Filed Pursuant to Rule 424(b)(3)

File No. 333-160508

Dated September 4, 2009

 

PROSPECTUS

Citizens Republic Bancorp, Inc.

OFFERS TO EXCHANGE

Up to 500,000,000 Common Shares of Citizens Republic Bancorp, Inc.

for up to all of
its outstanding 5.75% Subordinated Notes due 2013
and

the outstanding 7.50% Enhanced Trust Preferred Securities of Citizens Funding Trust I
(subject to the Maximum Aggregate Consideration provision and other terms and conditions described herein)

 

 

 

Citizens Republic Bancorp, Inc. (“Citizens”) is offering to exchange up to 500,000,000 shares (the “Maximum Aggregate Consideration”) of our newly issued common stock no par value (the “Common Shares”), for up to all of the outstanding (i) Subordinated Notes of Citizens (the “Subordinated Note Exchange Offer”) and (ii) Trust Preferred Securities of Citizens Funding Trust I (the “Trust Preferred Exchange Offer” and together with the Subordinated Note Exchange Offer, the “Exchange Offers”), on the terms and subject to the conditions set forth in this Prospectus and in the applicable letter of transmittal. We refer to the Subordinated Notes and the Trust Preferred Securities, collectively, as the “Subject Securities.” If the aggregate number of Common Shares issuable in exchange for the Subject Securities that are validly tendered and not properly withdrawn as of the Expiration Date exceeds the Maximum Aggregate Consideration, we will accept for exchange that amount of Subject Securities that does not result in a number of Common Shares being issued in the Exchange Offers in excess of the Maximum Aggregate Consideration. In that event, the Subject Securities will be accepted for exchange in accordance with the acceptance priority levels in the table on the inside front cover of this Prospectus (in numerical priority order with 1 considered to be the highest priority) (the “Acceptance Priority Levels”) and may be subject to proration, as described in this Prospectus.

 

We refer to each $1,000 principal amount of Subordinated Notes and each $25 liquidation amount of the Trust Preferred Securities as the “Denomination Amount” for the respective Subject Securities. For each Denomination Amount of Subject Securities that we accept for exchange in accordance with the terms of the Exchange Offers, we will issue a number of Common Shares having an aggregate dollar value (based on the Relevant Price as defined on the inside cover of this Prospectus) equal to the applicable Exchange Value set forth in the table on the inside front cover of this Prospectus or, in the case of Trust Preferred Securities tendered on or prior to the Early Tender Premium Deadline, having an aggregate dollar value (based on the Relevant Price) equal to the sum of the applicable Exchange Value plus the applicable Early Tender Premium Value set forth in the table below (such sum, the “Total Exchange Value”). We refer to the number of Common Shares we will issue for each Denomination Amount of Subject Securities we accept in the Exchange Offers as the “exchange ratio.” We will also pay cash for any accrued and unpaid distributions or interest on any Subject Securities accepted in the Exchange Offers to but not including the date of settlement of the Exchange Offers. Depending on the trading price of our Common Shares on the settlement date of the Exchange Offers compared to the Relevant Price, the market value of the Common Shares we issue in exchange for each Denomination Amount of Subject Securities we accept for exchange may be less than, equal to or greater than the applicable Exchange Value or Total Exchange Value referred to on the inside cover of this Prospectus.

 

We encourage you to read and carefully consider this Prospectus in its entirety, in particular the risk factors beginning on page 17, for a discussion of factors that you should consider with respect to these offers.

 

Our Common Shares are not savings accounts, deposits or other obligations of any of our bank or non-bank subsidiaries and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

 

Neither the Securities and Exchange Commission (the “SEC”), any state securities commission, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System nor any other regulatory body has approved or disapproved of the Exchange Offers or of the securities to be issued in the Exchange Offers or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

Dealer Managers

Sole Arranger and Lead Manager

 

The date of this Prospectus is September 4, 2009

 

The table below sets forth certain information regarding the Subject Securities and the Exchange Offers. If you are a holder of Subordinated Notes, you will be eligible to receive a number of Common Shares based on the Total Exchange Value only if you validly tender Subordinated Notes at or prior to 11:59 p.m., New York City time, on the Expiration Date and do not subsequently withdraw your Subordinated Notes. The Total Exchange Value for the Subordinated Notes does not include an Early Tender Premium. The Total Exchange Value for the Trust Preferred Securities does include an early tender premium. If you are a holder of Trust Preferred Securities, you will be eligible to receive a number of Common Shares based on the Total Exchange Value only if you validly tender Trust Preferred Securities at or prior to the Early Tender Premium Deadline and do not subsequently withdraw your Trust Preferred Securities.

 

 

 

 

The “Relevant Price” is equal to the average Volume Weighted Average price, or “Average VWAP,” of our Common Shares during the five consecutive trading day period ending on and including the Expiration Date, as it may be extended (we refer to such period as the “Pricing Period” and such Expiration Date as the “Pricing Date”); provided, however, that if an extension to the Exchange Offer period is announced following the commencement of the Pricing Period, we do not currently expect the Pricing Period or the Pricing Date to change.

 

The Exchange Offers will expire at 11:59 p.m., New York City time, on September 14, 2009 (unless we extend it or terminate it early). If you are a holder of Trust Preferred Securities, in order to receive the applicable Early Tender Premium Value per Denomination Amount set forth in the table above, you must have tendered your Trust Preferred Securities by the Early Tender Premium Deadline. You may withdraw any Subject Securities that you tender at any time prior to the expiration of the Exchange Offers.

 

For the Trust Preferred Securities only, with respect to any tender in an amount up to $250,000 in aggregate liquidation amount that is accepted in the Trust Preferred Exchange Offer, we will pay the relevant eligible soliciting dealer a fee of 0.50% on the amount of such tender.

 

Our obligation to exchange Common Shares for Subject Securities in the Exchange Offers is subject to a number of conditions that must be satisfied or, if permissible under applicable law, waived by us, including, among others, (i) that our shareholders have approved a proposal to amend our amended and restated articles of incorporation to increase the number of authorized shares of common stock from 150 million to 1,050 million at a special meeting of shareholders to be held on September 9, 2009, and (ii) that there has been no change or development that in our reasonable judgment may materially reduce the anticipated benefits to us of the Exchange Offers or that has had, or could reasonably be expected to have, a material adverse effect on us, our businesses, condition (financial or otherwise) or prospects. Our obligation to exchange is not subject to any minimum tender condition. In addition, the exchange of Common Shares for Subordinated Notes in the Subordinated Note Exchange Offer is subject to the approval by our shareholders at that same special meeting of the issuance of the Common Shares in exchange for the Subordinated Notes in accordance with Nasdaq Marketplace Rule 5635.

 

Our Common Shares are listed on the Nasdaq Global Select Market (“Nasdaq GSM”) under the symbol “CRBC”. As of August 24, 2009, the closing sale price for our Common Shares on the Nasdaq GSM was $0.76 per share.

 

None of Citizens, the trustee of the Citizens Funding Trust I (“Citizens Funding Trust”), the dealer managers, the exchange agent, the information agent or any other person is making any recommendation as to whether you should tender your Subject Securities. You must make your own decision after reading this Prospectus and the documents incorporated by reference herein and consulting with your advisor.

 

TABLE OF CONTENTS

 

IMPORTANT

 

All of the Subject Securities were issued in book-entry form, and all of the Subject Securities are currently represented by one or more global certificates held for the account of The Depository Trust Company (“DTC”). You may tender your Subject Securities by transferring the Subject Securities through DTC’s Automated Tender Offer Program (“ATOP”) or by following the other procedures described under “The Exchange Offers—Procedures for Tendering Subject Securities.”

 

We are not providing for guaranteed delivery procedures and therefore you must allow sufficient time for the necessary tender procedures to be completed during normal business hours of DTC on or prior to the Expiration Date of the Exchange Offers. If you hold your Subject Securities through a broker, dealer, commercial bank, trust company or other nominee, you should consider that such entity may require you to take action with respect to the Exchange Offers a number of days before the Expiration Date in order for such entity to tender Subject Securities on your behalf on or prior to the Expiration Date. Tenders not received by D.F. King & Co., Inc., as exchange agent for the Exchange Offers (the “Exchange Agent”), on or prior to the Expiration Date will be disregarded and of no effect.

 

Unless otherwise indicated or unless the context requires otherwise, all references to “we,” “us,” “our” or similar references mean Citizens and its direct and indirect subsidiaries on a consolidated basis.

 

We file annual, quarterly and current reports, proxy statements and other information with the SEC. 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. 20549. You can also request copies of the documents, upon payment of a duplicating fee, by writing the Public Reference Section of the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. These SEC filings are also available to the public from the SEC’s web site at http://www.sec.gov.

 

The SEC allows us to “incorporate by reference” the information we file with the SEC, which means that we can disclose important information to you by referring you to those documents. The information we incorporate by reference is considered to be part of this document. Information that we file later with the SEC will automatically update information in this document. In all cases, you should rely on the later information over different information included in this document. We incorporate by reference the documents listed below and any documents subsequently filed (but not documents that are furnished, unless expressly incorporated herein by a reference in such furnished document) with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (File No. 001-33063) on or after the date of this document and before the completion of the Exchange Offers:

 

 

Any statement contained in this Prospectus or in a document (or part thereof) incorporated or considered to be incorporated by reference in this Prospectus shall be considered to be modified or superseded for purposes of this Prospectus to the extent that a statement contained in this Prospectus or in any other subsequently filed document (or part thereof) that is or is considered to be incorporated by reference in this Prospectus modifies or supersedes that statement. The modifying or superseding statement need not state that it has modified or superseded a prior statement or include any other information set forth in the document that

it modifies or supersedes. Any statement so modified or superseded shall not be considered, except as so modified or superseded, to constitute part of this Prospectus.

 

Copies of each of the documents incorporated by reference into this Prospectus (other than an exhibit to a filing unless that exhibit is specifically incorporated by reference into that filing) may be obtained at no cost by contacting D.F. King & Co., Inc., our information agent, or Citizens at the following addresses and telephone numbers:

 

D.F. King & Co., Inc.
48 Wall Street, 22nd Floor
New York, NY 10005
Banks and Brokerage Firms, Call Collect: (212) 269-5550
All Others: (800) 714-3312
citizens@dfking.com

 

Citizens Republic Bancorp, Inc.
328 South Saginaw Street
Flint, Michigan 48502
Attention: Investor Relations
Telephone: (810) 257-2506

 

In order to ensure timely delivery of such documents, you must request this information no later than five business days before the date you must make your decision. Accordingly, you should make any request for documents by September 9, 2009 to ensure timely delivery of the documents prior to the Expiration Date.

 

You should rely only on the information contained in or incorporated by reference into this Prospectus. We have not authorized anyone to provide you with information that is different. You should assume that the information contained or incorporated by reference in this Prospectus is accurate only as of the date hereof or as of the date of the document incorporated by reference, as applicable. We are not making an offer of these securities in any jurisdiction where such offer is not permitted.

 

Discussions in this Prospectus and other reports filed by us under the Exchange Act that are not statements of historical fact including, without limitation, statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” and “plan,” and statements about future financial and operating results, plans, objectives, expectations and intentions and other statements that are not historical facts, are forward-looking statements.

 

Forward-looking statements express management’s current expectations, forecasts of future events or long-term goals and, by their nature, are subject to assumptions, risks and uncertainties. Although management believes that the expectations, forecasts and goals reflected in these forward-looking statements are reasonable, actual results could differ materially for a variety of reasons, including, without limitation, risks and uncertainties detailed under “Risk Factors” in this Prospectus and from time to time in our filings with the SEC, such as the risk factors listed in “Item 1A, Risk Factors,” of Citizens’ 2008 Annual Report on Form 10-K for the year ended December 31, 2008 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2009 and June 30, 2009.

 

Other factors not currently anticipated may also materially and adversely affect our results of operations, cash flows, financial position and prospects. There can be no assurance that future results will meet expectations. While we believe that the forward-looking statements in this Prospectus are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim any obligation to update or alter any statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

 

The following are certain questions regarding the Exchange Offers that you may have as a holder of the Subject Securities and the answers to those questions. To fully understand the Exchange Offers and the considerations that may be important to your decision whether to participate, you should carefully read this Prospectus in its entirety, including the section entitled “Risk Factors,” beginning on page 17 below, as well as the information incorporated by reference herein. For further information about us, see the section of this Prospectus entitled “Where You Can Find More Information.”

 

What is the purpose of the Exchange Offers?

 

The purpose of the Exchange Offers is to strengthen our financial condition by increasing our Tier 1 common equity and reducing our indebtedness for borrowed money. Because the Exchange Offers are offers to exchange Common Shares for Subject Securities that represent indebtedness for borrowed money, the effect of the Exchange Offers achieves that purpose. See “Unaudited Pro Forma Financial Information.”

 

Like many financial institutions across the United States, we have 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 (i) an issuance in concurrent public offerings of an aggregate of $200 million of Common Shares and contingent convertible perpetual non-cumulative preferred stock (which was subsequently converted into Common Shares) for net cash proceeds of $189 million; and (ii) the issuance to the U.S. Treasury under the U.S. Treasury’s Capital Purchase Program (“CPP”) of 300,000 shares of Series A Preferred Stock for gross proceeds of $300 million. 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 automobile parts suppliers, we believe that additional Tier 1 common equity 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, we have begun to take action to raise additional Tier 1 common equity.

 

As part of the U.S. government’s Financial Stability Plan, on February 25, 2009, the U.S. Treasury announced its Capital Assistance Program, or “CAP.” To implement the CAP, the Board Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Reserve Banks, the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency commenced a review, referred to as the Supervisory Capital Assessment Program (the “SCAP”), of the capital of the 19 largest U.S. banking institutions. While we are not one of the 19 institutions required to conduct a forward-looking capital assessment, or “stress test”, pursuant to the SCAP, it is possible that the U.S. Treasury or our bank regulators could apply a similar capital-based “stress test” to us, including in connection with our application for an investment by the U.S. Treasury pursuant to the CAP, and determine that we need to raise additional capital, including Tier 1 common equity. We and our regulators regularly perform a variety of analyses of our assets and the impact of credit losses on our capital base, including the preparation of stress case scenarios. We have determined to raise additional Tier 1 common equity in order to maintain and strengthen our capital base.

 

Subject to market conditions, in addition to the Exchange Offers, we currently expect to raise additional capital in one or more of the following additional transactions on a public and/or private basis, as applicable: (i) additional offerings of our Common Shares, (ii) asset sales, or (iii) other transactions. If we are unable to sufficiently increase common equity capital through the capital markets, we may attempt to obtain additional capital from the U.S. Treasury. We have applied for an investment by the U.S. Treasury of up to $290 million pursuant to the CAP including $100 million that would be exchanged for a portion of our outstanding Fixed Rate Cumulative Perpetual Preferred Stock (“Series A Preferred Stock”). The U.S. Treasury is not obligated to approve, and the U.S. Treasury may not approve our application under the CAP or, if our application is approved, the U.S. Treasury may not invest the full amount for which we may be eligible. Further, we may determine not to accept some or all of the amount of investment for which we are approved. The resulting capital issuances of such additional transactions will likely be highly dilutive to our common shareholders and may affect the market price of our Common Shares.

What are the consequences if our capital raising initiatives, including the Exchange Offers, are not successful?

 

We have determined to raise additional Tier 1 common equity in order to maintain and strengthen our capital base. The Exchange Offers are part of our plan to raise additional Tier 1 common equity. Our failure to raise additional Tier 1 common equity may result in our not being able to remain well capitalized. A failure to maintain well capitalized status could have serious negative consequences for our business and prospects, including our viability.

 

What are the general terms of the Exchange Offers?

 

We are offering to exchange up to 500,000,000 of our Common Shares for outstanding Subject Securities. Because the maximum number of our Common Shares that we may issue in exchange for Subject Securities in the Exchange Offers is 500,000,000, which we refer to as the “Maximum Aggregate Consideration,” we may not be able to accept for exchange all Subject Securities validly tendered and not properly withdrawn as of the Expiration Date. If we cannot accept all Subject Securities validly tendered and not properly withdrawn as of the Expiration Date without issuing a number of our Common Shares in exchange for those Subject Securities in excess of the Maximum Aggregate Consideration, acceptance of Subject Securities will be in accordance with the acceptance priority levels in the table below (in numerical priority order with 1 considered to be the highest priority) (the “Acceptance Priority Levels”), and may be subject to proration. For more information about Acceptance Priority Levels and proration, see below under “The Exchange Offers—Terms of the Exchange Offers—Acceptance Priority Levels; Proration.” In addition, we will only accept for exchange from any given participant in the Trust Preferred Exchange Offer that amount of Trust Preferred Securities that results in the issuance of Common Shares which, together with Common Shares beneficially owned by such participant immediately prior to the consummation of the Trust Preferred Exchange Offer, does not aggregate 20% or more of the Common Shares outstanding immediately after the consummation of the Trust Preferred Exchange Offer. Trust Preferred Securities not accepted for exchange will be returned to the holders and will be deemed not validly tendered for any purpose, including for purposes of determining the final proration factor, if proration is necessary. If you desire to limit your tender of Subject Securities in the manner described in “The Exchange Offers—Your Option to Limit Common Share Ownership to 9.99%”, you may follow the procedures described therein.

 

The Exchange Offers will expire at 11:59 p.m., New York City time, on September 14, 2009, unless extended or earlier terminated by us. The Early Tender Premium Deadline (the date by which a holder of Trust Preferred Securities must have tendered Trust Preferred Securities in order to be eligible to receive the applicable Early Tender Premium Value per Denomination Amount listed on the cover page of this Prospectus) was 5:00 p.m., New York City time, on August 13, 2009.

 

May I withdraw Subject Securities that I tender in the Exchange Offers?

 

You may withdraw any Subject Securities that you tender at any time prior to the Expiration Date. You may withdraw any Subject Securities in accordance with the terms of the Exchange Offers by following the procedures described under the caption “The Exchange Offers—Withdrawal of Tenders.”

 

What are the key terms of the Exchange Offers?

 

We are offering to exchange our newly issued Common Shares for outstanding Subject Securities set forth in the following table, subject to the Maximum Aggregate Consideration and the Acceptance Priority

Levels and on the terms and subject to the conditions set forth in this Prospectus and in the applicable letter of transmittal.

 

 

 

 

What consideration are we offering in exchange for the Subject Securities?

 

We refer to each $1,000 principal amount of Subordinated Notes and each $25 liquidation amount of the Trust Preferred Securities as the “Denomination Amount” for the respective Subject Securities. For each Denomination Amount of Subject Securities that we accept for exchange in accordance with the terms of the Exchange Offers, we will issue a number of Common Shares having an aggregate dollar value (based on the Relevant Price) equal to the applicable Exchange Value set forth in the table above or, in the case of Trust Preferred Securities tendered on or prior to the Early Tender Premium Deadline, having an aggregate dollar value (based on the Relevant Price) equal to the sum of the applicable Exchange Value plus the applicable Early Tender Premium Value set forth in the table above (such sum, the “Total Exchange Value”). We refer to the number of Common Shares we will issue for each Denomination Amount of Subject Securities we accept in the Exchange Offers as the “exchange ratio” and we will round the applicable exchange ratio down to four decimal places. The “Relevant Price” is equal to the average Volume Weighted Average price, or “Average VWAP,” of our Common Shares during the five consecutive trading day period ending on and including the Expiration Date, as it may be extended (we refer to such period as the “Pricing Period” and such Expiration Date as the “Pricing Date”); provided, however, that if an extension to the Exchange Offer period is announced following the commencement of the Pricing Period, we do not currently expect the Pricing Period or the Pricing Date to change.

 

Depending on the trading price of our Common Shares on the settlement date for the Exchange Offers compared to the Relevant Price described above, the market value of the Common Shares we issue in exchange for each Denomination Amount of Subject Securities we accept for exchange may be less than, equal to or greater than the applicable Exchange Value or Total Exchange Value.

 

We will also pay cash for any accrued and unpaid interest or distributions, as applicable on any Subject Securities accepted in the Exchange Offers to but excluding the date of settlement of the Exchange Offers.

 

How will the Average VWAP be determined?

 

Average VWAP during a period means the arithmetic average of VWAP for each trading day during that period. VWAP for any day means the per share volume weighted average price of our Common Shares on that day as displayed under the heading Bloomberg VWAP on Bloomberg Page CRBC <equity> AQR (or its equivalent successor page if such page is not available) in respect of the period from the scheduled open of trading on the relevant trading day until the scheduled close of trading on the relevant trading day (or if such volume weighted average price is unavailable, the market price of one share of our Common Shares on such trading day determined, using a volume weighted average method, by a nationally recognized investment banking firm retained by us for that purpose).

 

The period for which the Average VWAP will be determined will be each trading day in the five consecutive trading day period ending on and including the Expiration Date, as it may be extended (we refer to such period as the “Pricing Period” and such Expiration Date as the “Pricing Date”); provided, however,

that if an extension to the Exchange Offer period is announced following the commencement of the Pricing Period, we do not currently expect the Pricing Period and the Pricing Date to change.

 

How may I obtain information regarding the Relevant Price and applicable exchange ratios?

 

Throughout the Exchange Offers, the indicative Average VWAP, the resulting indicative Relevant Price and the indicative exchange ratios will be available at http://www.citizensbanking.com/exchangeoffer and from our information agent, D.F. King & Co., Inc., the “Information Agent,” at one of its telephone numbers listed on the back cover page of this Prospectus. We will announce the final exchange ratios for the Trust Preferred Securities and the Subordinated Notes (both for those tendered before the Early Tender Premium Deadline and those tendered after that deadline) by 4:30 p.m., New York City time, on the date the Exchange Offers are scheduled to expire, and those final exchange ratios will also be available by that time at http://www.citizensbanking.com/exchangeoffer and from the Information Agent.

 

Is there a maximum amount of Subject Securities that may be exchanged in the Exchange Offers?

 

We will accept for exchange the maximum amount of validly tendered and not properly withdrawn Subject Securities that does not result in the issuance of (i) more than 500,000,000 of our Common Shares, accepting first all validly tendered Subordinated Notes and then, if all 500,000,000 Common Shares have not been used to do so, accepting validly tendered Trust Preferred Securities, subject to proration, as described below under “The Exchange Offers—Terms of the Exchange Offers—Acceptance Priority Levels; Proration” or (ii) to any participant in the Trust Preferred Exchange Offer, a number of Common Shares in exchange for Trust Preferred Securities that, together with Common Shares beneficially owned by such participant immediately prior to the consummation of the Trust Preferred Exchange Offer, would aggregate 20% or more of the Common Shares outstanding immediately after the consummation of the Trust Preferred Exchange Offer. Trust Preferred Securities not accepted for exchange will be returned to the holders and will be deemed not validly tendered for any purpose, including for purposes of determining the final proration factor, if proration is necessary.

 

Will fractional shares be issued in the Exchange Offers?

 

We will not issue fractional Common Shares in the Exchange Offers. Instead, the number of Common Shares received by each registered holder whose Subject Securities are accepted for exchange in the Exchange Offers will be rounded down to the nearest whole number.

 

Are the Exchange Offers subject to any minimum tender or other conditions?

 

Our obligation to exchange Common Shares for Subject Securities in the Exchange Offers is not subject to any minimum tender condition. Our obligation to exchange Common Shares for Subject Securities in the Exchange Offers is subject to a number of conditions that must be satisfied or, if permissible under applicable law, waived by us, including among others (i) that our shareholders have approved a proposal to amend our amended and restated articles of incorporation to increase the number of authorized shares of common stock from 150 million to 1,050 million at a special meeting of shareholders to be held on September 9, 2009 (the “Authorized Share Approval Condition”), and (ii) that there has been no change or development that in our reasonable judgment may materially reduce the anticipated benefits to us of the Exchange Offer or that has had, or could reasonably be expected to have, a material adverse effect on us, our businesses, condition (financial or otherwise) or prospects. In addition, the exchange of Common Shares for Subordinated Notes in the Subordinated Note Exchange Offer is subject to the approval by our shareholders, at that same special meeting, of the issuance of the Common Shares in exchange for the Subordinated Notes in accordance with Nasdaq Marketplace Rule 5635 (the “Subordinated Note Exchange Approval Condition”). Nasdaq Marketplace Rule 5635 requires shareholder approval for issuance of our Common Shares under certain circumstances where the number of Common Shares issued or sold equals 20% or more of the number of outstanding Common Shares or 20% or more of the voting power outstanding before the issuance, other than in a transaction involving a public offering. The Subordinated Note Exchange Offer is likely not a public offering for purposes of that rule.

How do I participate in the Exchange Offers?

 

You may tender your Subject Securities by transferring the Subject Securities through ATOP or following the other procedures described under “The Exchange Offers—Procedures for Tendering Subject Securities.”

 

What must I do to participate if my Subject Securities are held of record by a broker, dealer, commercial bank, trust company or other nominee?

 

If you wish to tender your Subject Securities and they are held of record by a broker, dealer, commercial bank, trust company or other nominee, you should contact such entity promptly and instruct it to tender the Subject Securities on your behalf. In some cases, the nominee may request submission of such instructions on a beneficial owner’s instruction form. Please check with your nominee to determine the procedures for such form.

 

You are urged to instruct your broker, dealer, commercial bank, trust company or other nominee at least five business days prior to the Expiration Date in order to allow adequate processing time for your instruction.

 

In order to validly tender your Subject Securities in the Exchange Offers, you or your broker, dealer, commercial bank, trust company or other nominee must follow the procedures described under “The Exchange Offers—Procedures for Tendering Subject Securities.”

 

WE ARE NOT PROVIDING FOR GUARANTEED DELIVERY PROCEDURES AND THEREFORE YOU MUST ALLOW SUFFICIENT TIME FOR THE NECESSARY TENDER PROCEDURES TO BE COMPLETED DURING NORMAL BUSINESS HOURS OF DTC ON OR PRIOR TO THE EXPIRATION DATE. IF YOU HOLD YOUR SUBJECT SECURITIES THROUGH A BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE, YOU SHOULD CONSIDER THAT SUCH ENTITY MAY REQUIRE YOU TO TAKE ACTION WITH RESPECT TO THE EXCHANGE OFFER A NUMBER OF DAYS BEFORE THE EXPIRATION DATE IN ORDER FOR SUCH ENTITY TO TENDER SUBJECT SECURITIES ON YOUR BEHALF ON OR PRIOR TO THE EXPIRATION DATE. TENDERS NOT RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE WILL BE DISREGARDED AND OF NO EFFECT.

 

May I tender only a portion of the Subject Securities that I hold?

 

Yes. You do not have to tender all of your Subject Securities to participate in the Exchange Offers.

 

Is Citizens making a recommendation regarding whether I should tender in the Exchange Offers?

 

We are not making any recommendation regarding whether you should tender or refrain from tendering a portion of your Subject Securities in the Exchange Offers. Accordingly, you must make your own determination as to whether to tender your Subject Securities in the Exchange Offers and, if so, the number of Subject Securities to tender. Before making your decision, we urge you to carefully read this Prospectus in its entirety, including the information set forth in the section of this Prospectus entitled “Risk Factors”, and the documents incorporated by reference in this Prospectus.

 

When do the Exchange Offers expire?

 

The Exchange Offers will expire at 11:59 p.m., New York City time, on September 14, 2009, unless extended or earlier terminated by us. We refer to such time and date, as it may be extended, as the “Expiration Date”. The Early Tender Premium Deadline (the date by which a holder of Trust Preferred Securities must have tendered Trust Preferred Securities in order to be eligible to receive the applicable Early Tender Premium Value per Denomination Amount listed on the cover page of this Prospectus) was 5:00 p.m., New York City time, on August 13, 2009.

 

Under what circumstances can the Exchange Offers be extended, amended or terminated?

 

We do not intend to extend or amend the Exchange Offers. However, we reserve the right to extend the Exchange Offers for any reason or no reason at all. We also expressly reserve the right, at any time or from

time to time, to amend the terms of the Exchange Offers in any respect prior to the Expiration Date. If the Exchange Offers are terminated, no Subject Securities will be accepted for exchange and any Subject Securities that have been tendered will be returned to the holder promptly after the termination. For more information regarding our right to extend, amend or terminate the Exchange Offers, see “The Exchange Offers—Expiration Date; Extension; Termination; Amendment”.

 

How will I be notified if the Exchange Offers are extended, amended or terminated?

 

If the Exchange Offers are extended, amended or terminated, we will issue a timely public announcement. For more information regarding notification of extensions, amendments or the termination of the Exchange Offers, see “The Exchange Offers—Expiration Date; Extension; Termination; Amendment”.

 

How do I withdraw previously tendered Subject Securities?

 

To withdraw previously tendered Subject Securities, you must comply with the appropriate procedures. For more information regarding the procedures for withdrawing tendered Subject Securities, see “The Exchange Offers—Withdrawal of Tenders”.

 

With whom may I speak if I have questions about the Exchange Offers?

 

If you have questions regarding the procedures for tendering your Subject Securities in the Exchange Offers, require additional Exchange Offer materials or require assistance in tendering your Subject Securities, please contact D.F. King & Co., Inc., our Information Agent. You can call the Information Agent at one of its phone numbers listed on the back cover page of this Prospectus. You may also write to the Information Agent at the address set forth on the back cover page of this Prospectus.

 

SUMMARY

Terms of the Exchange Offers		Upon the terms and subject to the conditions set forth in this Prospectus and the applicable letter of transmittal, we are offering to exchange up to 500,000,000 of our Common Shares for Subject Securities validly tendered and not properly withdrawn prior to the Expiration Date. If the aggregate number of our Common Shares issuable in exchange for all Subject Securities that are validly tendered and not properly withdrawn prior to the Expiration Date exceeds 500,000,000, which is the “Maximum Aggregate Consideration,” we will accept for exchange that amount of Subject Securities that does not result in a number of our Common Shares being issued in the Exchange Offers in excess of the Maximum Aggregate Consideration. In this case, the Subject Securities will be accepted in accordance with the Acceptance Priority Levels specified in the table on the inside front cover of this Prospectus.
		In addition, we will only accept for exchange from any given participant in the Trust Preferred Exchange Offer that amount of Trust Preferred Securities that results in the issuance of Common Shares which, together with Common Shares beneficially owned by such participant immediately prior to the consummation of the Trust Preferred Exchange Offer, does not aggregate 20% or more of the Common Shares outstanding immediately after the consummation of the Trust Preferred Exchange Offer (the “Individual Cap”). Trust Preferred Securities not accepted for exchange will be returned to the holders and will be deemed not validly tendered for any purpose, including for purposes of determining the final proration factor, if proration is necessary.
		At the time you tender your Subject Securities, you will not know the extent of participation in the Exchange Offers of other holders of Subject Securities or whether acceptance of all validly tendered Subject Securities would result in a number of our Common Shares being issued (i) in excess of the Maximum Aggregate Consideration or (ii) to you in an amount that would result in your exceeding the Individual Cap. As a result, you will not know whether we will be able to accept for exchange your validly tendered Subject Securities, in whole or in part, at the time you tender those Subject Securities. If you desire to limit your tender of Subject Securities in the manner described in “The Exchange Offers—Your Option to Limit Common Share Ownership to 9.99%”, you may follow the procedures described therein.
		Acceptance of Subject Securities validly tendered and not properly withdrawn prior to the Expiration Date will be in accordance with the Acceptance Priority Levels and may be subject to proration, as described below under “The Exchange Offers—Terms of the Exchange Offers—Acceptance Priority Levels; Proration.”
		We are offering to exchange our newly issued Common Shares for outstanding Subject Securities, subject to (i) the Maximum Aggregate Consideration and the Acceptance Priority Levels and (ii) to the Individual Cap; and on the terms and subject to the conditions set forth in this Prospectus and in the applicable letter of transmittal.
		For each Denomination Amount of Subject Securities we accept for exchange in accordance with the terms of the Exchange Offers, we will issue a number of our Common Shares having a value (based on the

		Relevant Price) equal to the applicable Exchange Value plus, in the case of Trust Preferred Securities tendered prior to the Early Tender Premium Deadline referred to below, the applicable Early Tender Premium Value. The number of our Common Shares that we will issue for each Denomination Amount of Subject Securities we accept in an Exchange Offer—which we call the “exchange ratio” for that Exchange Offer—will be an amount (rounded down to four decimals) equal to (i) the value calculated pursuant to the preceding sentence divided by (ii) the Relevant Price. The “Relevant Price” is equal to the Average VWAP of our Common Shares during the five consecutive trading day period ending on and including the Expiration Date, as it may be extended (we refer to such period as the “Pricing Period” and such Expiration Date as the “Pricing Date”); provided, however, that if an extension to the Exchange Offer period is announced following the commencement of the Pricing Period, we do not currently expect the Pricing Period and the Pricing Date to change.
		We will accept properly tendered Subject Securities for exchange at the applicable exchange ratio determined as described above, on the terms and conditions of the Exchange Offers. We will return any Securities that are not accepted for exchange promptly following the expiration of the applicable Exchange Offer or, in the event of termination of the applicable Exchange Offer, promptly after such termination.
		Depending on the trading price of our Common Shares on the settlement date for the Exchange Offers compared to the Relevant Price described above, the market value of the Common Shares we issue in exchange for each Denomination Amount of Subject Securities we accept for exchange may be less than, equal to or greater than the applicable Exchange Value or Total Exchange Value, as applicable, listed in the table on the inside front cover of this Prospectus.
Acceptance Priority Levels		If acceptance for exchange of all Subject Securities validly tendered and not properly withdrawn prior to the Expiration Date would result in the issuance of a number of our Common Shares in excess of 500,000,000 shares (the “Maximum Aggregate Consideration”), then acceptance of Subject Securities will be in accordance with the Acceptance Priority Levels specified in the table on the inside front cover of this Prospectus. We initially will accept all Subordinated Notes validly tendered and not properly withdrawn prior to the Expiration Date as long as acceptance of all such Subordinated Notes would not result in the issuance of a number of our Common Shares in excess of the Maximum Aggregate Consideration.
		If acceptance of all Subordinated Notes validly tendered and not properly withdrawn prior to the Expiration Date would result in the issuance of a number of Common Shares in excess of the Maximum Aggregate Consideration, then we will accept for exchange a pro rata portion of the Subordinated Notes.
		After acceptance of Subordinated Notes, the number of Common Shares in the Maximum Aggregate Consideration will be reduced by the number of Common Shares issuable in exchange for all Subordinated Notes accepted for exchange. We refer to this as the “Adjusted Aggregate Consideration.” If the Adjusted Aggregate Consideration is greater than

		zero, then we will accept validly tendered and not withdrawn Trust Preferred Securities, but only to the extent that the Adjusted Aggregate Consideration is not exceeded.
		If we are unable to accept for exchange all Trust Preferred Securities validly tendered and not properly withdrawn prior to the Expiration Date without exceeding the Adjusted Aggregate Consideration, we will accept for exchange only a pro rata portion of the validly tendered and not properly withdrawn Trust Preferred Securities.
Proration		If proration of any series of Subject Securities is required, due to our inability to accept for exchange all Subject Securities of that series validly tendered and not properly withdrawn prior to the Expiration Date without the number of our Common Shares issuable in exchange for Subject Securities of that series exceeding the Maximum Aggregate Consideration or the Adjusted Aggregate Consideration, we will determine the proration factor applicable to that series promptly after the Expiration Date and will announce the proration results by press release. In applying the proration factor, we will multiply the amount of each tender of the applicable Subject Securities by the proration factor and round the resulting amount down to the nearest multiple of the Denomination Amount. All Subject Securities not accepted as a result of proration will be rejected from the Exchange Offers and promptly returned to the holders.
		For more information on proration, see below under “The Exchange Offers—Terms of the Exchange Offers—Acceptance Priority Levels; Proration.”
Early Tender Premium Deadline		The date by which a holder of Trust Preferred Securities must have tendered Trust Preferred Securities in order to be eligible to receive the applicable Early Tender Premium Value listed on the cover page of this Prospectus for each Denomination Amount of Trust Preferred Securities tendered was 5:00 p.m., New York City time, on August 13, 2009 (the “Early Tender Premium Deadline”).
Expiration Date and Withdrawal Rights		The Exchange Offers will expire at 11:59 p.m., New York City time, on September 14, 2009 (unless we extend it or earlier terminate it). The term “Expiration Date” means such date and time or, if the Exchange Offers are extended, the latest date and time to which the Exchange Offers are so extended. You may withdraw any Subject Securities that you tender at any time prior to the Expiration Date. You may withdraw any Subject Securities in accordance with the terms of the Exchange Offers by following the procedures described under the caption “The Exchange Offers—Withdrawal of Tenders.”
Publication of Exchange Ratio  Information		Throughout the Exchange Offers, the indicative Average VWAP, the resulting indicative Relevant Price and indicative exchange ratios will be available at http://www.citizensbanking.com/exchangeoffer and from the Information Agent at one of its numbers listed on the back cover page of this Prospectus. We will announce the final exchange ratios for the Subordinated Notes and Trust Preferred Securities (both for those tendered before the Early Tender Premium Deadline and those tendered after that deadline) by 4:30 p.m., New York City time, on the Expiration

		Date, and such final exchange ratios will also be available by that time at http://www.citizensbanking.com/exchangeoffer and from the Information Agent.
Extensions; Waivers and Amendments; Termination		Subject to applicable law, we reserve the right to (i) extend the Exchange Offers, or (ii) waive any and all conditions to or amend the Exchange Offers in any respect (except as to the requirement that the registration statement be declared effective and as to the Authorized Share Approval Condition (as defined below)). Any extension, waiver, amendment or termination will be followed as promptly as practicable by a public announcement thereof, such announcement in the case of an extension to be issued no later than 9:00 a.m., New York City time, on the next business day after the last previously scheduled Expiration Date. See “The Exchange Offers—Expiration Date; Extension; Termination; Amendment.”
Conditions to the Exchange Offers		Our obligation to exchange Common Shares for Subject Securities in the Exchange Offers is subject to a number of conditions that must be satisfied or, if permissible under applicable law, waived by us, including among others (i) that our shareholders have approved a proposal to amend our amended and restated articles of incorporation to increase the number of authorized shares of common stock from 150 million to 1,050 million at a special meeting of shareholders to be held on September 9, 2009 (the “Authorized Share Approval Condition”), and (ii) that there has been no change or development that in our reasonable judgment may materially reduce the anticipated benefits to us of the Exchange Offer or that has had, or could reasonably be expected to have, a material adverse effect on us, our businesses, condition (financial or otherwise) or prospects. In addition, the exchange of Common Shares for Subordinated Notes in the Subordinated Note Exchange Offer is subject to the approval by our shareholders, at that same special meeting, of the issuance of the Common Shares in exchange for the Subordinated Notes in accordance with Nasdaq Marketplace Rule 5635 (the “Subordinated Note Exchange Approval Condition”).
		Our obligation to consummate the exchange of Common Shares for Subject Securities is not subject to any minimum tender condition. See “The Exchange Offers—Conditions of the Exchange Offers.”
Settlement Date		The “settlement date” for the Exchange Offers will be a date promptly following the Expiration Date. We currently expect the settlement date to be three business days after the Expiration Date.
Fractional Shares		We will not issue fractional Common Shares in the Exchange Offers. Instead, the number of our Common Shares received by each registered holder whose Subject Securities are accepted for exchange in the Exchange Offers will be rounded down to the nearest whole number.
Procedures for Tendering Subject  Securities		You may tender your Subject Securities by transferring the Subject Securities through ATOP or by following the other procedures set forth below and described in more detail under “The Exchange Offers—Procedures for Tendering Subject Securities.”

		Any beneficial owner whose Subject Securities are held of record by a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender Subject Securities should contact such nominee promptly and instruct such nominee to tender Subject Securities on such owner’s behalf. In some cases, the nominee may request submission of such instructions on a Beneficial Owner’s Instruction Form. Please check with your nominee to determine the procedures for such form.
		You are urged to instruct your broker, dealer, commercial bank, trust company or other nominee at least five business days prior to the Expiration Date in order to allow adequate processing time for your instruction.
		Should you have any questions as to the procedures for tendering your Subject Securities, please call your broker, dealer, commercial bank, trust company or other nominee, or call our Information Agent, at its telephone number set forth on the back cover page of this Prospectus.
		In order to validly tender your Subject Securities in the Exchange Offers, you or your broker, dealer, commercial bank, trust company or other nominee must follow the procedures described under “The Exchange Offers—Procedures for Tendering Subject Securities.”
		WE ARE NOT PROVIDING FOR GUARANTEED DELIVERY PROCEDURES AND THEREFORE YOU MUST ALLOW SUFFICIENT TIME FOR THE NECESSARY TENDER PROCEDURES TO BE COMPLETED DURING NORMAL BUSINESS HOURS OF DTC ON OR PRIOR TO THE EXPIRATION DATE. TENDERS NOT RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE WILL BE DISREGARDED AND OF NO EFFECT.
United States Federal Income Tax Considerations		Your exchange of Subject Securities for our Common Shares pursuant to the Exchange Offers will be treated as a recapitalization for U.S. federal income tax purposes. Therefore, except with respect to accrued but unpaid distributions or interest, as applicable, on the Subject Securities, you will not recognize any gain or loss upon consummation of the Exchange Offers. See “Material U.S. Federal Income Tax Consequences.”
Consequences of Failure to Exchange Subject Securities		Depending on the amount of Subject Securities that are accepted for exchange in the Exchange Offers, the trading market for the Subject Securities that remain outstanding after the Exchange Offers may be more limited. A reduced trading volume may decrease the price and increase the volatility of the trading price of the Subject Securities that remain outstanding following the Exchange Offers.
		Following the Trust Preferred Exchange Offer, the Trust Preferred Securities we acquire in the Trust Preferred Exchange Offer will be exchanged for a like amount of the Underlying Debentures in accordance with the amended and restated trust agreement governing the Citizens Funding Trust. We will then submit such Underlying Debentures for cancellation by the indenture trustee under the applicable indenture. We currently expect to continue making distributions on the Trust Preferred

		Securities that are not tendered in the Trust Preferred Exchange Offer in accordance with their terms. However, there can be no assurance that those distributions will continue.
		Following the Subordinated Note Exchange Offer, we will submit the Subordinated Notes acquired in the Subordinated Note Exchange Offer to the indenture trustee for cancellation under the applicable indenture. We currently expect to continue making interest payments on the Subordinated Notes that are not tendered in the Subordinated Note Exchange Offer in accordance with their terms.
Comparison of the Rights of Common Shares and Subject Securities		There are material differences between the rights of a holder of our Common Shares and a holder of the Subject Securities. See “Comparison of Rights Between the Trust Preferred Securities and the Common Shares” and “Comparison of Rights Between the Subordinated Notes and the Common Shares.”
Market Trading		Our Common Shares are traded on the Nasdaq GSM under the symbol “CRBC”. The last reported closing price of our Common Shares on August 24, 2009 was $0.76 per share. We will file an application with the Nasdaq GSM to list the Common Shares to be issued in the Exchange Offers. The Trust Preferred Securities are listed for trading on the New York Stock Exchange (“NYSE”) under the symbol “CTZPRA.”
Brokerage Commissions		You will not be required to pay brokerage commissions to the Dealer Managers, the Exchange Agent, the Information Agent or us in connection with the Exchange Offers.
Soliciting Dealer Fee		For the Trust Preferred Securities only, with respect to any tender in an amount up to $250,000 in aggregate liquidation amount that is accepted in the Trust Preferred Exchange Offer, we will pay the relevant eligible soliciting dealer a fee of 0.50% on the amount of such tender. See “The Exchange Offer—Soliciting Dealer Fee.”
No Appraisal Rights		You will have no appraisal rights in connection with the Exchange Offers.
Regulatory Approvals		We have obtained the approval of the Federal Reserve required for the Trust Preferred Exchange Offer. No other regulatory approvals are required for the Exchange Offers.
Dealer Managers		Morgan Stanley & Co. Incorporated (Sole Arranger and Lead Manager)
		Keefe, Bruyette & Woods, Inc.
Information Agent and Exchange Agent		D.F. King & Co., Inc.

 

You should carefully consider the risks described below and all of the information contained and incorporated by reference in this Prospectus before you decide whether to participate in the Exchange Offers. In particular, you should carefully consider, among others, the matters discussed below and under “Item 1A, Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2009 and June 30, 2009.

 

Risks Relating to Our Business, Supplementing the “Risk Factors” in Our 2008 Annual Report on Form 10-K and Our Quarterly Reports on Form 10-Q for the Quarters Ended March 31, 2009 and June 30, 2009

 

Our core lending and other businesses continue to be adversely affected by the historic weakness in the national and regional economies in which we operate, particularly Michigan. Our ability to generate earnings and maintain regulatory capital ratios at acceptable levels at our holding company and our bank subsidiaries depends substantially on developments in those economies.

 

Our businesses face substantial challenges for the foreseeable future. In particular:

 

 

Our holding company may not have sufficient resources to make capital contributions to its bank subsidiaries when required by bank regulatory agencies, or when we might otherwise wish to do so, in order to maintain their capital ratios at acceptable levels.

 

Our bank holding company is required by banking regulation to act as a “source of strength” to our bank subsidiaries. If losses at our bank subsidiaries continue, whether because our credit costs continue at high levels or for other reasons, and regulatory capital levels at our bank subsidiaries decline, our bank holding company may be required by the bank regulatory agencies to contribute capital to our bank subsidiaries. Although we currently have substantial liquidity at the holding company level that would be available for that purpose, we may not have sufficient funds at the holding company level to make required capital contributions to our bank subsidiaries if the weakness in the economies in which we primarily operate continues over a substantial period of time and our bank subsidiaries continue to incur losses.

Our business may be adversely affected by the highly regulated environment in which we operate. Changes in banking or tax laws, regulations, and regulatory practices at either the federal or state level, or in our compliance with applicable regulations, may adversely affect us, including our ability to offer new products and services, obtain financing, pay dividends from our subsidiaries to our holding company, attract deposits, make loans at satisfactory spreads or engage in other business activities. Such changes may also result in the imposition of additional costs.

 

The banking industry is heavily regulated, and such regulations are intended primarily for the protection of depositors and the federal deposit insurance funds, not shareholders or holders of subordinated debt or trust preferred securities. As a bank holding company, Citizens’ holding company is subject to regulation by the Federal Reserve Board. Our bank subsidiaries are also subject to Federal regulation primarily by the Federal Reserve Board and are also subject to regulation by the state banking departments of the state in which they are chartered. These regulations affect lending practices, capital structure, investment practices, dividend policy and growth. In addition, we have non-bank operating subsidiaries from which we derive income. Certain of these non-bank subsidiaries engage in providing investment management and insurance brokerage services, which industries are also heavily regulated on both a state and federal level.

 

The Federal government recently announced plans for sweeping reform of financial regulation and financial services. If enacted, the new statutes and rules would further substantially increase regulation of the financial services industry and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices. We cannot predict the substance or impact of pending or future legislation, regulation or the application thereof.

 

We are not aware of any current failure to comply with existing laws, regulations and policies that would have a material adverse effect on our business, financial condition or results of operations. However, any failure to comply with current or proposed laws, regulations or policies, such as maintenance of capital ratios and reduction of nonperforming asset levels due to the deterioration in our financial condition and operating results as a result of the aforementioned adverse economic conditions, could also result in further heightened regulatory scrutiny and in sanctions by regulatory agencies (such as a memorandum of understanding or a cease and desist order), civil money penalties and/or reputation damage, which could increase our costs, restrict our ability to expand our business or require us to raise additional capital on terms that are not advantageous to us and could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, such violations may occur despite our best efforts.

 

Risks Related to the Implementation of Our Capital Plan

 

In order to maintain and strengthen our capital base, we have determined to raise additional capital in transactions that will likely be highly dilutive to our common shareholders.

 

Due to recent events affecting the economies in which we operate and the challenges posed to our business, including those described in the preceding risk factors, 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, we have begun to take action to raise additional Tier 1 common equity. In addition, while we are not one of the 19 institutions required to conduct a forward-looking capital assessment, or “stress test,” pursuant to the SCAP, a component of the CAP applied by the U.S. Treasury and Federal bank regulatory agencies to those institutions earlier this year, it is possible that the U.S. Treasury or our bank regulators could apply a similar capital-based “stress test” to us, including in connection with our application for an investment by the U.S. Treasury pursuant to the CAP, and determine that we need to raise additional capital, including additional Tier 1 common equity. We and our regulators regularly perform a variety of analyses of our assets and the impact of credit losses on our capital base, including the preparation of stress case scenarios. We have determined to raise additional Tier 1 common equity in order to maintain and strengthen our capital base. Any capital raising transactions, including the Exchange Offers, whether public or private or through the conversion of our Series A Preferred Stock or exercise of warrants issued to the U.S. Treasury, will likely be highly dilutive to our common shareholders, including participants in the

Exchange Offers. The market price of our Common Shares could decline as a result of the dilutive effect of the Exchange Offers or other capital raising transactions we may enter into, or the perception that such transactions could occur.

 

In connection with purchasing the Series A Preferred Stock, pursuant to a Letter Agreement between Citizens and U.S. Treasury dated December 12, 2008 and the Securities Purchase Agreement-Standard Terms attached thereto, the U.S. Treasury received a warrant to purchase 17,578,125 shares of our Common Shares at an initial per share exercise price of $2.56, subject to adjustment, which expires ten years from the issuance date. Even if we were to redeem the Series A Preferred Stock, we may not fully retire this warrant and, therefore, this warrant may be exercised, in whole or in part, prior to its Expiration Date. Furthermore, the terms of the warrant provide that, if we issue Common Shares or securities convertible or exercisable into, or exchangeable for, Common Shares at a price that is less than 90% of the market price of such shares on the last trading day preceding the date of the agreement to sell such shares, the number and the per share price of Common Shares to be purchased pursuant to the warrant will be adjusted pursuant to its terms. As part of our capital raising efforts in addition to the Exchange Offers, we may issue securities convertible into or exercisable for our Common Shares which may trigger the anti-dilution provisions of the warrant issued to the U.S. Treasury. If we issue such securities and they are subsequently exercised, converted into or exchanged for Common Shares, such transactions would have a further dilutive effect on other holders of our Common Shares. We do not expect the Exchange Offers to trigger the antidilution provisions of the warrant.

 

Our capital raising initiatives contemplate that we will raise a significant amount of common equity from private and/or governmental sources over the next six months. We may not succeed in our capital raising efforts.

 

As part of our capital raising initiatives, we are contemplating various methods of raising capital, including Tier 1 common equity. Subject to market conditions, in addition to the Exchange Offers, we currently expect to raise Tier 1 common equity in one or more of the following types of transactions: (i) additional offerings of our Common Shares, (ii) asset sales, and (iii) other transactions.

 

Private capital may not be available to us on acceptable terms or at all, and sufficient holders of our Subject Securities may not be willing to exchange such securities for our Common Shares to achieve the Tier 1 common equity capital level that may be necessary to keep us well capitalized. If we are unable to raise the amount required through private capital transactions, including further additional issuances and sales of Common Shares, asset dispositions and/or other transactions, we may attempt to obtain capital from the U.S. Treasury through an investment pursuant to the CAP and by converting a portion of our Series A Preferred Stock issued to the U.S. Treasury under the CPP to mandatorily convertible preferred shares issued to the U.S. Treasury under the CAP. To view the standard CAP term sheet, including a summary of the terms of the securities that the U.S. Treasury receives in connection with any CAP issuance, see www.financialstability.gov.

 

We have applied for an investment by the U.S. Treasury of up to $290 million pursuant to the CAP including $100 million that would be exchanged for a portion of our outstanding Series A Preferred Stock issued to the U.S. Treasury pursuant to the CPP. The U.S. Treasury is not obligated to approve, and may not approve, our application under the CAP or, if our application is approved, the U.S. Treasury may not invest the full amount for which we may be eligible.

 

If we do not successfully increase our Tier 1 common equity by an amount that may be necessary to keep us well capitalized, we may be required to reduce the size of our business or to raise capital on terms that are significantly less favorable to us. A failure to maintain well capitalized status would likely have serious negative consequences for our business and prospects, including our viability.

 

Converting our Series A Preferred Stock to mandatorily convertible preferred shares under the CAP would likely impose additional restrictions on operations and could adversely affect liquidity.

 

The issuance of mandatorily convertible preferred shares under the CAP would likely impose additional conditions and limitations related to executive compensation and corporate governance upon us as well as new

public reporting obligations. Many of our competitors would not be subject to these restrictions and therefore would gain a competitive advantage.

 

Furthermore, the CAP mandatorily convertible preferred shares would accrue cumulative dividends at a rate of 9% per annum until their mandatory conversion to Common Shares after seven years or prior redemption. This would represent an increase in dividend payments over the current CPP rate of 5% per annum (for the first five years), which could adversely impact liquidity, limit our ability to return capital to shareholders and have a material adverse effect on us.

 

Additional investment by the U.S. Treasury and conversion of our Series A Preferred Stock to mandatorily convertible preferred shares under the CAP would result in the U.S. Treasury acquiring a significant interest in us, which may have an adverse effect on operations and the market price of our Common Shares. Likewise, the potential issuance of a significant amount of Common Shares or equity convertible into our Common Shares to a private investor or group of private investors may have the same effect.

 

An additional investment by the U.S. Treasury under the CAP and converting a large amount of our Series A Preferred Stock issued under the CPP to mandatorily convertible preferred shares issued under the CAP could result in the U.S. Treasury becoming a significant shareholder of us. Even if the U.S. Treasury does not control a majority of voting power, it may be able to exert significant influence on matters submitted to shareholders for approval, including the election of directors and certain transactions. The U.S. Treasury may also transfer all, or a portion, of its shares to another person or entity and, in the event of such a transfer, that person or entity could become a significant shareholder of us. In addition, any issuance of a large amount of common equity or equity convertible into common to a private investor or group of investors may pose similar risks.

 

Having a significant shareholder may make some future transactions more difficult or perhaps impossible to complete without the support of such shareholder. The interests of the significant shareholder, may not coincide with our interests or the interests of other shareholders. A significant shareholder may exercise its influence in a manner that is not in our best interests but rather in its best interests as a significant shareholder. A significant shareholder may make it difficult to approve certain transactions even if they are supported by the other shareholders, which may have an adverse effect on the market price of our Common Shares.

 

Issuing a significant amount of convertible preferred equity to the U.S. Treasury or issuing a significant amount of common equity to a private investor may result in a change in control of us under regulatory standards and contractual terms.

 

Our obtaining a significant amount of additional capital from the U.S. Treasury or any individual private investor could result in a change of control for us under applicable regulatory standards and contractual terms. Such change of control may trigger notice, approval and/or other regulatory requirements in many states and jurisdictions in which we operate. We are also a party to various contracts and other agreements that may require us to obtain consents from our respective contract counterparties in the event of a change in control. The failure to obtain any required regulatory consents or approvals or contractual consents due to a change in control may have a material adverse effect on our financial condition, results of operations or cash flows.

 

The Exchange Offers are likely to trigger an ownership change that will negatively affect our ability to utilize net operating loss and capital loss and other deferred tax assets in the future.

 

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 Date. 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 Subject Securities exchange such securities for our Common Shares. We believe it is likely that the test will be met because of 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 Series A Preferred Stock, 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 Date.

 

Because the Exchange Offers likely will trigger an ownership change, our ability to use our net operating loss and capital loss carryforwards and certain built-in losses existing at the time of the deemed change in ownership to offset future income will be substantially limited. Therefore, we may suffer higher-than-anticipated tax expense, and consequently lower net income and cash flow, in those future years.

 

Risks Related to the Market Price and Value of the Common Shares Offered in the Exchange Offers

 

Although the number of Common Shares offered in the Exchange Offers will be determined based on the Average VWAP of our Common Shares during the Pricing Period, the market price of our Common Shares may fluctuate, and the market price of the Common Shares upon settlement of the Exchange Offers could be less than the Relevant Price.

 

The number of Common Shares offered for each Subject Security accepted for exchange will be determined based on the Average VWAP of the Common Shares during the Pricing Period and will not be adjusted regardless of any increase or decrease in the market price of our Common Shares or the Subject Securities between the Expiration Date of the Exchange Offers and the settlement date. Therefore, the market price of the Common Shares at the time you receive your Common Shares on the settlement date could be significantly less than the price used to determine the number of Common Shares you will receive. The market price of our Common Shares has recently been subject to significant fluctuations and volatility.

 

The trading price of our Common Shares may be subject to continued significant fluctuations and volatility.

 

The market price of our Common Shares could be subject to significant fluctuations due to a change in sentiment in the market regarding our operations or business prospects. The market price may be affected by:

 

 

Stock markets in general and our Common Shares in particular have experienced significant volatility over approximately the past eighteen months, and continue to experience significant price and volume volatility. As a result, the market price of our Common Shares may continue to be subject to similar market fluctuations that may be unrelated to our operating performance or prospects. Increased volatility could result in a decline in the market price of our Common Shares.

We urge you to obtain current market quotations for our Common Shares when you consider the Exchange Offers.

 

Offerings of debt or additional trust preferred securities, which would be senior to our Common Shares upon liquidation and/or preferred equity securities which may be senior to our Common Shares for purposes of dividend distributions or upon liquidation, may adversely affect the market price of our Common Shares.

 

We may attempt to increase our capital resources or, if our or our banking subsidiaries’ capital ratios fall below the required minimums, we or our banking subsidiaries could be forced to raise additional capital by making additional offerings of debt or preferred equity securities, including medium-term notes, trust preferred securities, senior or subordinated notes and preferred stock. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our Common Shares. Additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our Common Shares, or both. Holders of our Common Shares are not entitled to preemptive rights or other protections against dilution.

 

Our board of directors is authorized to issue one or more classes or series of preferred stock from time to time without any action on the part of the shareholders. Our board of directors also has the power, without shareholder approval, to set the terms of any such classes or series of preferred stock that may be issued, including voting rights, dividend rights, and preferences over our Common Shares with respect to dividends or upon our dissolution, winding-up and liquidation and other terms.

 

Therefore, if we issue preferred stock in the future that has a preference over our Common Shares with respect to the payment of dividends or upon our liquidation, dissolution, or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our Common Shares, the rights of holders of our Common Shares or the market price of our Common Shares could be adversely affected.

 

If our Common Shares fail to meet the listing requirements of the Nasdaq GSM and are delisted from trading on the Nasdaq GSM, the market price of our Common Shares could be adversely affected.

 

Our Common Shares are currently listed on the Nasdaq GSM under the symbol “CRBC” and have generally traded at prices below $1.00 per share since mid-June 2009. The Nasdaq GSM’s listing requirements include a requirement that, for continued listing, an issuer’s common shares trade at a minimum bid price of $1.00 per share. This requirement is deemed breached when the bid price of an issuer’s common shares closes below $1.00 per share for 30 consecutive trading days. Nasdaq had temporarily suspended the minimum bid price requirement until July 31, 2009. Beginning August 3, 2009, if our Common Shares fail to meet the requirement for 30 consecutive trading days, Nasdaq’s Listing Qualifications Department could initiate steps to delist our Common Shares from trading on Nasdaq GSM. The delisting process, after giving effect to our right to take action to return to compliance, may take up to one year. A delisting of our Common Shares from the Nasdaq GSM could affect the liquidity and therefore trading prices of our Common Shares.

 

Risks Related to the Rights of our Common Shares Compared to the Rights of our Debt Obligations and Senior Equity Securities, including the Subject Securities.

 

All of our debt obligations and our senior equity securities, including effectively any Subject Securities that remain outstanding after the Exchange Offers, will have priority over our Common Shares with respect to payment in the event of liquidation, dissolution or winding-up and with respect to the payment of dividends.

 

In any liquidation, dissolution or winding-up of Citizens, our Common Shares would rank below all debt claims against us and claims of all of our outstanding shares of preferred stock and other senior equity securities, including effectively the Subject Securities that are not exchanged for Common Shares in the Exchange Offers. As a result, holders of our Common Shares, including holders of Subject Securities whose securities are accepted for exchange in the Exchange Offers, will not be entitled to receive any payment or other distribution of assets upon the liquidation, dissolution or winding-up of Citizens until after all our obligations to our debt holders have been satisfied and holders of senior equity securities have received any payment or distribution due to them.

Holders of Trust Preferred Securities that participate in the Trust Preferred Exchange Offer are giving up their right to future distributions on Trust Preferred Securities.

 

If you tender your Trust Preferred Securities and your Trust Preferred Securities are accepted by us for exchange in the Trust Preferred Exchange Offer, you will be giving up your right to any future distribution payments that are paid on the Trust Preferred Securities on or after the Expiration Date.

 

Holders of Subordinated Notes that participate in the Subordinated Note Exchange Offer are giving up their right to future interest payments on Subordinated Notes.

 

If you tender your Subordinated Notes and your Subordinated Notes are accepted by us for exchange in the Subordinated Note Exchange Offer, you will lose the right to any future interest payments on the Subordinated Notes on or after the Expiration Date.

 

You may not receive dividends on the Common Shares.

 

Holders of our Common Shares are only entitled to receive such dividends as our board of directors may declare out of funds legally available for such payments. Furthermore, our common shareholders are subject to the prior dividend rights of any holders of our preferred stock or depositary shares representing such preferred stock then outstanding. As of August 24, 2009, there were 300,000 shares of our Series A Preferred Stock issued, with a liquidation amount of $300,000,000 issued and outstanding.

 

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 of our Series A Preferred Stock and a warrant to purchase common shares currently prohibits us from paying cash dividends and (with certain exceptions) repurchasing shares of common stock. This restriction will remain in effect until the earlier of December 12, 2011 or such time as the U.S. Treasury no longer holds the Series A Preferred Stock. If we receive an investment from the U.S. Treasury under the CAP, we will be prohibited, while the related convertible preferred shares are owned by the U.S. Treasury or the U.S. Treasury owns any common shares issued to it under the CAP, from paying dividends on common shares in excess of $.01 per share and (with certain exceptions) from repurchasing common shares.

 

Our results of operations and our ability to fund dividend payments on our Common Shares, distributions on the Trust Preferred Securities and all payments on our other obligations including interest on the Subordinated Notes depend upon the results of operations of our subsidiaries.

 

We are a separate and distinct legal entity from our banking and non-banking subsidiaries. Our principal source of funds to make payments on securities is dividends from our banking subsidiaries. Various federal and state statutes and regulations limit the amount of dividends that our banking and non-banking subsidiaries may pay to us without regulatory approval. In particular, dividend and other distributions from our bank to our holding company would require notice to or approval of the applicable regulatory authority, We may not receive such approval.

 

In addition, if, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged, in or is about to engage in an unsafe or unsound practice, such authority may require, after notice and hearing that such bank cease and desist from such practice. Depending on the financial condition of our banking subsidiaries, the applicable regulatory authority might deem us to be engaged in an unsafe or unsound practice if our banking subsidiaries were to pay dividends. The Federal Reserve and other federal bank regulatory agencies have issued policy statements generally requiring insured banks and bank holding companies only to pay dividends out of current operating earnings. The Federal Reserve recently released a supervisory letter advising bank holding companies, among other things, that as a general matter a bank holding company should inform the Federal Reserve and should eliminate, defer or significantly reduce its dividends if (i) the bank holding company’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends, (ii) the bank holding company’s prospective rate of earnings is not consistent with the bank holding company’s capital needs and overall current and prospective financial condition, or (iii) the bank holding company will not meet,

or is in danger of not meeting, its minimum regulatory capital adequacy ratios. Dividends includes, for this purpose, interest on junior subordinated notes underlying trust preferred securities, including the Trust Preferred Securities included in the Subject Securities. Accordingly, the Federal Reserve may require us to defer distributions of interest on the Trust Preferred Securities, including in the near term.

 

Payment of dividends including distributions on the Trust Preferred Securities could also be subject to regulatory limitations if any of our banking subsidiaries became “under-capitalized” for purposes of the “prompt corrective action” regulations of the federal bank regulatory agencies that are the primary regulators of our banking subsidiaries. “Under-capitalized” is currently defined as having a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0%, or a core capital, or leverage, ratio of less than 4.0%. Throughout 2008, our banking subsidiaries were in compliance with all regulatory capital requirements and considered to be “well-capitalized.”

 

Furthermore, our right to participate in any distribution of assets of any of our subsidiaries upon its liquidation or otherwise, and thus your ability as a holder of our Common Shares to benefit indirectly from such distribution, will be subject to the prior claims of creditors of such subsidiary, except to the extent that any of our claims as a creditor of such subsidiary may be recognized. As a result, our Common Shares are effectively subordinated to all existing and future liabilities and obligations of our subsidiaries.

 

Our amended and restated articles of incorporation as well as certain banking laws may have an anti-takeover effect.

 

Provisions of our amended and restated articles of incorporation and certain federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our shareholders. The combination of these provisions may inhibit a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of our Common Shares.

 

Additional Risks Related to the Exchange Offers

 

We have not obtained a third-party determination that the Exchange Offers are fair to holders of the Subject Securities.

 

We are not making a recommendation as to whether you should exchange your Subject Securities in the Exchange Offers. We have not retained, and do not intend to retain, any unaffiliated representative to act on behalf of the holders of the Subject Securities for purposes of negotiating the Exchange Offers or preparing a report concerning the fairness of the Exchange Offers. You must make your own independent decision regarding your participation in the Exchange Offers.

 

Failure to complete the Exchange Offers successfully could negatively affect the price of our Common Shares.

 

Several conditions must be satisfied or, if permissible under applicable law, waived in order to complete the Exchange Offers, including among other things (i) that our shareholders have approved a proposal to amend our amended and restated articles of incorporation to increase the number of authorized shares of common stock from 150 million to 1,050 million at a special meeting of shareholders to be held on September 9, 2009, and (ii) that there has been no change or development that in our reasonable judgment may materially reduce the anticipated benefits to us of the Exchange Offers or that has had, or could reasonably be expected to have, a material adverse effect on us, our businesses, condition (financial or otherwise) or prospects. In addition, the exchange of Common Shares for Subordinated Notes in the Subordinated Note Exchange Offer is subject to the approval by our shareholders, at that same special meeting, of the issuance of the Common Shares in exchange for the Subordinated Notes in accordance with Nasdaq Marketplace Rule 5635. See “The Exchange Offers—Conditions of the Exchange Offers.” The foregoing conditions may not be satisfied, and if not satisfied or waived (where permissible), the Exchange Offer may not occur or may be delayed.

If the Exchange Offers are not completed or are delayed, we may be subject to the following material risks:

 

 

If the Exchange Offers are successful, there may be a limited or no trading market for the Subject Securities and the market price for the Subject Securities may be depressed.

 

Depending on the amount of Subject Securities that are accepted for exchange in the Exchange Offers, the trading market for the Subject Securities that remain outstanding after the Exchange Offers may be more limited and the Trust Preferred Securities could be delisted from the New York Stock Exchange. A reduced trading volume may decrease the price and increase the volatility of the trading price of the Subject Securities that remain outstanding following the Exchange Offers.

 

The amount of Subject Securities we are able to accept for exchange is limited by the Maximum Aggregate Consideration, and any Subject Securities you tender may be rejected or subject to proration in the Exchange Offers.

 

In the Exchange Offers, we will be able to accept for exchange only the amount of validly tendered Subject Securities that does not result in the issuance of a number of our Common Shares in excess of the Maximum Aggregate Consideration. As a result, we may not be able to accept for exchange any Subject Securities you validly tender in the Exchange Offers and, if we are able to accept some Subject Securities you validly tender, the amount we accept may be subject to proration.

 

At the time you tender your Subject Securities, you will not know whether we will be able to accept your Subject Securities in the Exchange Offers.

 

At the time you tender your Subject Securities, you will not know the extent of participation in the Exchange Offers of other holders of Subject Securities or whether acceptance of all validly tendered Subject Securities would result in the issuance of a number of our Common Shares (i) in excess of the Maximum Aggregate Consideration or (ii) to you in an amount that would result in your exceeding the Individual Cap. As a result, at the time you tender your Subject Securities, you will not know whether we will be able to accept for exchange your validly tendered Subject Securities, in whole or in part.

 

The following table presents computations of certain financial measures related to “tangible common equity” and “Tier 1 common equity.” The tangible common equity ratio has become a focus of some investors and management believes that this ratio may assist investors in analyzing our capital position absent the effects of intangible assets and preferred stock. Traditionally, the Federal Reserve and other banking regulators have assessed a bank’s capital adequacy based on Tier 1 capital, the calculation of which is codified in federal banking regulations. More recently, the banking regulators have also supplemented their assessment of the capital adequacy of a bank based on a variation of Tier 1 capital, known as Tier 1 common equity. Because tangible common equity and Tier 1 common equity are not formally defined by GAAP or codified in the federal banking regulations, these measures are considered to be non-GAAP financial measures. Because analysts and banking regulators may assess our capital adequacy using tangible common equity and Tier 1 common equity, we believe that it is useful to provide investors the ability to assess our capital adequacy on these same bases.

 

Tier 1 common equity is often expressed as a percentage of net risk-weighted assets. Under the risk-based capital framework, a bank’s balance sheet assets and credit equivalent amounts of off-balance sheet items are assigned to one of four broad risk categories. The aggregated dollar amount in each category is then multiplied by the risk weight assigned to that category. The resulting weighted values from each of the four categories are added together and this sum is the risk-weighted assets total that, as adjusted, comprises the denominator of certain risk-based capital ratios. Tier 1 capital is then divided by this denominator (net risk-weighted assets) to determine the Tier 1 capital ratio. Adjustments are made to Tier 1 capital to arrive at Tier 1 common equity. Tier 1 common equity is also divided by net risk-weighted assets to determine the Tier 1 common equity ratio. The amounts disclosed as net risk-weighted assets are calculated consistent with banking regulatory requirements.

 

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate these limitations, we have procedures in place to ensure that these measures are calculated using the appropriate GAAP or regulatory components and to ensure that our capital performance is properly reflected to facilitate period-to-period comparisons. Although these non-GAAP financial measures are frequently used by investors in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

The following table provides reconciliations of ending shareholders’ equity (GAAP) to ending tangible common equity (non-GAAP) and ending assets (GAAP) to ending tangible assets (non-GAAP). It also provides a reconciliation of shareholders’ equity (GAAP) to Tier 1 capital (regulatory) to Tier 1 common equity (non-GAAP).

 

 

 

 

Set forth below are highlights from our consolidated financial data as of and for the years ended December 31, 2004 through 2008, and as of and for the six months ended June 30, 2008 and 2009. You should read this information in conjunction with our consolidated financial statements and related notes included in the Annual Report on Form 10-K for the year ended December 31, 2008 and the Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, which are incorporated by reference into this Prospectus and from which this information is derived. For more information, see the section entitled “Where You Can Find More Information.” See “Non-GAAP Financial Measures” for a discussion of our use of non-GAAP financial measures in this Prospectus.

 

 

 

 

The following selected unaudited pro forma financial information has been presented to give effect to and show the pro forma impact of the Exchange Offers and our participation in the CAP (the Exchange Offers and CAP participation together, the “Capital Transactions”) on our balance sheet as of June 30, 2009 and also describes the impact of the Capital Transactions on our earnings for the fiscal year ended December 31, 2008 and the six-month period ended June 30, 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 summary historical consolidated financial information included elsewhere in this Prospectus and 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 period ended June 30, 2009, filed with the SEC, each of which is incorporated by reference into this Prospectus.

 

Our unaudited pro forma consolidated balance sheets as of June 30, 2009 have been presented as if the Capital Transactions had been completed on June 30, 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 June 30, 2009, and as of June 30, 2009, we have assumed that the Average VWAP per share of our Common Shares is $0.59, which we determined assuming the Pricing Date for the determination of the Average VWAP was July 28, 2009. 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 Expiration Date.

 

We have also assumed that our shareholders will approve a proposal to amend our amended and restated articles of incorporation to increase the number of authorized Common Shares from 150 million to 1,050 million at a special meeting of shareholders to be held on September 9, 2009 (the “Increase of Authorized Shares Proposal”). As of August 24, 2009, we have approximately 681,808 Common Shares that are authorized and available to be issued. If our shareholders do not approve the Increase of Authorized Shares 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 Increase of Authorized Shares Proposal. However, if our shareholders do not approve the Increase of Authorized Shares 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 Mandatorily Convertible Preferred Stock that we would issue to the U.S. Treasury in connection with the CAP (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 as described in this Prospectus, if any) of such securities for Common Shares, (ii) the tender of 75% of the outstanding Subordinated Notes and exchange (after proration as described in this Prospectus, 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 Series A Preferred Stock issued to the U.S. Treasury under the CPP. 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. Both the High Participation Scenario and the Low Participation Scenario assume that Trust Preferred Securities that are tendered have been tendered on or prior to the Early Tender Premium Deadline.

 

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 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 under the CAP or, if approved, to invest the full amount for which we 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 described in this Prospectus, 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 Subject Securities that will be tendered in the Exchange Offers or the amounts received, if any, under the CAP.

Pro Forma Consolidated Balance Sheets
(Unaudited)

High Participation Scenario