DBRS Confirms Citizens Republic Bancorp – Senior BBB; Changes Trend to Negative

DBRS has today confirmed all ratings for Citizens Republic Bancorp (Citizens or the Company) and its related entities, including its Issuer and Senior Debt rating of BBB. At the same time, DBRS has changed the trend on all ratings to Negative from Stable.

The rating action follows the Company’s announcement of a $196 million loss for Q4 2008 and a $405 million loss for the full year 2008. Driving the quarterly loss was a significant increase in loan loss provisions, which totaled $119 million versus $58 million for the prior quarter and an outsized valuation allowance of $137 million taken against deferred tax assets. The full year’s loss included a $178 million goodwill impairment charge taken during Q2 2008.

The Negative ratings trend indicates the potential for future negative rating actions, which could be triggered by sustained elevated asset quality erosion, lack of sustainable revenue generation or the piercing of DBRS’s one-year threshold of income before provisions and taxes. Conversely, the absence of elevated credit costs and sustained solid profitability may result in the restoration of the trend to Stable.

The confirmation of Citizens’ ratings reflects its adequate capital and liquidity, well-established community banking and deposit franchise, and solid management team. Offsetting this is the Company’s deteriorating asset quality and absence of earnings. Indeed, Citizen’s Q4 2008 loss reflected the third consecutive quarterly loss for the Company.

The Company’s high credit costs continue to reflect problematic commercial real estate (CRE) exposures, most of which came over with the Republic Bancshares, Inc. acquisition. Furthermore, given the rapidly deteriorating economy, troubled assets reflect higher levels of C&I and residential mortgages. At December 31, 2008, Citizen’s non-performing assets (NPA) represented a high 4.79 % of loans versus 3.87% at September 30, 2008, and Q4 2008 net charge-offs (NCO) represented a high 3.48% of average loans, up from 0.94% for the prior quarter. The sizeable increase in NPAs exhibited the change in status of five commercial relationships, totaling $57 million. Elevated NCOs were driven by four large commercial loans totaling $45 million. For 2008, loan loss provisions exceeded NCOs by approximately 1.4 times. Nonetheless, allowance for loan loss reserves was moderate, at 83% of non-accrual loans.

Positively, the Company issued $300 million of preferred stock to the U.S. Department of the Treasury (the Treasury), as part of the Treasury’s Capital Purchase Program, which helped augment regulatory capital ratios and provide more of a cushion to absorb credit losses. Additionally, Citizens was able to raise capital on its own during Q2 2008, when it issued $200 million of capital, consisting of both common and preferred stock. The preferred stock was subsequently converted into common stock. DBRS notes that higher levels of capital reflect the new reality of thresholds for banks with strained asset quality. At December 31, 2008, Citizens’ Tier 1 and Total risk-based capital ratios were 12.26% and 14.55%, respectively.

The Company’s liquidity position is adequate. At September 30, 2008, core deposits represented roughly 83% of net loans (at September 30, 2008). Citizens’ securities portfolio, which represents 18% of total assets, and its access to the Federal Home Loan Bank, Term Auction Facility and the Federal Reserve Discount Window round out its liquidity profile.

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

The applicable methodology is Rating Banks and Bank Holding Companies operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.