DBRS Confirms Citizens Republic Bancorp at B (low); Ratings Still Under Review Negative

DBRS has today confirmed the Long and Short-Term ratings of Citizens Republic Bancorp, Inc. (Citizens or the Company), and its related entities, including its Issuer & Senior debt rating of B (low) and Short-Term Instruments ratings of R-5. All ratings remain Under Review with Negative Implications. The rating confirmation followed the Company’s release of 2Q10 operating results, which reflected a loss attributable to common shareholders of $45 million and the publication of the anticipated Written Agreement with the Federal Reserve Bank of Chicago and the Michigan Office of Financial and Insurance Regulation.

The ratings confirmation and Under Review with Negative Implications reflects Citizens’ continuing struggle with severe asset quality issues, weak earnings generation capacity, capital invasion, and DBRS’s expectation of sustained elevated credit costs over the intermediate term. Furthermore, although the Written Agreement with the regulators was necessary, it may have the unintended consequence of further constraining management’s time and ability to manage the Company. 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 continue to ascertain the impact of the Written Agreement on Citizen’s financial flexibility, and Board of Director’s (BOD) and management’s ability to address the provisions within the agreement.

The Written Agreement requires the BOD and management to address the following areas. The BOD will take appropriate steps to fully utilize Citizens’ financial and managerial resources to serve as a source of strength to Citizens Bank (Bank), Citizen’s bank subsidiary. The BOD will complete an assessment of the Bank’s management and staffing needs. The Bank will submit an acceptable written plan to strengthen credit risk management practices and an enhanced credit administration program. The Bank shall not extend, renew, or restructure any credit to or for the benefit of any borrower, whose loans or other extensions of credit were criticized in the asset quality target examination of the Bank, conducted by the Federal Reserve Bank or in any subsequent report of examination, without prior approval of the majority of the BOD. Within 10 days, the bank shall eliminate from its books, all assets or portions of assets classified “loss” in the Asset Quality Examination that have not been previously collected in full or charged off.

Other provisions of the Written Agreement include the following. Citizens and the Bank will submit to the Federal Reserve an acceptable joint written plan to maintain sufficient capital at Citizens on a consolidated basis, and the Bank on a stand-alone basis. The Bank shall submit a written business plan for the remainder of 2010 to improve the Bank’s earnings and overall condition. Citizens and the Bank shall submit an acceptable written plan designed to enhance management of the Bank’s liquidity position. Citizens and the Bank shall not declare or pay any dividends without the prior written approval of the Federal Reserve. Citizens and its nonbank subsidiary shall not incur, increase, or guarantee any debt without prior written approval of the Federal Reserve. Citizens and its nonbank subsidiary shall not purchase or redeem any shares of its stock without prior written approval from the Federal Reserve. Finally, Citizens and the bank’s BODs shall appoint a joint committee to monitor and coordinate compliance with the provisions of the Written Agreement.

Although credit quality indicators have improved somewhat, 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. At June 30, 2010, the Company’s nonperforming assets (NPAs) declined and represented a high 6.58% of total loans, down from 7.43% at March 31, 2010. Meanwhile, 2Q10 net charge-offs (NCOs) contracted to 3.40% of average loans from 6.25% for 1Q10. The bulk of the decrease in NCOs was due to lower levels of residential mortgage loan writedowns. DBRS comments that Citizens’ allowance for loan loss reserves was moderate at 84% of nonperforming loans. DBRS anticipates that Citizens’ NCOs may be volatile over the intermediate term, especially if the economy remains weak.

Citizens’ core earnings (income before provisions and taxes) provide an unsatisfactory level of loss absorption capacity for the Company and 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, through the sale of a bank subsidiary, F&M Bank. At June 30, 2010, the Company’s tangible common equity to tangible assets, and Tier 1 and Total risk based capital ratios were 5.83%, 12.74% and 14.12%, respectively. 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 securities portfolio, which represents 20% 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 $159 million of cash, currently provides sound parent company coverage. At YE09, Citizens’ 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.