Banks in my Mind: Citizens Republic Bancorp
by PlanMaestro
Don’t you just love it when someone else does your homework? Cale Smith is the open man and has been doing a fantastic job analyzing Citizens Republic – CRBC. He even has a Excel model for those of you that like Excel models: not me but I like data. So it might be better to just pass the ball and start blocking with some supporting analysis over the next weeks.
CRBC was mentioned in passing a couple of times including one with other financials for January effect picks. I remember that one of those picks was an aggressive one: TSFG, a bank that might be better for a what not do while investing in banking. Luckily, it seems that Cale and I decided that a more conservative bank was better for a first pick in a troubled sector.
To complement, you might want to check CRBC’s results reported this afternoon. A very solid performance with NPAs, NPLs, delinquencies, provisions, charge-offs, watchlist loans all down. Despite the small loss, all capital ratios and the loan loss reserve were way up … and the disclosure was excellent.
Annual pre-tax pre-provision earnings of $131 million and $613 million of tangible common equity for a $317 million market capitalization?
Cale mentioned he will next tackle the Michigan economy – do not ignore the economy while investing in banking – and if he convinces us that things are improving I might add a second pick in the region.
Long CRBC
Plan,
i cannot emphasize enough your caution about surrounding economies. Mi traditionally has a huge & healthy summer tourist season that is critical to many local economies. this
Summer is noticeably off in terms of spending in my area, a resort that weathers normal ups and downs w/o notice. real estate sales above starter home level nearly nil and buildable lots literally nil.
CRBC is mainly south by a bit, but the caution is equally important. Mi has real problems.
keep up the good work! m
Mojo, thanks a lot for that brief on the local economy. It is difficult for a foreign investor specially you are investing in an economy dependent sector like banking. And that helped a lot.
Several Michigan banks have been struggling for financing or close to FDIC intervention: FBC, DEAR, CCBD, CBC, MCBC, MBTF. Less competition has its advantages if you are well capitalized, and I think CRBC is clearly one survivor.
… even if it is based in Flint
Wow, every bank stock you wrote, the price jumps up quickly. I wish I could load up enough shared before you write for another bank I am holding LOL.
Interesting links that some banks don’t put the restructured loans onto NPA. I just called FDEF’s CFO, and he said that when they do a restructured loan, they put it on NPA for 6 months, and if the borrower keeps paying on time, then they will take it out of the NPA. Do you think that is a common practice? Since this link says that 50% of the restructured loans will eventually default, I am wondering if FDEF’s accounting for NPA is conservative enough.
Have you seen the recent news that FED requires CRBC to enforce the regulations? How do you think that will affect the company?
Old news, has been discussed in last two CCs. Nor me or management see much impact. Anything in particular you are concerned about?
What does CC mean? Could you please forward me to that if that means some comments in your website?
Conference Call
I don’t know why CRBC’s NIM is lower than other banks. Also its decreasing in the past 3 years.
I would be more interested in buying banks with increasing NIMs like TNCC. Growth can solve lots of problems.
Do you know any other banks whose NIM growth is as impressive as TNCC?
IBCP is another, but they are in an awful mess (not credit related) and I am not even sure how many shares they will end up with.
Also NIM is not everything, not interest income consequence of cross selling (insurance, credit cards, wealth management) can be another great source of profits. That is why I also look at PTPP earnings (check FDEF)
I see. That is probably why you like BAC and WFC as well?
I think WFC’s CMBS business is returning for sure. I haven’t had time to figure out how much profit it will make from CMBS if it eventually returns to 2007 level.
For BAC, I think their non interest income mostly comes from their trading desk. Since last year the stock market made such a big gain, it is not uncommon to see their big trading profit. But I consider this as non-recurring.
What do you think?
The other question is do you think CRBC is better than FBMI, or vice versa?
BAC has a very important credit card business and Merril Lynch was much more than trading.
FBMI has better credit indicators, but I prefer CRBC given its size and my opinion is that they were early recognizing problems so they may accelerate earnings before FBMI but it is very difficult to time this things,
Any thoughts on the recent 3q results? Still looks grim; how “well capitalized” are they?
They are well capitalized by all the metrics relevant to the FDIC. Also they have reserves close to 90% of nonperforming loans.
CRBC has some risk to be delisted in early December. Their price droped below $1 since early Jun.
A few month ago I saw a post that they can choose to extend delisting by another 180 days, so that would be Jun 2011 before they would be delisted?
I just called them and they said they won’t be delisted until Jan 18th 2011, but they have the option to get another 180 days extension, so I think their risk of delisting is low. What do you think?
I think it is low, but I usually do not overthink those issues too much: if they delist and the price per share tanks I will just buy more.
Right.
BTW Don’t you think GMET at current price has much more potential than CRBC?
Two different industries, two different levels of distress
I have been watching CRBC for half a year, and finally bought a significant position recently.
I think this is the best risk adjusted opportunity in bank stocks.
Right now the picture is so clear that they will dig the hole out of the cave this year.
Two recent news:
(1) Cathy Nash bought some shares (2) They are involved in a high profile supermarket chain ch11, that might explain part of the selloff
Who is Cathy Nash?
How did you know about their supermarket chain? Do you mean they lent money to them as commercial loan, and this supermarket is now in big trouble?
1. CEO
2. Google News
3. Yes, chapter 11
Got it. Thank you! Well, they still have a long way to go to dig out of this cave, but I think they will most likely make it happen. When I bought last month, I was thinking well, the price is almost the same as one year ago, but the picture is so much clearer, and they are so much stronger. So it is at least a much safer investment compared with last year.
I saw that CEO buy as well.
They just reported a solid quarter with NPA and problem loan in watch list down huge. I think they are very likely to report a profit in 3Q of this year.
Careful with the low TCE/TA … most probably it will be crashed today (thinking if I should buy again)
I think it will be fine with the low TCE as they are saying that the regulators are pleased with their current effort for reducing NPA.
I am projecting that after next quarter, the NPA will be 1.5%, and TCE will be 6%, and after that quarter, they will definitely start to report profits.
If this were the last quarter of high charge-offs, I would agree with you. However they are projecting that they are only half way through with chargeoffs. ANother quarter like this, even if they go against provisions until they reach 50% of NPAs and we consider the PTPP earnings, and their capital ratios would be very low (around 3%) and they could be pressured to dilute.
I really do not understand the hurry to clean their NPAs, it is either a sign of strength or weakness. It is most probably the first but I am waiting for the Q1 results
Regarding their accelerated NPA reduction program, I was wondering why they need this too. Maybe they want to be able to report profit before their final deadline for the delisting, but if I were them, I would simply do a reverse split to avoid delisting.
Why do you think it is more likely to be strength instead of weakness? If the macro is indeed going up, isn’t it better to hold the NPAs and slowing work through them in order to get better recovery?
One hypothesis is that they may be trying to show the full weight of their earnings fast to accelerate the price recovery. Why would they try to do that? They are on of the strongest banks in Michigan and if they want to acquire other banks they need to raise their valuation… and I would not be surprised if the FDIC is supporting them in the process.
Aha! Got it now! That sounds reasonable and great if they could acquire the other failed Michigan banks!
PlanMaestro, Zehua
during the the last conference call the CFO mentioned they had DTA allowance of $293 million which they were looking aggressively to bring back to the books. Do you have guess estimate on how much of this allowance would be added to TCE?
you can read the transcript of the CC here
http://seekingalpha.com/article/249416-citizens-republic-bancorp-inc-ceo-discusses-q4-2010-earnings-call-transcript?source=qp_transcript
great discussion
Roberto
My understanding is that all of it , wouldn’t it? That may be another reason to accelerate the NPA clean up…. to accelerate the recognition of the DTA (deferred tax allowance)
I believe management wants CRBC to be valued by their earnings.
The quicker they go through the write-offs the quicker people will realize that they are generating 100M plus in earnings which are currently being hidden by provisions
but 293M in deferred tax allowance wouldn’t hurt either
Also, the sooner they show earnings the sooner they can recognize the DTA
Yeah I think it should be all of it too. Right now their NPA is well below their reserves, so I would expect some of their reserves to be added back to TCE as well.
When they show earnings they can also get a better price for the next capital raise … an event which I believe Cathleen Nash mentioned in an earnings call last year as pretty much inevitable when the numbers are right.
Meanwhile, I am pleased as punch to buy shares on these earnings announcements that drive the share price down. The banks I worry about are the ones that aren’t cleaning up their balance sheets … extend and pretend style.
preprovision pretax earnings
watch the 3rd video
http://www.gurufocus.com/news.php?id=120967
That is the key. Another way is to look at cash from operations pre working capital adjustments.
We need more investors like Berkowitz, too many guys playing the short term.
Any thought on FPFC? Their PPTP is nearly 125M last year with a market cap of only 48M? That looks indeed strange.
NPA is trending down for a few quarters, but they kept making restructured loans. That makes me feel like a hide and pretend management.
Recently it looks like the regulator wants them to restate earnings, so I am not sure how bankregdata.com can still get their latest numbers when they haven’t actually filed the 10-Q and 10-K
I have PTPP for FPFC of $58m, still very cheap. They may still have endure a little more pain because of their high concentration in mortgages. Anyway, they survived the visit from the regulators relatively OK (they had to increase like 30% reserves) and that in my book is a positive.
Yeah I had the same feeling that their reserve has been too low. Don’t you feel worried about their restructured loans? They kept doing that for the past 2 years.
How do you know that they had to increase 30% reserves? I know they are visited by the regulators, and postponed their 10-K, so the numbers are in blind for me now.
They already restated them (November I think)
I think I would wait for the restated 10-K to come out. They will report a bigger loss, so price will likely drop.
In addition I felt really concerned about the restructured loans. I have seen banks hide and pretend for the past two years but finally their NPA exploded.
Oh you are right. Their updates are hidden in a 8-K form. I think this company looks very attractive at current valuation. The only thing I am concerned is their restructured loans. Do you feel ok about that? Or you think it is better to wait to see the performance of these restructured loans? (I remember in one of your post before, you said eventually 50% of these loans will be NPA again?)
CRBC’s Q1 is out. Looks pretty nice that the NPA is down to quite manageable levels now, and also 30-89 PD is below 1% now. This is a solid path for turnaround.
Tangible common equity to tangible assets 3.59% is a source of concern if the regulators get pushy. I want to hear tomorrow from Cathy Nash herself the reasons for this hurry in getting rid of NPAs. Not sure I want to buy again yet.
Yeah I am a bit concerned about the low TCE as well. Just finished hearing the CC, and it seems like they currently have a much improved loan pipeline, which means they wanted to walk off the NPAs and recycle that money to make higher quality new loans, I guess?
In the last question proposed by the analyst in KBW, Cathy said their new modified plans have been accepted by the regulators, so this means the regulator is likely feeling ok with their low TCE?
Or maybe the regulator is feeling ok on a future dilutive capital injection. It is very difficult to know.
Yeah that is a possibility too. I would definitely call them on Monday and see what info I can get.
Have you ever looked at this chart on page 21:
http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=7876099-4328-33478&type=sect&TabIndex=2&companyid=11826&ppu=%252fdefault.aspx%253fsym%253dFCZA
While 3.5% of TCE is a bit low, it is still way about the regulator’s current requirement of 2%.
It looks like Cathy is betting all in reverting the DTA to solve this issue. However, m impression is that it would take several quarters of profits to do that.:
At March 31, 2011, tangible common equity was $337 million and the TCE to TA ratio was 3.59%. The significant reduction in problem assets, improving credit trends, strong level of loan loss reserve and solid core earnings are all factors that will be considered as we determine when we can recognize the value of our deferred tax asset. This asset has meaningful value for our common shareholders and will continue to be monitored as we watch the status of others in our industry and determine the appropriate timing of this realization.
The DTA was valued at the $293 million at 12/31/2010. Just to note, that the DTA will change. And one of the primary drivers of that change is the loan loss reserve level.
Thanks for that graph, it puts the higher capital requirements in perspective.
Just called them, and they said although they cannot disclose any of the details of their new modified capital plan, they assured me that their regulator does not look at TCE/TA for all banks in their region.
They said different regulators may have different requirements, so that is probably why FCZA has the TCE/TA goal.
So everything still looks good so far. In the future when they realized the DTA and paid off TARP, business will go back to normal.
They said the same thing in a previous conference call. Bank regulation in the US is a complete mess.
Really? So you mean, before their last equity raise, they said in the conference call that they will not raise new common equity, or they said the regulators do not look at TCE/TA?
That their regulators have never asked once about TCE/TA
Thought about it for a while and decide to sold out today in the hope that the coming RS can cause a price drop.
I will be actively looking for more banks.
Nice find Zehua, helps putting TCE into context
I hope you keep posting your comments here even though you sold out