Few banking companies have been bold enough to talk about the future with as much optimism as Citizens Republic Bancorp Inc. in Flint, Mich.
Though it is based in one of the country's most economically distressed states, the $13.2 billion-asset company says it is poised for a strong second half.
The outlook seems counterintuitive, since Citizens Republic posted a $220 million loss for the second quarter as its credit quality continued to deteriorate. The results, reported last week, included a $178 million charge for goodwill impairment.
But William R. Hartman, its chairman, president, and chief executive officer, said in an interview Tuesday that he expects to post profits for the third and fourth quarters as chargeoffs decline. And with $200 million of fresh capital, his company has an adequate cushion, he said.
"I think we have definitely turned a corner," Mr. Hartman said. "Credit quality trends show stabilization, and we feel better about the future."
Analysts share his upbeat assessment. Though Michigan remains distressed, they said Citizens Republic has attacked its problem loans and raised capital, conducting concurrent offerings of common and contingent convertible stock last month.
Its Tier 1 capital ratio is now 10.75%, and its total capital ratio is 12.98%.
Terry McEvoy, an analyst at Oppenheimer & Co., said Citizens Republic has raised enough capital to ensure it will not need to get more later.
"The capital raise was painful because of how dilutive it was," Mr. McEvoy said. "But it was the right move for shareholders, because we won't see round two anytime this cycle."
Jason O'Donnell, an analyst at Boenning & Scattergood Inc., agreed with that perspective.
"A lot of these banks that have gone out and raised capital are chewing through that capital very quickly," Mr. O'Donnell said. "I just don't see that Citizens is going to be in danger of eating through its capital."
The analysts said Citizens Republic's history as a well-performing company and its strong management team helped it persuade investors to pony up.
Citizens Republic operates two banks with 245 branches — mostly in Michigan, but also in Ohio, Wisconsin, Iowa, and one in Indiana.
Charlie Christy, Citizens Republic's chief financial officer, said in a conference call last week that the fund raising was designed to allow his company to weather a worst-case scenario.
"The decision to raise the capital was to help better position Citizens to have the ability to work through this cycle, to have a balance sheet that is positioned to take advantage of better times in the future when the economy rebounds, and to eventually bring back value to our shareholders," Mr. Christy said. "We also wanted to make sure we would never have to do it again."
The second-quarter loss was Citizens Republic's first since 2002. It earned $11.1 million in the first quarter, and $9.6 million in second quarter of last year.
Mr. O'Donnell said the company's results reflect a tough stance on troubled loans.
"They decided to be aggressive and get them off the balance sheet in one shot, instead of spreading them out," Mr. O'Donnell said.
In addition to the goodwill charge, it wrote down about $42.4 million of loans.
Mr. Christy cited the declining value of collateral backing the commercial and residential real estate portfolio. He said Citizens Republic moved those loans to "held for sale" status so that they can be written down to market value and removed from the balance sheet more easily.
The company said its writedowns included $35 million in chargeoffs after $86 million of nonperforming commercial real estate and $42 million of nonperforming mortgages were transferred to held for sale status; $2.3 million for adjusting $30 million of commercial real estate previously held for sale to fair market value; and $5 million from a fair-value adjustment on repossessed commercial and residential real estate.
Second-quarter nonperforming assets fell 12% from the first quarter but nearly doubled from a year earlier, to $285.9 million, or 2.17% of total assets.
The goodwill charge, a noncash charge that has no impact on capital levels, is related to the December 2006 merger of Citizens Banking Corp. and Republic Bancorp Inc.; the company accumulated about $720 million of goodwill.
Third-quarter commercial chargeoffs are expected to be less than half the second-quarter total.
To address its credit problems, Citizens Republic has almost doubled the number of people working out loans, and it has formed a real estate portfolio management group, to monitor the credit quality of all real estate loans, Mr. Hartman said.
The company is still working on its budget for next year, but it expects cost-cutting efforts to continue.
Michigan's economy — and the balance sheets of banking companies there — have been hit with a double whammy. In addition to the housing problems that have swept the nation, the state has had to contend with a sagging auto industry.
The noncurrent loan ratio in Michigan was 0.94% of all loans at the end of 2006, compared with the national average of 0.79%. A year later the state's ratio was at 2.28%, compared with the national average of 1.39%.
By March 31, Michigan's ratio was 2.82, compared with the average of 1.71%.
"Is the worst behind us economically speaking?" Mr. Hartman asked. "I don't think we've bottomed yet, but we have been so proactive in the last 18 months in reorganizing credit problems and writing down and reserving adequately for them that we are well positioned for the economic cycle when and where it bottoms."
