CITIZENS BANKING CORP.
THIRD QUARTER EARNINGS CONFERENCE
LEADER, WILLIAM HARTMAN
ID# 2984001
10/17/03
DATE OF TRANSCRIPTION: OCTOBER 20, 2003
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Theresa: Good afternoon. My name is Theresa, and I
will be your conference facilitator. At this
time, I would like to welcome everyone to
the Citizens Bank Corporation 3rd quarter
earnings conference call. All lines have
been placed on mute to prevent any
background noise. After the speakers'
remarks, there will be a question and answer
period. If you are an analyst, and would
like to ask a question during this time,
simply press * then the number 1 on your
telephone keypad. If you would like to
withdraw your question, press * then the
number 2 on your telephone keypad.
Thank you. I will now turn the call over to
Mr. Brian Matthews, vice-president of
investor relations.
Brian: Good afternoon, everyone, and thank you for
joining us today. With me today is Mr.
William Hartman, chairman, president and
CEO, Mr. Charles Christy, chief financial
officer, Mr. John Schwab, chief credit
officer, Mr. Dan Beckmeyer, [PHONETIC] chief
accounting officer, and Martin Gronce
[PHONETIC] treasurer.
Before I 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 company's actual future results to
materially differ from those discussed.
These risks and uncertainties include, but
are not limited to, those which are
discussed in the company's 3rd quarter press
release dated October 16, 2003, and in the
company's filings with the Securities and
Exchange Commission.
Other factors not currently anticipated by
management may also materially and adversely
affect Citizen's results of operations.
Citizens does not undertake, and expressly
disclaims, any obligation to update its
forward-looking statement except as required
by law.
I would now like to turn the presentation
over to Bill Hartman.
Bill: Good afternoon, everyone, and thanks for
joining us. I'd like to spend a few minutes
today talking a little bit about some of the
positives of the quarter, and a little bit
about some of the challenges we're facing.
First of all, it was the most
straightforward quarter we have had in the
last 5 quarters. We're pleased with that.
We're also pleased that our credit quality
is continuing to track toward improvement.
We're at the lowest level of non-performing
assets we've had in the last 5
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quarters, and for the 3rd quarter we also
took the lowest provision expense we have
taken in the last 5 quarters, all of which
is positive.
We had projected last quarter that both
charge-offs and provisions expense would be
below 12 million for the quarter, and that
came true, as we had predicted. And we're
now, as we look forward to the 4th quarter,
would be comfortable projecting that both
charge-offs and provision expense will be
below $11 million for the 4th quarter.
We do look for continued improvement in the
credit quality in 2004, and would at this
point target that our provision expense for
2004 would be around 60 basis points for the
year. We want to keep you posted on the
improvements in our credit quality each
quarter as we go along.
Now you learned from the release that we did
put a new buyback program in place, and with
less than 500,000 shares remaining under our
existing program, the board and I felt it
would be appropriate to put a new program in
place. We view ongoing capital management as
an important part of our strategy to improve
shareholder value along with improving our
credit quality, focusing on our non-interest
expense and growing revenues.
We're really pleased that, based on the
hires we've made this quarter, our senior
executive management team is now complete.
We're particularly happy with the very high
quality of leaders that we have been able to
attract to our company. They believe in our
vision, and are working very hard to help us
achieve it.
A couple of the challenges -- and obviously,
I think the biggest challenge that we're
facing is our net interest margin, unlike
some of our other competitors and peers who
are also challenged with commercial loan
growth, we have been challenged a little bit
more with commercial loan run-off.
Just to talk about the margin for a minute,
again, the whole industry is suffering with
the compression thing, and we really are not
doing any worse than the rest of the
industry. But in addition to that
compression, the commercial loan run-off
challenge has been a bit harder for us. And
I think one of the things that I've talked
about in
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the past and want to reinforce to everyone
today is that, in the early stages of a
credit turnaround, it's very difficult, in
fact you simply can't generate enough new
quality loans to more than offset the
extrication of the lower-quality loans which
would result in loan growth.
So basically, we've been having this
run-off, and it's been hurting our earnings
in the short run. Some of this runoff has
not just been the result of the planned
extrication of lower-quality credit. Some of
it has been caused by planned reductions in
what we would view excessive concentration
of individual borrowers.
The other challenge is, of course, the
sluggish economy. Very, very hard to grow
loans in this kind of an economy. So again,
as we look forward to the 4th quarter, we
expect commercial loans to continue to trend
down through December, then we would expect
them to flatten out in the 1st quarter of
next year, and we would hope for some modest
growth beyond that.
Obviously, when we look at our peers,
particularly here in the midwest, we are
seeing non-turnaround banks with flat
commercial loan levels. So therefore, we're
not surprised that, given our efforts to
improve the credit quality, we're seeing
some rundown. And frankly, we're very
committed to the discipline that we have put
into our credit quality process. But we are,
of course, going to be putting in place the
kind of sales culture that will enable us to
do a better job of finding good, quality
opportunities in the future.
On the non-interest income side, like many
banks, we've had a great run at the mortgage
business, but we do expect this category to
be down in the 4th quarter as we think that
most people who were going to refinance have
probably done it at least once, and that the
refi activity will be dropping
precipitously.
We would expect that originations would
likely fall as much as 50% in the 4th
quarter, and that the total earnings impact
of a reduced mortgage business in the 4th
quarter could mean as much as $3 million
less in pre-tax income for the quarter.
On the non-interest expense side, we look to
-- we have been
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investing, first of all, you see that the
4th quarter is higher than the 3rd quarter,
and we have been investing in people and
products that are going to enable us to
create long-term shareholder value. When we
look ahead to the 4th quarter, we'd expect
the 4th quarter to be similar to the 3rd
quarter levels, and that the 4th quarter --
excuse me, the 3rd and 4th quarter, then,
will be more of what we would call a run
rate level of non-interest expense.
So, at this point, I'm going to turn it over
to John. He's going to go into a little bit
more detail on credit quality. And then,
Charlie is going to take some time to review
the financial highlights, and then we'll
open it up for questions.
John: In summary, from a credit quality
perspective, the 3rd quarter in comparison
with where we had been in several of our
previous quarters, was essentially not very
exciting. Our delinquencies in the
commercial loan portfolio are down over the
last year-end, and also over what they were
in the 2nd quarter.
The number of credits we have on the
commercial watch list is also down. You will
recall that, in the 2nd quarter of this
year, we exercised a major effort to look at
credits that were not on the OAEM or
substandard radar screen. We did also apply
a more conservative look at our risk rating
definitions, and pushed during the 2nd
quarter over $110 million onto our watch
list. In the 3rd quarter, we have reduced
that by approximately $15 million.
Non-performing loans for the period ended
September 30 are also down slightly, and we
can expect this trend to be able to continue
into the 4th quarter as we continue to work
to identify assets. Total non-performing
loans are down to $91 million, representing
1.17% of our outstandings.
Charge-offs for this quarter were also down
to 10.3 net, the combination of lower
charge-offs required gross as well as some
recoveries beginning to occur on the credits
we had charged earlier. Charge-offs for the
year to date on an annualized basis are now
under 1% at 97 basis points, and we hope to
see that improve in the quarters going
forward.
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The loan loss reserve as a percentage of our
total loans outstanding at the end of the
3rd quarter has crept up to 2.41%, as we
continue to believe that we will continue to
feed this reserve as positioning us for
further conservative growth.
The loan loss reserve relative to our
non-performing loans is now 151%, up from
126% at year end and 143% after 3rd quarter.
A brief update, for those who have been
following our field audit work, that work is
essentially now complete. We did defer a
handful of the examinations to dates that
will be completed by the end of October to
comply with customer requests in terms of
other audit activity that was going on.
Of the audits that we have completed, 42 of
them were deemed to be unsatisfactory upon
review. 34 of the 42 were correctable by the
company as they change their internal
reporting and timeliness, so we have 8
credits remaining that were deemed to be
unsatisfactory. And those have been deemed
to the exit strategies from the bank, and we
are in the process of doing that.
As a result of these field audits, we have
found it necessary not to take any
additional reserves or charge-offs. So this
review of the assets confirmed what we were
hoping to confirm, that there are no other
surprises out there.
In addition, there has been some previous
discussion about our small business
portfolio, those that have been approved on
our automated credit scoring approval
process. We are at this quarter beginning to
implement an examination of that by checking
the scorecards on at least a semi-annual
basis to validate any changes and
delinquency predictability in that
portfolio.
So all in all, not a terribly exciting
quarter for us. And from the credit guys'
perspective, that's a good thing. Charlie?
Charlie: Okay, John. Thanks. Financial highlights for
the quarter, our net income was 19.6 million
versus 13.2 million in the 2nd quarter. Our
earnings per share was at $.45 versus $.30
for the 2nd quarter. Our return on assets
for the quarter were at 1.01%, return on
equity was at
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12.7%, our efficiency ratio was up from 56%
to 59.9.
When comparing the results of this quarter
to last year's quarter, the comparison is
very hard due to the large number of charges
taken in the 3rd quarter of 2002. If you
remember, we had a large number of
charge-offs in that quarter, high provision,
and also a large amount of restructuring
charges.
Key drivers for this quarter; net interest
margin and net interest income, our margin
percentage moved from 4.17% to 4.03%. Our
net interest income was down by 1.8 million
from the 2nd quarter of 2003. This was due
to high levels of mortgage back and CMO
prepayments and, to a lesser extent, 6
straight commercial loan prepayments. This
also caused an acceleration in our purchase
premium amortization on mortgage-related
securities.
Looking forward to the 4th quarter, we
expect to see our net interest income to
drop somewhat from 3rd quarter levels, and
that our net interest margin percentage will
show some compression, but not at the pace
of the last two quarters.
Provision expense for the quarter was down
by 15.4 million from the 2nd quarter. We
expect to see that our provision expense and
that charge-offs will both be less than 11
million for the 4th quarter.
Net interest income was up by 207,000 from
the 2nd quarter. This included strong
mortgage fee income which basically was a
carry-over from the 2nd quarter refi volume.
It also showed a slight increase in deposit
fees and trust and brokerage fees. We expect
to see our total net interest income to drop
somewhat as we anticipate to see mortgage
fees at approximately 50% of prior levels.
Net interest expense increased by 3.2
million from the 2nd quarter due to a number
of factors. Federal audit fees were paid in
the 3rd quarter. We had increased legal fees
for loan collections. We had increased
recruitment and relocation expenses for many
new hires. We had increased advertisement,
and we also are now experiencing some SEI
conversion costs in the alliance we set up a
quarter or two ago in our wealth management
area.
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NIE is expected to remain relatively flat in
the 4th quarter as compared to the 3rd
quarter. This is driven by continued
additional marketing expenses for selected
markets and planned deposit campaigns. We
also expect to have continued conversion
costs, and also increased salaries from
recent new hires.
Moving on to the balance sheet, basically
our commercial loans are down 85 million
from the 2nd quarter, but also were down 284
million from the 3rd quarter of last year.
Much of this decrease has been basically
caused by the fact that we rationalized our
credit quality. Also, though, we are now
beginning to see some signs of stabilization
in our commercial loan portfolio.
If you look at mortgage loans, they're down
93 mill ion from the 2nd quarter and 180
million from the 3rd quarter last year, as
we sell most of our production into the
secondary markets. Offsetting these
decreases are consumer loans. Total consumer
loans were up 117 million from the 2nd
quarter and up 167 million from the 3rd
quarter.
In the future, we expect commercial loans to
drop slightly, our home equity to have some
modest growth, and our indirect to drop as
we are moving into the seasonal period for
indirect lending.
Moving on to deposits, total deposits for
the quarter were down by 178 million from
the 2nd quarter. 146 of that was from retail
CD drops, and also our savings decreased by
about 34 million.
The deposit comparison to last year's
quarter was down 422 million. The primary
driver of that drop is from retail CD's and
broker CD's, and that decreased by 477
million.
Last couple comments I want to make on some
key ratios. As John mentioned, our loan loss
reserve to non-performing loans were above
150%. That puts us at peer levels. And loan
loss reserve is at 2.41%. Our capital ratios
remain strong at 9.75% for Tier 1 ratio, up
from 9.64. Total capital is up to 13.21%, up
from 13.1, and the leverage ratio increased
to 7.25% up from 7.2. Bill, turn it over to
you.
Bill: Fine. I think that we've made the comments
that we want to make. As we said, a little
more straightforward quarter, which we're
pleased
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with, and we're pleased with the improvement
in credit quality. We think we're on top of
this, and we feel good that the improvement
is going to continue.
At this point, I would open it up for any
questions that any of you would have.
Theresa: At this time, if you are an analyst and
would like to ask a question, please press *
then the number 1 on your telephone keypad.
We'll pause for just a moment to compile the
Q&A roster. Your first question comes from
Eric of ABW.
Eric: Hi. That's KBW. Good afternoon guys. How are
you? I've got a bunch of questions. I'll ask
you a few so I don't monopolize anything,
and then maybe I'll come back in the queue.
But Bill, just a couple things for you. You
mentioned the margin challenge, and the fact
that you're getting commercial loan runoff,
it sounds like a lot of it by design. You're
pushing some loans out of the bank. But can
you tell us, X what is running off, what
kind of volume progress have you made in
terms of getting new loans booked in the
bank?
Bill: Well actually, we're doing pretty well with
that. We are establishing new relationships
in most of our markets. We're seeing some
good, positive growth there, Eric. I think
the challenge is, as I said, simply right
now is -- the company has too many large
concentrations that we've shared with you
before. So, we're bringing them down, plus
we're running off a lot of the criticized
and classified loans. And we're getting no
help from the economy, so that the loan
demand from existing borrowers is not
particularly high.
So, that altogether is the issue. I think
that there is a good momentum in the
business development effort, and we
certainly are bringing in new business. It's
just a question of the economy not being
strong enough to take us where we really
want to go on the road.
Eric: Okay. That's fine. The other thing was, and
maybe I'll just switch this to John Schwab
for a second. John, you did mention the
watch list was down by 15 million. Could you
put a number on what the total watch list is
for me? I don't remember what the number was
last quarter.
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Charlie: I can answer. This is Charlie. It was 520
million last quarter, and it's 504 million
this quarter.
Eric: And was there any -- maybe you can quantify
the migration in the watch list loans in
terms of criticized, classified, substandard
trends. How do the buckets fall out?
Bill: Well, a lot of the heavy lifting, Eric, was
done during the 2nd quarter, in which we
pushed probably about half of the stuff that
wasn't rated at 7 on our scale, which is the
first watch tier. We pushed some stuff that
was not rated into that category, and the
other piece of it was made up of loans that
were rated 7, and we moved them down into
the 8 category.
Eric: So this quarter, can you give us an idea
what -- of the 504 million, what it looks
like by 7's and 8's which would be, I guess,
your special mention in your substandard,
right?
Bill: Substandard and special mention. Exactly. I
am going to have to get a number, Eric, and
I'll be back to you in a little bit before
our call is finished.
Eric: That's fine. And you know what? I'll queue
back up into another call and let someone
else go.
Bill: Actually what happens, Eric, is that the 7's
were actually down a little bit. The 8's
were roughly flat, and the 9's were slightly
down. And I think that what's significant
here, we had four quarters in a row of
increases in the watch list. And this is
really the first quarter that there was not
an increase. There was a slight decrease
from 520 million to 504 million.
Eric: But before I hang up, I did have one more
asset quality sort of related to this.
You're in a pretty high level of reserves
against loan to 2.4%. And the MPA's are also
high at 1.7% of total loans. Bill, you
mentioned earlier on that you thought the
provision expense would be at about 60 basis
points going forward, at least as of 2004
target. But would it be a fair conclusion to
assume that you're going to be charging off
more than you provide in 2004?
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Bill: No. Actually, Eric, what we -- if you look
at what we did this 4th quarter, we actually
charged off some provision expenses that
were fairly similar.
Eric: Right.
Bill: And I think that the reserve is strong
enough now that as we go into 2004, we don't
think we need to provide more. The charge
off we would look for, when I said 60 basis
points, we think that both charge offs and
provision expense would be in that range for
the year.
Eric: Okay. So that's fine. Great. Thank you.
Theresa: Your next question comes from Wilson Smith
of Cohen Brothers.
Wilson: Eric stole a lot of my favorite questions, I
must say. But Bill, could you go into a
little detail on the different markets that
you serve, and the condition in those
economies? Certainly the latest
manufacturing reports that came out weren't
exactly glowing in terms of employment
statistics. And could you also kind of give
us a little flavor by the different states
or markets in terms of the direction of
asset quality?
Bill: Sure. Well, I'll let John comment on the
asset quality piece of it by market, Wilson.
But clearly, in terms of the economy, here
in Michigan we have not seen a huge pickup
at this point, although we are from a
variety of data points seeing some break
signs from some of our borrowers in terms of
what they anticipate their needs will be.
But clearly, there has been no big upturn in
Michigan. It certainly hasn't gotten worse,
but we are hearing more optimism from the
field. And that's going to, as we look at
some of our pipelines, we're seeing maybe
more requests. But by the same token, if
someone gets a larger line, that doesn't
necessarily mean that their utilization of
the line is going to be there.
So, in Michigan, we haven't seen much of a
pickup. In Wisconsin, perhaps the economy's
a little stronger, although the dairy
markets there are troubled, as I think
everyone knows. We're making credit quality
progress across all markets in the company.
And maybe John, I can let you comment
specifically on that.
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John: Yes. In the watch list credits, which we
have as the special mention and substandard,
were down in number in both Wisconsin and
Michigan for the 3rd quarter from the 2nd
quarter. As a percentage, the percentage of
credits that we consider watch in Wisconsin
is a little more than 25% of that portfolio.
So, we have been very aggressive at taking a
hard look at the ag dairy related exposure
that we have there, whereas Michigan has
remained more stable.
Wilson: And John, when you're talking about
mortgage-related revenues, you were saying
that you thought they would be down about
50%. Was that for the 4th quarter, or were
you looking at next year?
John: That would be for the 4th quarter.
Wilson: I'll queue back up if I have something else.
Thank you.
Theresa: Your next question comes from Jerry McAvoy
[PHONETIC] of Oppenheimer.
Jerry: Good afternoon. In your opening comments,
Bill, you touched -- you didn't touch on
your retail banking platform.
Bill: Right.
Jerry: Could you talk a little bit about the
progress being made on that front,
specifically since you, I think,
re-initiated the branch manager structure?
And also, are you now able to provide any
branch profitability statistics? And then
lastly, where do you see the number of
branches going forward? Are there some
markets you'd like to exit on the flipside?
Or should we anticipate some new branches
being opened in the future?
Bill: Jerry, thanks for asking that question. I
think the consumer business is really a
bright light for us. It's one we're not
really pleased with, and we were able to get
it staffed a little earlier at the
leadership level, and then in the wealth
management area, of course, we've been
working on staffing and product upgrade as
we have been in the commercial area, whereas
we've been in pretty good shape on the
consumer area on product.
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We put the branch manager program in place
in November, plus we've been very successful
with the campaigns that we're having, both
on the deposit side and on the loan side as
well.
The sales culture and the sales management
process are improving dramatically in the
retail group. Home equity loans are growing,
and active transaction accounts are growing.
And you can see in the numbers the impact of
the home equity loans. And that sales
culture thing is gelling well, particularly
when you're given how early we are in the
process of putting the managers in there.
So, I think it's a business that's going
very well.
Yes, we're going to be doing some
rationalization. Since we joined the
company, we've eliminated 18 branches at
this point, and we do plan to put some new
branches in southeast Michigan in the coming
year. So, we're in the process of planning
that right now. What our objective is is to
have more of our branches in the future in
markets that have higher density and higher
growth demographics than we do now.
So, I think that if you look over the next 5
years, there is going to be some
rationalization of the delivery system with
the objective that we move it more into
growing areas.
Jerry: Thank you very much.
Theresa: Your next question comes from Fred Cummings
of McDonald's Investments.
Fred: Good afternoon. A couple quick questions.
First, Charlie, you were talking about these
capital ratios. I don't think you mentioned,
do you have a targeted tangible capital
ratio, tangible capital or tangible assets?
Have you come out with a number there? I
think it was around 7.3% right now.
Charlie: Fred, one thing we don't want to do is,
we're trying to manage the capital position
of the bank so that we keep the leverage
ratio above 7%. We think that's important.
We did the -- we have tried to bolster the
capital by the $125 million subordinated
debt issue we did 1st quarter, and then the
trust preferred that we did. And then, when
we
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look at the dividends, capital management,
all that, we really look at 7% as being the
lowest number we'd want that leverage ratio
to be.
Fred: Then secondly, I wanted to get more detail
on the growth that's occurring in the
indirect portfolio. Is most of that
automobile loans? And if so, it looks like
based on the yield, it's primarily used
cars. Could you give us a feel for the mix
between new and used, and what type of
customer are you going after in terms of
kind of fical scores there?
Charlie: Basically, that's mostly RV and marine with
some auto. We have really diminished our
auto reliance on the indirect. We've been
really more in the RV, marine category. As
far as the customers that we go for, it's
basically your A customers, some B
customers, and very little C and D.
Fred: And Charlie, would it be correct that the
indirect auto remains in a runoff mode,
then?
Charlie: Boy, that's a good question. I haven't
looked at that lately, so I can't answer
that for sure. It was in a runoff mode a
number of quarters ago. While we're
answering questions, Dan's going to see if
he's got that with him. I don't have it off
the top of my head.
Fred: That was -- those were the only two
questions I had.
Theresa: Once again, if you do have a question and
you are an analyst, please press * then the
number 1 on your telephone keypad. Your next
question is a follow-up question from Eric.
Eric: Actually, maybe just to finish up a thought
that Fred was asking there about the
capital, can you tell us what the liquidity
looks like at the holding company that would
support your stock buyback, and how much
dividend capacity do you have without
regulatory approval out of the banks? That's
my first question.
Dan: We feel we've got about 80 million of
dividend capacity coming out of the Michigan
bank over the next five quarters, plus I
think their cash position in the parent
company right now is about at a level of $50
million. So, there is significant cash
available to us.
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Eric: And that's before any tapping into any
backup line of credit?
[INAUDIBLE]
Eric: That sounds good. I've got a question for
you on the mortgage origination side. I
mean, you pretty much said you thought that
that would be down in the 4th quarter. Did I
understand Bill correctly as saying that
that could be as much as $3 million pre-tax
in the 4th quarter, so that would be net of
expenses, i.e., paying the guys to originate
the loans for you. Is that -- was that the
right order of magnitude?
Bill: Basically, where I got that number, Eric,
was a combination of two things. One is the
-- it's actually a pretax, pre-expense
number. We would expect that the
originations would be down, and margin would
be down slightly because it would be less
than the held for sale category. So, the
pretax income would be affected by as much
as $3 million.
Now, we would also, on the other side -- and
I wasn't including the expense piece in
that. In the expense piece there'll be a
little less compensation for originations,
because the volumes are going to be less.
Eric: So, that would somewhat offset the $3
million impact? All right. That's what I'm
trying to understand. I was going to ask you
about the held for sale, because that went
up a lot this quarter. And I would assume,
like a lot of banks, that's going to tail
down for you quite a bit too. And quite
honestly, in hold for sale loans, it's a
pretty good widespread business for a lot of
companies right now. So, you're saying that
the $3 million is really more of a revenue,
it's not a pretax bottom line.
Bill: Correct.
Dan: Correct.
Bill: It is purely revenue.
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Eric: That's a lot better. You had me worried for
a minute there.
Bill: No.
Eric: Glad we cleared that up.
Bill: Thank you for doing that.
Eric: What's your pipeline look like right now,
your application pipeline?
Charlie: On the mortgage?
Eric: Yeah. Sorry. Yeah.
Charlie: Again, we would say that that is already
showing decrease, and we would think for
comparison to 3rd quarter to 4th quarter,
that would be half on a volume basis.
Eric: That's ---
Charlie: As far as showing the drop.
Eric: Yeah. I follow you. The last question I have
for you was, the securities portfolio. And
it's probably more a question for you or for
Dan, possibly, Charlie. As the portfolio's
grown quite a bit by design in the last
couple of quarters, principally in the 2nd
quarter, I guess -- it picked up a little
bit this quarter -- can you give us an
update as to the basic composition of the
portfolio in terms of the mix?
Mortgage type securities versus other,
bullets versus those types of securities
that are susceptible to cash flow variation,
either positive or negative, and if you have
any basic statistics on the duration of the
portfolio. And then, as just a third point
there, if you could just talk about the cash
flow you're getting off the portfolio now,
how does the reinvestment rate look compared
to the total portfolio yield?
Charlie: Eric, I'm going to let Marty address this.
He's got some information in front of him.
Marty: I'll see if I can remember those and do in
reverse order -- the
CITIZENS BANKING CORP.
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reinvestment rate is right around where the
portfolio, the taxable portfolio, came in
for September. And obviously, is depending
on the mix, what we put in, it can be around
that 25 or 50 basis points.
In terms of the mix, I don't have that --
here we go. Between -- mortgage back and
CMO's, we're right around 60% level,
municipals right around the 20% level, and
the rest in largely governments and other.
And within the governments portfolio, that
is certainly mostly bulked with some
callables, when you look at some of the
agency paper.
Charlie: Eric, this is Charlie. The other thing is,
basically, we did, in March, we did a lot of
heavy buying at that point. We had a $500
million investment move of which about 50%
of that was leveraged. And what you saw with
the average was very little impact, average
ADB for the 1st quarter was very little
impact. And you saw more of that impact on
the ADB in the 2nd quarter. But really, it
was mostly done in the 1st quarter. And
then, as prepayments increased in the latter
part of the 2nd quarter into the beginning
of the 3rd quarter, we have maintained some
of that, but not as much. We've let it drop
a little bit. And as far as any --
Male Speaker: Overall, roughly speaking, we've maintained
that portfolio level since then. It gives us
an interest rate risk position that we're
comfortable with.
Eric: Sorry about that. I was looking at the
average balances. I knew you put that on
late in the 1st quarter. But were you saying
that you're trying to maintain the portfolio
where it is, about a billion nine? Did I
understand that correctly?
Male Speaker: Roughly speaking, yes. Right around that
area.
Eric: So you're trying to maintain at that level.
Are those securities -- again, you've got
60% in the mortgage back type of instrument.
The securities that you have, it's very hard
for me to ask this. But, if rates start to
tick back up a bit, do those securities
extend out a lot? Or are they fairly -- is
the variability not so much with what you
bought? Is it more of a -- we thought it was
going to have a 2-3 year average life, and
if rates go up 25 or 50 basis points, it
probably stays there. Or, is
CITIZENS BANKING CORP.
ID# 2984001 PAGE 18
this the type of stuff that's going to
extend out on you and give you more cash
flow as well?
Male Speaker: This will all have some level of extension
in it. However, the vast majority of that
portfolio is back, back CMO's. So, sort of
in that intermediate term, and a 2-4 year
average life kind of neighborhood. So, while
it is mortgage products, certainly the much
less convex end of the mortgage product. And
if you look in the mortgage back portfolio,
you won't see much 30-year at all. It's
10-15, typically.
Eric: 10-15 year collateral?
Male Speaker: Right.
Eric: So, maybe asking it a different way. You
mentioned on the call before, in the press
release, that your amortization, the premium
amortization, was high in the portfolio. Was
that higher than you thought it was? Or was
that -- again, on the --let me ask it this
way. It's a very confusing topic for me, and
probably a lot of people. But the prepayment
amortization you were seeing an increase,
was that on the new stuff that you bought,
or was it on old stuff before the end of the
1st quarter?
Male Speaker: No. The vast majority was that old stuff
prior to the 1st quarter.
Eric: Okay.
Male Speaker: In fact, a fair amount of that was bought in
the '01 timeframe.
Eric: Okay. I got it. So that was on the older
securities. Good. Thanks very much. That's
all I needed to know.
Charlie: This is Charlie again. Fred, you had asked
the question about the indirect auto. It is
running down, and it is running off. We are
still doing some, but it is a continued
decreasing portfolio.
Bill: That's by design, Fred, because we really
like the demographics and the credit quality
characteristics, and the pricing of the
marine and the RV business.
CITIZENS BANKING CORP.
ID# 2984001 PAGE 19
Theresa: Your next question is a follow-up question
from Jerry McAvoy.
Jerry: Thanks. Just one other question. Under the
non-interest income section in the text part
of the press release, you talk about the
sequential increase in non-interest income,
and you mentioned a loss from the sale of
equipment. Could you just provide some color
on that statement? Thanks.
Male Speaker: We closed several branches during the
quarter, and there was some unamortized
equipment. It was -- I forget the amount,
but it was around 100,000 I believe.
Male Speaker: 174,000.
Male Speaker: 174. Okay.
Jerry: Thank you.
Theresa: Your next question is a follow-up question
from Wilson Smith.
Wilson: I wanted to follow up on one of Eric's
questions. In looking at the loans and the
investments, the held for sale portfolio
averaged about 235 million in the 3rd
quarter. If we're expecting that to run
down, you had indicated that you were
looking to keep the investment portfolio in
that $1.9 billion range where it was in the
3rd quarter. Does that mean that overall, we
can expect your averages, average
outstandings, to go down? If you hold the
1.9 and the held for sale goes down, are you
going to compensate by raising your
investment securities? Or are you just going
to let it all come down?
Male Speaker: We would probably leave the investment
securities pretty much where it's at. So,
the drop from the mortgage held for sale
portfolio would be a decrease in the total.
Wilson: Thank you.
Theresa: As a reminder, this call will be available
for replay beginning at 2:00 pm Eastern
Standard Time today through 11:59 pm Eastern
Standard Time on Friday, October the 24th,
2003. The conference ID number for the
replay is 2984001. Again, the conference ID
for the replay is
CITIZENS BANKING CORP.
ID# 2984001 PAGE 20
2984001. The number to dial in for the
replay is 1-800-642-1687, or if calling from
international, the number is 706-645-2991.
Once again, the number to dial in for the
replay is 1-800-642-1687 or for our
international listeners, the number is
706-645-2991.
Bill: If there's no further questions, I'd like to
just take the time to thank you all for
joining us this afternoon. We appreciate
your interest in the company, and look
forward to further conversations. Have a
great day, and a good weekend.
Theresa: Thank you for participating in today's
conference call. You may now disconnect.