DBRS Downgrades Citizens Republic Bancorp to B (low); Maintains Ratings Under Review Negative

DBRS has today downgraded the ratings of Citizens Republic Bancorp, Inc. (Citizens or the Company), and its related entities, including its Issuer & Senior debt rating to B (low) from B (high). Citizens’ banking subsidiaries’ Short-Term Instruments ratings are unchanged at R-4. All ratings remain Under Review with Negative Implications. Subsequent to the rating actions, DBRS withdrew the ratings of Citizens’ Iowa-based banking subsidiary, F&M Bank, due to its recent sale. The Under Review with Negative Implications for F&M Bank has not been resolved as a result of its sale. The rating actions followed the Company’s release of 1Q10 operating results, which reflected a loss attributable to common shareholders of $90 million.

The rating actions and Under Review with Negative Implications reflects Citizens’ continuing struggle with severe asset quality issues and capital invasion, and DBRS’s expectation of sustained elevated credit costs over the near to intermediate term. Furthermore, the Company anticipates that it will be subject to formal regulatory actions over the near term, which could further strain Citizens’ financial flexibility. Ratings also consider the Company’s large CRE concentration, currently adequate funding profile and well-established community banking and deposit franchise.

DBRS’s review will focus on Citizens’ asset quality, capital erosion and franchise value. Additionally, the review will consider the implications of the anticipated formal regulatory actions and potential impact on the Company’s financial flexibility.

It is DBRS’s perception that a significant amount of loss content remains embedded within Citizens’ loan portfolio, especially given its sizeable commercial real estate exposure and Michigan dominated footprint, where unemployment far exceeds the national average. At March 31, 2010, the Company’s nonperforming assets (NPAs) represented a high 7.34% of total loans, slightly down from 7.48% at December 31, 2009. Meanwhile, net charge-offs (NCOs) represented an elevated 6.16% of average loans for 1Q10, up from 4.00% for 4Q09. The bulk of the increase in NCOs was attributed to the Company writing down a sizeable component of residential mortgages, prior to placing them in the available for sale category. DBRS notes that Citizens’ allowance for loan loss reserves was relatively modest at 58% of NPAs. DBRS anticipates that Citizens’ NCOs may be volatile over the near to intermediate term, especially as the company works through its troubled loan portfolio.

Citizens’ core earnings (income before provisions and taxes) provide a modest level of loss absorption capacity for the Company, which are currently being overwhelmed by credit costs. DBRS expects this trend to continue over the intermediate term and to continue to pressure capital. Positively, the Company was able to bolster its capital position in late April 2010, as it received $50 million in proceeds from the sale of a bank subsidiary, F&M Bank. On a pro forma basis (including the proceeds for F&M Bank), the Company’s tangible common equity to tangible assets, and Tier 1 and Total risk based capital ratios were 5.79%, 12.42% and 13.79%, respectively, versus 5.54%, 12.12% and 13.49%, respectively, at March 31 2010. DBRS comments that Citizens’ capital position includes $300 million of TARP funds.

DBRS notes that Citizens’ funding is currently sound. At March 31, 2010, core deposits represented roughly 97% of net loans. The Company’s good quality securities portfolio, which represents 19% of total assets, access to the FHLB and the Federal Reserve round out its liquidity profile. Citizens’ parent maintains a solid liquidity position, as its $160 million of cash (including proceeds for F&M Bank) currently provides sound parent company coverage. DBRS notes that the holding company’s nearest debt maturity is during February 2013, when roughly $17 million of subordinated notes mature. At YE09, the Company announced the deferral of interest payments on its two trust preferred securities and also suspended dividend payments on its TARP preferred shares. DBRS notes that it does not view the exercising of the contractual right to defer or skip payments as equivalent to default.

Note:
All figures are in U.S dollars unless otherwise noted.

The applicable methodologies are Rating Bank Preferred Shares and Equivalent Hybrids, published in June 2009 and the press release ‘DBRS clarifies its Approach to Rating Bank Subordinated Debt and Hybrid Instruments” published in December 2009; Global Methodology for Rating Banks and Banking Organisations, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.