UPDATE 2-Citizens Republic shares fall on dilution concerns

(Adds CFO comments, updates stock activity)

By Anurag Kotoky

BANGALORE, June 26 (Reuters) - Shares of Citizens Republic Bancorp Inc (CRBC.O) fell as much as 17 percent Friday, a day after the company said it plans to increase the number of common shares to 1.05 billion, risking massive dilution, and said it would seek an additional $290 million from the U.S. Treasury.

The loss-making Midwestern bank said it plans to convert up to $125 million of certain debentures as well as trust preferred securities worth $150 million at liquidation into common stock.

"We believe the most likely scenario is that Citizens Republic will successfully convert a small portion of its sub debt and trust preferreds, but the majority of the capital infusion will once again come from the federal government, as a result leading to material government ownership," Keefe, Bruyette & Woods analyst Eileen Rooney said.

Although it is unlikely that the company will be able to convert the full amount of trust preferred securities and sub debt given that some proportion of it is held by retail holders, the stock could be attractive if the company is able to tender it at a material discount to par value, Rooney said.

Citizen's Chief Financial Officer Charles Christy told Reuters that he is not "100 percent confident" that the company would be able to convert all of the trust preferred securities and sub debt into common stock. Sandler O'Neill analyst R. Scott Siefers echoed similar sentiments and said the company's very low stock price likely means that any meaningful capital actions will be highly dilutive and painful for existing shareholders.

"While a raise could help to halt the stock's slide and reinforce confidence in the company, it would also likely cap the amount of upside the stock has in an eventual recovery," Siefers said in a note to clients.

Citizens Republic, which had a market capitalization of about $1.5 billion last September, has lost about 93 percent of its value ever since.

The company could not be immediately reached for comments.

Citizens Republic, which received an investment of $300 million from the U.S. Treasury under the Troubled Asset Relief Program, also said it expects to record a charge of about $270 million for the second quarter. "The goodwill impairment charge brings into question the fortitude of the base platform and resurfaces the poor due diligence conducted when Citizens acquired Republic," Standard & Poor's Rating Services said in a statement.

Citizens bought Republic Bancorp, with assets of over 6 billion in 2006 for about $1.03 billion.

"It (the acquisition) happend to be at the wrong time when the real estate downturn turned out to be the worst since the Depression," CFO Christy said.

The ratings agency, that did not change its outlook on the company, said if the capital raise does not materialize, it could lower the rating on the company, but if asset-quality metrics improve toward industry averages, the outlook would be revised to stable.

Shares of the Flint, Michigan-based company were trading down 12 percent at 83 cents Friday on Nasdaq. They traded as high as $11 last September. (Editing by Anil D'Silva, Jarshad Kakkrakandy)