing of the FHLB debt which Marty again said that
thats the last remaining
piece of that large amount, being repriced going forward, that equated to basically three basis
points. And then in the fourth quarter and the first quarter, both quarters included some
additional penalty interest income and so those quarters were a little inflated as far as the
margin percentage matters. And then when you look at the first quarter, that basically added two
basis points to that first quarter margin percentage. When you look at those when you look at
those components, a number of those are saying that are either just currently in that run rate that
we
currently have today of the 3.8 core or we can kind of tell with the key drivers up and ongoing
where we are having good growth at end of the quarter and are earning assets and hopefully some of
our other initiatives would help come back some of that continued compressions.
<A William Hartman>: Well, with regard to compression that is six to seven basis points,
the
other two things are one time, the FHLB and the pre-penalty interest from last quarter that was a
benefit there.
<Q
Eric Grubelich>: Okay, so, I mean I saw the back-ended of growth in the loan portfolio and
I can understand how thats going to support your spread income. But looking at the margins specifically,
do you anticipate the margin being down next quarter?
<A
Martin Grunst>: Yes, we do anticipate that margin
percentage to be down. Thats
certain.
<Q Eric Grubelich>: Okay. And then, Marty. Well, youve got the mike since youre
talking
about the deposit trends before and I think Wilson Smith had mentioned the same thing that I
looked at. On average balances, which is what I am going to look at, the core deposits
continue to slide as they have for most banks in the Midwest and who knows where else, but you
had that bump up in the non-interest bearing at the end of the quarter. Do you really think that
thats going to stick or are we going to continue to see more erosion in the core deposits?
<A Martin Grunst>: Well on the DDA, I mean thats a good question because at the end of the
quarter sometimes thats up, sometimes thats down. But....
<Q
Eric Grubelich>: Thats the most important
deposit for you at the end of the day, too.
<A
Martin Grunst>: Yes, youre right. But if you peel back the onion on the DDA, its more commercial and small business and weve seen decent growth in number of accounts in that
category as well. So that will lend some credence to the idea that a
good chunk of that is sticky. But we will
see, I mean, obviously there is lot of trends going on there.
<Q Eric Grubelich>: Yes, got it. Okay, thanks a lot.
Operator: As a reminder ladies and gentlemen, if you do have a question please press star one on
your telephone keypad at this time. Our next question is coming from Fred Cummings of KeyBanc
Capital Markets. Please proceed with your question.
<Q Fred Cummings>: Yes, good morning.
<A William Hartman>: Good morning, Fred.
<Q Fred Cummings>: I have couple of quick questions. First, Bill, can you give us some
sense
for your checking accounts, household growth year-to-date, if you look at both demands and
noninterest growing demand, maybe Marty on the if you guys had others want to get some sense
for your ability to maintain your level of market penetration?
<A Charles Christy>: Fred, this is Charlie. Household information, we dont have that
sitting in front of our right now. So, were a little weak on answering
that question. But as Marty said in the last
comment that we are seeing good growth coming from the small business, commercial and the
account for the non-interest bearing DDA.
<Q Fred Cummings>: Okay. And then second question as relates more to looking out to 07,
when you if the it seems like the Fed might be finished and then there is some
prognosticators
who believe that rates could be coming down in early 07. Excluding Republic, if the loan gain kind
of stays where it is, and we start to get rates moving down, how
beneficial might that be for the
margin?
<A
Martin Grunst>: Hi Fred, this is Marty. Yes, a deepening of the curve with short
end
coming down would be something we will be happy to see. Itd be
slightly supportive but we dont have any big position in either
direction of our balance sheet so it certainly would be positive but not a huge number.
<Q Fred Cummings>: Okay.
<A Charles Christy>: Hi, Fred. This is Charlie. Ive got another add on to the first
question. If you noticed everybody is recognizing deposit mix changes and things like that, and
you were
concerned whether or not we were losing market share or gaining market share. And if you look at
our time deposits and our savings, we are capturing a lot of those customers plus new money. So, we
feel that from that perspective we are doing very well.
<Q Fred Cummings>: Okay. And then lastly, Bill, just a branding issue. With respect to the
new company. Is this Citizens Republic brand, is that a temporary name or are you now looking at
changing of the name of the combined company, Im just thinking for marketing purposes, that
Citizens Republic doesnt roll smoothly off the tongue.
<A William Hartman>: Okay. Thanks, Fred. The personal Citizens Republic Bancorp will be the
name of the holding company and we actually do plan to use Citizens Republic Bank as the name of
the company. There is a number of things about it we like. Number one, it does get both names into
the brand, its transportable more transportable than either of our companys brands right now. And
frankly, while it is a mouthful as I think you have said. As a practical matter the two names do go
together and there is some synergy between the names. In fact we have even had some shareholder
reactions that is its a gritty all-American patriotic theme. And it seems to go well with our
logo and our branding. So, at this point it is something we do plan to stay with.
<Q Fred Cummings>: Okay, all right. Thank you.
Operator: Thank you our next question is coming from John Rowan of Sidoti. Please proceed with
your question.
<Q John Rowan>: Good morning.
<A William Hartman>: Good morning John.
<Q John Rowan>: Just one question, most of my questions have already been asked. Charlie,
just looking at the presentation further for the merger, there is a pro forma margin of 3.68%, and
just looking at your press release and Republics press release, given the margin contraction, is
that still your target?
<A
Charles Christy>: Thats a good question. What we did is, we built from the base of
probably, information that we had during the second quarter and then, if you remember, we actually
moved towards saying in 07 that our forecasts will be based on us reaching $2.05 and $0.93 on a
similar basis for Republic, and thinking that the component piece is already down from the margin,
I dont know those off the top of my head, we felt very comfortable at the 07 forecast and still do.
<Q John Rowan>: Okay, thank you.
Operator: Thank you. Our next question is coming from Wilson Smith of Boenning. Please proceed with
your question.
<Q
Wilson Smith>: Just a follow-up here, Martin if we
could, Fred asked a great question
about the movements in the yield curve and the benefits to your
margin. Is that the best case for
you if we get some slope in the yield curve and the short end comes
down or you better served if the
whole curve just shifts up?
<A Martin Grunst>: We are better off with deepening, we are not better off with the whole
curve shifting up, that certainly is the case.
<Q Wilson Smith>: I guess, I misstated it. would you rather have the short end
come down or the long end go up?
<A Martin Grunst>: We would rather have the long end go up and the short end stay the same.
<Q Wilson Smith>: Okay, and ?
<A Martin Grunst>: I wouldnt turn down if the long end the short end comes down either.
<Q Wilson Smith>: And Charlie, is the increase you have in the service charges in the
quarter, is that sustainable? Do you expect to see continued increases?
<A Charles Christy>: Its a good question and I am glad you asked it. If you look back at
our
history, the second and third quarter in service charges are highest quarters and then we trend
back down in the fourth and first. I think the first usually is the lowest quarter and so as a lot
of that depends on how much deposit mix change occurs and how much we are able to capture and grow
the transaction type accounts where we get most of our service charges from.
<Q
Wilson Smith>: Thanks. And one last one here, John,
because I neglected you so far I think?...
<A
John Schwab>: Its not a bad thing.
<Q Wilson Smith>: In the presentation for the merger you had indicated that you did have
some anticipated charges in their credit quality. Did you anticipate
for the decline in credit quality
that Republic has spelled out in their press release and conference call the other day?
<A Charles Christy>: Its during our due diligence, Wilson, we looked at what we needed to
look at and I think there were a number of credits that well, the one loan that they mentioned in
their release that went non-performing, we have reviewed that and that was certainly in our numbers
as well. The good news is that our partners are of a similar view about recognizing problems early
and getting them on the table so we can work on them and if anybody
is leaning towards the comments
that there were some movements into the watch in credit in Republic during the second quarter, we
had an increase in movement into our watch credits portfolio in the
second quarter. Now we move
some out as well. But I think that people need to look at this from a
perspective that merely
putting a loan on the radar screen so its getting appropriate attention does not necessarily mean
that, that it is the first bow wave of trouble.
<Q Wilson Smith>: Good point, good point. Okay, thank you.
Operator: Thank you. Our next question is coming from Eric Grubelich of KBW. Please proceed
with your question.
<Q Eric Grubelich>: One follow-up on the investment securities portfolio Marty. Do you
expect to keep that fairly level going forward?
<A Martin Grunst>: It will probably come down a bit over the next quarter, but maybe not as
such as 60 million as it is this quarter. We will still have 60 million in cash flow coming off the
portfolio, but we might put a little with back in.
<Q
Eric Grubelich>: Okay, so no particular adds, no
particular desire to penny it down yet?
<A
Martin Grunst>: No, we will keep an eye on those, the
bulk of the curve and all other factors that that we keep an eye on that, that is what were thinking right now.
<Q Eric Grubelich>: Okay, okay thank you.
Operator: Ladies and gentlemen at this time I would like to turn the call back over to Mr. Hartman
for any closing comments.
<A William Hartman>: Well, I would just like to thank you all for joining us and some
excellent
questions as usual. I hope you all have a very great weekend.
Operator: Ladies and gentlemen thank you for your participation. This does conclude todays
teleconference. You may disconnect your lines at this time and have a wonderful day.
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