DBRS Confirms Citizens Banking Corporation at BBB (high) following Republic Bancorp Inc. Acquisition Announcement

Dominion Bond Rating Service (“DBRS”) has today confirmed the ratings of Citizens Banking Corporation (“Citizens” or the “Company”) and its related entities with Stable trends, as indicated above. The confirmation follows the announcement by Citizens of its intent to acquire Republic Bancorp Inc. (“Republic”), headquartered in Owosso, Michigan.

DBRS considers the overall transaction to be neutral for the Company’s ratings as a variety of risks embedded in the proposed merger offset the positives. With proper execution and favourable market conditions, Citizens could well emerge with a materially strengthened franchise; however, short- and medium-term financial concerns will need to be addressed.

DBRS expects the transaction will boost the Company’s profitability, improve its operating efficiency, increase its deposit market share in key existing markets, and provide entry into new markets in Michigan, Ohio, and Indiana. However, the acquisition, which is sizeable for the Company, will negatively impact its capital levels and financial flexibility.

The proposed acquisition, valued at about $1.05 billion, will be financed through a combination of 85% stock and 15% cash. DBRS noted that Citizens is paying a full acquisition price at nearly 2.6 times price to book.

The combined entity will nearly double the Company’s existing asset base to $14 billion, while total deposits and loans are projected to be $8.6 billion and $10.4 billion respectively. Subject to various regulatory and shareholder approvals, the transaction is expected to close in the fourth quarter of 2006.

The key strategic benefit from the acquisition will be a dramatic increase in Citizens’ earnings from increased loan volumes, which have reflected slow organic growth over the last few years; however, fee income levels will be diluted by Republic’s lower level of non-interest income. The acquisition is projected to be accretive to earnings in the first year, based on cost savings of $28 million that may be realized from in-market branch overlap and back-office consolidation. These expense reductions should also improve Citizens’ efficiency ratio which is currently below that of its similarly rated DBRS peer group.

Citizens’ liquidity and capitalization position however, will weaken at closing. Moreover, the transaction will create further reliance on wholesale funding given Republic’s concentration on more costly time deposits and FHLB funding sources while interest rate risk will increase primarily due to Republic’s funding structure.

DBRS also noted that the Company’s deposit market share will increase in a number of strategic markets, particularly in its strongest Michigan MSAs. DBRS expects execution and integration risk to be manageable, given the familiarity of the target’s footprint market. In addition, DBRS believes that the senior management executive team has the knowledge and expertise to manage a larger institution which includes extensive merger experience.

Citizens’ tangible common equity ratios will also suffer as a result of the goodwill associated with the purchase that will be tempered by the projected earnings stream as the transaction is being largely funded with equity. DBRS does not expect these tangible capital ratios to return to current levels for at least the next three to four years. Additionally, Citizen’s will have increased exposure to interest rate risk than historically and will be more reliant on higher cost and less stable deposit funding.

Citizens Banking Corporation, a financial holding company headquartered in Flint, Michigan, reported total assets of $7.7 billion at March 31, 2006.

Note:
All figures in U.S. dollars.