DBRS Downgrades Citizens Republic Bancorp – Senior BBB (low); Trend Remains 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 BBB (low) from BBB. At the same time, DBRS downgraded Citizens’ banking subsidiaries’ Deposits & Senior debt ratings to BBB from BBB (high). All ratings remain on Negative trend.

The downgrade reflects Citizens’ struggle with steepening asset quality deterioration over the past year and DBRS’s expectation of sustained elevated credit costs going forward, especially given the deteriorating economy. DBRS notes that the bulk of Citizens’ exposure is within Michigan, a state which exhibits weaker economic fundamentals than the average for the U.S. Moreover, the Company maintains a moderate level of exposure to the ailing U.S. automobile industry. Indeed, Citizens’ revenues and income before provisions and taxes are likely to continue to be pressured throughout 2009.

The rating actions follow the Company’s announcement of its Q1 2009 loss to common shareholders of $49.3 million. The loss reflects Citizen’s elevated credit costs and a 30 basis points narrowing of its net interest margin (NIM) to 2.73%, partially offset by a 22% increase in non-interest income, which benefited from higher mortgage origination revenues. Citizen’s NIM compression was driven by weak loan demand and corresponding increase in balance sheet liquidity, deposit price competition and to a lesser extent increased levels of nonaccrual loans.

The Negative Ratings trend indicates the potential for future negative rating actions, which could be triggered by the continuation of elevated asset quality erosion and/or the lack of sustainable revenue generation. Conversely, the absence of elevated credit costs and sustained solid profitability may result in the restoration of the trend to Stable

Citizens’ ratings are underpinned by its adequate capital position, ample liquidity, well-established community banking and deposit franchise and solid management team.

The Company’s elevated credit costs continue to reflect problematic commercial real estate (CRE) exposures. Moreover, given the rapidly deteriorating economy and increasing levels of unemployment, troubled assets reflect higher levels of C&I and residential mortgages. At March 31, 2009, Citizen’s nonperforming assets (NPA) represented a high 6.25% of loans versus 4.79% at December 31, 2008. Meanwhile the Company’s net charge-offs (NCO) decreased to 1.7% of average loans, down from a high 3.5% for the prior quarter. DBRS notes that the hefty increase in NPAs reflected steepening deterioration within income producing and owner occupied properties, commercial and industrial loans and residential mortgages. For Q1 2009, loan loss provisions totaled $64 million, of which 42% was for reserve build. DBRS comments that Citizens’ allowance for loan loss reserves to NPAs was somewhat low at 51%.

Positively, the Company issued $300 million of preferred stock to the U.S. Department of the Treasury (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. At March 31, 2009, Citizens’ tangible common equity, Tier 1 and total risk-based capital ratios were adequate at 5.5%, 12.17% and 14.23%, respectively.

The Company’s liquidity position is ample. At December 31, 2008, core deposits represented roughly 87% of net loans. Citizens’ securities portfolio, which represents 19% of total assets, access to the FHLB and the Federal Reserve round out its liquidity profile.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, 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.