1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended September 30, 2000
--------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
---------------- -----------------
Commission file Number 0-10535
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CITIZENS BANKING CORPORATION
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(Exact name of registrant as specified in its charter)
MICHIGAN 38-2378932
- -------------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
328 S. Saginaw St., Flint, Michigan 48502
- -------------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
(810) 766-7500
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(Registrant's telephone number, including area code)
None
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
X Yes No
--- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 10, 2000
- ------------------------------- --------------------------------
Common Stock, No Par Value 46,902,028 Shares
2
CITIZENS BANKING CORPORATION
Index to Form 10-Q
Page
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements.................... .......... 3
Item 2 - Management's Discussion and Analysis of Financial Condition
And Results of Operations....................................... 11
Item 3 - Quantitative and Qualitative Disclosure of Market Risk...........26
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................... 26
Item 2 - Changes in Securities........................................... 26
Item 3 - Defaults upon Senior Securities................................. 26
Item 4 - Submission of Matters to a Vote of Security Holders............. 26
Item 5 - Other Information............................................... 26
Item 6 - Exhibits and Reports on Form 8-K................................ 26
SIGNATURES.................................................................. 27
EXHIBIT INDEX............................................................... 28
2
3
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
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CONSOLIDATED BALANCE SHEETS
CITIZENS BANKING CORPORATION AND SUBSIDIARIES SEPTEMBER 30, December 31,
(in thousands) 2000 1999
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(UNAUDITED) (Note 1)
ASSETS
Cash and due from banks $ 236,147 $ 250,745
Money market investments:
Interest-bearing deposits with banks 1,849 755
Federal funds sold 5,220 63,048
----------- -----------
Total money market investments 7,069 63,803
Securities available-for-sale:
U.S. Treasury and federal agency securities 869,950 920,435
State and municipal securities 405,164 368,732
Other securities 85,872 108,180
----------- -----------
Total investment securities 1,360,986 1,397,347
Loans:
Commercial 3,187,302 2,875,387
Real estate construction 231,297 185,352
Real estate mortgage 1,510,443 1,440,104
Consumer 1,476,995 1,416,640
----------- -----------
Total loans 6,406,037 5,917,483
Less: Allowance for loan losses (81,074) (76,397)
----------- -----------
Net loans 6,324,963 5,841,086
Premises and equipment 141,110 141,460
Intangible assets 93,694 97,032
Other assets 111,642 107,884
----------- -----------
TOTAL ASSETS $ 8,275,611 $ 7,899,357
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 953,006 $ 965,849
Interest-bearing 5,201,374 5,163,149
----------- -----------
Total deposits 6,154,380 6,128,998
Federal funds purchased and securities sold
under agreements to repurchase 386,286 276,805
Other short-term borrowings 540,611 660,474
Other liabilities 82,170 72,307
Long-term debt 447,211 127,104
----------- -----------
Total liabilities 7,610,658 7,265,688
Shareholders' Equity:
Preferred stock - No par value --- ---
Common stock - No par value 213,720 226,972
Retained earnings 458,615 424,140
Accumulated other comprehensive income (7,382) (17,443)
----------- -----------
Total shareholders' equity 664,953 633,669
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,275,611 $ 7,899,357
=========== ===========
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See notes to consolidated financial statements.
3
4
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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share amounts) 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 138,835 $116,966 $ 395,506 $339,810
Interest and dividends on investment securities:
Taxable 16,387 16,486 50,054 42,574
Nontaxable 5,087 4,298 15,180 12,546
Money market investments 38 424 99 2,207
--------- -------- --------- --------
Total interest income 160,347 138,174 460,839 397,137
--------- -------- --------- --------
INTEREST EXPENSE
Deposits 59,676 48,241 166,284 145,303
Short-term borrowings 14,959 8,576 44,251 14,029
Long-term debt 6,087 2,956 11,690 9,194
--------- -------- --------- --------
Total interest expense 80,722 59,773 222,225 168,526
--------- -------- --------- --------
NET INTEREST INCOME 79,625 78,401 238,614 228,611
Provision for loan losses 4,642 4,370 15,088 13,253
--------- -------- --------- --------
Net interest income after provision for loan losses 74,983 74,031 223,526 215,358
--------- -------- --------- --------
NONINTEREST INCOME
Service charges on deposit accounts 6,825 5,598 19,553 15,502
Trust fees 5,901 5,350 18,312 16,278
Bankcard fees 2,865 2,330 8,226 6,729
Brokerage and investment fees 1,752 1,279 5,770 3,304
Mortgage and other loan income 1,402 1,092 3,126 5,180
Investment securities gains (losses) (5) 39 (6) 532
Premium on sale of deposits --- --- --- 1,348
Gain on sale of equity security --- --- --- 5,693
Other 4,470 3,882 11,983 11,511
--------- -------- --------- --------
Total noninterest income 23,210 19,570 66,964 66,077
--------- -------- --------- --------
NONINTEREST EXPENSE
Salaries and employee benefits 31,309 30,432 94,501 91,257
Equipment 4,824 4,126 14,222 12,279
Occupancy 4,009 4,065 12,660 11,564
Data processing fees 3,223 2,411 8,936 7,238
Professional services 2,771 2,211 7,779 5,370
Intangible asset amortization 2,619 1,864 7,858 5,610
Bankcard fees 2,202 2,108 6,713 5,378
Postage and delivery 1,750 1,572 5,147 4,704
Advertising and public relations 1,493 1,042 4,534 4,300
Special charge (99) --- 7,189 ---
Other 7,470 9,720 21,933 29,973
--------- -------- --------- --------
Total noninterest expense 61,571 59,551 191,472 177,673
--------- -------- --------- --------
INCOME BEFORE INCOME TAXES 36,622 34,050 99,018 103,762
Income taxes 10,893 10,625 28,713 32,539
--------- -------- --------- --------
NET INCOME $ 25,729 $ 23,425 $ 70,305 $ 71,223
========= ======== ========= ========
NET INCOME PER SHARE:
Basic $ 0.54 $ 0.49 $ 1.48 $ 1.47
Diluted 0.54 0.49 1.47 1.46
AVERAGE SHARES OUTSTANDING:
Basic 47,235 47,774 47,495 48,361
Diluted 47,518 48,166 47,659 48,853
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See notes to consolidated financial statements
4
5
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Accumulated
Other
Common Retained Comprehensive
(in thousands except per share amounts) Stock Earnings Income Total
- --------------------------------------------------------------------------------------------------------------------------
BALANCE - SEPTEMBER 30, 1999 $ 230,291 $ 444,551 $ (8,647) $ 666,195
Net income (9,229) (9,229)
Net unrealized loss on securities available-for-sale,
net of tax effect (8,796) (8,796)
---------
Total comprehensive income (18,025)
Exercise of stock options, net of
shares purchased 830 830
Shares acquired for retirement (4,149) (4,149)
Cash dividends - $0.235 per share (11,182) (11,182)
--------- --------- --------- ---------
BALANCE - DECEMBER 31, 1999 226,972 424,140 (17,443) 633,669
Net income 21,885 21,885
Net unrealized loss on securities available-for-sale,
net of tax effect (231) (231)
---------
Total comprehensive income 21,654
Exercise of stock options, net of
shares purchased 261 261
Shares acquired for retirement (669) (669)
Cash dividends - $0.235 per share (11,173) (11,173)
--------- --------- --------- ---------
BALANCE - MARCH 31, 2000 $ 226,564 $ 434,852 $ (17,674) $ 643,742
Net income 22,691 22,691
Net unrealized gain on securities available-for-sale,
net of tax effect 1,153 1,153
---------
Total comprehensive income 23,844
Exercise of stock options, net of
shares purchased 380 380
Shares acquired for retirement (3,171) (3,171)
Cash dividends - $0.26 per share (12,362) (12,362)
--------- --------- --------- ---------
BALANCE - JUNE 30, 2000 $ 223,773 $ 445,181 $ (16,521) $ 652,433
Net income 25,729 25,729
Net unrealized gain on securities available-for-sale,
net of tax effect 9,139 9,139
---------
Total comprehensive income 34,868
Exercise of stock options, net of
shares purchased 642 642
Shares acquired for retirement (10,695) (10,695)
Cash dividends - $0.26 per share (12,295) (12,295)
--------- --------- --------- ---------
Balance - September 30, 2000 $ 213,720 $ 458,615 $ (7,382) $ 664,953
========= ========= ========= =========
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See notes to consolidated financial statements
5
6
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Nine Months Ended
September 30,
(in thousands) 2000 1999
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OPERATING ACTIVITIES:
Net income $ 70,305 $ 71,223
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 15,088 13,253
Depreciation 11,611 10,443
Amortization of intangibles 7,858 5,610
Net amortization on investment securities (8) 2,320
Investment securities (gains) losses 6 (532)
Loans originated for sale (70,211) (103,013)
Proceeds from loan sales 70,395 103,823
Donation of equity security 1,116 ---
Accrued merger related and other charges (13,439) ---
Other 11,881 (1,212)
---------- ----------
Net cash provided by operating activities 104,602 101,915
INVESTING ACTIVITIES:
Net decrease in money market investments 56,734 82,725
Securities available-for-sale:
Proceeds from sales 5,766 13,560
Proceeds from maturities 140,525 306,136
Purchases (94,075) (564,587)
Securities held-to-maturity:
Proceeds from maturities --- 17,426
Purchases --- (58,087)
Net increase in loans (498,901) (333,258)
Net increase in premises and equipment (10,151) (15,515)
Acquisitions (net of cash acquired) 26,008 5,447
---------- ----------
Net cash used by investing activities (374,094) (546,153)
FINANCING ACTIVITIES:
Net decrease in demand and savings deposits (247,155) (115,219)
Net increase in time deposits 241,530 29,145
Net increase (decrease) in short-term borrowings (10,382) 636,625
Proceeds from issuance of long-term debt 690,000 24,253
Principal reductions in long-term debt (370,017) (62,781)
Cash dividends paid (35,830) (30,618)
Proceeds from stock options exercised 1,283 2,518
Shares acquired for retirement (14,535) (49,717)
---------- ----------
Net cash provided by financing activities 254,894 434,206
---------- ----------
Net decrease in cash and due from banks (14,598) (10,032)
Cash and due from banks at beginning of period 250,745 221,880
---------- ----------
Cash and due from banks at end of period $ 236,147 $ 211,848
========== ==========
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See notes to consolidated financial statements.
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7
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions for Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three- and nine
month periods ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000. The
balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Corporation's 1999 Annual Report on Form 10-K.
NOTE 2. ACQUISITIONS AND MERGER-RELATED EXPENSES
On May 12, 2000, Citizens Banking Corporation completed the purchase of three
Jackson, Michigan offices of Great Lakes National Bank with approximately $31
million in deposits.
In the fourth quarter of 1999, Citizens merged with F&M Bancorporation, Inc.
("F&M") headquartered in Kaukauna, Wisconsin and completed the acquisition of
seventeen (17) former Bank One offices located in the northern section of
Michigan's Lower Peninsula (the "Branch Purchase"). The Branch Purchase added
approximately $88 million in loans and $442 million in deposits. Merger
related and other costs recorded in the fourth quarter of 1999 totaled $50.6
million ($35.2 million after tax) of which $40.2 million was recorded as a
separate component of noninterest expense (the "Special Charge"), $6.8
million as additional provision for loan losses and $3.6 million as
securities losses. Actions incorporated in the business combination and
restructuring plan for the Branch Purchase were completed in 1999. Certain
ongoing merger integration activities pertaining to the November 1, 1999
merger with F&M, are targeted by the plan for implementation over a 12-month
period following the merger.
In the third quarter of 2000, Citizens successful contract settlement with a
former vendor of F&M resulted in the reversal of approximately $3.9 million
in previously accrued contract termination costs. As a result,
merger-related, restructuring and other integration costs, the Special
Charge, in the third quarter was a net gain of $99,000 ($40,000 after-tax).
Year-to-date, the Special Charge totaled $7.2 ($4.4 million after tax), or
$0.10 per share. For the remainder of 2000, Citizens expects to incur net
merger-related and other integration costs of approximately $2 million to $3
million that will be recorded as part of the Special Charge. The Noninterest
Expense section, under the subheading Special Charge, of Management's
Discussion and Analysis of Financial Condition and Results of Operations"
provides additional details.
As of September 30, 2000, the remaining liabilities associated with the
business combination and restructuring plan were approximately $3.9 million.
As shown in the following table, the majority of the remaining balance
represents personnel-related expenses and contract termination and other
conversion costs.
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DESCRIPTION OF COSTS Estimated Liability At
Liability At ---------------------------------------------------
(in thousands) Acquisition 12/31/99 3/31/00 6/30/00 9/30/00
- ------------------------------------------------------------------------------------------------------------------------------
Employee benefits and severance $ 7,481.9 $ 7,337.9 $ 6,680.0 $ 5,232.4 $ 3,613.1
Contract termination and other conversion costs 13,597.8 9,356.9 5,810.7 4,678.5 253.2
Professional fees 6,345.2 634.5 165.6 132.3 81.5
Facilities and equipment 3,354.9 --- --- --- ---
Goodwill & core deposit premium write-down 2,349.1 --- --- --- ---
Equity investment write-down 519.9 --- --- --- ---
Charitable trust 2,500.0 --- --- --- ---
Other 4,049.4 57.6 --- --- ---
----------- ---------- ----------- ----------- ---------
Total $ 40,198.2 $17,386.9 $ 12,656.3 $ 10,043.2 $ 3,947.8
=========== ========== =========== =========== =========
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NOTE 3. LINES OF BUSINESS INFORMATION
The Corporation is managed along the following business lines: Commercial
Banking, Retail Banking, Financial Services, F&M and all other. Selected
lines of business segment information for the three and nine month periods
ended September 30, 2000 and 1999 is provided below. Total assets by business
segment did not change materially from that previously disclosed in the
Corporation's 1999 Annual Report on Form 10-K. Prior year amounts have been
restated to reflect the current business unit structure and cost allocation
methodology. There are no significant intersegment revenues.
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Special
Charge
Net And
Commercial Retail Financial Operating Other
(in thousands) Banking Banking Services F&M Other Income Items Total
- -----------------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY - THREE MONTHS ENDED
SEPTEMBER 30, 2000
Net interest income (taxable equivalent) $ 22,457 $ 35,530 $ 337 $ 26,208 $ (1,373) $ 83,159 -- $ 83,159
Provision for loan losses 1,671 2,190 -- 832 (51) 4,642 -- 4,642
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income after provision 20,786 33,340 337 25,376 (1,322) 78,517 -- 78,517
Noninterest income 2,815 9,054 6,466 4,161 714 23,210 -- 23,210
Noninterest expense 10,055 24,376 4,470 17,319 5,450 61,670 (99) 61,571
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes 13,546 18,018 2,333 12,218 (6,058) 40,057 99 40,156
Income tax expense (taxable equivalent) 4,736 6,307 816 4,571 (2,062) $ 14,368 59 14,427
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) 8,810 11,711 1,517 7,647 (3,996) $ 25,689 40 25,729
======== ========
Allocation of special charge and
other unusual items -- -- -- 313 (273) (40) --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 8,810 $ 11,711 $ 1,517 $ 7,960 $ (4,269) -- $ 25,729
======== ======== ======== ======== ======== ======== ========
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EARNINGS SUMMARY - THREE MONTHS ENDED
SEPTEMBER 30, 1999
Net interest income (taxable equivalent) $ 18,219 $ 28,622 $ 324 $ 28,131 $ 6,150 $ 81,446 -- $ 81,446
Provision for loan losses 1,073 3,136 -- 771 (610) 4,370 -- 4,370
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income after provision 17,146 25,486 324 27,360 6,760 77,076 -- 77,076
Noninterest income 2,674 7,089 6,198 3,749 (140) 19,570 -- 19,570
Noninterest expense 9,784 18,327 4,839 15,649 8,456 57,055 2,496 59,551
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes 10,036 14,248 1,683 15,460 (1,836) 39,591 (2,496) 37,095
Income tax expense (taxable equivalent) 3,513 4,986 589 5,937 (481) 14,544 (874) 13,670
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) 6,523 9,262 1,094 9,523 (1,355) $ 25,047 (1,622) 23,425
======== ========
Allocation of special charge and
other unusual items -- (4,222) -- -- 2,600 1,622 --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 6,523 $ 5,040 $ 1,094 $ 9,523 $ 1,245 -- $ 23,425
======== ======== ======== ======== ======== ======== ========
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9
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Special
Charge
Net And
Commercial Retail Financial Operating Other
(in thousands) Banking Banking Services F&M Other Income Items Total
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY - NINE MONTHS ENDED
SEPTEMBER 30, 2000
Net interest income (taxable equivalent) $ 64,638 $ 101,476 $ 995 $ 79,965 $ 1,977 $ 249,051 $ --- $ 249,051
Provision for loan losses 3,997 7,934 --- 1,708 1,449 15,088 --- 15,088
-------- --------- -------- -------- -------- --------- ------- ---------
Net interest income after provision 60,641 93,542 995 78,257 528 233,963 --- 233,963
Noninterest income 8,335 24,500 19,939 11,837 2,353 66,964 --- 66,964
Noninterest expense 30,494 76,726 13,719 47,862 15,482 184,283 7,189 191,472
-------- --------- -------- -------- -------- --------- ------- ---------
Income (loss) before income taxes 38,482 41,316 7,215 42,232 (12,601) 116,644 (7,189) 109,455
Income tax expense (taxable equivalent) 13,469 14,461 2,525 15,454 (3,933) 41,976 (2,826) 39,150
-------- --------- -------- -------- -------- --------- ------- ---------
Net income (loss) 25,013 26,855 4,690 26,778 (8,668) $ 74,668 (4,363) 70,305
=========
Allocation of special charge and
other unusual items --- --- --- (3,744) (619) 4,363 ---
-------- --------- -------- -------- -------- ------- =--------
Net income (loss) $ 25,013 $ 26,855 $ 4,690 $ 23,034 $ (9,287) $ --- $ 70,305
======== ========= ======== ======== ======== ======= =========
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EARNINGS SUMMARY - NINE MONTHS ENDED
SEPTEMBER 30, 1999
Net interest income (taxable equivalent) $ 53,716 $ 85,210 $ 1,038 $ 82,408 $ 15,208 $ 237,580 $ --- $ 237,580
Provision for loan losses 1,723 11,600 --- 1,954 (2,024) 13,253 --- 13,253
-------- --------- -------- -------- -------- --------- ------- ---------
Net interest income after provision 51,993 73,610 1,038 80,454 17,232 224,327 --- 224,327
Noninterest income 7,206 20,974 17,952 12,121 783 59,036 7,041 66,077
Noninterest expense 26,925 62,920 12,913 47,266 21,153 171,177 6,496 177,673
-------- --------- -------- -------- -------- --------- ------- ---------
Income (loss) before income taxes 32,274 31,664 6,077 45,309 (3,138) 112,186 545 112,731
Income tax expense (taxable equivalent) 11,296 11,081 2,127 17,477 (664) 41,317 191 41,508
-------- --------- -------- -------- -------- --------- ------- ---------
Net income (loss) 20,978 20,583 3,950 27,832 (2,474) $ 70,869 354 71,223
=========
Allocation of special charge and
other unusual items --- (3,346) --- --- 3,700 (354) ---
-------- --------- -------- -------- -------- ------- ---------
Net income (loss) $ 20,978 $ 17,237 $ 3,950 $ 27,832 $ 1,226 $ --- $ 71,223
======== ========= ======== ======== ======== ======= =========
- -----------------------------------------------------------------------------------------------------------------------------------
NOTE 4. EARNINGS PER SHARE
Net income per share is computed based on the weighted-average number of
shares outstanding, including the dilutive effect of stock options, as
follows:
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Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share amounts) 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
NUMERATOR:
Basic and dilutive earnings per share -- net income
available to common shareholders $ 25,729 $ 23,425 $ 70,305 $ 71,223
======== ======== ======== ========
DENOMINATOR:
Basic earnings per share -- weighted average shares 47,235 47,774 47,495 48,361
Effect of dilutive securities -- potential conversion of
employee stock options 283 392 164 492
-------- ------ ------ -------
Diluted earnings per share -- adjusted weighted-average
shares and assumed conversions 47,518 48,166 47,659 48,853
======== ======== ======== ========
BASIC EARNINGS PER
SHARE $ 0.54 $ 0.49 $ 1.48 $ 1.47
======== ======== ======== ========
DILUTED EARNINGS PER SHARE $ 0.54 $ 0.49 $ 1.47 $ 1.46
======== ======== ======== ========
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9
10
During the third quarter of 2000, employees exercised stock options to
acquire 34,319 shares at an average exercise price of $18.73 per share.
NOTE 5. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year financial statement presentation.
10
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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FIVE-QUARTER SUMMARY OF SELECTED FINANCIAL INFORMATION
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
FOR QUARTER ENDED
-----------------------------------------------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
2000 2000 2000 1999 (1) 1999 (1)
- -----------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS (THOUSANDS)
Interest income $ 160,347 $ 153,406 $ 147,086 $ 144,422 $ 138,174
Net interest income 79,625 79,528 79,461 81,031 78,401
Provision for loan losses 4,642 5,162 5,284 11,422 4,370
Investment securities gains (losses) (5) --- (1) (3,584) 39
Other noninterest income 23,215 22,626 21,129 19,499 19,531
Noninterest expense before special charge 61,670 61,735 60,878 59,105 59,551
Special charge:
Before-tax (99) 3,289 3,999 40,198 ---
After-tax (40) 1,994 2,409 28,403 ---
Income taxes 10,893 9,277 8,543 (4,550) 10,625
Net income 25,729 22,691 21,885 (9,229) 23,425
Net operating income (2) 25,689 24,685 24,294 25,833 25,047
Cash dividends (3) 12,295 12,362 11,173 11,182 10,493
- -----------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Basic net income $ 0.54 $ 0.48 $ 0.46 $ (0.19) $ 0.49
Diluted net income 0.54 0.47 0.46 (0.19) 0.49
Diluted - net operating income (2) 0.54 0.52 0.51 0.54 0.52
Cash dividends (3) 0.26 0.26 0.235 0.235 0.235
Market value (end of period) 23.00 16.23 19.50 22.38 26.13
Book value (end of period) 14.15 13.73 13.52 13.32 13.95
- -----------------------------------------------------------------------------------------------------------------------------------
AT PERIOD END (MILLIONS)
Assets $ 8,276 $ 8,146 $ 7,936 $ 7,899 $ 7,530
Loans 6,406 6,251 6,045 5,918 5,649
Deposits 6,154 6,125 6,106 6,129 5,787
Shareholders' equity 665 652 644 634 666
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE FOR THE QUARTER (MILLIONS)
Assets $ 8,164 $ 8,016 $ 7,865 $ 7,749 $ 7,446
Loans 6,311 6,148 5,954 5,804 5,576
Deposits 6,159 6,036 6,109 6,156 5,821
Shareholders' equity 657 641 635 661 661
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS (ANNUALIZED)
Return on average assets 1.25 % 1.14 % 1.12 % (0.47)% 1.25 %
Net operating return on average assets (2) 1.25 1.24 1.24 1.32 1.33
Return on average shareholders' equity 15.58 14.24 13.86 (5.54) 14.06
Net operating return on average shareholders' equity (2) 15.56 15.49 15.39 15.51 15.03
Net interest margin (FTE) 4.31 4.40 4.49 4.63 4.64
Net loans charged off to average loans 0.23 0.27 0.18 0.53 0.29
Average equity to average assets 8.05 8.00 8.07 8.53 8.88
Allowance for loan losses ratio 1.27 1.28 1.31 1.29 1.26
Nonperforming assets to loans plus ORAA (end of period) 0.84 0.75 0.67 0.59 0.69
Nonperforming assets to total assets (end of period) 0.65 0.58 0.51 0.45 0.52
Leverage ratio 7.19 7.23 7.30 7.20 8.40
Tier 1 capital ratio 9.20 9.25 9.40 9.20 11.30
Total capital ratio 10.45 10.50 10.60 10.50 12.50
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Certain amounts have been reclassified to conform with current year
presentation.
(2) Net operating income is based on net income that excludes special charges,
restructuring and other non-recurring items incurred in the connection with
acquisitions and other corporate initiatives.
(3) Cash dividends and cash dividends per share are for Citizens Banking
Corporation only, not restated for pooling of interests.
11
12
INTRODUCTION
The following is a review of Citizens Banking Corporation's ("Citizens")
performance during the three-and nine months ended September 30, 2000. This
discussion should be read in conjunction with the accompanying unaudited
financial statements and notes thereto appearing on pages 3 through 10 of this
report and Citizens' 1999 Annual Report on Form 10-K.
To better understand underlying trends and performance, and to present financial
performance on an "operating basis" Citizens has excluded special charges
associated with merger and integration costs as well as the effects of unusual
events or transactions. Operating results should be reviewed in conjunction with
reported results. A quarterly summary of selected financial data for the
five-quarter period ended September 30, 2000 is presented in the table on page
11.
EARNINGS SUMMARY
Citizens earned net income of $25,729,000 for the three months ended September
30, 2000, or $0.54 per share, compared with net income of $23,425,000, or $0.49
per share, for the same quarter of 1999. On an operating basis, Citizens earned
$25,689,000, or $0.54 per share, compared with $25,047,000 or $0.52 per share
for the same period in 1999. Operating returns on average assets and average
equity for the third quarter of 2000 were 1.25% and 15.56%, respectively,
compared with 1.33% and 15.03% in 1999. For the first nine months of 2000, net
income was $70,305,000, or 1.47 per share, compared with $71,223,000, or 1.46
per share, for the same period in 1999. On an operating basis, net income was
$74,668,000, or $1.57 per share, compared with $70,869,000, or $1.45 per share
in 1999, representing an increase of 8.3% on a per diluted share basis.
Operating returns on average assets and average equity during the first nine
months of 2000 were 1.24% and 15.49%, respectively, compared with 1.32% and
14.06%, respectively, in 1999.
Operating earnings for the first nine months of 2000 exclude nonrecurring pretax
merger-related costs (the "Special Charge") of $7,189,000 ($4,363,000 after-tax)
for the on-going conversion and integration of F&M Bancorporation, Inc. (F&M),
which merged with Citizens on November 1, 1999. See Note 2. Acquisitions and
Merger-Related Expenses to Citizens consolidated financial statements for
additional details. Operating earnings for the first nine months of 1999 exclude
various one-time gains and charges, which resulted in a net gain of $545,000
($354,000 after-tax). This net gain is comprised of a $1,348,000 ($876,000
after-tax) gain from the sale of a branch deposits in the first quarter; a gain
of $5,693,000 ($3,700,000 after-tax) from the sale of Citizens' equity position
in Magic Line, Inc., an ATM processor in the second quarter; a one-time charge
of $6,246,000 ($4,060,000 after-tax) in the third quarter as a result of a
fraudulent check kiting scheme; a charge of $4,000,000 ($2,600,000 after-tax) in
the second quarter to accrue Citizens' commitment to fund a charitable trust,
and the subsequent reversal of $3,750,000 ($2,438,000 after-tax) of the
charitable trust contribution accrual in the third quarter as a partial offset
to the fraud loss.
The improvement in operating earnings for three and nine months ended September
30, 2000 reflect increased noninterest income and higher net interest income
from growth in earning assets offset, in part, by a higher provision for loan
losses and increases in operating expense. On an operating basis, noninterest
income, excluding securities gains and losses, was $23,215,000 for the third
quarter of 2000 and $66,970,000 for the first nine months of 2000, reflecting
increases of $3,684,000, or 18.9%, and $8,466,000, or 14.5%, respectively, over
the same periods in 1999. In both the three and nine month periods there were
significant increases in brokerage and investment fees, deposit service charges,
bankcard fees, and trust fees. Mortgage and related fee income was up
significantly in the third quarter but was still down on a year-to-date basis.
Noninterest expense, on an operating basis, was $61,670,000 in the third quarter
of 2000, an increase of $4,615,000 or 8.1% over the same period of 1999. For the
first nine months of 2000, noninterest expense, on an operating basis, was
$184,283,000, an increase of $13,106,000, or 7.7%, over the same period of 1999.
Increases in both the three and nine month periods reflect higher compensation,
professional services costs, intangible asset amortization, bankcard fees, data
processing fees, telecommunication costs, and equipment and occupancy costs.
Growth from the Branch Purchase along with costs associated with ongoing revenue
enhancement and cost efficiency initiatives generated most of the increases.
12
13
LINES OF BUSINESS REPORTING
The Corporation operates along four major business segments: Commercial Banking,
Retail Banking, Financial Services and F&M. For more information about each line
of business, see Note 17 to the Corporation's 1999 Annual Report on Form 10-K
and Note 2 of this Quarterly Report on Form 10Q. A summary of net operating
income by each business line is presented below.
- -----------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Commercial Banking $ 8,810 $ 6,523 $25,013 $20,978
Retail Banking 11,711 9,262 26,855 20,583
Financial Services 1,517 1,094 4,690 3,950
F&M 7,647 9,523 26,778 27,832
Other (3,996) (1,355) (8,668) (2,474)
------- ------- ------- -------
Total operating income $25,689 $25,047 $74,668 $70,869
======= ======= ======= =======
- -----------------------------------------------------------------------------------------------------------------------
The increase in Commercial Banking operating income for the three and nine
months ended September 30, 2000 was due to increases in Citizens prime lending
rate and growth in overall commercial account relationships, including strong
loan growth, increased demand deposits and related service charges, and expanded
cash management services. Retail Banking operating income increased in 2000 as a
result of higher net interest income, generated from greater direct and indirect
consumer loan volumes, increased deposit levels, and improved spreads on core
deposits; higher noninterest income; and reduced loan charge-offs partially
offset by higher operating expense. Financial Services operating income improved
in 2000 due to strong growth in trust, brokerage and investment advisory
services revenue (partially offset by higher compensation and other expenses),
introduction of new products and services and successful sales efforts. The
decrease in F&M's operating income in 2000 reflects lower net interest income
from a declining net interest margin, partially offset by merger cost
efficiencies and a lower provision for loan losses. Operating income in the
Other category decreased as higher funding costs lowered net interest income in
Citizens' treasury unit. The higher funding costs reflect higher long and
short-term borrowing levels as well as Citizens sensitivity to higher interest
rates.
NET INTEREST INCOME
Tax equivalent net interest income, Citizens' principal source of earnings,
increased $1.713 million, or 2.1%, to $83.159 million in the third quarter of
2000 from $81.446 million for the same period in 1999. For the first nine months
of 2000, tax equivalent net interest income increased $11.471 million, or 4.8%,
to $249.051 million from $237.580 million a year ago. A higher level of earning
assets, partially offset by increases in interest-bearing deposits and borrowing
balances, and a lower net interest margin, led to this increase. Detailed
analyses of net interest income, with average balances and related interest
rates for the three and nine months ended September 30, 2000 and 1999 are
presented on pages 15 and 16. An analysis of how changes in average balances
("volume") and market rates of interest ("rates") have effected net interest
income appears in the table on page 14.
For both the three and nine month periods ended September 30, 2000, net
favorable volume variances, offset in part, by unfavorable rate related
variances in net interest income resulted in an increases of $1,224,000 and
$10,003,000, respectively, in net interest income, as compared to the same
periods in 1999. Yields on earning assets for the three and nine months ended
September 30, 2000 increased to 8.48% and 8.32%, respectively, from 8.06% for
the year-ended 1999 and 8.02% for the three and nine months ended September 30,
1999. Management's decision to reposition the securities portfolio following the
merger with F&M, in November 1999, as well as increases in Citizens' prime
lending rate in the last two months of 1999 and in the first half of 2000 were
major factors of this increase. The cost of interest-bearing liabilities for the
three and nine-months ended September 30, 2000 increased to 4.97% from 4.09% and
to 4.67% from 4.05%, respectively, as compared with the same periods in 1999. A
higher overall interest rate environment and increased levels of relatively
higher cost Federal Home Loan Bank ("FHLB") borrowings fueled this increase.
Although Citizens continues to be successful at attracting new deposits, loan
growth has outpaced deposit growth and required the use of FHLB advances and
other purchased funds to support the higher level of earning assets.
Net interest margin, the difference between yields earned on earning assets
compared to the rates paid on supporting funds, was 4.31% for the third quarter
and 4.40% for the first nine months of 2000, a decline of 33 and 29 basis
points, respectively, over the same periods in 1999. Compared to last quarter,
net interest margin was down 9 basis points. The decrease in net interest margin
is primarily due to a change in funding mix and increases in short-term interest
rates by the Federal Reserve.
13
14
The change in mix reflects the growth in lower spread investment securities and
increased reliance on short-term borrowings, which are more expensive than
deposits, to support loan growth in Citizens' markets.
Going forward, a modest decline in the net interest margin is expected, as mix
and recent rate increases will reduce interest spreads and earning asset growth
is expected to continue to outpace traditional deposit growth with a resulting
increase in borrowed funds. Management continually monitors Citizens' balance
sheet to insulate net interest income from significant swings caused by interest
rate volatility. Citizens' policies in this regard are further discussed in the
section titled "Interest Rate Risk".
- ------------------------------------------------------------------------------------------------------------------
ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
2000 Compared with 1999
------------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
Increase (Decrease) Increase (Decrease)
Net Due to Change in Net Due to Change in
---------------------- ----------------------
(in thousands) Change (1) Rate Volume (2) Change (1) Rate Volume (2)
- ------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Money market investments $ (386) $ 154 $ (540) $ (2,108) $ 586 $ (2,694)
Investment securities:
Taxable (99) 970 (1,069) 7,480 2,996 4,484
Tax-exempt 789 (17) 806 2,634 (128) 2,762
Loans:
Commercial 20,186 3,449 16,737 48,681 8,424 40,257
Real estate (2,565) 558 (3,123) (3,552) (432) (3,120)
Consumer 4,248 627 3,621 10,567 830 9,737
-------- -------- -------- -------- -------- --------
Total 22,173 5,741 16,432 63,702 12,276 51,426
-------- -------- -------- -------- -------- --------
INTEREST EXPENSE
Deposits:
Demand (224) (245) 21 (355) (502) 147
Savings 1,383 138 1,245 5,193 2,617 2,576
Time 10,276 4,479 5,797 16,143 7,006 9,137
Short-term borrowings 6,383 2,580 3,803 30,222 3,875 26,347
Long-term debt 3,131 481 2,650 2,496 1,467 1,029
-------- -------- -------- -------- -------- --------
Total 20,949 7,433 13,516 53,699 14,463 39,236
-------- -------- -------- -------- -------- --------
NET INTEREST INCOME $ 1,224 $ (1,692) $ 2,916 $ 10,003 $ (2,187) $ 12,190
======== ======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------
(1) Changes are based on actual interest income and do not reflect taxable
equivalent adjustments.
(2) Rate/Volume variances are allocated to changes due to volume.
14
15
- ----------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
2000 1999
----------------------------------- --------------------------------
Three Months Ended September 30 AVERAGE AVERAGE Average Average
(in thousands) BALANCE INTEREST(1) RATE (2) Balance Interest(1) Rate (2)
- ----------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Money market investments:
Federal funds sold $ 927 $ 16 7.09 % $ 31,288 $ 403 5.11 %
Other 1,813 22 4.81 1,589 21 5.29
Investment securities(3):
Taxable 992,975 16,387 6.60 1,072,018 16,486 6.15
Tax-exempt 393,172 5,087 7.96 330,874 4,298 8.01
Loans:
Commercial 3,312,422 74,023 8.98 2,531,473 53,837 8.55
Real estate 1,424,353 27,910 7.84 1,606,989 30,475 7.59
Consumer 1,573,778 36,902 9.33 1,437,404 32,654 9.02
----------- --------- ----------- --------
Total earning assets(3) 7,699,440 160,347 8.48 7,011,635 138,174 8.02
NONEARNING ASSETS
Cash and due from banks 223,686 215,498
Bank premises and equipment 141,666 134,761
Investment security fair value adjustment (17,044) (8,901)
Other nonearning assets 197,330 164,812
Allowance for loan losses (80,881) (71,537)
----------- -----------
Total assets $ 8,164,197 $ 7,446,268
=========== ===========
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits 568,706 1,985 1.39 568,065 2,209 1.54
Savings deposits 1,662,668 13,832 3.31 1,734,335 12,449 2.85
Time deposits 2,966,068 43,859 5.88 2,607,231 33,583 5.11
Short-term borrowings 888,866 14,959 6.70 669,587 8,576 5.08
Long-term debt 379,073 6,087 6.39 215,272 2,956 5.45
----------- --------- ----------- --------
Total interest-bearing liabilities 6,465,381 80,722 4.97 5,794,490 59,773 4.09
--------- --------
NONINTEREST-BEARING LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits 961,961 911,725
Other liabilities 79,760 78,930
Shareholders' equity 657,095 661,123
----------- -----------
Total liabilities and shareholders' equity $ 8,164,197 $ 7,446,268
=========== ===========
NET INTEREST INCOME $ 79,625 $ 78,401
========= ========
NET INTEREST INCOME AS A PERCENT OF
EARNING ASSETS 4.31 % 4.64 %
- ----------------------------------------------------------------------------------------------------------------------------
(1) Interest income shown on actual basis and does not include taxable
equivalent adjustments.
(2) Average rates are presented on an annual basis and include taxable
equivalent adjustments to interest income of $3,534,000 and $3,045,000 for
the three months ended September 30, 2000 and 1999, respectively, based on
a tax rate of 35%.
(3) For presentation in this table, average balances and the corresponding
average rates for investment securities are based upon historical cost,
adjusted for amortization of premiums and accretion of discounts.
15
16
- ---------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
2000 1999
------------------------------------ -----------------------------------
Nine Months Ended September 30 AVERAGE AVERAGE Average Average
(in thousands) BALANCE INTEREST(1) RATE (2) Balance Interest(1) Rate(2)
- ---------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Money market investments:
Federal funds sold $ 822 $ 39 6.26 % $ 58,213 $ 2,096 4.81 %
Other 1,530 60 5.27 2,832 111 5.22
Investment securities(3):
Taxable 1,020,705 50,054 6.54 943,723 42,574 6.02
Tax-exempt 389,266 15,180 8.00 318,563 12,546 8.08
Loans:
Commercial 3,087,108 202,977 8.85 2,466,579 154,296 8.48
Real estate 1,528,408 87,910 7.67 1,589,837 91,462 7.67
Consumer 1,522,429 104,619 9.18 1,380,536 94,052 9.11
----------- --------- ----------- ---------
Total earning assets(3) 7,550,268 460,839 8.32 6,760,283 397,137 8.02
NONEARNING ASSETS
Cash and due from banks 224,919 217,292
Bank premises and equipment 142,350 133,400
Investment security fair value adjustment (27,950) (953)
Other nonearning assets 206,007 159,421
Allowance for loan losses (80,090) (70,599)
----------- -----------
Total assets $ 8,015,504 $ 7,198,844
=========== ===========
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits 587,167 6,345 1.44 569,885 6,700 1.57
Savings deposits 1,726,156 41,155 3.18 1,741,017 35,962 2.76
Time deposits 2,835,445 118,784 5.58 2,635,358 102,641 5.21
Short-term borrowings 947,365 44,251 6.23 391,699 14,029 4.79
Long-term debt 246,212 11,690 6.32 225,192 9,194 5.46
----------- --------- ----------- ---------
Total interest-bearing liabilities 6,342,345 222,225 4.67 5,563,151 168,526 4.05
----------- -----------
NONINTEREST-BEARING LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits 952,773 884,977
Other liabilities 75,944 76,460
Shareholders' equity 644,442 674,256
----------- -----------
Total liabilities and shareholders'
equity $ 8,015,504 $ 7,198,844
=========== ===========
NET INTEREST INCOME $ 238,614 $ 228,611
========= =========
NET INTEREST INCOME AS A PERCENT OF
EARNING ASSETS 4.40 % 4.69 %
- ---------------------------------------------------------------------------------------------------------------------------
(1) Interest income shown on actual basis and does not include taxable
equivalent adjustments.
(2) Average rates are presented on an annual basis and include taxable
equivalent adjustments to interest income of $10,437,000 and $8,969,000 for
the nine months ended September 30, 2000 and 1999, respectively, based on a
tax rate of 35%.
(3) For presentation in this table, average balances and the corresponding
average rates for investment securities are based upon historical cost,
adjusted for amortization of premiums and accretion of discounts.
16
17
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses represents a charge against income and a
corresponding increase in the allowance for loan losses. The provision for loan
losses was $4,642,000 in the third quarter of 2000 and $15,088,000 for the first
nine months of the year, an increase of $272,000 and $1,835,000, respectively
over the same periods in 1999. Net charge-offs were 0.23% of average loans in
the third quarter of 2000, down from 0.29% in the same period a year ago. Year
to date, net charge-offs were 0.23% of average loans, down from 0.31% in the
first nine months of 1999. The decrease primarily reflects fewer charge-offs and
higher recoveries in Citizens' indirect consumer portfolio in the first nine
months of 2000, as compared to the same period in 1999. A summary of loan loss
experience during the three and nine months ended September 30, 2000 and 1999 is
provided below.
- -----------------------------------------------------------------------------------------------------------------------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses - beginning of period $ 80,047 $ 71,070 $ 76,397 $ 70,842
Charge-offs 5,223 5,690 15,850 17,066
Recoveries 1,608 1,642 5,439 4,363
---------- ---------- ---------- ----------
Net charge-offs 3,615 4,048 10,411 12,703
Provision for loan losses 4,642 4,370 15,088 13,253
---------- ---------- ---------- ----------
Allowance for loan losses - end of period $ 81,074 $ 71,392 $ 81,074 $ 71,392
========== ========== ========== ==========
Loans outstanding at period end $6,406,037 $5,649,008 $6,406,037 $5,649,008
Average loans outstanding during period 6,310,553 5,575,866 6,137,945 5,436,952
Allowance for loan losses as a percentage of
loans outstanding at period end 1.27 % 1.26 % 1.27 % 1.26 %
Ratio of net charge-offs during period to
average loans outstanding (annualized) 0.23 0.29 0.23 0.31
Loan loss coverage (allowance as a multiple of
net charge-offs, annualized) 5.6 X 4.4 x 5.8 X 4.2 x
- ------------------------------------------------------------------------------------------------------------------------------
Management provides for possible loan losses by dividing the allowance into two
components, allocated and unallocated. The allocated component of the allowance
is based on expected losses from the analysis of specific loans and historical
loss experience for each category of loans. This analysis is performed
throughout the year and is updated based on actual experience and loan reviews.
The unallocated portion of the allowance is determined based on Citizens'
assessment of general economic conditions, the economic conditions in the
markets in which Citizens operates, the level and composition of nonperforming
loans and other factors. This analysis involves a higher degree of uncertainty
and considers factors, which may not be reflected in historical loss factors
used to determine the allocated portion of the allowance.
Citizens maintains formal policies and procedures to monitor and control credit
risk. Citizens' loan portfolio has no significant concentrations in any one
industry or any exposure to foreign loans. Citizens has generally not extended
credit to finance highly leveraged transactions nor does it intend to do so in
the future.
Based on present information, management believes the allowance for loan losses
is adequate to meet known risks in the loan portfolio. Employment levels and
other economic conditions in the Corporation's local markets may have a
significant impact on the level of credit losses. Management has identified and
devotes appropriate attention to credits that may not be performing as well as
expected. Nonperforming loans are further discussed in the section entitled
"Nonperforming Assets."
17
18
NONINTEREST INCOME
A summary of significant sources of noninterest income during the first three
and nine months of 2000 and 1999 follows:
- -------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME Percent
Three Months Ended Nine Months Ended Change in 2000
September 30, September 30, ---------------------
---------------------- ------------------- Three Nine
(in thousands) 2000 1999 2000 1999 Months Months
- -------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 6,825 $ 5,598 $ 19,553 $ 15,502 21.9 % 26.1 %
Trust fees 5,901 5,350 18,312 16,278 10.3 12.5
Bankcard fees 2,865 2,330 8,226 6,729 23.0 22.2
Brokerage and investment fees 1,752 1,279 5,770 3,304 37.0 74.6
Mortgage and other loan income 1,402 1,092 3,126 5,180 28.4 (39.7)
ATM network user fees 836 943 2,388 2,433 (11.3) (1.8)
Cash management services 686 651 2,018 1,858 5.4 8.6
Title insurance fees 309 231 837 733 33.8 14.2
Other, net 2,639 2,057 6,740 6,487 28.3 3.9
-------- -------- -------- --------
Total fees and other income 23,215 19,531 66,970 58,504 18.9 14.5
Investment securities gains (losses) (5) 39 (6) 532 (1) (1)
-------- -------- -------- --------
Noninterest income - operating basis 23,210 19,570 66,964 59,036 18.6 13.4
Gain on sale of Magic Line stock -- -- -- 5,693 -- (100.0)
Premium on sale of deposits -- -- -- 1,348 -- (100.0)
-------- -------- -------- --------
Total noninterest income $ 23,210 $ 19,570 $ 66,964 $ 66,077 18.6 1.3
======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------
On an operating basis, noninterest income, before securities gains and losses,
increased 18.9% and 14.5% for the three and nine months ended September 30,
2000, respectively, over the same periods of 1999. Operating income excludes a
premium of $1.3 million received from the sale of deposits of a branch office in
March 1999 and a gain of $5.7 million from the sale of Citizens' equity position
in Magic Line, Inc., an ATM processor in the second quarter of 1999. Most
categories of noninterest income are up in 2000 as Citizens has experienced
significant increases in deposit service charges, trust fees, bankcard fees,
brokerage and investment fees and title insurance fees.
Fee income for personal and employee benefit trust services increased 10.3% and
12.5% for the three and nine months ended September 30, 2000, respectively, as
compared to the same periods in 1999. Growth in trust fees was attributable to
continued pricing and marketing efforts, offset in part by lower equity market
performance this year compared to the first nine months of 1999. Brokerage and
investment fees were up 37.0% and 74.6%, respectively, for the three and nine
months, propelled by successful retail sales efforts and growth in new mutual
fund and annuity products. Improvements in service charges on deposit accounts,
bankcard fees and cash management service fees reflect higher transaction volume
due to the purchase of the seventeen Bank One branches (the "Branch Purchase")
and enhanced marketing strategies. Mortgage and other loan income was down
substantially in the first nine months of 2000, but rose in the third quarter
over prior year same-period levels. Stable interest rates in the third quarter
of 2000 improved origination volume and refinance activity, which in turn
resulted in more gains on sale of residential mortgage loans and related
servicing release premiums. Title insurance fees were up substantially for the
quarter driven by increased demand for Citizens home equity and construction
loan products.
Gains on the sale of investment securities in 1999 resulted from the sale of
certain securities to reposition the investment portfolio based on the current
rate environment and, in part, to fund loan growth and meet liquidity needs.
18
19
NONINTEREST EXPENSE
Significant changes in noninterest expense during the three and nine months
ended September 30, 2000 and 1999 is summarized in the table below.
- --------------------------------------------------------------------------------------------------------------------------
NONINTEREST
EXPENSE Percent
Three Months Ended Nine Months Ended Change in 2000
September 30, September 30, ------------------
---------------------- ----------------------- Three Nine
(in thousands) 2000 1999 2000 1999 Months Months
- --------------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits $31,309 $ 30,432 $ 94,501 91,257 2.9 % 3.6 %
Equipment 4,824 4,126 14,222 12,279 16.9 15.8
Occupancy 4,009 4,065 12,660 11,564 (1.4) 9.5
Data processing services 3,223 2,411 8,936 7,238 33.7 23.5
Professional services 2,771 2,211 7,779 5,370 25.3 44.9
Intangible asset amortization 2,619 1,864 7,858 5,610 40.5 40.1
Bankcard fees 2,202 2,108 6,713 5,378 4.5 24.8
Postage and delivery 1,750 1,572 5,147 4,704 11.3 9.4
Telephone 1,735 1,428 4,891 3,994 21.5 22.5
Advertising and public relations 1,493 1,042 4,534 4,300 43.3 5.4
Stationery and supplies 1,341 1,599 4,329 4,152 (16.1) 4.3
Other loan fees 1,158 939 3,293 3,108 23.3 6.0
Other, net 3,236 3,258 9,420 12,223 (0.7) (22.9)
------- -------- --------- ---------
Noninterest expense - operating basis 61,670 57,055 184,283 171,177 8.1 7.7
Fraud loss --- 6,246 --- 6,246 (100.0) (100.0)
Charitable trust --- (3,750) --- 250 (100.0) (100.0)
Special charge (99) --- 7,189 --- (1) (1)
------- -------- --------- ---------
Total noninterest expense $61,571 $ 59,551 $ 191,472 $ 177,673 3.4 7.8
======= ======== ========= =========
- --------------------------------------------------------------------------------------------------------------------------
(1) Not Meaningful
On an operating basis, noninterest expense for the three and nine months ended
September 30, 2000 increased 8.1% and 7.7%, respectively, over 1999 levels for
the same periods. Growth from the Branch Purchase and ongoing initiatives
designed to provide future revenue and cost efficiencies generated most of the
increase. Operating earnings for 2000 exclude nonrecurring pretax merger-related
costs (the "Special Charge") of $7.2 million ($4.4 million after-tax) for the
on-going conversion and integration of F&M Bancorporation, Inc. (F&M), which
merged with Citizens on November 1, 1999. Operating earnings for the first nine
months of 1999 exclude a one-time charge of $6.25 million ($4.06 million
after-tax) in the third quarter as a result of a fraudulent check kiting scheme
and a net charge of $0.25 million ($0.16 million after-tax) for Citizens'
commitment to fund a charitable trust. Citizens accrued a $4.0 million ($2.6
million after-tax) commitment to fund its charitable trust in the second quarter
of 1999, but subsequently reversed $3.75 million ($2.44 million after-tax) of
this accrual in the third quarter as a partial offset to the fraud loss.
Salaries and employee benefits expense decreased 1.2% from the second quarter of
2000 but, when compared to the prior year, are up slightly in both the three and
nine-month periods ended September 30, 2000. Higher salaries reflect increased
incentive-based compensation and higher staffing levels to support growth in
certain business units and from acquisitions, partially offset by the reduction
in staff due to merger synergies and outsourcing of internal audit, loan review
and micro computer support functions. The cost of employee benefits was up
slightly reflecting higher health care costs and additional benefits resulting
from conforming and combining of certain benefit plans.
Occupancy and equipment expense for 2000 increased $0.6 million, or 7.8%, in the
third quarter and $3.0 million, or 12.7%, in the first nine months, over the
same periods of 1999. The increase reflects the growth in facilities and
equipment costs associated, in part, with the Branch Purchase transaction in
October 1999. Growth in data processing and telephone costs is also primarily
attributable to the Branch Purchase. The increase in professional services
expense reflects the cost of outsourcing the internal audit, loan review and
microcomputer support functions, which were offset by related reductions in
salaries and benefits. Bankcard fees were up due to higher transaction volume
and system processing costs as well as from fees associated with outsourcing of
bankcard operations in the second quarter of 1999. The additional intangible
asset amortization was attributable to the Branch Purchase. Advertising and
public relations costs were up in 2000 reflecting a slow down in advertising and
public relations spending in the third quarter of 1999 due to the check kiting
fraud and in
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anticipation of the pending acquisitions. Stationery and supply expense in the
third quarter of 1999 included a one-time accrual adjustment for a new
electronic billing process implemented by Citizens' primary check vendor.
Excluding this adjustment, stationary and supply expense was up 1.6% for the
quarter and 11.8% year-to-date. The decrease in other expenses is attributable
to fewer losses on deposit accounts, recoveries from previous fraud-related
losses and lower state taxes.
Special Charge
On November 1, 1999, Citizens merged with F&M. As a result, Citizens management
approved, in 1999, a series of initiatives designed to achieve future cost
efficiencies. Actions incorporated in the business combination and restructuring
plan are targeted for implementation over a 12-month period following the
merger. Ongoing costs associated with these actions are recorded as a Special
Charge. The Special Charge, comprised primarily of system conversion and
merger-related integration costs, netted to a gain of $99,000 ($40,000
after-tax), in the second quarter of 2000 and a charge of $7.2 ($4.4 million
after tax), or $0.10 per share, in the first nine months of 2000. In the third
quarter of 2000, Citizens successfully settled its contract with a former vendor
of F&M and, as a result, reversed against the Special Charge approximately $3.9
million of previously accrued contract termination costs. Through the remainder
of year 2000, Citizens expects to incur net merger-related and other integration
costs of approximately $2 million to $3 million that will be recorded as part of
the Special Charge.
Major merger integration achievements in 2000 include:
- - Consolidation of F&M's 22 separate banking subsidiaries into three banks,
organized by state;
- - Closing of 13 F&M Bank branch offices located in Wisconsin; and
- - Completion, as of November 6, 2000, of all planned operating system
conversions scheduled for 2000. F&M Bank Iowa was successfully converted to
Citizens' integrated system on June 5, 2000. The last four of twenty former
F&M Wisconsin banks were converted to Citizens' integrated system on
November 6, 2000.
Other planned initiatives accomplished in 2000 not related to the merger
include:
- - Transfer of Citizens internal audit and corporate loan review functions to
a third party; and
- - As part of Citizens' branch reconfiguration initiative, nine Citizens
branch offices were closed (1 in February and 8 in April) and on May 12,
1999, Citizens acquired three Jackson, Michigan branches operated by Great
Lakes National Bank and simultaneously consolidated three existing Citizens
offices in the Jackson market into the newly acquired branches.
As of September 30, 2000, the remaining liabilities associated with Citizens
business combination and restructuring plan were approximately $3.9 million. The
majority of the remaining balance represents personnel-related expenses and
other conversion costs. See Note 2. Acquisitions and Merger-Related Expenses for
additional details.
INCOME TAXES
Income tax expense was $10.9 million in the third quarter of 2000, an increase
of 2.5% over the same period last year. For the nine months ended September 30,
2000, income tax expense was $28.7 million, a decrease of 11.8% over the same
period in 1999. Lower pre-tax earnings due to the special charge, a higher level
of tax-exempt interest income and tax benefits from the donation of appreciated
marketable equity securities in the first quarter of 2000 resulted in the
decrease for the nine months ended September 30, 2000, as compared to the same
period in the prior year.
FINANCIAL CONDITION
Citizens had total assets of $8.276 billion as of September 30, 2000, an
increase of $129.7 million, or 1.6%, from June 30, 2000 and $376.3 million, or
4.8%, from $7.899 billion as of December 31, 1999. Average earning assets
comprised 93.8% of average total assets during the first nine months of 2000
compared with 93.9% in the first nine months of 1999.
INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
Total average investments, including money market investments, comprised 18.4%
of average earning assets during the first nine months of 2000, compared with
19.6% for the same period of 1999. Average investment security balances for the
nine months ended September 30, 2000 were up $120.7 million over the same period
in 1999 primarily reflecting a balance sheet leveraging strategy deployed in the
third quarter of 1999 in anticipation of the pending Branch Purchase. Citizens
leveraged its future core deposit growth by utilizing short-term FHLB advances
to fund purchases of longer-term Federal Agency securities. Average money market
investments were down $58.7 million from the first nine months of 1999 levels as
liquidity needs associated with strong loan growth reduced Citizens capacity to
sell Federal funds.
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LOANS
Citizens extends credit primarily within the local markets of its banking
subsidiaries located in Michigan, Wisconsin, Iowa, Illinois and Minnesota. The
loan portfolio is widely diversified by borrower and industry groups with no
foreign loans or significant concentrations in any industry. Total loans at
September 30, 2000 were up $488.6 million, or 8.3%, from year-end 1999 and
$757.0 million, or 13.4%, from September 30, 1999. For the quarter, Citizens
continued to experience strong loan growth as total loans increased $155.5
million, an annualized growth rate of 10.0%. Commercial loans grew at an
annualized rate of 13.5% for the quarter and home equity loans grew at an
annualized rate of 18.7%. Average loans for the first nine months of 2000 were
up $701.0 million or 12.9% over the same period of 1999 reflecting enhanced
sales efforts, strong demand for business loans in Citizens' markets and
acquisition of approximately $88 million of commercial loans from the Branch
Purchase.
NONPERFORMING ASSETS
Nonperforming assets are comprised of nonaccrual loans, restructured loans,
loans 90 days past due and still accruing interest, and other real estate owned.
Certain of these loans, as defined below, are considered to be impaired. Under
Citizens' credit policies and practices, a loan is placed on nonaccrual status
when there is doubt regarding collection of principal or interest, or when
principal or interest is past due 90 days or more and the loan is not well
secured and in the process of collection. Interest accrued but not collected is
reversed and charged against income when the loan is placed on nonaccrual
status. A loan is considered impaired when management determines it is probable
that all the principal and interest due under the contractual terms of the loans
will not be collected. In most instances, impairment is measured based on the
fair value of the underlying collateral. Impairment may also be measured based
on the present value of expected future cash flows discounted at the loan's
effective interest rate. Citizens maintains a valuation allowance for impaired
loans. Interest income on impaired nonaccrual loans is recognized on a cash
basis. Interest income on all other impaired loans is recorded on an accrual
basis.
Certain of the Corporation's nonperforming loans included in the following table
are considered to be impaired. The Corporation measures impairment on all large
balance nonaccrual commercial and commercial real estate loans. Certain large
balance accruing loans rated substandard or worse are also measured for
impairment. In most instances, impairment is measured based on the fair value of
the underlying collateral. Impairment losses are included in the provision for
loan losses. The policy does not apply to large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment, except for
those loans restructured under a troubled debt restructuring. Loans collectively
evaluated for impairment include certain smaller balance commercial loans,
consumer loans, residential real estate loans, and credit card loans, and are
not included in the impaired loan data in the following paragraphs.
At September 30, 2000, loans considered to be impaired totaled $79.1 million (of
which $29.0 million were on a nonaccrual basis). Included within this amount was
$42.5 million of impaired loans for which the related allowance for loan losses
was $5.4 million and $36.6 million of impaired loans for which the fair value
exceeded the recorded investment in the loan. The average recorded investment in
impaired loans during the quarter ended September 30, 2000 was approximately
$53.4 million. For the quarter ended September 30, 2000, Citizens recognized
interest income of approximately $1.0 million. Cash collected on nonaccrual
impaired loans totaled $0.6 million of which $0.3 million was applied to
principal and $0.3 million was recognized using the cash basis method of income
recognition.
At September 30, 1999, loans considered to be impaired totaled $30.1 million (of
which $17.2 million were on a nonaccrual basis). Included within this amount was
$13.4 million of impaired loans for which the related allowance for loan losses
was $2.8 million and $16.7 million of impaired loans for which the fair value
exceeded the recorded investment in the loan. The average recorded investment in
impaired loans during the quarter ended September 30, 1999 was approximately
$30.1 million. For the quarter ended September 30, 1999, Citizens recognized
interest income of approximately $0.2 million. Cash collected on nonaccrual
impaired loans totaled $0.4 million, all of which was applied to principal.
The table below provides a summary of nonperforming assets as of September 30,
2000, December 31, 1999 and September 30, 1999. Total nonperforming assets
amounted to $54.1 million as of September 30, 2000, compared with $35.1 million
as of December 31, 1999 and $39.1 million as of September 30, 1999.
Nonperforming assets were up from year-end 1999 and September 30, 1999, but
remain well below 1% of total loans and other nonperforming assets. The increase
in nonaccrual loans since year-end 1999 primarily reflects higher consumer loan
delinquencies and application of Citizens more stringent nonaccrual policy on
former F&M bank loan portfolios as they convert to Citizens data processing
systems in 2000. Citizens does not anticipate a significant increase in
nonperforming in the near term. Employment levels and other economic conditions
in the Citizens' local markets; however, can impact the level and composition of
nonperforming assets. In a deteriorating or weak economy, higher levels of
nonperforming assets, charge-offs and provisions for loan losses could result
which may adversely impact the Corporation's results.
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- -------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
SEPTEMBER 30, December 31, September 30,
(IN THOUSANDS) 2000 1999 1999
- -------------------------------------------------------------------------------------------------------------------------
Nonperforming Loans
Nonaccrual
Less than 30 days past due $ 4,431 $ 1,661 $ 3,460
From 30 to 89 days past due 6,840 772 881
90 or more days past due 37,151 26,498 26,806
--------- -------- --------
Total 48,422 28,931 31,147
90 days past due and still accruing 1,189 2,139 2,318
Restructured 1,295 9 114
--------- -------- --------
Total nonperforming loans 50,906 31,079 33,579
Other Repossessed Assets Acquired (ORAA) 3,178 4,039 5,497
--------- -------- --------
Total nonperforming assets $ 54,084 $ 35,118 $ 39,076
========= ======== ========
Nonperforming assets as a percent of total loans plus ORAA 0.84 % 0.59 % 0.69 %
Nonperforming assets as a percent of total assets 0.65 0.45 0.52
- -------------------------------------------------------------------------------------------------------------------------
In addition to nonperforming loans, management identifies and closely monitors
other credits that are current in terms of principal and interest payments but,
in management's opinion, may deteriorate in quality if economic conditions
change. As of September 30, 2000, such credits amounted to $46.4 million or 0.7%
of total loans, compared with $18.9 million or 0.3% at December 31, 1999 and
$31.6 million or 0.6% of total loans as of September 30, 1999. These loans are
primarily commercial and commercial real estate loans made in the normal course
of business and do not represent a concentration in any one industry.
DEPOSITS
Total deposits increased $25.4 million to $6.154 billion at September 30, 2000
from $6.129 billion at year-end 1999 and were up $367.7 million from September
30, 1999. Average deposits increased 4.6% in the first nine months of 2000 over
the same period in 1999. The increase over the September 1999 totals primarily
reflects the acquisition of $442 million in deposits from the Branch Purchase in
October 1999. The Corporation gathers deposits primarily in its local markets
and historically has not relied on brokered funds to sustain liquidity. At
September 30, 2000 Citizens had approximately $151 million in brokered deposits
as an alternative source of funding, up from $15 million at year-end 1999.
Citizens will continue to evaluate the use of alternative funding sources such
as brokered deposits as funding needs change. Management continues to promote
relationship driven core deposit growth and stability through focused marketing
efforts and competitive pricing strategies.
SHORT-TERM BORROWINGS AND LONG-TERM DEBT
On average, total short-term borrowings increased to $947.4 million during the
first nine months of 2000 from $391.7 million during the same period of 1999.
The increase primarily reflects increased borrowings at the subsidiary bank
level due to higher growth rates in loans and other earning assets than in
traditional deposit funding. Long-term debt accounted for $246.2 million or 3.9%
of average interest-bearing funds for the first nine months of 2000, compared
with $225.2 million or 4.0% of average interest-bearing funds for the same
period in 1999. At September 30, 2000, $446.8 million of the long-term debt
consists of borrowings from the Federal Home Loan Bank with $322.4 million
maturing at different intervals over the next five years. These borrowings are
utilized to fund the Corporation's loan growth. Borrowed funds are expected to
remain an important, reliable and cost-effective funding vehicle for Citizens
and its subsidiary banks as earning asset growth opportunities are expected to
continue to outpace traditional deposit growth.
CAPITAL RESOURCES
Citizens continues to maintain a strong capital position which supports its
current needs and provides a sound foundation to support further expansion. At
September 30, 2000, shareholders' equity was $665.0 million compared with $633.7
million at December 31, 1999 and $666.2 as of September 30, 1999. Repurchase of
Citizens' common stock and unrealized fair value depreciation in the available
for sale securities portfolio led to the decline in stockholders' equity in
1999. Book value per common share at September 30, 2000, December 31, 1999 and
September 30, 1999 was $14.15, $13.32 and $13.95, respectively.
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Citizens has consistently maintained regulatory capital ratios at or above the
"well-capitalized" standards and all bank subsidiaries of Citizens have
sufficient capital to maintain a well-capitalized designation. Citizens' capital
ratios as of September 30, 2000, December 31, 1999 and September 30, 1999 is
presented below.
- -------------------------------------------------------------------------------------------
CAPITAL RATIOS Regulatory
Minimum For
"Well SEPTEMBER 30, December 31, September 30,
Capitalized" 2000 1999 1999
- -------------------------------------------------------------------------------------------
Risk based capital:
Tier I 6.0 % 9.2 % 9.2 % 11.3 %
Total capital 10.0 10.5 10.5 12.5
Tier I leverage 5.0 7.2 7.2 8.4
- -------------------------------------------------------------------------------------------
In May 1998, Citizens initiated a stock repurchase plan that allowed for the
repurchase of up to 600,000 shares for treasury to satisfy Citizens' obligation
to issue shares under its existing employee and director stock option plans, all
of which were repurchased by March 31, 2000. In January 1999, Citizens initiated
a second stock repurchase plan that provided for the repurchase of up to
1,400,000 shares of its common stock for general bank purposes. All of these
shares were repurchased during 1999. On May 23, 2000, Citizens approved a new
stock repurchase plan that authorized the repurchase of up to 3,000,000 shares
of Citizens common stock. Through the third quarter of 2000, Citizens
repurchased 688,800 shares of stock under this plan at an average price of
$20.13.
Citizens declared cash dividends of $0.26 per share in the third quarter of
2000, an increase of 10.6% over the $0.235 per share declared during the same
period in 1999.
LIQUIDITY AND DEBT CAPACITY
The liquidity position of Citizens is monitored for its subsidiaries and the
Parent company to ensure that funds are available at a reasonable cost to meet
financial commitments, to finance business expansion and to take advantage of
unforeseen opportunities. Citizens' subsidiary banks derive liquidity primarily
through core deposit growth, maturity of money market investments, and maturity
and sale of investment securities and loans. Additionally, Citizens' subsidiary
banks have access to market borrowing sources on an unsecured, as well as a
collateralized basis, for both short-term and long-term purposes including, but
not limited to, the Federal Reserve and Federal Home Loan Banks where the
subsidiary banks are members. Another source of liquidity is the ability of
Citizens' Parent Company to borrow funds on both a short-term and long-term
basis. The Parent has established borrowing facilities with a group of
unaffiliated banks and has used portions of this revolving credit agreement for
various corporate purposes.
In 2000, Citizens has continued its strategy to operate at lower levels of on
balance sheet liquidity, thereby improving the asset mix, resulting in increased
net interest income. Citizens experienced no liquidity or operational problems
as a result of its liquidity levels. Management believes that the key to
operating at lower levels of balance sheet liquidity is the establishment and
subsequent utilization of sufficient sources of liquidity. Proactive management
of Citizens' liquidity capacity and generation has increased sources of funds
and borrowing capacities enabling Citizens and its subsidiary banks to operate
effectively, safely and with improved profitability. At September 30, 2000,
Citizens had sufficient liquidity to meet presently known cash flow requirements
arising from ongoing business transactions.
INTEREST RATE RISK
Interest rate risk generally arises when the maturity or repricing structure of
Citizens' assets and liabilities differs significantly. Asset/liability
management, which among other things addresses such risk, is the process of
developing, testing and implementing strategies that seek to maximize net
interest income, maintain sufficient liquidity and minimize exposure to
significant changes in interest rates. This process includes monitoring
contractual and expected repricing of assets and liabilities as well as
forecasting earnings under different interest rate scenarios and balance sheet
structures. Generally, management seeks a structure that insulates net interest
income from large swings attributable to changes in market interest rates. The
Corporation's static interest rate sensitivity ("GAP") as of September 30, 2000
and 1999 is illustrated below in the table on page 24.
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- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY
TOTAL
1-90 91-180 181-365 WITHIN 1-5 Over
(dollars in millions) Days Days Days 1 YEAR Years 5 Years Total
- -----------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2000
RATE SENSITIVE ASSETS (1)
Loans $ 2,002.7 $ 354.8 $ 654.7 $ 3,012.2 $ 2,660.3 $ 733.5 $ 6,406.0
Investment securities 36.5 16.2 55.7 108.4 542.0 710.6 1,361.0
Short-term investments 7.1 -- -- 7.1 -- -- 7.1
--------- ------- --------- --------- --------- --------- ---------
Total $ 2,046.3 $ 371.0 $ 710.4 $ 3,127.7 $ 3,202.3 $ 1,444.1 $ 7,774.1
========= ======= ========= ========= ========= ========= =========
RATE SENSITIVE LIABILITIES
Deposits (2) $ 950.7 $ 698.3 $ 1,428.3 $ 3,077.3 $ 1,889.2 $ 234.9 $ 5,201.4
Other interest bearing liabilities 986.9 190.0 100.0 1,276.9 82.6 14.6 1,374.1
--------- ------- --------- --------- --------- --------- ---------
Total $ 1,937.6 $ 888.3 $ 1,528.3 $ 4,354.2 $ 1,971.8 $ 249.5 $ 6,575.5
========= ======= ========= ========= ========= ========= =========
Period GAP (3) $ 108.7 $(517.3) $ (817.9) $(1,226.5) $ 1,230.5 $ 1,194.6 $ 1,198.6
Cumulative GAP 108.7 (408.6) (1,226.5) 4.0 1,198.6
Cumulative GAP to Total Assets 1.31 % (4.94)% (14.82)% (14.82)% 0.05 % 14.48% 14.48%
Multiple of Rate Sensitive Assets
to Liabilities 1.06 0.42 0.46 0.72 1.62 5.79 1.18
- ----------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1999
RATE SENSITIVE ASSETS (1)
Loans $ 1,582.2 $ 351.2 $ 577.6 $ 2,511.0 $ 1,768.1 $ 1,369.9 5,649.0
Investment securities 134.4 50.8 81.0 266.2 519.0 632.0 1,417.2
Short-term investments 27.6 -- -- 27.6 -- -- 27.6
--------- ------- --------- --------- --------- --------- ---------
Total $ 1,744.2 $ 402.0 $ 658.6 $ 2,804.8 $ 2,287.1 $ 2,001.9 7,093.8
========= ======= ========= ========= ========= ========= =========
RATE SENSITIVE LIABILITIES
Deposits (2) $ 967.9 $ 691.6 $ 1,132.0 $ 2,791.5 $ 1,847.3 $ 250.2 4,889.0
Other interest bearing liabilities 920.0 11.9 6.2 938.1 30.9 40.7 1,009.7
--------- ------- --------- --------- --------- --------- ---------
Total $ 1,887.9 $ 703.5 $ 1,138.2 $ 3,729.6 $ 1,878.2 $ 290.9 5,898.7
========= ======= ========= ========= ========= ========= =========
Period GAP (3) $ (143.7) $(301.5) $ (479.6) $ (924.8) $ 408.9 $ 1,711.0 $ 1,195.1
Cumulative GAP (143.7) (445.2) (924.8) (515.9) 1,195.1
Cumulative GAP to Total Assets (1.91)% (5.91)% (12.28)% (12.28)% (6.85)% 15.87 % 15.87 %
Multiple of Rate Sensitive Assets
to Liabilities 0.92 0.57 0.58 0.75 1.22 6.88 1.20
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Incorporates prepayment projections for certain assets which may shorten the
time frame for repricing or maturity compared to contractual runoff.
(2) Includes interest bearing savings and demand deposits of $778 million and
$805 million in 2000 and 1999, respectively, in the less than one year
category, and $1.420 billion and $1.467 billion, respectively in the over
one year category, based on historical trends for these noncontractual
maturity deposit types, which reflects industry standards.
(3) GAP is the excess of rate sensitive assets (liabilities).
As shown, Citizens' interest rate risk position is liability sensitive in the
less than one year time frame with rate sensitive liabilities exceeding rate
sensitive assets by $1,226.5 million at September 30, 2000 and by $924.8 million
at September 30, 1999. Application of GAP theory would suggest that with such a
position Citizens' net interest income could decline if interest rates rise;
i.e., liabilities are likely to reprice faster than assets, resulting in a
decrease in net income in a rising rate environment. Conversely, net income
should increase in a falling rate environment. Net interest income is not only
affected by the level and direction of interest rates, but also by the shape of
the yield curve, relationships between interest sensitive instruments and key
driver rates, as well as balance sheet growth and the timing of changes in these
variables. Management is continually reviewing its interest rate risk position
and modifying its strategies based on projections to minimize the impact of
future interest rate changes. While traditional GAP analysis does not always
incorporate adjustments for the magnitude or timing of non-contractual
repricing, the table below does incorporate appropriate adjustments as indicated
in footnotes (1) and
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(2) to the table. Because of these and other inherent limitations of any GAP
analysis, management utilizes net interest income simulation modeling as its
primary tool to evaluate the impact of changes in interest rates and balance
sheet strategies. Management uses these simulations to develop strategies that
can limit interest rate risk and provide liquidity to meet client loan demand
and deposit preferences.
OTHER
ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" and SFAS 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," establishes accounting
and reporting standards for hedging activities and for derivative instruments,
including certain derivative instruments embedded in other contracts. This
Statement, as amended, requires a company to recognize all derivatives as either
assets or liabilities in its balance sheet and measure those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as a fair value, cash flow, or foreign currency hedge. The accounting
for changes in the fair value of a derivative (i.e., gains and losses) depends
on the intended use of the derivative and the resulting designation. If Citizens
elects to apply hedge accounting, it is required to establish at the inception
of the hedge the method it will use for assessing the effectiveness of the
hedging derivative and the measurement approach for determining the ineffective
aspect of the hedge. This Statement is effective for all fiscal quarters of
fiscal years beginning after September 15, 2000. Citizens plans to adopt this
Statement effective January 1, 2001. Presently Citizens does not utilize
derivative or related types of financial instruments except for Federal agency
collateralized mortgage obligations. Therefore, this Statement is not
anticipated to have a material impact on Citizens.
In September 2000, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - a replacement of FASB Statement No. 125." This
Statement revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires new disclosures
relating to securitization transactions and collateral, but carries over most of
SFAS No. 125's provisions without change. It provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. To be accounted for as a sale the transferor must
surrender control (as defined by the Statement) over those assets. Upon
completion of any transfer of financial assets, any liabilities and derivatives
incurred or obtained by transferors as part of the transfer are initially
measured at fair value, if practicable. Servicing assets and other retained
interests in the transferred assets are measured by allocating the previous
carrying amount between the assets sold, if any, and retained interests, if any,
based on their relative fair values at the date of transfer. Under the Statement
a debtor may extinguish a liability, if and only if either (a) the debtor pays
the creditor and is relieved of its obligation for the liability or (b) the
debtor is legally released from being the primary obligor under the liability
either judicially or by the creditor. In addition, this Statement requires a
debtor to (a) reclassify financial assets pledged as collateral and report those
assets in its statement of financial position separately from other assets if
the party has the right by contract or custom to sell or repledge the collateral
and (b) disclose assets pledged as collateral that have not been reclassified
and separately reported. This Statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,
2001 and is effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. This Statement is not anticipated to have
a material impact on Citizens.
FORWARD-LOOKING STATEMENTS
The foregoing disclosure contains "forward-looking statements" within the
meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934,
both as amended, with respect to expectations for future periods. These
forward-looking statements involved are subject to risk and uncertainties that
could cause actual results to differ. These risks and uncertainties include
unanticipated changes in the competitive environment and relationships with
third party vendors and clients and certain other factors discussed in this
report. Management believes that the expectations used in the forward-looking
statements are reasonable, however, actual results may vary significantly.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information concerning quantitative and qualitative disclosures about market
risk contained and incorporated by reference in Item 7A of Citizens' 1999 Annual
Report on Form 10-K, is here incorporated by reference.
Citizens faces market risk to the extent that both earnings and the fair value
of its financial instruments are affected by changes in interest rates. Citizens
manages this risk with static GAP analysis and simulation modeling. Throughout
the first nine months of 2000, the results of these measurement techniques were
within Citizens' policy guidelines. Citizens does not believe that there has
been a material change in its primary market risk exposure (i.e., the categories
of market risk to which Citizens is exposed and the particular markets that
present the primary risk of loss to the Citizens). As of the date of this
Quarterly Report on Form 10-Q, Citizens does not know of or expect there to be
any material change in the general nature of its primary market risk exposure in
the near term.
The methods by which Citizens manages its primary market risk exposure, as
described in the sections of its 1999 Annual Report on Form 10-K incorporated by
reference in response to this item, have not changed materially during the
current year. As of the date of this Quarterly Report on Form 10-Q, Citizens
does not expect to change those methods in the near term. However, Citizens may
change those methods in the future to adapt to changes in circumstances or to
implement new techniques. In this discussion, "near term" means a period of one
year following the date of the most recent balance sheet contained in this
report.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - None
ITEM 2. CHANGES IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed during the three-month period ended
September 30, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIZENS BANKING CORPORATION
Date November 13, 2000 By /s/ John W. Ennest
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John W. Ennest
Vice Chairman of the Board, Treasurer
and Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Signatory)
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28
Exhibit EXHIBIT INDEX Form 10-Q
No. Exhibit Page No.
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27 Financial Data Schedule 29
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