FLINT, Mich., Jan. 22 /PRNewswire-FirstCall/ -- Citizens Republic Bancorp,
Inc. (Nasdaq: CRBC) announced today a net loss of $195.4 million for the three
months ended December 31, 2008, compared with a net loss of $7.2 million for
the third quarter of 2008 and net income of $28.0 million for the fourth
quarter of 2007. For the year ended December 31, 2008, Citizens recorded a
net loss of $393.1 million compared with net income of $100.8 million for the
same period of 2007. The decreases were primarily the result of a non-cash
valuation allowance of $136.6 million against deferred tax assets and higher
provision for loan losses. Additionally, the decrease from the full year of
2007 included the result of the goodwill impairment charge, credit writedown
and fair-value adjustments recorded in the second quarter of 2008.
(Logo: http://www.newscom.com/cgi-bin/prnh/20050421/DETH014LOGO )
On December 12, 2008, Citizens issued fixed rate cumulative perpetual
preferred stock ("preferred stock") and ten-year warrants ("warrants") to
purchase up to 17,578,125 shares of Citizens' common stock to the U.S.
Department of the Treasury that together totaled $300.0 million. The
preferred stock was recorded at a fair value of $265.9 million, which will be
accreted up to the $300.0 million par value over the estimated term of five
years. As a result, Citizens recorded a $0.2 million dividend to the
preferred shareholders. While this did not affect total shareholders' equity
or the book value of the common stock, it increased the net loss attributable
to common shareholders and affected the calculation of basic and diluted net
loss per common share for the three and twelve months ended December 31, 2008.
After incorporating the aforementioned $0.2 million dividend to the
preferred shareholders, Citizens reported a net loss attributable to common
shareholders of $195.6 million for the three months ended December 31, 2008.
Diluted net income (loss) per share was $(1.56), compared with $(0.20) for the
third quarter of 2008 and $0.37 for the fourth quarter of 2007. Annualized
returns on average assets and average equity during the fourth quarter of 2008
were (5.94)% and (49.86)%, respectively, compared with (0.22)% and (1.84)% for
the third quarter of 2008 and 0.83% and 7.11% for the fourth quarter of 2007.
For the year ended December 31, 2008, Citizens recorded a net loss
attributable to common shareholders of $405.0 million, or $(4.30) per diluted
share, compared with net income of $100.8 million or $1.33 per diluted share
for the full-year of 2007.
"This past year was extremely difficult, presenting unprecedented economic
challenges for the banking industry. While these challenges had a negative
impact on our results, we believe we've taken the necessary steps to emerge
from this turmoil poised to profitably grow our franchise over the long-term.
Our internal credit stress-test analyses, based on industry peak and worse-
than-industry-peak scenarios, indicate that Citizens is solidly positioned
with sufficient capital and liquidity to manage through this uncertain credit
market," stated William R. Hartman, chairman, president and chief executive
officer. "While we can't control the economic forces working against us, we
will continue facing them head-on, maintaining sound operating fundamentals,
and providing clients with the extraordinary service which has been our
hallmark since 1871," continued Hartman.
"The U.S. Department of Treasury's investment in our bank has enabled us
to enhance our capital and liquidity positions and our lending capabilities.
Throughout the financial crisis we have continued lending and this investment
expands our ability to respond to our customers' needs now and after demand
improves. Additionally, our participation in the FDIC Transaction Account
Guarantee Program provides 100% coverage for our non-interest bearing
depositors. We believe these actions benefit the many communities we serve,"
Hartman concluded.
Key Highlights in the Quarter:
-- Total deposits at December 31, 2008 increased $46.3 million or less
than 1% over September 30, 2008 and increased $750.5 million or 9.0% over
December 31, 2007. This represents the fifth consecutive quarter of total
deposit growth.
-- Citizens continues to hold excess short-term (liquid) assets at
December 31, 2008. Citizens' parent company cash resources totaled $261.4
million at December 31, 2008 as compared with $270.3 million at September 30,
2008. The parent company's interest and preferred dividend payment
obligations are approximately $35 million annually and, therefore, Citizens
believes its parent company has more than adequate long-term liquidity.
-- Citizens continues to maintain strong pre-tax pre-provision core
operating earnings, with $38.1 million for the fourth quarter of 2008,
compared with $40.6 million for the third quarter of 2008 and $42.7 million
for the fourth quarter of 2007.
-- At year end Citizens' regulatory capital ratios were higher than third
quarter and continue to exceed the "well-capitalized' designation. As of
December 31, 2008, Citizens' estimated regulatory capital ratios are as
follows:
-- Tier 1 - 12.26%
-- Total Capital - 14.55%
-- Tier 1 Leverage - 9.65%
-- The allowance for loan losses at December 31, 2008 increased to $255.3
million or 2.80% of portfolio loans, compared with $217.7 million or 2.32% at
September 30, 2008. The provision for loan losses for the fourth quarter of
2008 was $118.6 million, compared with $58.4 million for the third quarter of
2008. The increase in the provision for loan losses was primarily due to
$45.3 million in gross charge-offs on four large commercial loans (higher than
anticipated) and the continued migration of commercial real estate loans to
nonperforming status. Net charge-offs for the fourth quarter of 2008 totaled
$81.0 million, compared with $22.4 million for the third quarter of 2008.
-- Citizens recorded a non-cash valuation allowance of $155.7 million
against deferred tax assets under SFAS 109, "Accounting for Income Taxes,"
during the fourth quarter of 2008. The valuation allowance was recorded as a
$136.6 million income tax provision and $19.1 million as a reduction to the
other comprehensive income component of shareholders' equity primarily due to
the significant loss Citizens experienced in 2008 reflecting the decreased
likelihood that Citizens will be able to recognize the full benefit of its
deferred tax assets.
Balance Sheet
Total assets at December 31, 2008 were $13.1 billion, essentially
unchanged from September 30, 2008 and December 31, 2007.
Investment securities at December 31, 2008 totaled $2.4 billion, an
increase of $228.8 million or 10.6% over September 30, 2008 and an increase of
$126.1 million or 5.6% over December 31, 2007. The increase over September
30, 2008 was primarily the result of investing the proceeds of the
aforementioned fourth quarter of 2008 preferred stock issuance into securities
that can be pledged as collateral for funding of future loans, partially
offset by using portfolio cash flow to reduce short-term borrowings. Given
the timing of the preferred stock issuance in mid-December 2008, Citizens
invested the proceeds in highly liquid securities to ensure availability as
customer demand for loans increases. In addition to the aforementioned
factors, the variance from December 31, 2007 reflects the use of portfolio
cash flow to fund commercial loan growth during 2008. Citizens did not have
any other-than-temporary impairment charges during the fourth quarter of 2008.
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
Dec 31 Sep 30 Jun 30 Mar 31 Dec 31
in millions 2008 2008 2008 2008 2007
------ ------ -------------------------
Land Hold $45.0 $48.3 $49.8 $61.6 $63.8
Land Development 132.7 125.0 128.2 159.2 167.8
Construction 263.5 364.2 344.1 370.7 342.6
Income Producing 1,556.2 1,533.2 1,569.9 1,567.3 1,526.0
Owner-Occupied 967.3 999.6 1,009.3 1,015.6 997.0
------- ------- ------- ------- -------
Total Commercial Real
Estate 2,964.7 3,070.3 3,101.3 3,174.4 3,097.2
Commercial and
Industrial 2,602.4 2,703.7 2,703.8 2,653.8 2,557.1
------- ------- ------- ------- -------
Total Commercial Loans $5,567.1 $5,774.0 $5,805.1 $5,828.2 $5,654.3
======== ======== ======== ======== ========
Total commercial loans at December 31, 2008 decreased $206.9 million or
3.6% from September 30, 2008 and decreased $87.2 million or 1.5% from December
31, 2007. The decrease from September 30, 2008 was primarily the result of
reducing balances on approximately $85 million of certain asset-based and
large participated loans with narrow margins and $68.9 million of gross
charge-offs. The decrease from December 31, 2007 was primarily the result of
the aforementioned decrease during the fourth quarter of 2008 and transferring
$86.2 million of nonperforming commercial real estate loans to loans held for
sale during the second quarter of 2008, partially offset by new relationships
in all of Citizens' markets during 2008.
Residential mortgage loans at December 31, 2008 totaled $1.3 billion,
essentially unchanged from September 30, 2008 and a decrease of $182.4 million
or 12.6% from December 31, 2007. The decline was primarily the result of weak
consumer demand in Citizens' markets, the sale of more than 70% of new
mortgage originations into the secondary market, and transferring $41.7
million of nonperforming residential mortgage loans to loans held for sale
during the second quarter of 2008.
Direct consumer loans, which are primarily home equity loans, were $1.5
billion at December 31, 2008, essentially unchanged from September 30, 2008
and a decrease of $120.2 million or 7.6% from December 31, 2007. The decrease
was due to weak consumer demand, which is being experienced throughout the
industry.
Indirect consumer loans, which are primarily marine and recreational
vehicle loans totaled $820.5 million at December 31, 2008, a decrease of $22.6
million or 2.7% from September 30, 2008 as a result of the anticipated
seasonal decline in consumers' interest for indirect products. Indirect
consumer loans were essentially unchanged from December 31, 2007.
Loans held for sale at December 31, 2008 were $91.4 million, a decrease of
$15.2 million or 14.2% from September 30, 2008 and an increase of $15.5
million or 20.5% over December 31, 2007. The decrease from September 30, 2008
was primarily the result of transferring loans to other real estate owned
("ORE") due to nonpayment issues. The increase over December 31, 2007 was
primarily the result of transferring $92.8 million in nonperforming commercial
real estate and residential mortgage loans to loans held for sale during the
second quarter of 2008, partially offset by a decrease in residential mortgage
origination volume awaiting sale in the secondary market as a result of faster
funding through Citizens' alliance with PHH Mortgage, which began in the first
quarter of 2008 and, to a lesser extent; a decline in commercial loans held
for sale due to customer paydowns, adjustments to reflect current fair-market
value, and transfers to ORE.
Goodwill at December 31, 2008 was $597.2 million, unchanged from September
30, 2008 and a decrease of $178.1 million or 23.0% from December 31, 2007.
The decrease was due to a $178.1 million non-cash and non-tax-deductible
goodwill impairment charge recorded in the second quarter of 2008. As
required by SFAS 142, "Goodwill and Other Intangible Assets," Citizens
conducted its annual goodwill impairment test during the fourth quarter of
2008 and concluded there was no additional impairment at this time. 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 December 31, 2008 were $9.1 billion, up slightly from
September 30, 2008 and an increase of $750.5 million or 9.0% over December 31,
2007. Core deposits, which exclude all time deposits, totaled $4.4 billion at
December 31, 2008, a decrease of $105.1 million or 2.3% from September 30,
2008 and an increase of $297.1 million or 7.2% over December 31, 2007. The
decrease in core deposits from September 30, 2008 was primarily the result of
the migration of funds from lower-cost deposits to time deposits with higher
yields and businesses holding lower cash positions. The increase over
December 31, 2007 was primarily the result of a new on-balance sheet sweep
product for Citizens' commercial clients introduced in late 2007. Time
deposits totaled $4.6 billion at December 31, 2008, an increase of $151.4
million or 3.4% over September 30, 2008 and an increase of $453.4 million or
10.9% over December 31, 2007. The increases were primarily the result of a
shift in funding mix from short-term borrowings to longer-term certificates of
deposit and brokered deposits, as well as focused deposit generation during
2008.
Other interest-bearing liabilities, which include federal funds purchased
and securities sold under agreements to repurchase, other short-term
borrowings, and long-term debt, decreased $202.7 million or 8.2% from
September 30, 2008 to $2.3 billion and decreased $1.2 billion or 34.9% from
December 31, 2007. The decreases were primarily the result of a shift in the
mix of funding to deposits and the proceeds from the issuance of equity
securities in June 2008 being used to pay down debt.
Capital Adequacy and Liquidity
Shareholders' equity at December 31, 2008 increased $64.5 million or 4.2%
over September 30, 2008 to $1.6 billion and increased $23.4 million or 1.5%
over December 31, 2007. Shareholders' equity at December 31, 2008 reflects
the issuance of $265.9 million of fixed rate cumulative perpetual preferred
stock and $34.1 million of ten-year warrants to purchase up to 17,578,125
shares of Citizens' common stock to the U.S. Department of the Treasury on
December 12, 2008. The increase over September 30, 2008 was primarily the
result of the aforementioned preferred stock and warrant issuance, partially
offset by the effect of net loss recorded during the fourth quarter of 2008
and an increase in the accumulated other comprehensive loss position due to
lower market interest rates and the $19.1 million component of the deferred
tax asset valuation allowance. When compared with December 31, 2007, the
increase also reflects two actions which occurred during the second quarter of
2008: the issuance of $200.0 million of common stock and preferred stock
($189.0 million net of issuance costs and the underwriting discount) and a
goodwill impairment charge, credit writedown and fair-value adjustments that
together reduced shareholders' equity by $205.6 million (after-tax).
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 Excess
Minimum for Capital over
"Well-Capital- Minimum
ized" 12/31/08 9/30/08 6/30/08 (in millions)
---------------------------------- ------------------------ -----------
Tier 1 capital ratio* 6.00% 12.26% 10.88% 10.80% $616.4
Total capital ratio* 10.00% 14.55% 13.13% 13.03% $447.4
Tier 1 leverage ratio* 5.00% 9.65% 8.76% 8.71% $581.6
Tangible common equity to
tangible assets 5.75% 7.33% 6.44%
Tangible equity to tangible
assets 7.88% 7.33% 7.35%
* December 31, 2008 is an estimate
-------------------------------------------------------------------------
Citizens maintains a very strong liquidity position due to its on-balance
sheet liquidity sources and very stable funding base comprised of
approximately 69% deposits, 17% long-term debt, 12% equity, and 2% short-term
liabilities. During the fourth quarter of 2008, Citizens increased total
deposits by $46.3 million, issued $300.0 million in preferred stock and
warrants and participated in the FDIC's Temporary Liquidity Guarantee Program
("TLGP"). The TLGP provides 100% FDIC coverage to noninterest-bearing deposit
accounts and certain interest-bearing checking accounts as well as eligibility
for Citizens to issue FDIC-guaranteed unsecured debt through June 30, 2009 in
an amount up to approximately $230 million. 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.
Citizens' parent company cash resources totaled $261.4 million at December
31, 2008. The parent company's interest and preferred dividend payment
obligations increased from approximately $20 million to approximately $35
million annually as a result of the fourth quarter of 2008 preferred stock
issuance. Citizens believes its parent company has more than adequate long-
term liquidity.
Net Interest Margin and Net Interest Income
Net interest margin was 3.03% for the fourth quarter of 2008 compared with
3.09% for the third quarter of 2008 and 3.26% for the fourth quarter of 2007.
The decrease in net interest margin from the third quarter of 2008 was
primarily the result of deposit spread compression due to price competition in
Citizens' markets and an increase in loan balances transferring to
nonperforming status, partially offset by expanding commercial and consumer
loan spreads.
The decrease in net interest margin from the fourth quarter of 2007 was
primarily the result of deposit price competition, the transfer of loans to
nonperforming status, and an increase in funding costs related to extending
short-term borrowings, partially offset by expanding commercial and consumer
loan spreads and retail time deposits repricing to a lower rate. For the full
year of 2008, net interest margin declined to 3.09% compared with 3.38% for
the full year 2007 as a result of the aforementioned factors.
Net interest income was $85.7 million for the fourth quarter of 2008
compared with $87.3 million for the third quarter of 2008 and $92.2 million
for the fourth quarter of 2007. The decrease from the third quarter of 2008
was primarily the result of lower net interest margin, partially offset by a
$19.2 million increase in average earning assets. The increase in average
earning assets was primarily the result of higher investment portfolio and
money market investments balances due to the factors discussed under "Balance
Sheet," partially offset by decreases to commercial and consumer loan
portfolio balances as a result of general economic conditions.
The decrease in net interest income compared with the fourth quarter of
2007 was primarily the result of a lower net interest margin, partially offset
by a $52.7 million increase in average earning assets. The increase in average
earning assets was primarily the result of an increase in commercial loan
balances and money market investments balances due to the factors discussed
under "Balance Sheet," partially offset by decreases in the investment
portfolio, residential mortgage, and consumer loan portfolio balances.
For the full year of 2008, net interest income declined to $348.9 million
compared with $382.2 million for the full year of 2007 as a result of the
lower net interest margin, partially offset by a $41.0 million increase 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 continues to manage credit quality challenges proactively, by:
-- Continuing to analyze Citizens' commercial automobile-related exposure
through various forward-looking potential stress scenarios.
-- Expanding the quarterly review of non-watch credits to include
commercial and industrial relationships. Coupled with the continuation of
reviewing the non-watch commercial real estate relationships, these practices
enable Citizens to validate obligor ratings and exposure management
strategies.
-- Streamlining collection and modification programs for residential
mortgage loans to mitigate foreclosures more effectively.
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, may be at risk due to general
economic conditions or changes in a borrower's financial status.
-- 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, 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 Dec 31, 2008 Sep 30, 2008 Jun 30, 2008
------------ ------------ ------------
% of % of % of
Port- Port- Port-
in millions $ folio $ folio $ folio
------------ ------------ ------------
Land Hold $3.9 8.67% $7.3 15.11% $9.3 18.67%
Land Development 5.2 3.92 10.3 8.24 1.1 0.86
Construction 27.3 10.36 26.1 7.17 11.9 3.46
Income Producing 76.7 4.93 50.1 3.27 48.5 3.09
Owner-Occupied 37.5 3.88 21.3 2.13 18.6 1.84
------------ ------------ ------------
Total Commercial Real Estate 150.6 5.08 115.1 3.75 89.4 2.88
Commercial and Industrial 56.5 2.17 29.1 1.08 29.5 1.09
------------ ------------ ------------
Total Commercial Loans 207.1 3.72 144.2 2.50 118.9 2.05
Residential Mortgage 39.5 3.13 37.7 2.95 38.5 2.94
Direct Consumer 25.5 1.76 19.5 1.32 18.4 1.22
Indirect Consumer 18.5 2.25 13.6 1.61 14.4 1.73
------------ ------------ ------------
Total Delinquent Loans $290.6 3.19% $215.0 2.29% $190.2 2.01%
====== ====== ======
Table 1 -- Delinquency Rates By Loan Portfolio
30 to 89 days Past Due Mar 31, 2008 Dec 31, 2007
---------------- ----------------
% of % of
in millions $ Portfolio $ Portfolio
---------------------------------
Land Hold $6.6 10.71% $4.6 7.21%
Land Development 16.3 10.24 28.7 17.10
Construction 10.5 2.83 31.7 9.25
Income Producing 29.3 1.87 54.0 3.54
Owner-Occupied 19.0 1.87 20.3 2.04
--------------- ---------------
Total Commercial Real Estate 81.7 2.57 139.3 4.50
Commercial and Industrial 39.9 1.50 39.0 1.53
--------------- ---------------
Total Commercial Loans 121.6 2.09 178.3 3.15
Residential Mortgage 33.5 2.40 46.4 3.21
Direct Consumer 21.7 1.42 24.3 1.55
Indirect Consumer 13.3 1.62 15.9 1.92
--------------- ---------------
Total Delinquent Loans $190.1 1.99% $264.9 2.79%
====== ======
Total delinquencies at December 31, 2008 increased $75.6 million or 35.2%
over September 30, 2008 and increased $25.7 million or 9.7% over December 31,
2007 due to the continued weak Midwest economy. When compared with September
30, 2008, the increase in total commercial delinquencies was primarily due to
ten large customers requiring proactive mitigation strategies. In general,
40% - 45% of the increase in commercial delinquency is attributable to
administrative and renewal matters, such as longer response times for updated
appraisals, which delinquencies are generally resolved through discussion with
the borrowers.
As part of the overall credit underwriting and review process, 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 change. 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
in accruing (see Table 2) or nonperforming status (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 reviews, action plans are affirmed to address emerging problem
loans or to implement a specific plan for removing the 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 Dec 31, 2008 Sep 30, 2008 Jun 30, 2008
% of % of % of
in millions $ Port- $ Port- $ Port-
folio folio folio
Land Hold $18.5 41.11% $20.7 42.86% $24.2 48.59%
Land Development 49.3 37.15 51.8 41.44 47.5 37.05
Construction 74.8 28.39 104.8 28.78 86.3 25.08
Income Producing 401.0 25.77 290.3 18.93 239.3 15.24
Owner-Occupied 178.4 18.44 167.0 16.71 161.8 16.03
----- ----- -----
Total Commercial Real
Estate 722.0 24.35 634.6 20.67 559.1 18.03
Commercial and Industrial 436.8 16.78 431.2 15.95 432.5 16.00
----- ----- -----
Total Watchlist Loans $1,158.8 20.82% $1,065.8 18.46% $991.6 17.08%
======== ======== ======
Table 2 -- Commercial Watchlist
Accruing loans only Mar 31, 2008 Dec 31, 2007
% of % of
in millions $ Portfolio $ Portfolio
Land Hold $27.7 44.97% $27.1 42.48%
Land Development 55.9 35.11 72.7 43.33
Construction 66.7 17.99 90.1 26.30
Income Producing 221.3 14.12 225.5 14.78
Owner-Occupied 155.8 15.34 153.0 15.35
----- -----
Total Commercial Real Estate 527.4 16.61 568.4 18.35
Commercial and Industrial 407.1 15.34 387.4 15.15
----- -----
Total Watchlist Loans $934.5 16.03% $955.8 16.90%
====== ======
Accruing watchlist loans at December 31, 2008 increased $93.0 million or
8.7% over September 30, 2008 and increased $203.0 million or 21.2% over
December 31, 2007. The increases are primarily the result of continuing
commercial real estate deterioration in Michigan and additional downgrades as
a result of closely monitoring borrowers' repayment capacity in this
environment.
Table 3 -- Nonperforming Assets
Dec 31, 2008 Sep 30, 2008 Jun 30, 2008
------------- -------------- ------------
% of % of % of
in millions $ Portfolio $ Portfolio $ Portfolio
------------- -------------- ------------
Land Hold $10.4 23.11% $11.0 22.77% $3.4 6.83%
Land Development 23.4 17.63 20.6 16.48 22.8 17.78
Construction 18.3 6.94 25.7 7.06 12.6 3.66
Income Producing 78.6 5.05 57.6 3.76 23.1 1.47
Owner-Occupied 31.8 3.29 17.7 1.77 13.1 1.30
------------- -------------- ------------
Total Commercial
Real Estate 162.5 5.48 132.6 4.32 75.0 2.42
Commercial and
Industrial 64.6 2.48 38.2 1.41 31.6 1.17
------------- -------------- ------------
Total Nonperforming
Commercial Loans 227.1 4.08 170.8 2.96 106.6 1.84
Residential Mortgage 59.5 4.71 40.2 3.14 12.4 0.95
Direct Consumer 15.1 1.04 16.3 1.10 16.3 1.09
Indirect Consumer 2.6 0.32 2.1 0.25 1.4 0.17
Loans 90+ days still
accruing and
restructured 1.7 0.02 1.9 0.02 2.5 0.03
------------- -------------- ------------
Total Nonperforming
Portfolio Loans 306.0 3.36% 231.3 2.47% 139.2 1.47%
Nonperforming Held
for Sale 75.2 86.6 92.6
Other Repossessed
Assets Acquired 58.0 46.5 54.1
------ ------ ------
Total Nonperforming
Assets $439.2 $364.4 $285.9
====== ====== ======
Table 3 -- Nonperforming Assets
Mar 31, 2008 Dec 31, 2007
% of % of
in millions $ Portfolio $ Portfolio
-------------- ---------------
Land Hold $5.5 8.93% $4.5 7.05%
Land Development 46.4 29.15 35.6 21.22
Construction 51.9 14.00 28.8 8.41
Income Producing 40.5 2.58 21.5 1.41
Owner-Occupied 23.5 2.31 19.7 1.98
------------- --------------
Total Commercial Real Estate 167.8 5.29 110.1 3.55
Commercial and Industrial 20.3 0.76 12.7 0.50
------------- --------------
Total Nonperforming Commercial
Loans 188.1 3.23 122.8 2.17
Residential Mortgage 45.8 3.29 46.9 3.25
Direct Consumer 13.5 0.88 13.7 0.87
Indirect Consumer 1.7 0.21 2.1 0.25
Loans 90+ days still
accruing and restructured 4.4 0.05 3.9 0.04
------------- --------------
Total Nonperforming Portfolio
Loans 253.5 2.65% 189.4 1.99%
Nonperforming Held for Sale 22.8 21.6
Other Repossessed Assets Acquired 50.3 40.5
------ ------
Total Nonperforming Assets $326.6 $251.5
====== ======
Nonperforming assets are comprised of nonaccrual loans, loans past due
over 90 days and still accruing interest, restructured loans, nonperforming
held for sale, and other repossessed assets acquired. Nonperforming assets
totaled $439.2 million at December 31, 2008, an increase of $74.8 million or
20.5% over September 30, 2008 and an increase of $187.7 million over December
31, 2007. The increase over September 30, 2008 was primarily the result of a
change in status of five commercial relationships, which together totaled
$57.0 million, and higher nonperforming residential mortgage loans as a result
of general economic deterioration in the Midwest, especially Michigan. The
increase over December 31, 2007 was primarily the result of significant
deterioration in the real estate secured portfolios (particularly commercial)
and general economic deterioration in the Midwest. Nonperforming assets at
December 31, 2008 represented 4.79% of total loans plus other repossessed
assets acquired compared with 3.87% at September 30, 2008 and 2.64% at
December 31, 2007. Nonperforming commercial loan inflows were $155.5 million
in the fourth quarter of 2008 compared with $102.6 million in the third
quarter of 2008 and $72.1 million in the fourth quarter of 2007.
Nonperforming commercial loan outflows were $99.2 million in the fourth
quarter of 2008 compared with $38.5 million in the third quarter of 2008 and
$56.2 million in the fourth quarter of 2007. The fourth quarter of 2008
outflows included $15.2 million loans that returned to accruing status, $14.5
million in loan payoffs and paydowns, $66.5 million in charged-off loans, and
$3.0 million transferring to other repossessed assets acquired.
Table 4 --
Net Charge-Offs Three Months Ended
Dec 31, 2008 Sep 30, 2008 Jun 30, 2008
------------ ------------ ------------
% of % of % of
in millions $ Port- $ Port- $ Port-
folio** folio** folio**
------------ ------------ ------------
Land Hold $4.6 40.89% $1.7 14.08% $0.7 5.62%
Land Development 5.8 17.48 6.9 22.08 16.4 51.17
Construction 10.7 16.24 0.5 0.55 13.8 16.04
Income Producing 21.7 5.58 4.4 1.15 7.7 1.96
Owner-Occupied 3.1 1.28 1.3 0.52 3.4 1.35
------------ ------------ ------------
Total Commercial Real
Estate 45.9 6.19 14.8 1.93 42.0 5.42
Commercial and
Industrial 21.9 3.37 0.4 0.06 0.6 0.09
------------ ------------ ------------
Total Commercial
Loans 67.8 4.87 15.2 1.05 42.6 2.94
Residential Mortgage 1.6 0.51 0.5 0.16 20.7 6.33
Direct Consumer 5.9 1.63 3.3 0.89 3.1 0.83
Indirect Consumer 5.7 2.78 3.4 1.61 2.9 1.39
------------ ------------ ------------
Total Net Charge-offs $81.0 3.48% $22.4 0.94% $69.3 2.93%
===== ===== =====
** Represents an annualized rate.
Table 4 --
Net Charge-Offs Three Months Ended
Mar 31, 2008 Dec 31, 2007
------------ ------------
% of % of
in millions Port- Port-
$ folio** $ folio**
------------ ------------
Land Hold $0.5 3.25% $0.4 2.51%
Land Development 6.6 16.58 6.3 15.02
Construction 1.2 1.29 1.8 2.10
Income Producing 0.9 0.23 2.4 0.63
Owner-Occupied (0.1) (0.04) (0.2) (0.08)
------------ ------------
Total Commercial Real Estate 9.1 1.15 10.7 1.38
Commercial and Industrial 0.9 0.14 1.4 0.22
------------ ------------
Total Commercial Loans 10.0 0.69 12.1 0.86
Residential Mortgage 1.8 0.52 2.0 0.55
Direct Consumer 3.0 0.79 2.3 0.59
Indirect Consumer 2.6 1.27 3.3 1.59
------------ ------------
Total Net Charge-offs $17.4 0.74% $19.7 0.84%
===== =====
** Represents an annualized rate.
Full Year 2008 Full Year 2007
-------------- --------------
Net charge-offs $190.1 2.01% $50.9 0.55%
Net charge-offs totaled $81.0 million or 3.48% of average portfolio loans
in the fourth quarter of 2008 compared with $22.4 million or 0.94% of average
portfolio loans in the third quarter of 2008 and $19.7 million or 0.84% of
average portfolio loans in the fourth quarter of 2007. The increase over the
third quarter of 2008 was primarily the result of charging-off four large
commercial loans totaling $45.3 million. The increases over the three-month
and twelve-month periods of 2007 were primarily the result of higher charge-
offs on commercial real estate due to declining real estate values and general
economic deterioration in the Midwest.
After determining what Citizens believes is an adequate allowance for loan
losses, the provision for loan losses is calculated as a result of the net
effect of the quarterly change in the allowance for loan losses identified
based on the risk in the portfolio and the quarterly net charge-offs. The
provision for loan losses was $118.6 million in the fourth quarter of 2008,
compared with $58.4 million in the third quarter of 2008 and $6.1 million in
the fourth quarter of 2007. The increase over the third quarter of 2008 was
primarily the result of the aforementioned four large commercial charge-offs
as well as continued migration of commercial real estate loans to
nonperforming status. This migration, and continuous 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. For the full year of 2008, the provision
for loan losses totaled $282.1 million compared with $45.2 million for the
full year of 2007 due to the aforementioned factors.
The allowance for loan losses was $255.3 million or 2.80% of portfolio
loans at December 31, 2008, compared with $217.7 million or 2.32% at September
30, 2008 and $163.4 million or 1.72% at December 31, 2007. The increases were
primarily the result of continued deterioration in commercial real estate
loans, signs of potential deterioration in commercial and industrial loans due
to recessionary pressures, 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 at December 31, 2008 is adequate to address the estimated loan
losses inherent in the existing loan portfolio.
Noninterest Income
Noninterest income for the fourth quarter of 2008 was $15.8 million, a
decrease of $12.3 million from the third quarter of 2008 and a decrease of
$13.5 million from the fourth quarter of 2007. For the full year of 2008,
noninterest income totaled $101.7 million, a decrease of $20.8 million from
the full year of 2007.
The decrease in noninterest income from the third quarter of 2008 was
primarily the result of lower other income ($5.2 million), higher net loss on
loans held for sale ($4.6 million), lower mortgage and other loan income ($1.5
million), as well as minor decreases in several other categories. The
decrease in other income was primarily due to swap income recognition ($3.4
million) and lower revenue on bank owned life insurance policies ($1.6
million) resulting from lower market interest rates in the fourth quarter of
2008. The decrease in swap income recognition was primarily the result of
changes in the credit spreads of Citizens' swap counterparties and changes in
market interest rates as well as hedge ineffectiveness due to cash flow hedges
on prime-based loans that were pre-paid. The higher net loss on loans held
for sale was primarily the result of updated lower appraisal values on
underlying collateral. The decrease in mortgage and other income was
primarily the result of lower mortgage origination volume.
The decrease in noninterest income from the fourth quarter of 2007 was
primarily due to lower other income ($5.3 million), net loss on loans held for
sale ($5.4 million), lower trust fees ($1.1 million), lower mortgage and other
loan income ($0.9 million), lower service charges on deposit accounts ($0.6
million), and lower brokerage and investment fees ($0.4 million). The
decrease in other income was primarily the result of the aforementioned
factors. The net loss on loans held for sale was primarily the result of
updated lower appraisal values on the underlying collateral. The decline in
trust fees and brokerage and investment fees were primarily the result of
recent negative market conditions and lower demand for investment products due
to attractively-priced traditional certificates of deposit in Citizens'
markets. The lower mortgage and other loan income was primarily due to weak
consumer demand in Citizens' markets. The decrease in service charges on
deposit accounts was primarily due to a decline in customer transaction
volume.
The decrease in noninterest income compared to the full year of 2007 was
primarily due to a higher net loss on loans held for sale ($8.9 million),
lower other income ($5.2 million), lower mortgage and other loan income ($4.6
million), lower trust fees ($2.1 million), and a net decrease from minor
changes in several other categories, all as a result of the aforementioned
factors, partially offset by higher bankcard fees ($1.3 million). In
addition, the other income category included a $2.1 million gain in the first
quarter of 2008 due to Citizens' receipt of proceeds from the partial
redemption of its Visa shares.
Noninterest Expense
Noninterest expense for the fourth quarter of 2008 was $78.6 million, an
increase of $4.3 million over the third quarter of 2008 and essentially
unchanged from the fourth quarter of 2007. For the full year of 2008,
noninterest expense totaled $490.7 million, an increase of $163.3 million over
the full year of 2007.
The increase in noninterest expense from the third quarter of 2008 was
primarily the result of other expense ($3.9 million) and other loan expenses
($2.6 million), partially offset by savings in salaries and employee benefits
($2.5 million). The increase in other expense was primarily the result of a
$2.4 million loss related to the repurchase of all auction rate securities
sold to wealth management clients ($8.8 million in par value) to restore
liquidity to their accounts, a $1.1 million loss on a captive insurance
program, and an increase in the FDIC premiums as a result of a mandatory
phase-out of FDIC credits, partially offset by lower telephone expenses.
Increases in other loan expenses were primarily the result of higher
foreclosure expenses ($2.6 million), partially offset by lower provisioning to
fund the reserve for unused loan commitments, which fluctuates with the amount
of unadvanced customer lines of credit. The decrease in salaries and
benefits was primarily the result of lower commission-based compensation due
to a decline in production volume and a reduction in annual performance-based
incentives due to overall corporate performance for 2008.
Noninterest expense was essentially unchanged from the fourth quarter of
2007 as increases in other expense ($3.5 million), other loan expenses ($3.1
million), and ORE expenses, profits, and losses, net ($1.6 million) were
substantially offset by a general decline in all expenses due to cost savings
and efficiencies implemented throughout 2007 following completion of the
Republic merger in December 2006. The increase in other expense was primarily
due to higher FDIC premiums as a result of a mandatory phase-out of FDIC
credits and industry-wide increases on FDIC insurance, as well as the
aforementioned loss on auction rate securities. The increase in other loan
expense was primarily the result of higher other mortgage processing fees due
to the alliance with PHH Mortgage entered into in the first quarter of 2008
and higher foreclosure expenses associated with repossessing collateral
underlying commercial and residential real estate loans. The increase in ORE
expenses, profits, and losses, net was primarily the result of owning more
repossessed properties.
Salary costs included severance expense of $1.2 million for the fourth
quarter of 2008, $2.0 million for the third quarter of 2008, and $3.0 million
for the fourth quarter of 2007. Citizens had 2,232 full-time equivalent
employees at December 31, 2008 compared with 2,261 at September 30, 2008 and
2,501 at December 31, 2007.
The increase in noninterest expense over the full year of 2007 was
primarily due to the aforementioned $178.1 million goodwill impairment charge
and the $5.0 million fair-value adjustment on ORE which occurred in the second
quarter of 2008, as well as higher other loan expenses ($7.9 million) and ORE
expenses, profits, and losses, net ($5.7 million, excluding the aforementioned
$5.0 million fair-value adjustment) in 2008 due to the factors discussed
above, partially offset by the general decline in all other expense categories
due to cost savings and efficiencies implemented during 2007 as well as the
effect of $8.2 million in restructuring and merger-related expenses incurred
in 2007.
Income Tax Provision
The income tax provision for the fourth quarter of 2008 was $99.6 million,
an increase of $109.8 million over the third quarter of 2008 and an increase
of $91.1 million over the fourth quarter of 2007. For the full year of 2008,
the income tax provision totaled $71.0 million, an increase of $39.7 million
over the same period of 2007. The increases over the three-month periods were
primarily the result of recording a valuation allowance of $136.6 million
against deferred tax assets, partially offset by the effect of lower pre-tax
income. Additionally, the increase over the prior year was partially offset
by the effect of lower pre-tax income, excluding the non-tax deductible
goodwill impairment charge recorded in the second quarter of 2008.
SFAS 109, "Accounting for Income Taxes," requires that companies assess
whether a valuation allowance should be established against their deferred tax
assets based on the consideration of all available evidence using a "more
likely than not" standard. In accordance with SFAS 109, Citizens reviewed its
deferred tax asset and determined that due mainly to the significant pre-tax
loss in 2008 it must establish a valuation allowance against the entire net
deferred tax asset, excluding goodwill. As of December 31, 2008, Citizens
recorded a $155.7 million valuation allowance, which consisted of $136.6
million recognized as income tax provision and $19.1 million recognized
through the other comprehensive income component of shareholders' equity in
the accompanying consolidated financial statements. Despite the valuation
allowance, these assets remain available to offset future taxable income. The
deferred tax asset will be analyzed quarterly for changes affecting
realizability and the valuation allowance may be reduced or eliminated in
future periods accordingly. In making such judgments, significant weight is
given to evidence that can be objectively verified. Citizens analyzes changes
in near-term market conditions and considers both positive and negative
evidence as well as other factors which may impact future operating results in
making the decision to establish the valuation allowance.
Reconciliation of Pre-Tax Pre-Provision Core Operating Earnings
Citizens is presenting pre-tax pre-provision core operating earnings in
this release for purposes of additional analysis of 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 (including goodwill,
credit writedowns and fair-value adjustments) caused by this economic cycle.
The following table reconciles pre-tax pre-provision core operating
earnings to consolidated net income (loss) presented in accordance with US
generally accepted accounting principles ("GAAP"), which 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, 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
Dec 31 Sep 30 Jun 30 Mar 31 Dec 31
(in thousands) 2008 2008 2008 2008 2007
-------------------------------------------------------------------------
Net Income (Loss) $(195,369) $(7,176) $(201,634) $11,127 $27,967
Income tax provision
(benefit) 99,634 (10,192) (19,401) 929 8,582
Provision for loan losses 118,565 58,390 74,480 30,619 6,055
Goodwill impairment
charge --- --- 178,089 --- ---
Fair-value writedown on
loans held for sale 5,865 1,261 2,248 --- 508
Fair-value writedown on
ORE 602 675 5,849 937 (427)
Fair-value writedown on
bank owned life
insurance 2,896 551 --- --- ---
Loss on auction rate
securities repurchase 2,406 --- --- --- ---
SFAS 157 mark-to-market
on swaps 2,414 (2,894) (293) (514)
Captive insurance
impairment charge 1,053 --- --- --- ---
-----------------------------------------------
Pre-Tax Pre-Provision
Core Operating Earnings $38,066 $40,615 $39,338 $43,098 $42,685
==============================================
-------------------------------------------------------------------------
Citizens is very focused on preserving capital, enhancing liquidity, and
generating solid operating earnings in the long-term.
Forward-Looking Guidance
Citizens anticipates the following performance for the first quarter of
2009:
-- Net interest income will be slightly lower than the fourth quarter of
2008 due to continued deposit price competition and continued migration of
certain loans to nonperforming status.
-- Noninterest income will be higher than the fourth quarter of 2008
primarily due to a lower net loss on loans held for sale.
-- Noninterest expense will be higher than the fourth quarter of 2008 as
increases in FDIC premiums, ORE expenses, and advertising are expected to more
than offset current savings initiatives.
-- Citizens does not anticipate recording an income tax provision
(benefit) during 2009 unless there is a change in the realizability of the
deferred tax asset.
Given the uncertainties in the Midwest economy, continued downturn in real
estate markets, and volatility in borrower capacities, it is very difficult to
give a narrow range of qualitative guidance on net charge-offs and provision
expense at this time. Citizens anticipates net charge-offs and provision for
loan losses for the first quarter of 2009 will be less than the fourth quarter
of 2008, assuming future real estate values stabilize and the recessionary
impact on borrowers' ability to re-pay does not continue to worsen.
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
"Reconciliation of Pre-Tax Pre-Provision Core Operating Earnings" section and
the "Non-GAAP Reconciliation" 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.
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
Stock Repurchase Program
During the fourth quarter of 2008, Citizens did not repurchase any shares
of its stock under the stock repurchase program. As of December 31, 2008,
there were 1,241,154 shares remaining to be purchased under the program
approved by the Board of Directors on October 16, 2003.
Analyst Conference Call
William R. Hartman, chairman, president and CEO, Charles D. Christy, EVP
and CFO, John D. Schwab, EVP and chief credit officer, and Martin E. Grunst,
treasurer, will review the quarter's results in a conference call for analysts
and investors at 10:00 a.m. ET