Owners Of Citizens Republic Bancorp Preferred (CTZ-A) Could Receive $3 Dividend?

On September 28, 2006 Citizens Republic Bancorp (CRBC) introduced a new cumulative trust preferred stock (TRUPS) under the symbol CTZ-A. CRBC, founded in 1871, is headquartered in Flint, Michigan, home of the U.S. auto industry. After surviving the Global Credit Crisis, CRBC took a double-dose of misery when the auto industry melted down shortly thereafter.

Trouble was mounting at Citizens. Originally issued as an investment grade security, CTZ-A lost its investment grade rating on May 6, 2009.

On January 28, 2010, this security became one of the few, if not the only, high quality preferred stock (cumulative, investment grade when issued, issued by a company with a perfect track record of never having suspended a preferred dividend) in history to defer its dividend (my data goes back to 1926). The December 15, 2009 dividend was the last received by CTZ-A shareholders.

But since CTZ-A is "cumulative," CRBC has an obligation, short of bankruptcy, to pay the skipped dividends back to shareholders. Announcing its first quarterly profit a couple of weeks ago, CTZ-A shareholders suddenly have reason to be more hopeful.

CRBC has two problems with CTZ-A: (1) every quarter that goes by the mountain of past due deferred dividends owed to shareholders keeps getting bigger and (2) if they retire (call) CTZ-A in order to stop the meter, they shoot themselves in the foot with respect to their Tier 1 Capital reserves (closely watched by regulators).

But there is at least one solution that solves both problems at once and the timing for CRBC to pull the trigger is coming up between now and September 15, 2011. Here's some interesting speculation:

CTZ-A has a coupon rate of 7.5%, paying $1.88 per share per year in dividends or about $0.47 per quarter. Since the last six dividends have not been paid, CRBC owes $2.82 per share right now (and counting). There are 1.9 million shares of CTZ-A outstanding so CRBC owes about $5.3 million in deferred dividends. Another $25 per share would be needed in order to retire the outstanding shares which is another $47.5 million.

All together, CRBC would have to come up with about $53 million in order to call CTZ-A and get out from under the ever increasing deferred dividend obligation. The bank posted an $18.5 million profit during Q2 (a big chunk of which was in the form of a one-time tax benefit) so coming up with $53 million or so in extra cash is not only going to take a while, but the $53m keeps growing with every quarter.

Also, as a TRUPS CTZ-A currently counts towards CRBC's Tier 1 Capital regulatory reserves. But that will cease to be the case beginning on January 1, 2013 when Section 171 of the Wall Street Reform Act will force CRBC to stop counting CTZ-A toward this reserve metric. Coming up with $53 million and calling CTZ-A solves the dividend accumulation problem, but it does nothing toward backfilling the Tier 1 hole that calling CTZ-A would create.

So here's one solution for CRBC:

CTZ-A reaches its published call date on September 15, 2011*, about 4 weeks from now. CRBC could issue a new traditional preferred stock at, say, 9% and use the proceeds to call CTZ-A and pay back all deferred dividends. The new issue, as a traditional preferred (not a TRUPS) would also continue to count as Tier 1 Capital before and after January 1, 2013.

By issuing a new traditional preferred stock in the next few weeks (non-cumulative), CRBC can solve all problems related to CTZ-A (stop the dividend meter and pay back all past deferred dividends without affecting their Tier 1 reserve metric).

You may ask: if the bank cannot afford to pay the quarterly dividends on CTZ-A at 7.50%, how are they going to afford the even greater dividend payout expense that would come with a new 9%-er?

The profit that CRBC posted last quarter far exceeds the quarterly obligation of a new 9% preferred stock. To call CTZ-A CRBC would have to introduce about 2.1 million shares of a new traditional preferred stock. At 9%, the quarterly dividend obligation to CRBC would be about $1.18 million. Easily affordable if CRBC can maintain its current performance. It is the deferred dividend mountain from CTZ-A that is the problem, not the quarterly obligation of the new issue.

The biggest challenge for CRBC would be finding a group of underwriters who would agree to underwrite a new issue for this troubled regional bank. But if CRBC could put this deal together, we could hear of a new traditional preferred stock from CRBC any day now as driven by CTZ-A's September 15 call date.

Under this speculative scenario, CTZ-A shareholders could receive close to $3 per share in back dividend payment plus $25 per share as soon as next month.

* The signing of the Wall Street Reform Act in July 2010 qualified as a "Special Event" as defined by CTZ-A's prospectus with respect to the inclusion in Tier 1 Capital. Under the Redemption Upon a Special Event provision on page S-50, CRBC has 90 days from such an event within which it is allowed to prematurely call CTZ-A. The company failed to do so, so the next call opportunity will be the security's published call date of September 15, 2011.

Many Happy Returns.