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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

Filed by the Registrant o

Filed by a Party other than the Registrant o

Check the appropriate box:

o Preliminary Proxy Statement

o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ Definitive Proxy Statement

o Definitive Additional Materials

o Soliciting Material Pursuant to §240.14a-12

CITIZENS REPUBLIC BANCORP, INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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þ No fee required.

o Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

     1) Title of each class of securities to which transaction applies:

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SEC 1913 (02-02)		Persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.

 

 

Dear Shareholders:

 

We are pleased to invite you to a special meeting of the shareholders of Citizens Republic Bancorp, Inc. called for the purpose of approving a significant increase in the number of authorized shares of common stock. The meeting will be held at 8:30 a.m. local time, on September 9, 2009 at the Holiday Inn-Gateway Centre at 5353 Gateway Centre in Flint, Michigan 48507.

 

The board of directors recommends that you vote “FOR” the proposal to amend our Amended and Restated Articles of Incorporation to increase the number of authorized shares of common stock from 150,000,000 shares to 1,050,000,000 shares, “FOR” the proposal to permit Citizens to issue additional common stock in accordance with Nasdaq Marketplace Rule 5635 in exchange for certain outstanding debt securities and “FOR” the proposal to permit the board of directors to adjourn the special meeting in its discretion.

 

Your vote is important. Most shareholders have a choice of voting on the Internet, by telephone, or by mail using a traditional proxy card. Please refer to the proxy card or other voting instructions included with these proxy materials for information on the voting methods available to you. If you vote by telephone or on the Internet, you do not need to return your proxy card.

 

We look forward to seeing you at the meeting.

 

Sincerely,

 

 

 

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

TO BE HELD ON SEPTEMBER 9, 2009

 

 

To the Shareholders of Citizens Republic Bancorp, Inc.:

 

Notice is hereby given that a special meeting of shareholders of Citizens Republic Bancorp, Inc. (“Citizens” or the “Corporation”) will be held at the Holiday Inn-Gateway Centre at 5353 Gateway Centre in Flint, Michigan 48507 on September 9, 2009 at 8:30 a.m., local time, for the following purposes:

 

(1) To approve a proposal to amend our Amended and Restated Articles of Incorporation to increase the number of authorized shares of common stock from 150,000,000 to 1,050,000,000 shares (the “Common Stock Proposal”),

 

(2) To approve a proposal to issue additional shares of our common stock in accordance with Nasdaq Market Rule 5635 in exchange for up to $125 million principal amount of our outstanding subordinated notes (the “Debt Exchange Proposal”),

 

(3) To approve a proposal to grant the board of directors authority to adjourn, postpone or continue the special meeting (the “Adjournment Proposal”), and

 

(4) To consider and act upon any other matters that are both necessary to obtaining a shareholder vote for the Common Stock Proposal, the Debt Exchange Proposal and the Adjournment Proposal and to properly come before the meeting or any adjournment or postponement thereof.

 

Shareholders of record of Citizens common stock outstanding at the close of business on July 29, 2009 are entitled to notice of and to vote at the meeting.

 

You are invited to attend this meeting. Please date, sign and return your proxy promptly whether or not you plan to be present at the meeting. In the alternative, you may vote via the Internet or by telephone by following the procedures set forth on the enclosed proxy card. You may still vote in person if you attend the meeting and are a shareholder of record or have a legal proxy from a shareholder of record.

 

By Order of the Board of Directors

 

Thomas W. Gallagher
Executive Vice President
General Counsel and Secretary

 

Flint, Michigan

August 4, 2009

 

328 South Saginaw Street
Flint, Michigan 48502

 

PROXY STATEMENT

 

This proxy statement is furnished in connection with the solicitation of proxies by our board of directors for our special meeting of shareholders to be held on September 9, 2009 or any adjournment or postponement of the meeting. The time, place and purposes of the meeting are disclosed on the cover page of these materials and in the notice of the special meeting. Directions to attend the meeting in person may be obtained by contacting Ms. Kristine Brenner, director of Investor Relations, at (810) 257-2506.

 

This proxy statement, the proxy and the notice of the special meeting of shareholders are first being sent or given to shareholders on or about August 7, 2009. References in this proxy statement to “us,” “we,” “our” or the “Corporation” refer to Citizens Republic Bancorp, Inc.

 

The holders of our common stock as of the close of business on July 29, 2009 will be entitled to be present and to vote at the meeting. Each share of our common stock is entitled to one vote on each matter to be voted at the meeting. There are no other classes of our stock entitled to vote at the meeting. On July 29, 2009, there were 126,254,577 shares of our common stock outstanding and entitled to vote. The board of directors requests that you execute and return the proxy promptly, whether or not you plan to attend the meeting. Instead of returning signed proxy cards, shareholders of record may vote their shares over the Internet, or by calling a specially designated telephone number. These Internet and telephone voting procedures are designed to authenticate shareholders’ identities, allow shareholders to give their voting instructions and confirm that shareholders’ instructions have been recorded properly. Specific instructions for shareholders of record that wish to use the Internet or telephone voting procedures are included on the proxy card, and this proxy statement and the proxy card are available at www.citizensbanking.com/shareholdermeeting. Shareholders who vote via the Internet or by telephone do not need to mail their proxy cards. Any vote by proxy, Internet or telephone may be revoked by the person giving it at any time before the meeting by giving written notice of such revocation to the corporate secretary, by executing another proxy or using the Internet or telephone voting procedures as of a date subsequent to the prior proxy or Internet or telephone vote, or, if you are a shareholder of record or have a legal proxy from a shareholder of record, by voting in person at the special meeting.

 

The shares represented by properly executed proxies (including those properly voted by telephone or Internet) will be voted in accordance with the instructions provided therein and where no instructions are given, will be voted in favor of the proposal to approve an amendment to our Amended and Restated Articles of Incorporation to increase the number of common shares authorized for issuance, which we refer to as the “Common Stock Proposal,” the proposal to approve the potential issuance of common stock in accordance with Nasdaq Marketplace Rule 5635 in exchange for certain outstanding debt securities of the Corporation, which we refer to as the “Debt Exchange Proposal,” and the proposal to grant the board of directors the authority to adjourn, postpone or continue the special meeting, which we refer to as the “Adjournment Proposal.” Approval of the Common Stock Proposal requires the affirmative vote of a majority of the outstanding shares of our common stock entitled to vote at the meeting. Approval of the Debt Exchange Proposal and the Adjournment Proposal require the affirmative vote of a majority of the votes cast on such proposal at the meeting. Abstentions and broker non-votes are counted only for purposes of determining whether a quorum is present at the special meeting and will not impact the vote on the Debt Exchange Proposal and the Adjournment Proposal, but in the case of the Common Stock Proposal, broker non-votes and abstentions will have the same effect as a vote against that proposal. “Broker non-votes” result when shareholders hold their shares in street name and do not provide

voting instructions to their broker or other nominee. Those shares will not be voted on any proposal on which the broker or other nominee does not have discretionary authority to vote under applicable rules.

 

We will bear the cost of soliciting proxies, which will be solicited primarily by mail. We have retained the Altman Group, specialists in proxy solicitation, to solicit proxies from brokers, bank nominees, and other institutional holders of our common stock at an anticipated cost of $8,000 plus certain out-of-pocket expenses. Proxies may also be solicited by our directors and employees personally, and by telephone, facsimile, or other means. No additional compensation will be paid to these individuals for proxy solicitation nor is it expected to result in more than a minimal cost to us. We may make arrangements directly with banks, brokerage houses, custodians, nominees and fiduciaries to forward solicitation material to the beneficial owners of our common stock held of record by them and to obtain authorization for the execution of proxies. We expect to reimburse these institutional holders for their reasonable expenses in connection with these activities.

 

The persons named in the proxy to represent shareholders who are present by proxy at the meeting are James L. Wolohan and Cathleen H. Nash.

 

Important Notice Regarding Delivery of Proxy Statement

 

To reduce the expenses of delivering duplicate materials to our shareholders, we are taking advantage of householding rules that permit us to deliver only one set of proxy solicitation materials to shareholders who share the same address, unless otherwise requested. Each shareholder retains a separate right to vote on all matters presented at the meeting.

 

If you share an address with another shareholder and have received only one set of materials, you may write or call us to request a separate copy of these materials at no cost to you. For future shareholders meetings, you may request separate materials or request that we only send one set of materials to you if you are receiving multiple copies by writing to us at sendmaterial@proxyvote.com, or calling us at 1-800-579-1639.

 

QUESTIONS AND ANSWERS ABOUT THIS PROXY STATEMENT

 

 

 

 

 

 

 

SECURITY OWNERSHIP

 

Certain Beneficial Owners

 

The table below includes all of our shareholders that we know to beneficially own more than 5 percent of our common stock as of December 31, 2008, unless otherwise indicated.

 

 

 

Management

 

The following table reflects the beneficial ownership of our common stock as of July 29, 2009 by:

 

 

The information in the table has been obtained from these individuals and is reported in accordance with the applicable rules of the Securities and Exchange Commission, or Commission. Under these rules, a person is deemed to beneficially own stock if they have or share the power to vote or dispose of the stock or have the right to acquire the power to vote or dispose of the stock within the next 60 days. As a result, the amounts shown in the table do not necessarily reflect stock ownership for any purpose other than compliance with the Commission’s reporting requirements.

 

 

 

 

 

 

 

In January 2009, certain Named Executive Officers received long-term incentive awards consisting of a long-term equity component and a cash component. The long-term equity component is performance based and in the form of restricted shares. Generally, the restrictions as to 50% of the shares granted will lapse on January 29, 2011 if both of the following performance measures are met: (i) we are profitable in 2010 (based on net income); and (ii) our 2010 pre-tax/pre-provision income improves over 2009 results. On January 29, 2012 the restrictions on the remaining 50% of the granted shares (or in the event the aforementioned performance measures are not achieved in 2010 the restrictions on the full 100% of the shares granted) will lapse if: (i) we are profitable in 2011 (based on net income); and (ii) 2011 pre-tax/pre-provision income improves over 2010 results. If both of the aforementioned performance measures are not met for 2011, then any shares remaining unvested will be canceled. Pre-tax/pre-provision income represents net income (loss) excluding income tax

provision (benefit), the provision for loan losses, and impairment charges (such as goodwill, credit writedowns, and fair-value adjustments). If the executive officer retires, resigns, or is terminated for cause, then any unvested restricted shares and unearned cash will be forfeited. If the executive officer’s position is eliminated, then the executive officer will receive a pro-rata portion of any vested restricted shares (if the performance targets have been met) and the cash portion of the award will be forfeited. However, if the executive officer terminates employment due to death or disability, or if we terminate the officer’s employment without cause, then the executive officer will receive a pro-rata portion of any vested restricted shares (if the performance targets have been met) and earned cash. In the event of a change in control, the provisions of our Amended and Restated Change in Control Agreements would apply and the incentive awards would be fully vested, subject to limitations imposed by law applicable at the time. The restricted shares reflected in this column for the Named Executive Officers become vested and transferable as follows:

 

 

 

PROPOSAL TO APPROVE AN AMENDMENT TO THE CORPORATION’S
AMENDED AND RESTATED ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES (THE “COMMON STOCK PROPOSAL”)

 

On June 15, 2009, our Board of Directors approved a resolution that Article III of our Amended and Restated Articles of Incorporation (the “Articles of Incorporation”) be amended to increase the number of shares of our authorized common stock, no par value per share, from 150,000,000 shares to 1,050,000,000 shares, subject to the approval of Citizens’ shareholders, and we are now asking you to approve this amendment. No change is being proposed to the authorized number of shares of our preferred stock, which will remain at 5,000,000 shares.

 

As of the record date, there were 150,000,000 shares currently authorized for issuance under our Articles of Incorporation, of which 126,254,577 shares were issued and outstanding, approximately 17,578,125 shares were reserved for issuance upon the exercise of the common stock purchase warrant issued to the U.S. Treasury in connection with our Series A Preferred Stock, and approximately 5,486,303 shares were reserved for issuance upon the exercise of outstanding stock options and for future awards under our stock-based compensation plans, leaving approximately 680,995 shares unissued and unreserved.

 

If the Common Stock Proposal is approved, we intend to file a certificate of amendment to our Articles of Incorporation with the Department of Energy, Labor and Economic Growth of the State of Michigan, which will become effective upon filing. The certificate of amendment would provide that the initial section of Article III of our Articles of Incorporation (excluding the certificates of designations relating to previously issued series of preferred stock) be amended to read as follows:

 

“The total authorized capital stock is:

 

Common shares 1,050,000,000 No Par Value

 

Preferred shares 5,000,000 No Par Value”

Why We Are Seeking Shareholder Approval

 

Pursuant to the law of our state of incorporation, Michigan, our board of directors must approve any amendment to our Articles of Incorporation and submit the amendment to shareholders for their approval. The affirmative vote of a majority of the outstanding shares of our common stock is required to approve the Common Stock Proposal.

 

Like many financial institutions across the United States, Citizens has been impacted by deteriorating economic conditions in Michigan and the Upper Midwest states in which we operate, and declining real estate markets have adversely affected the value of our loan portfolio. As a result of such events, we completed two capital raising transactions in 2008 that resulted in the issuance of common stock and preferred stock. However, due to recent events affecting the national economy and particularly the Michigan economy, including the recent bankruptcy filings by General Motors Corporation, Chrysler LLC and a number of Tier I automobile parts suppliers, we believe that additional capital is necessary to maintain and strengthen our capital base as the effects of these events impact our business over the coming months and years. Consequently, management and the board of directors are considering actions to raise additional capital. As noted above, however, we have very few authorized but unissued shares currently available for issuance, other than shares reserved for other purposes. We therefore believe it is necessary to take steps now to authorize a sufficient number of additional shares to allow us to move promptly to raise additional capital in the short term and to provide additional shares for future issuances should further capital needs arise.

 

We are considering and, in certain cases as described below, pursuing various initiatives to increase our capital and strengthen our balance sheet through a variety of means involving the issuance or potential issuance of common stock, including the following:

 

 

 

 

Any cash proceeds from the Treasury investment under the Capital Assistance Program and the other contemplated transactions would be used for general corporate purposes, including without limitation maintaining the Corporation’s subsidiary banks at well-capitalized levels, providing the subsidiary banks with capital to lend to

their current and future customers, and reducing the Corporation’s outstanding debt. We have not made any other determination about any specific use of proceeds. There would be no cash proceeds from the issuance of preferred stock under the Capital Assistance Program that would be exchanged for a portion of the outstanding preferred stock issued to the U.S. Treasury under its Capital Purchase Program in 2008 nor will there be cash proceeds from the issuance of common shares under the Debt Exchange Proposal or the exchange offer for outstanding trust preferred securities.

 

The additional authorized shares of common stock will also be available from time to time for other corporate purposes, including acquisitions of other companies, products, technologies or businesses, stock dividends, stock splits and other distributions, and in connection with equity-based benefit plans. We do not have any current intention or plan to issue shares of common stock for any of these purposes, other than upon the exercise of outstanding stock options and future issuances under our compensation plans to the extent deemed appropriate by the Compensation and Human Resources Committee of our board of directors.

 

Authorized but unissued shares of our common stock may be issued from time to time upon authorization by our board of directors, at such times, to such persons and for such consideration as the board of directors may determine in its discretion and generally without further approval by shareholders, except as may be required for a particular transaction by applicable law, regulation or stock exchange rule. When and if such shares are issued, they would have the same voting and other rights and privileges as the currently issued and outstanding shares of common stock.

 

Certain Material Terms of the Common Stock

 

All of the outstanding shares of our common stock are fully paid and nonassessable. Subject to the prior rights of the holders of shares of preferred stock that may be issued and outstanding, the holders of common stock are entitled to receive:

 

 

We are currently prohibited from paying cash dividends and (with certain exceptions described below) repurchasing shares of common stock pursuant to the Letter Agreement between Citizens and the U.S. Treasury, dated December 12, 2008, pursuant to which we completed our sale to the U.S. Treasury as part of the Treasury’s Capital Purchase Program of certain preferred shares (the “CPP Preferred Shares”) and a warrant to purchase common shares. This restriction will remain in effect until the earlier of December 12, 2011 or such time as Treasury no longer holds the CPP Preferred Shares. If we receive an investment from the Treasury under the Capital Assistance Program, we will be prohibited, while the related convertible preferred shares are owned by Treasury or Treasury owns any common shares issued to it under the Capital Assistance Program, from paying dividends on common shares in excess of $.01 per share and (with certain exceptions described below) from repurchasing common shares.

 

The U.S. Treasury’s Capital Purchase Program and Capital Assistance Program permit repurchases of shares of our common stock only under the following limited circumstances:

 

 

 

In addition, as a bank holding company, our ability to pay distributions will be affected by the ability of our banking subsidiaries to pay dividends under applicable laws, rules and regulations. The ability of these banking subsidiaries, as well as the Corporation, to pay dividends in the future currently is, and could be further, influenced by bank regulatory requirements and capital guidelines.

 

Each holder of common stock is entitled to one vote for each share held of record on all matters presented to a vote at a shareholders meeting, including the election of directors. Holders of common stock have no cumulative voting rights or preemptive rights to purchase or subscribe for any additional shares of common stock or other securities and there are no conversion rights or redemption or sinking fund provisions with respect to the common stock. Our common stock is traded on the Nasdaq Global Select Market under the symbol “CRBC”.

 

CAP Treasury Investment

 

Citizens has applied for an investment by the U.S. Treasury of up to $290 million pursuant to Treasury’s Capital Assistance Program, $190 million of which would be new capital and up to an additional $100 million of which would be exchanged for a portion of the outstanding preferred stock issued to the U.S. Treasury under its Capital Purchase Program in 2008. Such investment would be made in the form of the Corporation’s Mandatorily Convertible Preferred Stock, liquidation preference $1,000 per share (the “CAP Preferred Shares”), and a common stock purchase warrant (the “Warrant”). The CAP Preferred Shares would count as Tier I capital for regulatory capital purposes and so would increase our capital upon issuance. Unlike CPP Preferred Shares, CAP Preferred Shares may be converted into common stock at the option of the Corporation. If the Corporation replaces CPP Preferred Shares with CAP Preferred Shares and then converts a portion of the CPP Preferred Shares into common stock, the Corporation would reduce its future cash obligations and increase its Tier I common equity.

 

The following is a summary of the material proposed standardized terms of such securities based on the term sheet posted on Treasury’s website at www.ustreas.gov. The terms of the CAP Preferred Shares and the Warrant are subject to further changes by the Treasury and to the terms and conditions of the legal documents entered into between the Corporation and Treasury. If the number of shares into which the CAP Preferred Shares are convertible and for which the Warrant may be exercised exceed 20% of our outstanding common shares prior to closing any transaction with Treasury, or would result in Treasury beneficially owning more than 20% of our outstanding common shares after conversion or exercise, we will be required by applicable Nasdaq rules to seek shareholder approval of the investment by Treasury.

 

Conversion

 

The CAP Preferred Shares would mandatorily convert to common stock after 7 years at the “Conversion Price” and may be converted in whole or from time to time in part at the “Conversion Price” at the option of the Corporation at any time, subject to the approval of the Federal Reserve. In addition, the CAP Preferred Shares would be convertible at the Conversion Price at the option of the holder upon specified corporate events, including certain sales, mergers or changes of control of the Corporation. The “Conversion Price” would be $1.50 per share (90% of the average closing price for the common stock for the 20 trading day period ending February 9, 2009, the date immediately preceding the date on which the U.S. Treasury announced its Financial Stability Plan, of which the Capital Assistance Program is a component), subject to customary anti-dilution adjustments. Upon any conversion,

we would also pay any accrued and unpaid dividends in either cash or in shares of common stock valued for this purpose at the closing price on the second preceding trading day.

 

Ranking

 

The CAP Preferred Shares would rank senior to common stock and pari passu with existing preferred shares other than preferred shares which by their terms rank junior to any existing preferred shares.

 

Dividend

 

The CAP Preferred Shares would pay cumulative dividends at a rate of 9% per annum, compounding quarterly.

 

Redemption of Convertible Preferred

 

The CAP Preferred Shares would be redeemable, subject to the approval of the Federal Reserve, in whole or in part at any time solely with the proceeds of one or more issuances of common stock for cash which results in aggregate gross proceeds to the Corporation of not less than 25% of the issue price of the CAP Preferred Shares, or additions to retained earnings. Any CAP Preferred Shares redeemed within the first two years of issuance would be redeemable at par, plus any accrued and unpaid dividends. After the first two years of issuance, CAP Preferred Shares would be redeemable at the greater of par plus accrued and unpaid dividends and the as-converted value. Following the redemption in whole of the CAP Preferred Shares held by Treasury, the Corporation would have the right to repurchase the Warrant issued in conjunction with the sale of the CAP Preferred Shares and any common stock then held by Treasury under the Capital Assistance Program at fair market value.

 

Dividends and Repurchases

 

For as long as any CAP Preferred Shares are outstanding, no dividends may be declared or paid on junior preferred shares, preferred shares ranking pari passu with the CAP Preferred Shares, or common shares (other than in the case of pari passu preferred shares, dividends on a pro rata basis with the CAP Preferred Shares), nor may the Corporation repurchase or redeem any junior preferred shares, preferred shares ranking pari passu with the Convertible Preferred or common shares, unless all accrued and unpaid dividends for all past dividend periods on the CAP Preferred Shares are fully paid. Even if such dividends have been so paid, for so long as any CAP Preferred Shares are outstanding and owned by Treasury or Treasury owns any common stock of the Corporation issued under the Capital Assistance Program, dividends declared and paid on the common stock must be no greater than $0.01 per share per quarter without Treasury’s consent. In addition, for so long as any CAP Preferred Shares are outstanding and owned by Treasury or Treasury owns any common stock of the Corporation, Treasury’s consent would be required for any repurchases of equity securities or trust preferred securities, subject to certain exceptions similar to those in the agreement governing the CPP Preferred Shares described above under “Certain Material Terms of the Common Stock.”

 

Voting Rights

 

The CAP Preferred Shares would have no voting rights prior to conversion to common stock, other than class voting rights on (i) any authorization or issuance of shares ranking senior to the CAP Preferred Shares, (ii) any amendment to the rights of the CAP Preferred Shares, or (iii) any merger, exchange or similar transaction which would adversely affect the rights of the CAP Preferred Shares. If dividends on the CAP Preferred Shares are not paid in full for six dividend periods, whether or not consecutive, the CAP Preferred Shares would have the right to elect two directors to our board of directors. The right to elect directors would end when full dividends have been paid for four consecutive dividend periods. Upon conversion of the CAP Preferred Shares, Treasury would have the same voting rights as other holders of our common stock. Treasury intends to publish a set of principles governing its use of these rights prior to closing any transactions.

 

Transferability

 

The CAP Preferred Shares and the underlying shares of common stock would not be subject to any contractual restrictions on transfer. We would be required to file a shelf registration statement covering the CAP Preferred

Shares and the underlying shares of common stock as promptly as practicable after the date of the investment and to take all action required to cause such shelf registration statement to be declared effective as soon as possible. We would also grant to Treasury piggyback registration rights for the CAP Preferred Shares and the underlying shares of common stock and would take such other steps as may be reasonably requested to facilitate the transfer of the CAP Preferred Shares and the underlying shares of common stock including, if requested by Treasury, using reasonable efforts to list the CAP Preferred Shares on the Nasdaq Stock Market (if our common stock is listed there at the time).

 

After the mandatory conversion date, Treasury would make reasonable efforts to sell on an annual basis an amount of common stock equal to at least 20% of the total common stock owned by Treasury on the mandatory conversion date until all of the common stock owned by Treasury is sold. Following the conversion of the CAP Preferred Shares into common stock, we would have the right, subject to Federal Reserve approval, to repurchase any of such shares of common stock held by Treasury at a price equal to the greater of the Conversion Price and the market price of the common stock on the date of repurchase (calculated based on the average closing price during the 20 trading day period beginning on the day after notice of repurchase is given). Any such repurchases must be made with the proceeds of an issuance of common stock for cash or additions to retained earnings. Following the repurchase in whole of the common stock held by Treasury as provided above, we would have the right to repurchase the Warrant issued to Treasury under the Capital Assistance Program (and any common stock issued upon its exercise and then held by Treasury) at fair market value.

 

Executive Compensation, Transparency, Accountability, Monitoring, and Other Terms

 

The Corporation and its covered officers and employees would agree to comply with Treasury’s rules, regulations and guidance with respect to executive compensation, transparency, accountability and monitoring, as published and in effect at the time of the investment closing.

 

If we participate in the CAP, we will be required to submit monthly and quarterly reports to the U.S. Treasury detailing our lending by category, showing how many new loans we provided to businesses and consumers and how many asset-backed and mortgage-backed securities we purchased during the relevant period, accompanied by a description of the lending environment in the communities and markets we serve. These reports would also include a comparison to the most rigorous estimate of what our lending would have been in the absence of governmental support. We will furnish these reports to the SEC on Form 8-K simultaneously with the filing with the U.S. Treasury.

 

If we participate in the CAP, we will also be required to commit to participate in the Home Affordable Modification Program. The Home Affordable Modification Program is meant to assist “at-risk homeowners” avoid foreclosure by encouraging loan modifications that will result in affordable monthly mortgage payments. Under this program, the U.S. Treasury will partner with financial institutions to modify qualifying mortgages (principally via interest rate reductions but with a possibility of principal reductions as well) with a goal of substantially reducing monthly payments. The servicer/lender is responsible for making modifications to eligible mortgages that will bring the monthly payment down to 38% of the borrower’s gross monthly income, after which U.S. Treasury will share, on a dollar-for-dollar basis, the costs of further reducing the payment to a 31% debt-to-income ratio. The modified payments must remain in place for 5 years, after which the interest rate may be gradually stepped up by 100 basis points per year, subject to a permanent cap.

 

Servicers/lenders that modify loans under the Home Affordable Modification Program will receive an up-front fee of $1,000 for each loan that is modified, plus an additional “Pay for Success” fee of up to $1,000 per year for up to three years on each loan so long as the borrower stays in the program during this time. Servicers are eligible for one-time bonus payments of $1,500 for modifications made while a borrower is still current on mortgage payments. We expect our participation in the Home Affordable Modification Program would not have a material adverse effect on our financial condition and results of operation and could have a marginally positive effect.

 

Summary of Terms of Warrant to Be Issued in Connection With CAP Preferred Shares

 

Warrant

 

As part of the purchase of our CAP Preferred Shares, Treasury would also receive a ten-year Warrant to purchase at any time a number of shares of common stock having an aggregate market value (based on the

Conversion Price) equal to 20% of the CAP Preferred Shares amount on the date of investment. The initial exercise price for the Warrant, and the price for determining the number of shares of common stock subject to the Warrant, would be the Conversion Price, subject to customary anti-dilution adjustments. If we issue $190 million of CAP Preferred Shares to Treasury, the Warrant would give Treasury the right to purchase 25.3 million common shares at $1.50 per share for ten years. If we issue an additional $100 million of CAP Preferred Shares to Treasury in exchange for outstanding CPP Preferred Shares, the Warrant would give Treasury the right to purchase a total of 38.7 million shares.

 

Transferability

 

The Warrant would not be subject to any contractual restrictions on transfer and would be registered for resale as discussed above. The Corporation would apply for Nasdaq listing of the shares underlying the Warrant.

 

Voting

 

Treasury would agree not to exercise voting power with respect to any shares of common stock issued to it upon exercise of the Warrant.

 

Substitution

 

In the event our common stock is no longer listed or traded on a national securities exchange or securities association, the Warrant would be exchangeable, at the option of Treasury, for senior term debt or another economic instrument or security of the Corporation such that Treasury is appropriately compensated for the value of the Warrant, as determined by Treasury.

 

Effect on Outstanding Common Stock

 

The amount of capital we may seek to raise through issuances of common stock, including through the initiatives under consideration and referenced above under “— Why We Are Seeking Shareholder Approval” or through other means, is likely to be substantial. While we are not one of the 19 institutions required to conduct a forward-looking capital assessment, or “stress test”, pursuant to the Supervisory Capital Assessment Program (the “SCAP”) applied by the U.S. Treasury and Federal bank regulatory agencies to those institutions in early 2009, it is possible that the U.S. Treasury or our bank regulators could apply a similar “stress test” to us, including in connection with our application for an investment by the U.S. Treasury pursuant to the Capital Assistance Program. Furthermore, both we and our regulators regularly perform a variety of analyses of our assets, including the preparation of stress case scenarios, and as a result of those assessments we could determine, or our regulators could require us, to raise additional capital.

 

The authorization of the additional shares would not, by itself, have any effect on the rights of shareholders. However, holders of common stock have no preemptive rights to acquire additional shares of common stock, so the future issuance of shares of common stock pursuant to the exchange of shares for subordinated notes as contemplated by the Debt Exchange Proposal, the exchange of shares for outstanding trust preferred securities, or any of the other potential capital raising initiatives discussed above would have an immediate and significant dilutive effect on earnings per share and the voting power of existing shareholders at the time of the issuance. The following table assumes the exchange offers occur on the terms announced on July 31, 2009, including the term limiting the aggregate number of shares that may be issued in the exchange offers to 500 million.

 

 

 

 

 

 

 

Based on such assumptions, upon completion of a debt exchange and an exchange for outstanding trust preferred securities in which the holders of 75% of such securities participated at a Relevant Price of $0.60 Citizens’ existing shareholders would own only 29% of Citizens’ outstanding common stock. If the maximum aggregate number of shares that may be issued in the exchange offers is increased to as much as 750 million as permitted by the Debt Exchange Proposal (if it is approved), and the Relevant Price was $0.25, Citizens’ existing shareholders would own only 14.5% of the outstanding common stock, assuming the holders of 75% of the trust preferred securities and subordinated notes participate.

 

The issuance of additional shares, or the perception that additional shares may be issued, may also adversely affect the market price of our common stock. In addition, approval of the Common Stock Proposal could adversely affect the ability of third parties to take over or change the control of the Corporation. It is possible that an increase in authorized shares could render such an acquisition more difficult under certain circumstances or discourage an attempt by a third party to obtain control of us by making possible the issuance of shares that would dilute the share ownership of a person attempting to obtain control or otherwise make it difficult to obtain any required shareholder approval for a proposed transaction for control. The board of directors has no current intention to authorize the issuance of additional shares for such purposes and is not aware of any present attempt to obtain control of us or otherwise accumulate our common stock. The issuances contemplated by the initiatives described above are intended for capital raising purposes only.

 

In addition, the exchange offers for the subordinated notes and the trust preferred securities may trigger an ownership change that would negatively affect our ability to utilize net operating loss and capital loss and other deferred tax assets in the future. As a result, we may suffer higher-than-anticipated tax expense, and consequently lower net income and cash flow, in those future years. As of December 31, 2008, we had a domestic federal net operating loss carryforward of approximately $20.2 million, and such amount may grow significantly prior to the expiration of the exchange offers. Companies are subject to a change of ownership test under Section 382 of the

Internal Revenue Code of 1986, as amended (the “Code”), that, if met, would limit the annual utilization of the pre-change of ownership carryforward as well as the ability to use certain unrealized built-in losses. This change of ownership test will be met if a sufficient number of the holders of the subordinated notes and the trust preferred securities exchange such securities for our common shares. We believe it is likely that the test will be met if there is substantial participation in the exchange offers. Generally, under Section 382, the yearly limitation on our ability to utilize such deductions will be equal to the product of the applicable long-term tax exempt rate (presently 4.58 percent) and the sum of the values of our common shares and of our outstanding CPP Preferred Shares, immediately before the ownership change. Our ability to utilize deductions related to credit losses during the five-year period following such an ownership change would also be limited under Section 382, together with net operating loss carryforwards, to the extent that such deductions reflect a net loss that was “built-in” to our assets immediately prior to the ownership change. Similar rules under Section 383 of the Code will also limit utilization of our capital loss carryforwards. These carryforwards amounted to approximately $12.5 million at December 31, 2008, and such amount may grow significantly prior to the expiration of the offers.

 

Pro Forma Financial Information

 

Selected unaudited pro forma financial information giving effect to the exchange offers for the subordinated notes and trust preferred securities and certain other transactions is set forth in the attached Annex I. Shareholders are urged to read the pro forma information carefully. The inclusion of any transactions in the pro forma financial information does not necessarily indicate that such transactions are likely to occur.

 

The board of directors recommends that you vote “FOR” the Common Stock Proposal to approve an amendment to the Articles of Incorporation to increase the number of authorized common shares from 150,000,000 to 1,050,000,000.

 

PROPOSAL TO APPROVE THE ISSUANCE OF COMMON STOCK IN AN EXCHANGE
TRANSACTION IN ACCORDANCE WITH NASDAQ MARKETPLACE RULE 5635 (THE “DEBT
EXCHANGE PROPOSAL”)

 

On July 8, 2009, our board of directors found it to be advisable and in the best interests of the Corporation that the Corporation pursue an offer to exchange shares of common stock for up to the entire $125 million outstanding principal amount of our outstanding 5.75% subordinated notes due February 1, 2013 (the “Subordinated Notes”). The maximum number of shares of common stock approved for issuance in the exchange is 750,000,000, subject to approval of the final terms of the exchange offers. If the Corporation proceeds with the exchange offer, the Corporation will issue for each $1,000 principal amount of Subordinated Notes accepted for exchange a number of shares of common stock, referred to herein as the “Exchange Ratio,” having a dollar value that is not more than $1,100 and not less than $750. The dollar value per share of common stock used in determining the Exchange Ratio will be the average volume weighted average price of one share of common stock for a designated number of trading days in the seven trading days ending not later than the last day of the exchange offer.

 

As noted previously in this proxy statement, due to recent events affecting the national economy and particularly the Michigan economy, including the recent bankruptcy filings by General Motors Corporation, Chrysler LLC and a number of Tier I automobile parts suppliers, and the projected significant rise in unemployment rates in our primary markets, particularly Michigan, we believe that additional capital is necessary to maintain and strengthen our capital base as the effects of these events impact our business over the coming months and years. One means identified to improve our capital position is to offer to exchange common stock, which is considered both Tier 1 regulatory capital and Tier 1 common capital, to holders of our Subordinated Notes, which are not considered Tier 1 regulatory capital. The Subordinated Notes bear interest and will become due and payable in less than five years. As a result, the board of directors and management believe it is advisable and in the best interests of the Corporation to take proactive steps to increase our Tier 1 regulatory capital by offering to exchange common stock for the Subordinated Notes. If shareholders do not approve the Debt Exchange Proposal, it would be unlikely that the Corporation would be able to complete the exchange transactions at a level that would be meaningful to the Corporation, which could materially and adversely affect the Corporation’s business, financial results, and prospects.

Nasdaq Marketplace Rule 5635 requires shareholder approval prior to the sale or issuance or potential issuance of shares, in a transaction other than a public offering, equal to 20% or more of the Corporation’s outstanding common stock or 20% or more of the voting power of the Corporation outstanding before the issuance, if the sale price of the common stock is less than the greater of the book or market value of the common stock. Shares of common stock issuable upon the exercise or conversion of warrants, options, debt instruments, preferred stock or other equity securities issued or granted in such a transaction are considered shares issued in such a transaction in determining whether the 20% limit has been reached.

 

In addition, Nasdaq Marketplace Rule 5635 requires shareholder approval prior to the sale or issuance or potential issuance of shares, in a transaction that would result in a change in control. Published Nasdaq interpretative guidance indicates that the ownership by a person of 20% or more of the outstanding common stock as a result of the issuance or potential issuance of shares could result in a change in control requiring shareholder approval.

 

Given the uncertainty in the value of the Subordinated Notes we may receive in exchange for each share of common stock in such a transaction, the amount of Subordinated Notes sought for exchange, the current market value of the common stock in comparison to its book value per share at June 30, 2009 and the number of shares of common stock that may be exchanged in such a transaction, the exchange of securities in such a transaction may result in the issuance of 20% or more of the outstanding common stock of the Corporation or 20% or more of the voting power of the Corporation’s outstanding stock in exchange for Subordinated Notes having a value that is less than the greater of the book value or market value of the shares, and could result in one or more of the holders of Subordinated Notes acquiring or having the right to acquire 20% or more of the outstanding common stock following the exchange. Therefore, to comply with Nasdaq Marketplace Rule 5635, the Corporation is seeking shareholder approval for the potential issuance of shares of common stock in an exchange transaction so that the Corporation will have flexibility to enter into and close such a transaction on a timely basis. The terms of the exchange offer for Subordinated Notes as made on July 31, 2009 are $900 per $1,000 principal amount of Subordinated Notes if tendered for exchange on or before August 13, 2009 and $850 per $1,000 principal amount if tendered after August 13, 2009 and on or before the expiration date, in each case payable in common stock valued based on the mathematical average of the volume weighted average price per share for the five trading days ending on and including the second trading day immediately preceding the expiration date of the exchange offer, up to a maximum of 500,000,000 shares. However, Citizens has the right, subject to applicable law, to modify the terms of the exchange offer at any time prior to the expiration date and may modify such terms if deemed in Citizens’ best interests. If the Corporation waited until after it decided to modify the terms of the exchange offer before arranging for another special meeting of its shareholders to approve the terms as modified, it would delay and possibly jeopardize the consummation of the transaction.

 

Generally, under published Nasdaq interpretative guidance, general authorizations by the shareholders for purposes of Nasdaq Marketplace Rule 5635 will be effective only if limited to transactions which are completed within three months of the approval. The three month requirement only applies to the initial issuance of the shares of common stock or other securities exercisable for or convertible into common stock. Nasdaq interpretative guidance also requires us to include a maximum potential discount in shareholder proposals such as this one. As described above, the price being offered was determined, and any modified price, if any, subject to the maximum discount, would be determined, by a committee of the board of directors and would likely depend upon discussions with holders of Subordinated Notes and prevailing market conditions.

 

If the issuance of common stock in the exchange transaction for the Subordinated Notes results or would result in one or more holders of Subordinated Notes beneficially owning 20% or more of the common stock following the issuance of common stock, then shareholder approval of this proposal also will constitute approval of any change in control or potential change in control for purposes of Nasdaq Marketplace Rule 5635 and no additional approval will be solicited.

 

As of the date of this proxy statement, except as otherwise disclosed in this proxy statement, the Corporation does not have any specific plans, arrangements or contracts with any third party, which alone or when aggregated with subsequent transactions, would contemplate or require the Corporation to issue shares of its common stock or other securities exercisable for or convertible into common stock in excess of 20% of its outstanding common stock or

voting power and at a price that would be less than the book or market value of the Corporation’s common stock as of such date or that would result in a change in control of the Company. If any material plans, arrangements or contracts regarding securities issuances subject to this proposal arise after the date of this proxy statement and prior to the actual vote on this proposal, the Corporation will notify its shareholders and make revised proxy solicitation materials publicly available in accordance with SEC rules. These materials will include a new proxy card, if necessary.

 

Any transaction requiring approval by shareholders under Nasdaq Marketplace Rule 5635 would likely result in a significant increase in the number of shares of common stock outstanding, and current shareholders will own a smaller percentage of the outstanding common stock. Moreover, the shares of common stock exchanged for the Subordinated Notes will be freely tradable. The issuance of these securities will cause a significant reduction in the percentage interests of current shareholders in the voting power, liquidation value, and book and market value of the Corporation, and in its future earnings per share. The sale or resale of these securities could cause the market price of the common stock to decline. In addition to the foregoing, the increase in the number of issued shares of common stock in connection with one or more financings may have an incidental anti-takeover effect in that additional shares may dilute the stock ownership of one or more parties seeking to obtain control of the Corporation. The increased number of issued shares could discourage the possibility of, or render more difficult, certain mergers, tender offers, proxy contests or other change of control or ownership. Please also see “Proposal To Approve An Amendment To The Corporation’s Articles Of Incorporation To Increase The Number Of Authorized Shares — Effect On Outstanding Common Stock.”

 

The foregoing description of the terms of the exchange for Subordinated Notes and the reasons for the exchange offer is included for informational purposes to shareholders in connection with this proxy solicitation and does not constitute an offer to sell or a solicitation of an offer to buy any securities of the Corporation. The Corporation cannot guarantee that any exchange transaction will be completed (or, if so, what the terms or timing may be) and, accordingly, cannot be certain that it will reacquire and cancel any Subordinated Notes. If the board of directors determines that such issuance is in the best interests of the Corporation, the Corporation could exchange up to a total of 750,000,000 shares of its common stock.

 

Even if our shareholders approve this proposal, we may only issue shares of common stock authorized for issuance under our Articles of Incorporation. Our Articles of Incorporation currently authorize the issuance of up to 150,000,000 shares of common stock. As of July 29, 2009, there were approximately 680,995 unissued and unreserved shares of common stock available for issuance by the Corporation. Our issuance of shares of common stock in excess of that amount is contingent upon shareholder approval of the Common Stock Proposal.

 

The board of directors recommends that shareholders vote FOR the Debt Exchange Proposal, for purposes of complying with Nasdaq Marketplace Rule 5635, to authorize the Corporation to issue shares of the Corporation’s common stock in exchange for up to $125 million aggregate principal amount of Subordinated Notes upon such terms as the board of directors shall deem to be in the best interests of the Corporation, provided that (i) not more than 750,000,000 shares of common stock may be issued in the exchange, (ii) the Corporation will issue for each $1,000 principal amount of Subordinated Notes accepted for exchange a number of shares of common stock having a dollar value that is not more than $1,100 and not less than $750, (iii) the dollar value per share of common stock used in determining the Exchange Ratio will be the average volume weighted average price of one share of common stock for a designated number of trading days in the seven trading days ending not later than the last day of the exchange offer, and (iv) the issuance of shares of common stock pursuant to such exchange offer shall occur not later than the date three months after the date of the approval of the Debt Exchange Proposal by the shareholders of the Corporation.

 

ADJOURNMENT, POSTPONEMENT OR CONTINUATION
OF THE SPECIAL MEETING (THE “ADJOURNMENT PROPOSAL”)

 

If at the special meeting the number of shares of common stock present in person or represented by proxy and voting in favor of the Common Stock Proposal or the Debt Exchange Proposal is insufficient to approve such proposal, management may move to adjourn, postpone or continue the special meeting in order to enable the board of directors to continue to solicit additional proxies in favor of such proposals; however, the special meeting may not be adjourned, postponed or continued to a date later than October 9, 2009. In that event, you will be asked to vote

only upon the Adjournment Proposal and any other proposal described in this proxy statement for which, at such time, the Corporation has received sufficient votes for approval and not the proposal for which sufficient votes for approval have not been received.

 

In this proposal, the Company is asking you to authorize the holder of any proxy solicited by its board of directors to vote in favor of adjourning, postponing or continuing the special meeting and any later adjournments. If the shareholders approve the Adjournment Proposal, the Corporation could adjourn, postpone or continue the special meeting, and any adjourned session of the special meeting, to use the additional time to solicit proxies in favor of a proposal not receiving votes sufficient for approval, including the solicitation of proxies from the shareholders that have previously voted against such proposal. Among other effects, approval of the Adjournment Proposal could mean that, even if proxies representing a sufficient number of votes against either the Common Stock Proposal or the Debt Exchange Proposal have been received, the Corporation could adjourn, postpone or continue the special meeting without a vote on such proposal and seek to convince the holders of those shares to change their votes to vote in favor of such proposal.

 

Approving the Adjournment Proposal requires the affirmative vote of the holders of a majority of the votes cast in person or by proxy at the special meeting and entitled to vote thereon. No proxy that is specifically marked AGAINST the Common Stock Proposal or the Debt Exchange Proposal will be voted in favor of the Adjournment Proposal unless the proxy is specifically marked FOR the Adjournment Proposal.

 

The board of directors believes that if the number of shares of its common stock present in person or represented by proxy at the special meeting and voting in favor of the Common Stock Proposal or the Debt Exchange Proposal is insufficient to approve such proposal, it is in the best interests of the shareholders to enable the board of directors, for a limited period of time, to continue to seek to obtain a sufficient number of additional votes to approve such proposal.

 

The board of directors has approved and recommends a vote “FOR” the Adjournment Proposal granting the board of directors the discretionary authority to adjourn the special meeting to a date not later than October 9, 2009.

 

INFORMATION INCORPORATED BY REFERENCE

 

We incorporate by reference in this proxy statement the information contained under Part II, Items 7, 7A, 8 and 9 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and the information contained in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, each as filed with the SEC. We also incorporate by reference in this proxy statement the information contained in any reports (and amendments thereto) filed with the SEC under the Securities Exchange Act of 1934 after the date hereof and prior to the date of the special meeting.

 

You may read and copy any document we file at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20002. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. In addition, our SEC filings are available to the public at the SEC’s Internet site at http://www.sec.gov. Additionally, you may request a copy of any of these filings at no cost, by writing to or telephoning us at the following address: Citizens Republic Bancorp, Inc., 328 South Saginaw Street, Flint, Michigan 48502, Attention: Investor Relations or by telephone at (810) 257-2506. We undertake to provide by first class mail, within one business day of receipt of such a request, a copy of any and all information that has been incorporated by reference in this proxy statement.

 

Representatives of Ernst & Young LLP will be present at the special meeting, will have the opportunity to make a statement if they so desire, and will be available to respond to appropriate questions submitted to the Secretary of Citizens in advance of the special meeting.

 

OTHER MATTERS

 

The board of directors is not aware of any other matters which may come before the special meeting. Currently, in accordance with our bylaws, the only matters to be acted on at the special meeting are those described in this proxy statement, along with any necessary procedural matters related to the special meeting. As to procedural matters, or any other matters that are determined to be properly brought before the special meeting calling for a vote of the shareholders, it is the intention of the persons named in the accompanying proxy, unless otherwise directed in that proxy, to vote on those matters in accordance with their best judgment.

 

Any proposal by a shareholder intended to be included in the proxy statement for the 2010 annual meeting must be received by Thomas W. Gallagher, the secretary of the Corporation, by the close of business on December 18, 2009. In addition to applicable rules of the SEC for inclusion of shareholder proposals in our proxy statement, our bylaws provide that, in order for a shareholder proposal to be properly brought before the annual meeting, written notice of such proposal must be given by the shareholder to our corporate secretary, either by personal delivery or by United States mail, postage prepaid, not later than February 26, 2010, which is the 90^th day prior to the first anniversary of the 2009 annual meeting. If the annual meeting date has been advanced to a date earlier than April 27, 2010, which is the 30^th day prior to the first anniversary of the 2009 annual meeting or delayed to a date later than July 26, 2010, which is the 60^th day after the first anniversary of the 2009 annual meeting, then notice of the proposal must be given within 10 days after the first public disclosure of the date of such meeting in accordance with the procedures set forth in our bylaws. We also expect the persons named as proxies for the 2010 annual meeting of shareholders to use their discretionary voting authority, to the extent permitted by law, with respect to any proposal properly presented at that meeting by a shareholder who does not provide us with written notice of the proposal during the period provided in our bylaws.

 

CITIZENS REPUBLIC BANCORP, INC.

 

Thomas W. Gallagher

Executive Vice President

General Counsel and Secretary

 

Flint, Michigan

August 4, 2009

ANNEX I

 

The following selected unaudited pro forma financial information has been presented to give effect to and show the pro forma impact of the offers to holders of our outstanding 5.75% subordinated notes due February 1, 2013 (the “Subordinated Notes”) and holders of our trust preferred securities traded on the New York Stock Exchange (“Trust Preferred Securities”) to exchange shares of our common stock (“Common Shares”) for such Subordinated Notes and Trust Preferred Securities (individually, the “Subordinated Note Exchange Offer” and the “Trust Preferred Exchange Offer” and collectively, the “Exchange Offers”) and our participation in the U.S. Treasury’s Capital Assistance Program (the “CAP” and, together, with the Exchange Offers, the “Capital Transactions”) on our balance sheet as of March 31, 2009 and also describes the impact of the Capital Transactions on our earnings for the fiscal year ended December 31, 2008 and the three-month period ended March 31, 2009.

 

The unaudited pro forma financial information is presented for illustrative purposes only and does not necessarily indicate the financial position or results that would have been realized had the Capital Transactions been completed as of the dates indicated or that will be realized in the future when and if the Capital Transactions are consummated. The selected unaudited pro forma financial information has been derived from, and should be read in conjunction with, our historical consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008 and our Quarterly Report on Form 10-Q for the three month period ended March 31, 2009, filed with the SEC, each of which is incorporated by reference into this proxy statement.

 

Our unaudited pro forma consolidated balance sheets as of March 31, 2009 have been presented as if the Capital Transactions had been completed on March 31, 2009 and our pro forma consolidated statements of income have been presented as if the Capital Transactions had been completed on January 1, 2008.

 

For purposes of the pro forma presentations for the year ended December 31, 2008 and period ended March 31, 2009, and as of March 31, 2009, we have assumed that, for purposes of the Exchange Offers, the average Volume Weighted Average price, or “Average VWAP”, of our common shares is $0.59, which we determined assuming the pricing date for the determination of the Average VWAP ended on and included July 28, 2009 (the “Pricing Date”). The Average VWAP of our common shares is the arithmetic average of VWAP for each trading day during the five consecutive trading day period ending on and including the second trading day immediately preceding the expiration date of the Exchange Offers.

 

We have also assumed that our shareholders will approve the Common Stock Proposal. As of July 29, 2009, we have approximately 680,995 Common Shares that are authorized and available to be issued. If our shareholders do not approve the Common Stock Proposal we will be required to terminate the Exchange Offers. Receipt of an investment by the U.S. Treasury in connection with the CAP is contingent on approval by the Treasury and not on shareholder approval of the Common Stock Proposal. However, if our shareholders do not approve the Common Stock Proposal and we participate in the CAP, the value of the warrant we would issue to the Treasury in connection with the CAP would be recorded on our balance sheet as a liability. In addition, if we do not have sufficient available authorized Common Shares to reserve for issuance upon conversion of the CAP Preferred Shares and exercise of the related warrant or approval is required under applicable stock exchange rules, we must call a shareholders meeting as soon as practicable after the date of the investment under CAP to increase the number of authorized shares of common stock and/or comply with such exchange rules.

 

For purposes of the pro forma presentations, we have assumed that we would not convert the CAP preferred shares (the “CAP Preferred Shares”) into Common Shares since we do not currently have plans to do so. Under the proposed standardized terms of the CAP Preferred Shares as set forth in the term sheet posted on Treasury’s website at www.ustreas.gov, the CAP Preferred Shares may be converted in whole or from time to time in part at the “Conversion Price” at our option, subject to the approval of the Federal Reserve. The “Conversion Price” would be $1.50 per share (90% of the average closing price for the Common Shares for the 20 trading day period ending February 9, 2009, the date immediately preceding the date on which the U.S. Treasury announced its Financial Stability Plan, of which the CAP is a component), subject to customary anti-dilution adjustments. Upon any conversion, we would also pay any accrued and unpaid dividends in either cash or in Common Shares valued for this purpose at the closing price on the second preceding trading day. The terms of the CAP Preferred Shares are subject to further changes by the Treasury and to the terms and conditions of the legal documents entered into between us and Treasury.

 

Furthermore, the pro forma presentations reflect our belief that there will be no material effect on the pro forma financial statements from the potential limitations related to Section 382 of the Code due to our having a full tax valuation allowance.

 

We have shown the pro forma impact of a “High Participation Scenario” and a “Low Participation Scenario” with respect to the Capital Transactions prepared using the assumptions set forth below. The “High Participation Scenario” assumes (i) the tender of 75% of the Trust Preferred Securities and exchange (after proration, if any) of such securities for Common Shares, (ii) the tender of 75% of the outstanding Subordinated Notes and exchange (after proration, if any) of such securities for Common Shares and (iii) the issuance of $290 million of preferred stock to the U.S. Treasury under the CAP including $100 million of preferred stock that would be exchanged for a portion of our outstanding Fixed Rate Cumulative Perpetual Preferred Stock issued to the U.S. Treasury under the CPP (“Series A Preferred Stock”). The “Low Participation Scenario” assumes (i) the tender and exchange of 25% of the Trust Preferred Securities into Common Shares, (ii) the tender and exchange of 25% of the outstanding Subordinated Notes for Common Shares and (iii) the issuance of $95 million of preferred stock to the U.S. Treasury under the CAP with none exchanged for outstanding Series A Preferred Stock.

 

We assumed participation rates of 75% and 25% for the High Participation Scenario and the Low Participation Scenario, respectively, based on the results of recently concluded similar exchange offers by similarly situated issuers. We assumed a CAP investment in the High Participation Scenario of $190 million as that amount is approximately 2% of our risk-weighted assets and a CAP investment in the Low Participation Scenario of $95 million as that amount is approximately 1% of our risk-weighted assets. Those percentages are the high and low limits established by the Treasury for CAP investment. We applied for up to $190 million. Similarly, we assumed that we will exchange $100 million of our Mandatorily Convertible Preferred Stock, liquidation preference $1,000 per share (“CAP Preferred Shares”) for Series A Preferred Stock in the High Participation Scenario and will exchange none in the Low Participation Scenario as a reflection of the minimum and maximum amounts for which we applied in our CAP application. The Treasury is not obligated to approve, and there is no assurance the Treasury will approve, our application to the CAP or, if approved, to invest the full amount for which Citizens may be eligible. The inclusion of the Capital Transactions in the pro forma financial information does not necessarily indicate that such transactions are likely to occur.

 

We have further assumed that the Exchange Offers occur on the terms announced on July 31, 2009, including the term limiting the aggregate number of shares that may be issued in the Exchange Offers to 500 million. If the maximum aggregate number of shares that may be issued in the Exchange Offers is increased to as much as 750 million as permitted by the Debt Exchange Proposal (if it is approved), the number of Common Shares issued, the amount of Trust Preferred Securities accepted for exchange and the amount of future earnings per common share and shareholder voting power dilution could increase substantially.

 

There can be no assurances that the foregoing assumptions will be realized in the future, including as to the amounts and percentages of Subordinated Notes and Trust Preferred Securities (together “Subject Securities”) that will be tendered in the Exchange Offers or the level, if any, of our participation in the CAP.

 

Pro Forma Consolidated Balance Sheets
(Unaudited)

High Participation Scenario

 

 

 

 

Pro Forma Consolidated Balance Sheets
(Unaudited)

Low Participation Scenario

 

 

 

 

The following presents the pro forma impact of the Capital Transactions on certain statement of income items and earnings per share for the fiscal year ended December 31, 2008 and the three-month period ended March 31, 2009 as if the Capital Transactions had been completed on January 1, 2008 under the “High Participation Scenario” and the “Low Participation Scenario.”

 

Pro Forma
Consolidated Statements of Operations
(Unaudited)

High Participation Scenario