DBRS Confirms Citizens Republic Bancorp’s Issuer & Senior Debt at B (high); Negative Trend

DBRS has today confirmed the ratings of Citizens Republic Bancorp, Inc. (Citizens or the Company), and its related entities, including its Issuer & Senior Debt rating of B (high). At the same time, DBRS confirmed Citizens’ banking subsidiaries’ Deposits & Senior Debt rating at BB. All ratings were placed on Negative Trend.

Today’s rating actions conclude a review with Negative Implications initiated by DBRS in August 2009. The confirmation reflects Citizens continuing struggle with steep asset quality erosion, lack of profitability, and DBRS’s expectation of sustained elevated credit costs and expenses over the intermediate term. Persistent steep credit deterioration within the Company’s commercial real estate (CRE) portfolio and more recently within its commercial and industrial (C&I) and residential mortgage portfolios, have placed considerable pressure on the Company’s credit fundamentals, and to some extent has reduced its financial flexibility. Since Q2 2008, Citizens’ has evidenced high credit costs, which in combination with various non-recurring charges has resulted in 6 consecutive quarterly losses. Nonetheless, the addition of $198 million of common equity, generated from Citizens’s Q3 2009 exchange of subordinated notes and enhanced trust preferred securities for common stock, bolstered its loss absorption capacity.

Citizens’ ratings also reflect its large CRE concentration (3.69 times TCE), highly stressed Midwestern footprint, adequate liquidity, and well-established community banking and deposit franchise. The Negative trend reflects DBRS’s view that significant amounts of loss content remains embedded within Citizens’ loan portfolio. DBRS comments that escalating asset quality erosion and/or a material contraction in capital may negatively pressure ratings.

The rating actions follow the Company’s Q3 2009 results, which reflect a lower sequential quarterly loss, driven largely by the absence of its Q2 2009 $266 million goodwill impairment charge. During Q3 2009, the company reported a $62 million loss to common shareholders, up from a $353 million loss for the prior quarter. On a core basis, which excludes non-recurrent gains/losses and charges, Q3 2009 results reflected a 22% decrease in provisions for loan loss reserves, a moderate increase in revenues, partially offset by a slight increase in non-interest expense. Net-interest income increased 7% and reflected a 24 basis points (bps) widening of net interest margin (NIM) to 2.97%, partially offset by a $346 million decrease in average earning assets. Citizens’ margin expansion reflected wider loan spreads, and lower deposit costs, spurred by a decrease in brokered deposit balances. Citizens’ core non-interest income, which excludes a Q3 2009 $16 million debt extinguishment charge and losses on loans held for sale for both quarters, was up considerably, due to higher deposit service charges, trust fees, and brokerage and investment fees, partially offset by lower mortgage and other loan income. Citizens’ core non-interest expense (excludes the goodwill impairment charge and the Company’s Q2 2009 $5.6 million FDIC special assessment fee) increased slightly reflecting higher salaries and employee benefits, and OREO expenses.

The Company’s steep asset quality erosion reflects the severely challenged Midwestern economy, especially within the state of Michigan, where unemployment far exceeds the national average. Citizens’ high credit costs reflect its problematic CRE portfolio and to a lesser extent C&I and residential mortgages. At September 30, 2009, Citizen’s non-performing assets (NPA) represented a very high 7.34 % of loans versus 7.13% at June 30, 2009. Meanwhile net charge-offs (NCO) increased and represented an elevated 3.41% of average loans, up from 2.30% for the prior quarter. The bulk of the increase in NCOs reflected four large CRE loans and four large C&I loans. Although they should not be considered trends, DBRS noted two positive signs for the quarter. Specifically, NPAs were relatively flat on an absolute basis and the pace of increasing commercial watchlist loans slowed. The allowance for loan loss reserves was relatively modest at 56% of NPAs.

The Q3 2009 exchange of debt for common stock enhanced the Company’s capital position. The exchange increased the Company’s tangible common equity, Tier 1 and Total capital ratios to 6.75%, 12.83% and 14.23%, respectively, from 5.14%, 11.81% and 13.91%, at June 30, 2009. Nonetheless, DBRS notes that Citizens’ financial flexibility remains somewhat stressed and its ability to raise additional capital may be constrained. DBRS notes that Citizens’ capital position includes $300 million of TARP related preferred stock.

The Company’s liquidity position remains adequate. Citizens’ core deposits represent 96% of net loans (at June 30, 2009). Citizens’ securities portfolio, which represents 19% of total assets, and access to the Federal Home Loan Bank and the Federal Reserve Discount Window round out its liquidity profile.

Notes:
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.