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SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-12
Citizens Banking Corporation
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, schedule or registration statement no.:
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(3) Filing party:
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(4) Date filed:
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[CITIZENS BANKING CORPORATION LOGO]
328 S. SAGINAW STREET
FLINT, MICHIGAN 48502 THOMAS W. GALLAGHER
Senior Vice President,
General
Counsel and Secretary
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS, APRIL 17, 2001
To the Shareholders of Citizens Banking Corporation:
Notice is hereby given that the annual meeting of shareholders of Citizens
Banking Corporation (the "Corporation") will be held in the Presidential Ball
Room located in the Holiday Inn, Gateway Centre, Flint, Michigan, on Tuesday,
April 17, 2001, at 10:00 a.m., local time, for the following purposes:
(1) To elect five (5) Class III directors to serve a three (3) year term
and until their successors are duly elected and qualify.
(2) To transact such other business as may properly come before the
meeting or any adjournment or adjournments thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE DIRECTORS
NOMINATED IN THE PROXY STATEMENT.
Shareholders of record of the Corporation's common stock outstanding at the
close of business on February 28, 2001 are entitled to notice of and to vote at
the meeting.
You are invited to attend this meeting. Please date, sign and return your
proxy promptly in the enclosed, stamped envelope whether or not you plan to be
present at the meeting. In the alternative you may vote via the Internet or by
telephone by following the procedures set forth on the enclosed proxy card. You
may still vote in person if you attend the meeting.
By Order of the Board of Directors
/s/ Thomas W. Gallagher
Thomas W. Gallagher
Secretary
Flint, Michigan
March 15, 2001
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[CITIZENS BANKING CORPORATION LOGO]
Citizens Banking Corporation
328 South Saginaw Street
Flint, Michigan 48502
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PROXY STATEMENT
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This proxy statement is furnished in connection with the solicitation of
proxies by the board of directors of Citizens Banking Corporation (the
"Corporation") to be used at the annual meeting of shareholders of the
Corporation and any adjournments thereof. The annual meeting will be held on
April 17, 2001 at the time and place and for the purposes set forth in the
accompanying notice of annual meeting of shareholders.
This proxy statement, the proxy and the notice of annual meeting of
shareholders are first being provided to shareholders on or about March 15,
2001.
The shareholders of the common stock of the Corporation ("Common Stock") as
of the close of business on February 28, 2001 will be entitled to be present and
to vote at the meeting. Each share is entitled to one vote on each matter to be
voted upon at the meeting. On February 28, 2001, there were 46,551,205 shares of
Common Stock outstanding and entitled to vote. The Corporation has no other
class of stock issued and outstanding at this time that is entitled to vote at
the meeting. The board of directors requests that you execute and return the
proxy promptly, whether or not you plan to attend the meeting. Instead of
returning signed proxy cards, shareholders of record can vote their shares over
the Internet, or by calling a specially designated telephone number. These
Internet and telephone voting procedures are designed to authenticate
shareholders' identities, allow shareholders to give their voting instructions
and confirm that shareholders' instructions have been recorded properly.
Specific instructions for shareholders of record that wish to use the Internet
or telephone voting procedures are included on the enclosed proxy card.
Shareholders who vote via the Internet or by telephone do not need to mail their
proxy cards. Any proxy may be revoked by the person giving it at any time before
it is exercised by giving written notice of such revocation to the secretary of
the Corporation, by executing a later dated proxy or by voting in person at the
annual meeting.
The shares represented by properly executed proxies will be voted in
accordance with the instructions provided therein and where no instructions are
given, will be voted in favor of the election of the Class III nominees
identified herein. For purposes of determining the number of votes cast with
respect to the election of directors, only those cast "for" are included.
Withheld votes are counted only for purposes of determining whether a quorum is
present at the annual meeting.
The costs of soliciting proxies will be borne by the Corporation. The
solicitation of proxies will be made primarily by mail. The Corporation has,
however, retained the firm of Georgeson Shareholder Communications, Inc.,
specialists in proxy solicitation, to solicit proxies on its behalf from
brokers, bank nominees, and other institutional holders of its stock at an
anticipated cost of $8,500 plus certain out-of-pocket expenses. Proxies may also
be solicited by directors, officers, and other employees of the Corporation and
its subsidiaries personally, and by telephone, facsimile, or other means. No
additional compensation will be paid to directors, officers, or employees for
any such solicitation nor is any such solicitation expected to result in more
than a minimal cost to the Corporation. Arrangements may also be made directly
by the Corporation with banks, brokerage houses, custodians, nominees, and
fiduciaries to forward solicitation material to the beneficial owners of stock
held of record by them and to obtain authorization for the execution of proxies.
The Corporation may reimburse such institutional holders for reasonable expenses
incurred by them in connection therewith.
The persons named in the proxy to represent shareholders who are present by
proxy at the meeting are Edward P. Abbott and Joseph P. Day.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below includes all of the shareholders of the Corporation known
by the Corporation to beneficially own more than five percent of its Common
Stock as of December 31, 2000.
COMMON STOCK
BENEFICIALLY
OWNED AS A
COMMON STOCK INVESTMENT POWER VOTING POWER PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIALLY ------------------------------- ------------------------------- OUTSTANDING
BENEFICIAL OWNER OWNED SOLE SHARED NONE SOLE SHARED NONE COMMON STOCK
Citizens Bank
328 S. Saginaw St
Flint, Michigan
48502(1) 3,767,008 1,023,907 692,391 2,050,710 1,608,474 91,701 2,066,833 8.10%
CenTra, Inc.
12225 Stephens
Warren, Michigan
48089(2) 3,305,691 3,193,025 112,666 -0- 3,193,025 112,666 -0- 7.11%
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(1) As sole or co-fiduciary, Citizens Bank, a wholly owned subsidiary of the
Corporation, will generally vote the shares held by it in trusts or estates
in which the indenture creating the same specifically grants such power.
Shares held in all other trusts or estates in which the bank acts as
co-fiduciary will generally be voted by the other co-fiduciary or by the
bank at the direction of such co-fiduciary.
(2) The information furnished for CenTra, Inc. is based upon data which have
been supplied to the Corporation by CenTra, Inc. As set forth in the table,
CenTra, Inc. shares investment and voting power with respect to 112,666
shares. Such powers are shared with the Manuel J. Moroun Trust under
agreement dated March 4, 1977, for the benefit of Manuel J. Moroun.
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SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the number of shares of the Corporation's
Common Stock beneficially owned as of December 31, 2000, together with the
percentage of the outstanding shares which such ownership represents, by (i)
each director and nominee for election to the board of directors, (ii) each
executive officer named in the Summary Compensation Table under "Executive
Compensation" and (iii) all directors and executive officers of the Corporation
as a group. The information with respect to directors and executive officers has
been obtained from the respective individuals and is reported in accordance with
the beneficial ownership rules of the Securities and Exchange Commission (the
"Commission") under which a person may be deemed to be the beneficial owner of a
security if such person has or shares voting power or investment power with
respect to such security or has the right to acquire such ownership within the
next 60 days. Accordingly, the amounts shown in the following table do not
purport to represent beneficial ownership for any purpose other than compliance
with the Commission's reporting requirements.
COMMON STOCK
BENEFICIALLY OWNED
COMMON STOCK AS A PERCENTAGE
BENEFICIALLY OF OUTSTANDING
OWNED AS OF SOLE SHARED COMMON STOCK AS
DECEMBER 31, VOTING AND VOTING AND OF DECEMBER 31,
NAME 2000 DISPOSITIVE POWER DISPOSITIVE POWER 2000
Edward P. Abbott(1) 25,152 25,011 141 *
Hugo E. Braun Jr.(1) 27,204 27,204 - *
Jonathan E. Burroughs
II(1,2) 310,472 266,384 44,088 *
Joseph P. Day(1) 11,765 8,265 3,500 *
Richard J. Dolinski 1,500 1,500 - *
John W. Ennest(3) 290,334 290,334 - *
Lawrence O. Erickson(1) 440,718 7,975 432,743 *
Ronald E. Fenton(4) 249,275 249,275 - *
Victor E. George(1) 14,407 14,407 - *
William J. Hank(1) 89,222 87,998 1,224 *
Gail E. Janssen(5) 118,946 118,946 - *
John W. Johnson(6) 39,788 17,207 22,581 *
Benjamin W. Laird 1,333 1,333 - *
Stephen J. Lazaroff(7) 36,502 32,928 3,574 *
William F. Nelson Jr.(1) 18,690 15,978 2,712 *
Robert C. Safford(8) 92,832 92,832 - *
Wayne G. Schaeffer(9) 163,936 114,913 49,023 *
William C. Shedd(1) 17,975 17,975 - *
James M. VanTiflin(10) 86,532 86,532 - *
Robert J. Vitito(11) 423,774 319,823 103,950 *
Ada C. Washington(7) 7,056 7,056 - *
Charles R. Weeks(12) 176,627 170,170 6,457 *
Kendall B. Williams(1) 10,346 9,308 1,038 *
James L. Wolohan(12,13) 26,691 15,000 11,691 *
All directors and
executive officers as
a group (30)(14) 3,194,628 2,460,284 734,344 6.87%
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* Represents holdings of less than one percent.
(1) Includes 7,500 exercisable options to purchase Common Stock.
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(2) The shares shown for Mr. Burroughs II, include 40,050 shares held in the
Burroughs' Memorial Trust, to which Mr. Burroughs II serves as one of 5
trustees. Mr. Burroughs II disclaims beneficial ownership of such shares.
(3) Includes 178,936 exercisable options to purchase Common Stock.
(4) Includes 3,234 exercisable options to purchase Common Stock.
(5) Includes 7,533 exercisable options to purchase Common Stock.
(6) Includes 7,842 exercisable options to purchase Common Stock.
(7) Includes 4,500 exercisable options to purchase Common Stock.
(8) Includes 10,170 exercisable options to purchase Common Stock.
(9) Includes 94,748 exercisable options to purchase Common Stock.
(10) Includes 68,769 exercisable options to purchase Common Stock.
(11) Includes 266,728 exercisable options to purchase Common Stock.
(12) Includes 6,000 exercisable options to purchase Common Stock.
(13) The shares shown for Mr. Wolohan include 11,691 shares held by the Wolohan
Family Foundation to which Mr. Wolohan serves as a trustee. Mr. Wolohan
disclaims beneficial ownership of such shares.
(14) The directors and executive officers disclaim beneficial ownership of
94,378 of these shares. Also, of the 3,194,628 shares shown as being
beneficially owned by such group, 1,103,099 represent exercisable options
to purchase Common Stock.
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ELECTION OF DIRECTORS
In accordance with the Corporation's restated articles of incorporation,
the board of directors is divided into three classes. Each year, on a rotating
basis, the terms of office of the directors in one of the three classes will
expire. Successors to the class of directors whose terms have expired will be
elected for a three-year term. The directors whose terms expire at the 2001
annual meeting of shareholders ("Class III directors") are Stephen J. Lazaroff,
William F. Nelson Jr., Robert C. Safford, William C. Shedd, Charles R. Weeks and
Kendall B. Williams. Messrs. Nelson and Safford will not stand for re-election
at this year's annual meeting of shareholders pursuant to the provisions of the
Corporation's Retirement Policy for Directors. The board of directors has
nominated Messrs. Lazaroff, Shedd, Weeks and Williams as well as Mr. Richard J.
Dolinski for election as Class III directors at the 2001 annual meeting of
shareholders. All of these individuals except for Mr. Dolinski have previously
been elected as directors by the shareholders. The term for the Class III
directors will expire at the 2004 annual meeting of shareholders or upon the
election and qualification of their successors. If any of the nominees should be
unable to serve, the proxies may be voted for the election of such other person
or persons as the board of directors may recommend or the number of directors
will be automatically reduced by the number of nominees unable to serve if no
substitute is recommended by the board of directors.
Five nominees will be elected as Class III directors at the 2001 annual
meeting of shareholders. On the basis of information presently available to the
board of directors, only the five persons named above as nominees will be
nominated for election as directors. PROXIES IN THE ACCOMPANYING FORM WILL BE
VOTED FOR THE ELECTION OF SUCH NOMINEES UNLESS A CONTRARY DIRECTION IS
INDICATED. The affirmative vote of a majority of the votes cast at the meeting
is required for election. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
FOR EACH OF THE NOMINEES.
The name and age of each nominee and incumbent director, positions and
offices currently held with the Corporation and its subsidiaries, his or her
five-year business experience, and the year each became a director of the
Corporation, according to information furnished by such nominees and incumbent
directors, are set forth below.
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CLASS III
NOMINEES TO SERVE THREE (3) YEARS
SERVED BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS,
POSITIONS AND OFFICES CONTINUOUSLY DIRECTORSHIPS IN CERTAIN CORPORATIONS, AND
WITH CORPORATION AS A DIRECTOR PRINCIPAL OCCUPATION IF OTHER THAN CURRENT
NAME AGE AND ITS SUBSIDIARIES OF CORPORATION POSITION WITH CORPORATION AND ITS SUBSIDIARIES
Richard J. Dolinski 60 Director of Citizens Bank. New Nominee President and Chief Executive Officer, Dolinski
Associates, Inc., a management consulting firm.
Stephen J. Lazaroff 47 Director of Corporation and 1997 President, Diversified Precision Products, Inc., a
Director of Citizens Bank. special cutting tool manufacturer serving the
automotive and hydraulic fittings industries.
William C. Shedd 61 Director of Corporation and 1982 Of counsel to the law firm of Winegarden, Shedd,
Director of Citizens Bank. Haley, Lindholm & Robertson. Previously an attorney
and partner with such firm.
Charles R. Weeks 66 Director of Corporation and 1982 Retired Chairman, President and Chief Executive
Director of Citizens Bank. Officer of the Corporation; Director, Wolohan
Lumber Co.
Kendall B. Williams 48 Director of Corporation and 1992 Attorney and Counselor, The Williams Firm, P.C.
Director of Citizens Bank. Previously an attorney with Gault Davison, P.C.
from January 1980 to September 1997.
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CLASS I(1)
CONTINUING DIRECTORS -- TERM EXPIRING IN 2002
SERVED BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS,
POSITIONS AND OFFICES CONTINUOUSLY DIRECTORSHIPS IN CERTAIN CORPORATIONS, AND
WITH CORPORATION AS A DIRECTOR PRINCIPAL OCCUPATION IF OTHER THAN CURRENT
NAME AGE AND ITS SUBSIDIARIES OF CORPORATION POSITION WITH CORPORATION AND ITS SUBSIDIARIES
Edward P. Abbott 61 Director of Corporation and 1982 President and Chief Executive Officer, Abbott's
Director of Citizens Bank. Meat, Inc., a wholesale and retail meat
distributor.
Hugo E. Braun Jr. 68 Director of Corporation and 1986 Attorney & Partner, Braun Kendrick Finkbeiner;
Director of Citizens Bank. Director, Wolohan Lumber Co.
Jonathan E. Burroughs II 58 Director of Corporation and 1986 President, JEB Enterprises, an investment
Director of Citizens Bank. consulting firm.
Lawrence O. Erickson 65 Director of Corporation and 1993 Chief Executive Officer, Four-Way Tool & Die,
Director of Citizens Bank. Inc., an engineering consulting firm for metal
stamping fabrication and tool manufacturing.
William J. Hank 68 Director of Corporation, 1987 Chairman and Chief Executive Officer, Farnham
Director of Citizens Bank and Investments Group; Retired Executive Vice
Director of Citizens President of the Corporation; Retired Chairman
Bank - Illinois, N.A. of the Board, Citizens Bank - Illinois, N.A.
Robert J. Vitito 58 Chairman of the Board, 1991
President, Chief Executive
Officer and Director of
Corporation and of Citizens
Bank.
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(1) Mr. Gail E. Janssen, a Class I Director of the Corporation, will be retiring
from the board of directors of the Corporation as of March 31, 2001 pursuant
to the provisions of the Corporation's Retirement Policy for Directors.
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CLASS II(2)
CONTINUING DIRECTORS -- TERM EXPIRING IN 2003
SERVED BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS,
POSITIONS AND OFFICES CONTINUOUSLY DIRECTORSHIPS IN CERTAIN CORPORATIONS, AND
WITH CORPORATION AS A DIRECTOR PRINCIPAL OCCUPATION IF OTHER THAN CURRENT
NAME AGE AND ITS SUBSIDIARIES OF CORPORATION POSITION WITH CORPORATION AND ITS SUBSIDIARIES
Joseph P. Day 61 Director of Corporation and 1992 President, Banner Engineering & Sales, Inc., a
Director of Citizens Bank. combustion engineering and manufacturing firm.
John W. Ennest 58 Vice Chairman of the Board 1991
and Chief Financial Officer
and Treasurer of
Corporation; Vice Chairman
of the Board and Chief
Financial Officer of
Citizens Bank.
Benjamin W. Laird 51 Director of Corporation, 2001 Attorney, Godfrey & Kahn, S.C.
Director of Citizens Bank
and Director of F&M
Bank - Wisconsin.
Ada C. Washington 50 Director of Corporation and 1997 Community volunteer.
Director of Citizens Bank.
James L. Wolohan 49 Director of Corporation and 1997 Chairman, President and Chief Executive Officer
Director of Citizens Bank. of Wolohan Lumber Co., a retailer of lumber,
building materials and home improvement
products; Director, Jacobson Stores, Inc.
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(2) Messrs. Ronald E. Fenton and Victor E. George, Class II Directors of the
Corporation, are retiring from the board of directors of the Corporation as
of March 31, 2001 pursuant to the provisions of the Corporation's Retirement
Policy for Directors.
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MEETINGS OF DIRECTORS
During 2000, eleven meetings of the board of directors of the Corporation
were held. During such period, all incumbent directors attended at least 75% of
the aggregate of the number of meetings of the board of directors and the number
of meetings held by the committees on which they serve.
COMMITTEES OF THE BOARD OF DIRECTORS
The Corporation has several committees on which members of the board of
directors serve, including a compensation and human resources committee, a
directors nominating committee, and an audit committee. The audit committee
meets quarterly and on call when needed, and the compensation and human
resources committee and directors nominating committee meet on call.
The COMPENSATION AND HUMAN RESOURCES COMMITTEE met 4 times during 2000 and
is currently comprised of the following directors: Hugo E. Braun Jr., chairman;
Lawrence O. Erickson; Victor E. George; Stephen J. Lazaroff; and Kendall B.
Williams. The responsibilities of the committee include approval of all aspects
of corporate executive compensation and administration of the Corporation's
compensation and benefits plans.
The DIRECTORS NOMINATING COMMITTEE met 1 time during 2000 and is currently
comprised of the following directors: Robert J. Vitito, chairman; Hugo E. Braun
Jr.; Jonathan E. Burroughs II; Victor E. George; and Stephen J. Lazaroff. The
responsibilities of the committee are: to determine a desirable balance of
expertise among board members; to identify qualified candidates to fill board
positions; to provide aid in attracting qualified candidates to the board of
directors; to recommend the slate of director nominees to the board of directors
for inclusion in the Corporation's proxy statement for election by the
shareholders at the annual meetings; to consider director nominees proposed by
shareholders; and to handle such other matters as may be properly delegated to
the committee by the board of directors. Shareholders proposing director
nominees at any annual meeting of shareholders must provide written notice of
such intention, along with certain information regarding the proponent and the
nominees as provided in the bylaws, to the secretary of the Corporation at least
90 days prior to an annual shareholders meeting for which such nominations are
proposed. If the annual meeting date has been advanced to a date earlier than
the last Thursday in January then notice of such intention must be given within
10 days after the first public disclosure of the date of the annual meeting.
With respect to an election to be held at a special meeting of shareholders,
such notice must be given by the close of business on the seventh day following
the date on which notice of such meeting is first given to shareholders.
The AUDIT COMMITTEE met 4 times during 2000 and is currently comprised of
the following directors: Edward P. Abbott, chairman; Joseph P. Day; William F.
Nelson Jr., Robert C. Safford and William C. Shedd. The responsibilities of the
committee are primarily to oversee the Corporation's financial reporting
process, and also include oversight of the internal accounting controls for and
internal audit function of the Corporation and its subsidiaries; recommending to
the board of directors the independent auditors to be retained to conduct the
annual audit of the Corporation; reviewing the annual audit plan with the
independent auditors and the internal auditors; oversight of the Corporation's
legal, compliance, and ethics policies; and reviewing the results of the
internal and independent audits of the Corporation.
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REPORT OF THE AUDIT COMMITTEE
In accordance with its written charter adopted by the board of directors,
which is attached as Appendix A to this proxy statement, the Audit Committee of
the board of directors (the "Committee") assists the board of directors in
fulfilling its responsibility for oversight of the quality and integrity of the
accounting, auditing and financial reporting practices of the Corporation. Each
Audit Committee member is "independent," as defined in Rule 4200(a)(14) of the
National Association of Securities Dealers' Listing Standards.
The Committee received from the independent auditors and reviewed a
statement describing all relationships between the auditors and the Corporation
that might bear on the auditors' independence, as required by Independence
Standards Board Standard No. 1, "Independence Discussions with Audit
Committees," discussed with the auditors any relationships that may impact their
objectivity and independence and satisfied itself as to the auditors'
independence.
The Committee discussed with the independent auditors the matters required
to be discussed by Statement on Auditing Standards No. 61, as amended,
"Communication with Audit Committees," and, with and without management present,
discussed and reviewed the results of the independent auditors' examination of
the financial statements. The Committee also discussed the results of the
internal audit examinations.
The Committee reviewed and discussed the audited financial statements of
the Corporation as of and for the year ended December 31, 2000, with management
and the independent auditors.
Based on the above-mentioned review and discussions with management and the
independent auditors, the Committee recommended to the board that the
Corporation's audited financial statements be included in its Annual Report on
Form 10-K for the year ended December 31, 2000 for filing with the Securities
and Exchange Commission. The Committee also recommended the reappointment of the
independent auditors and the board of directors concurred in such
recommendation.
Edward P. Abbott, Audit Committee Chairman
Joseph P. Day, Audit Committee Member
William F. Nelson Jr., Audit Committee Member
Robert C. Safford, Audit Committee Member
William C. Shedd, Audit Committee Member
COMPENSATION OF DIRECTORS
During 2000, directors of the Corporation were paid an annual retainer of
$12,000 plus the sum of $1,000 for attendance at each meeting of the board of
directors. Non-officer directors were paid $600 for each committee meeting
attended with the exception of the committee chairpersons who were paid $900.
Committee member directors who are also employees of the Corporation do not
receive fees for committee meeting attendance.
The Corporation also maintains the Stock Option Plan for Directors.
Annually during the ten year term of the Plan, each nonemployee director serving
on the board of directors immediately following the annual meeting of
shareholders will receive an automatic grant of a non-qualified stock option to
purchase 1,500 shares of Common Stock at an exercise price equal to the fair
market value per share of Common Stock on the date of the annual meeting of
shareholders. Each such option will become exercisable six months following the
grant date and expire five years after grant. On April 18, 2000, pursuant to the
Plan, nonemployee directors received a stock option grant to purchase 1,500
shares of Common Stock of the Corporation at an exercise price of $16.66 per
share.
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EXECUTIVE OFFICERS
The following information is provided for those officers currently
designated as executive officers by the Corporation's board of directors and
includes the president, chief financial officer, controller, and secretary of
the Corporation, officers of the Corporation who are in charge of principal
business units, divisions or functions, and officers of the Corporation or its
subsidiaries who perform significant policy making functions for the
Corporation.
YEAR BECAME
EXECUTIVE OFFICER
NAME AGE FIVE-YEAR BUSINESS EXPERIENCE OF THE CORPORATION
Richard T. Albee 57 Executive Vice President of Corporation (April 1999 1996
to present); Executive Vice President of Citizens
Bank (December 1997 to present); Senior Vice
President of Citizens Bank (April 1994 to December
1997).
Daniel E. Bekemeier 44 Senior Vice President and Controller of Citizens Bank 1996
(April 1995 to present).
Nicholas J. Cilfone 50 Executive Vice President of Corporation (April 1999 1985
to present); Senior Vice President of Corporation
(August 1988 to April 1999); Executive Vice President
of Citizens Bank (June 1996 to present). Also served
as Executive Vice President of former subsidiary bank
of the Corporation which was consolidated with
Citizens Bank (October 1991 to June 1996).
Gary P. Drainville 51 Executive Vice President of Corporation and of 1985
Citizens Bank (December 1993 to present); Director of
Human Resources of Corporation and of Citizens Bank
(December 1985 - June 1996).
John W. Ennest 58 Vice Chairman of the Board of Corporation (October 1983
1991 to present); Chief Financial Officer and
Treasurer of Corporation (July 1994 to present); Vice
Chairman of the Board and Chief Financial Officer of
Citizens Bank (June 1996 to present) Chairman of the
Board, Citizens Bank - Illinois, N.A. (August 1992 to
May 1999).
Thomas W. Gallagher 48 Senior Vice President of Corporation (July 1993 to 1989
present); General Counsel of Corporation (August 1988
to present); Secretary of Corporation (January 1989
to present); Senior Vice President, General Counsel
and Secretary of Citizens Bank (August 1988 to
present).
John W. Johnson 46 President of F&M Bank - Wisconsin (January 2000 to 1999
present); Chief Executive Officer and President F&M
Bancorporation, Inc. (November 1997 to December
1999); Vice President F&M Bancorporation, Inc. (July
1994 to July 1997); President and Director F&M
Bank - Northeast (March 1994 to July 1997).
Wayne G. Schaeffer 54 Executive Vice President of Corporation (December 1987
1993 to present); President - Southeast Region,
Citizens Bank (June 1996 to present); Senior
Executive Vice President and Chief Operating Officer,
Citizens Bank (July 1994 to June 1996).
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YEAR BECAME
EXECUTIVE OFFICER
NAME AGE FIVE-YEAR BUSINESS EXPERIENCE OF THE CORPORATION
Thomas C. Shafer 42 Executive Vice President of Corporation (April 1999 1996
to present); Executive Vice President of Citizens
Bank (June 1996 to present); Senior Vice President of
Citizens Bank (November 1994 to June 1996).
James M. VanTiflin 53 Executive Vice of Corporation (April 1999 to 1996
present); President - Mid Michigan Region, Citizens
Bank (June 1996 to present); President and Chief
Executive Officer of former subsidiary bank of the
Corporation which was consolidated with Citizens Bank
(February 1995 to June 1996).
Robert J. Vitito 58 Chairman of the Board of Corporation (April 1999 to 1986
present); President and Chief Executive Officer of
Corporation (April 1996 to present); President and
Chief Administrative Officer of Corporation (July
1994 to April 1996); Chairman, President and Chief
Executive Officer of Citizens Bank (May 1996 to
present); also served as Chairman of the Board of
former subsidiary bank of the Corporation which was
consolidated with Citizens Bank (January 1987 to June
1996).
Jack S. Werner 53 Executive Vice President of Corporation (April 1999 1996
to present); President - Northern Region, Citizens
Bank (June 1996 to present). Also served as Chairman
and Chief Executive Officer of former subsidiary bank
of the Corporation which was consolidated with
Citizens Bank (May 1991 to June 1996).
Citizens Bank, Citizens Bank - Illinois, N.A. and F&M Bank - Wisconsin are
wholly owned subsidiaries of the Corporation.
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EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid or accrued by the Corporation and its subsidiaries, to or on
behalf of the Corporation's Chief Executive Officer and each of the four other
most highly compensated executive officers during 2000 (the "Named Officers") of
the Corporation (determined as of the end of the last fiscal year) for the
fiscal years ended December 31, 1998, 1999, and 2000:
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------
NAME AND PRINCIPAL OPTIONS/ ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) SARS (#) COMPENSATION(1)($)
- ------------------------------------------------------------------------------------------------------
Robert J. Vitito 2000 489,999 52,376 114,000 32,580
Chairman, President and 1999 425,046 -0- 80,000 26,126
Chief Executive Officer 1998 339,999 213,197 62,000 25,950
- ------------------------------------------------------------------------------------------------------
John W. Ennest 2000 281,036 19,491 32,000 32,580
Vice Chairman, Treasurer 1999 272,850 53,195 23,000 26,247
and Chief Financial Officer 1998 262,850 79,879 20,500 25,950
- ------------------------------------------------------------------------------------------------------
John W. Johnson(2) 2000 265,865 10,000 30,000 8,685
President, F&M Bank - Wisconsin
- ------------------------------------------------------------------------------------------------------
Wayne G. Schaeffer 2000 187,078 14,413 30,000 8,253
Executive Vice President 1999 176,073 39,337 22,000 8,050
1998 166,500 64,978 17,700 8,165
- ------------------------------------------------------------------------------------------------------
James M. VanTiflin 2000 172,937 12,436 26,000 8,214
Executive Vice President 1999 162,383 42,428 18,500 7,989
1998 153,554 50,969 12,700 7,030
- ------------------------------------------------------------------------------------------------------
(1) The amounts set forth in the "All Other Compensation" column for 2000
represent: (i) matching contributions on behalf of each of the Named
Officers to the Corporation's Section 401(k) Plan in the amount of $7,875;
(ii) insurance payments with respect to term life insurance as follows: Mr.
Vitito $1,805, Mr. Ennest $1,805, Mr. Johnson $810, Mr. Schaeffer $378 and
Mr. VanTiflin $339; and (iii) director fees in the amount of $22,900 paid to
each of Messrs. Vitito and Ennest for services as a director of the
Corporation.
(2 )Mr. Johnson became an executive officer of the Corporation in January 2000.
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STOCK OPTION GRANTS
The following table contains information concerning the grant of stock
options under the Corporation's Third Amended Stock Option Plan (the "Option
Plan") to the Named Officers during 2000.
- ----------------------------------------------------------------------------------------------------------------
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- ----------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE
- ----------------------------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATE OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(2)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ----------------------------------------------------------------------------------------------------------------
R.J. Vitito 114,000 9.51% 16.66 5/18/10 1,194,422 3,026,899
J.W. Ennest 32,000 2.67% 16.66 5/18/10 335,276 849,656
J.W. Johnson 30,000 2.50% 16.66 5/18/10 314,322 796,552
W.G. Schaeffer 30,000 2.50% 16.66 5/18/10 314,322 796,552
J.M. VanTiflin 26,000 2.17% 16.66 5/18/10 272,412 690,345
- ----------------------------------------------------------------------------------------------------------------
(1) These stock options are non-qualified stock options granted pursuant to the
Option Plan. The options are exercisable in whole or in part during the term
thereof once vested, beginning November 18, 2000. Generally, such options
will become 100% vested after 5 years from the date of grant, but may vest
earlier on a graduated basis in accordance with a pre-determined option
vesting schedule. Such vesting schedule is based upon a rolling four quarter
diluted earnings per share ("EPS") target for the Corporation (excluding
extraordinary gains and losses) with a minimum vesting of 9% upon the
Corporation's achieving EPS of $2.15 and 100% vesting upon achieving EPS of
$2.65. In the event of a change in control of the Corporation, the options
will immediately become exercisable in full.
(2) Such "potential realizable values" represent the value of such options at
the end of their term, assuming a 5% and 10% appreciation in the price of
the Common Stock compounded annually over the term without discounting for
inflation. The actual value of such options is dependent upon actual
appreciation in the market price of the Common Stock during the term of the
options.
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OPTION/SAR EXERCISES AND HOLDINGS
The following table provides information, with respect to the Named
Officers, about the exercise of options and/or SARs during the last fiscal year,
and the unexercised options and SARs held as of the end of the fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
- ----------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES FISCAL YEAR END (#) FISCAL YEAR END ($)(1)
ACQUIRED ON VALUE --------------------------- ----------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------------------------------------------------------
R.J. Vitito 34,782 441,987 266,728 207,880 1,917,246 1,385,607
J.W. Ennest 13,482 146,898 178,936 60,290 1,757,829 388,942
J.W. Johnson 2,898 41,858 7,842 29,400 39,493 364,634
W.G. Schaeffer -0- -0- 94,748 56,156 709,878 364,634
J.M. VanTiflin -0- -0- 68,769 46,931 641,203 316,016
- ----------------------------------------------------------------------------------------------------------
(1) The value set forth in the table was calculated by subtracting the exercise
price of the options from the closing price of the Common Stock at year end
and then multiplying the difference by the number of shares subject to such
options.
PENSION PLANS
The following table shows the estimated annual pension benefits payable to
the Named Officers at normal retirement age(1) under the Corporation's qualified
defined benefit pension plan, based on remuneration that is covered under the
plan and years of service with the Corporation and its subsidiaries.(2)
PENSION PLAN TABLE
- -----------------------------------------------------------------------
YEARS OF CREDITED SERVICE
-----------------------------------------------------
REMUNERATION(3) 15 20 25 30 35
- -----------------------------------------------------------------------
$125,000 $29,000 $39,000 $49,000 $59,000 $ 69,000
150,000 36,000 48,000 60,000 72,000 84,000
175,000 43,000 57,000 71,000 86,000 100,000
200,000 50,000 66,000 83,000 99,000 116,000
- -----------------------------------------------------------------------
(1) Normal retirement age for the Named Officers is age 65.
(2) Mr. Johnson does not participate in the Plan. He participates in the
Corporation's Cash Balance Pension Plan discussed below.
(3) The law in effect throughout calendar year 2000 limits remuneration
considered for benefit purposes to $170,000. Messrs. Vitito and Ennest have
supplemental plans that pay benefits based upon earnings in excess of the
pension plan limitations, which plans are described below.
A participant's remuneration covered by the Corporation's pension plan is
his or her "average monthly compensation," which is computed over the 60
consecutive months of the participant's last 120 months in which he or she
received the greatest compensation, multiplied by 12 months. For this purpose,
compensation is defined as the participant's base salary, exclusive of bonuses,
overtime, and
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fringe benefits, but includes the participant's 401(k) salary reduction
contributions. Covered remuneration for the Named Executives who participate in
the Corporation's pension plan as of the end of the last calendar year is
$170,000 for Messrs. Vitito and Ennest, $158,295 for Mr. Schaeffer, and $154,546
for Mr. VanTiflin. The estimated credited years of service for each named
executive are as follows: Mr. Vitito, 33; Mr. Ennest, 18; Mr. Schaeffer, 17; and
Mr. VanTiflin, 26. Benefits are computed as a straight single life annuity
beginning at normal retirement age and are not subject to offset for social
security or other benefits.
Mr. Johnson (a former F&M Bancorporation employee) participates in the Cash
Balance Pension Plan. Benefits are computed as a lump sum amount payable at
retirement, although a participant may elect to have the lump sum converted into
lifetime annuity payments under actuarial assumptions specified by the plan.
There is no offset for social security or other benefits. The lump sum amount is
based on a bookkeeping account maintained under the plan in the participant's
name that is credited each year with 4% of a participant's compensation earned
for that year. The cumulative account is also credited annually with assumed
earnings at the 30-year U.S. Treasury bond rate in effect for November of the
previous year. For purposes of the plan, compensation is defined as a
participant's base salary from the Corporation, plus bonuses, overtime and
taxable fringe benefits. A participant's 401(k) salary reduction contributions
also are included. However, the plan does not consider annual compensation in
excess of the federal tax law limit for plan purposes, which is $170,000 for
2000. Mr. Johnson's compensation for plan purposes as of the end of 2000 is
$170,000. His estimated lump sum benefit at normal retirement age of 65, based
on projected future earnings and the applicable Treasury rate, is $305,604,
which he could elect to convert to an annual annuity for life of $29,040.
The Corporation has an agreement with Mr. Vitito and Mr. Ennest which
provides that they shall be entitled to receive a retirement benefit at age 65
equal to 60%, and 50%, respectively, of their average annual base salary and
bonus over the consecutive 36-month period in which they received the highest
compensation during their final 60 months of employment with appropriate
percentage reductions in the event of retirement before age 65. That portion of
the retirement benefit not covered by the Corporation's pension plan and social
security is covered by a supplemental retirement benefits plan. Under the
combined plans, the estimated annual benefits payable to Mr. Vitito and Mr.
Ennest upon retirement at age 65 would be approximately $449,000 and $236,000,
respectively.
CHANGE IN CONTROL AGREEMENTS
The Corporation has entered into change in control agreements with each of
the Named Officers. Each agreement provides severance benefits to the Named
Officer if there is a change in control of the Corporation and the Named
Officer's employment with the Corporation is actually or constructively
terminated at any time within 3 months prior to or on the date of such change in
control, or within twenty-four (24) months thereafter. A "change in control" of
the Corporation is generally defined as the acquisition by any person or group
of 20% or more of the outstanding Common Stock in a transaction which has not
been approved by a majority of the board of directors, a liquidation or
dissolution of the Corporation, a sale of substantially all of the assets of the
Corporation, a merger, consolidation or combination in which the shareholders of
the Corporation immediately before such a transaction do not continue to control
more than 65% of the voting power of the resulting entity or, under certain
circumstances, a change in the majority of the members of the board of directors
within a two-year period. A Named Officer's employment is deemed to have been
constructively terminated following a change in control if (i) there is a
significant reduction in the scope of the Named Officer's authority or in the
extent of such Officer's powers, functions, duties or responsibilities, (ii)
there is a reduction in the Named Officer's rate of compensation, (iii) fringe
benefits are not provided to such Named Officer on a basis commensurate with
other executives of the Corporation, or (iv) there are changes in the Named
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Officer's responsibilities which would require moving such Officer's job
location outside of lower Michigan.
Each Agreement continues until two years after a change in control of the
Corporation and generally provides severance benefits of a lump-sum payment
equal to three years salary and bonus plus medical, dental and life insurance
coverage for a period of three years. Further, each Agreement provides for
additional payments to make the Named Officer whole, on an after-tax basis, for
any excise tax imposed by Section 4999 of the Internal Revenue Code. Any Named
Officer whose employment is terminated and who thereafter receives the benefits
provided under such change in control agreement may not, for a period of
twenty-four months following termination of employment, accept employment,
consult for or otherwise assist any other financial institution which conducts
business from a location within fifty (50) miles of any location of the
Corporation or its subsidiary banks.
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COMPENSATION AND HUMAN RESOURCES COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The compensation and human resources committee of the board of directors of
the Corporation consists of five directors who are not employed by the
Corporation and are not eligible to participate in any of the Corporation's
benefit plans other than the Stock Option Plan for Directors. The following
report is submitted by the Committee.
OVERVIEW AND PHILOSOPHY
The Committee, pursuant to authority delegated by the board of directors of
the Corporation, is responsible for determining and implementing compensation
and benefit systems for executive officers and other employees of the
Corporation. The Committee determines the annual salaries and other compensation
for executive officers based upon recommendations from the Corporation's
chairman, president and chief executive officer, as well as information from the
Corporation's human resources department and independent outside consultants.
With respect to the compensation of the Corporation's chairman, president and
chief executive officer, in addition to the utilization of the Corporation's
human resources department and independent outside consultants, the members of
the board of directors also provide input and recommendations. The Committee's
determinations relating to executive compensation are intended to:
- align the financial interests of the executive officers with the
long-term interests of the Corporation's shareholders;
- attract and retain high performing executive officers to lead the
Corporation to greater levels of profitability; and
- motivate executive officers to attain the Corporation's performance
goals by placing a significant portion of such officers' financial
reward at risk relative to achievement of Corporate goals.
In furtherance of these objectives, the compensation package structured for
the Corporation's executive officers has three primary components: base
compensation (including salary, pension and welfare benefits and perquisites),
annual cash bonus awards, which may be made under the Management Incentive Plan
("MIP") or otherwise, for performance during the year, and long term, stock-
based compensation generally awarded under the Corporation's Third Amended Stock
Option Plan (the "Option Plan").
BASE COMPENSATION
Given the Committee's continuing emphasis on performance-based long-term
and short-term compensation, base compensation for executive officers has been
established by the Committee at competitive levels based upon information
available to the Committee relating to compensation for corresponding executive
positions at similarly situated financial institutions, some of which are
included in the 50 Bank Index shown in the Shareholder Return Graph. Executive
officer salaries are evaluated by the Committee on a periodic basis utilizing
information from independent outside compensation consultants, the Corporation's
human resources department and the Corporation's chairman, president and chief
executive officer. Input from the members of the Corporation's board of
directors is utilized with respect to the salary of the chairman, president and
chief executive officer. To determine the actual base salary for each executive
officer, the Committee also takes into account individual performance,
experience, and unique contributions or needs for certain expertise required by
the Corporation.
Base Compensation of Chief Executive Officer. The Committee reviewed Mr.
Vitito's performance for 1999 in December of that year and awarded him an 8.89%
merit increase effective January 1,
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2000. In support of such increase, the Committee first noted that the
Corporation had achieved record earnings in 1999 while continuing to maintain
strong credit quality. Secondly, the Committee noted the Corporation's
successful acquisition of F&M Bancorporation, Inc. and its bank and nonbank
subsidiaries located in the states of Wisconsin, Iowa and Minnesota. With
respect to such accomplishment, the Committee noted that the acquisition was the
largest and most complex acquisition that the Corporation has ever undertaken
and that such acquisition, along with the subsequent consolidations that took
place during the year of the various F&M Banks within each of the three states,
was completed in a timely and efficient manner. Thirdly, the Committee noted the
measurable progress that was made during the year with respect to sales of bank
products which resulted from coaching and assessment and deployment techniques
instituted by Mr. Vitito throughout the Corporation's Banks. Finally, in support
of Mr. Vitito's increase in base compensation the Committee noted Mr. Vitito's
management and oversight concerning the measures that were taken relative to the
Year 2000 computer and operating systems issues and the exceptional results
experienced by the Corporation.
BONUS COMPENSATION
All of the Corporation's executive officers participate in the MIP. The MIP
is designed to motivate participating officers of the Corporation and its
subsidiaries to achieve strategic goals; to strengthen links between pay and
performance; and to align management more closely with the shareholders. The
amount of an individual's MIP award is a function of (i) the midpoint of the
salary range for the individual's position, (ii) the "participation rate"
established by the Committee for the individual (15% for lower level executive
officers to 45% for the Chief Executive Officer), (iii) the performance of the
Corporation, and (iv) the extent to which the individual achieved agreed-upon
objectives for the year. As a general practice under the MIP, no amounts will be
awarded unless the Corporation's earnings per share ("EPS") for the year equals
or exceeds 100% of the EPS target approved by the Corporation's board of
directors for that year. For 2000, the Corporation's EPS was below the 2000
profit plan and therefore no incentive awards were paid pursuant to the
provisions of the MIP. The Committee did, however, award certain significantly
smaller bonuses outside the MIP to individuals, including the Named Officers,
who contributed significantly to the Corporation in terms of the conversion
successes with the F&M banks, earnings performance during the year and in other
significant initiatives.
Chief Executive Officer Award. Inasmuch as the Corporation did not achieve
its profit plan target, Mr. Vitito did not receive an incentive award under the
MIP. The Committee did, however, award a bonus outside the MIP to Mr. Vitito in
the amount of $52,376 in recognition of his extraordinary effort and significant
contribution to the management and oversight of the conversions of the various
operating systems of F&M during 2000. The Committee noted that, during the year,
a total of 23 F&M Banks were converted onto the Corporation's operating systems
and that the management and employees of the F&M Banks were trained on such
systems and in offering Bank products reflective of the corporate standard.
Moreover, the Committee noted that, during 2000, significant progress was made
under Mr. Vitito's direction to unify the culture of F&M with that of the
Corporation by redefining jobs at the F&M Banks and by evaluating and
standardizing salary ranges and certain key employee fringe benefits.
LONG-TERM STOCK-BASED COMPENSATION
The Option Plan provides for a variety of different types of compensation
arrangements, such as stock options, restricted stock, and stock appreciation
rights, which increase in value as the value of the Common Stock increases. The
purpose of these and similar long-term compensation arrangements is to more
closely align the financial interests of executive officers and other key
employees with the
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long-term interests of the Corporation's shareholders by linking a significant
portion of their compensation directly to stock price growth or decline.
In furtherance of such purpose, the Committee generally makes annual grants
to executive officers of stock options with an exercise price equal to the fair
market value of the Common Stock on the date of grant. Such options vest and
generally become exercisable as the Corporation's EPS increases in accordance
with a vesting schedule pertaining to such option grants. The Committee has
adopted option grant guidelines to reflect competitive practices of other
similarly situated financial institutions. These guidelines, implemented by the
Committee with the assistance of the Corporation's outside compensation
consultants, employ a modified Black-Scholes option valuation model to estimate
the present value of long-term incentive compensation for corresponding
executive positions at similarly situated and performing financial institutions.
A similar analysis is performed to determine the comparative value of an option
to be awarded under the Option Plan. Based upon this information and other
information concerning compensation practices within the financial services
industry, an appropriate participation rate for each of the executive officers
in the Plan is assigned. The option grant size for each executive officer is
then determined by dividing the product of the position's salary mid-point and
participation rate by the current market price of Common Stock, subject to being
increased or decreased by the Committee based upon its evaluation of the
officer's individual performance.
Chief Executive Officer Long Term Compensation. Mr. Vitito received an
option grant from the Committee in the amount of 114,000 shares during 2000 in
accordance with the formula described above.
Deductibility of Executive Compensation. Section 162(m) of the Internal
Revenue Code of 1986, as amended, restricts the deductibility of executive
compensation paid to the Corporation's Chief Executive Officer and any of the
four other most highly compensated executive officers at the end of any fiscal
year to not more than $1,000,000 in annual compensation (including gain from the
exercise of certain stock option grants). Certain performance-based compensation
is exempt from this limitation if it complies with the various conditions
described in Section 162(m). The Option Plan contains a restriction on the
number of options that may be granted which is intended to cause compensation
realized in connection with the exercise of options granted under the Option
Plan to comply with these conditions and be exempt from the Section 162(m)
restriction on deductibility.
The Committee does not believe that other components of the Corporation's
compensation program are likely to result in payments to any executive officer
in any year which would be subject to the restriction on deductibility and has
concluded that no further action with respect to qualifying such compensation
for deductibility is necessary at this time. The Committee intends to continue
to evaluate from time to time the advisability of qualifying future executive
compensation programs for exemption from the Section 162(m) restriction on
deductibility.
HUGO E. BRAUN JR. VICTOR E. GEORGE
LAWRENCE O. ERICKSON STEPHEN J. LAZAROFF
KENDALL B. WILLIAMS
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SHAREHOLDER RETURN
Set forth below is a graph which summarizes the cumulative return
experienced by the Corporation's shareholders over the past five years compared
with the S&P 500 Index and the Keefe, Bruyette & Woods, Inc. 50 Bank Index. Such
presentation assumes that the value of the investment in the Corporation's
Common Stock and each index was $100 on December 31, 1995 and that all dividends
were reinvested.
Cumulative Total Returns
Five Years Ended December 31, 2000
Value at Year End
[LINE GRAPH]
- -----------------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
- -----------------------------------------------------------------------------------------------------------------------------
Citizens $100 $110 $185 $185 $127 $173
KBW 50 $100 $141 $207 $224 $216 $260
S&P 500 $100 $123 $164 $211 $255 $232
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COMPENSATION COMMITTEE INTERLOCKS AND
CERTAIN TRANSACTIONS AND RELATIONSHIPS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Hugo E. Braun Jr., Lawrence O. Erickson, Victor E. George, Stephen
J. Lazaroff, and Kendall B. Williams served on the compensation and human
resources committee of the board of directors of the Corporation throughout the
last completed fiscal year. None of these individuals are or have been employees
of the Corporation.
Committee member Braun is a partner in the law firm of Braun Kendrick
Finkbeiner which rendered legal services during 2000 to the Corporation's
Michigan banking subsidiary, Citizens Bank. Citizens Bank plans to employ this
firm for additional services in 2001.
Committee member George is the owner of Victor George Oldsmobile, Inc.
During 2000 the Corporation paid to this dealership in the aggregate, $61,138
for the purchase of three new vehicles and for certain maintenance on other
vehicles owned by the Corporation.
OTHER TRANSACTIONS WITH OFFICERS AND DIRECTORS
During 2000 the banking subsidiaries of the Corporation had, and expect to
have in the future, banking transactions, in the ordinary course of business,
with directors, officers and their associates. Except as set forth below, these
transactions were made on substantially the same terms, including interest rate
charges and collateral requirements, as comparable transactions made with
unrelated parties prevailing at the time of such transactions and did not
involve more than the normal risk of collectability or present other unfavorable
features.
In connection with its acquisition of F&M Bancorporation, Inc. ("F&M"), the
Corporation assumed certain obligations of F&M relative to F&M's Officers' Stock
Purchase Plan (the "F&M Purchase Plan"). To facilitate stock ownership by
management, the F&M Purchase Plan included provisions which permitted F&M to
make loans for the purchase of shares of F&M common stock. Such loans were
secured by shares of F&M common stock with a market value equal to at least 110%
of the loan at the date of the loan and for a term of either three or five
years, as selected by the executive. The F&M Purchase Plan was terminated
effective December 31, 2000. No new loans were made under the F&M Purchase Plan
during 2000 and no renewals of existing loans have been made with a maturity
date beyond December 31, 2000. Loans totaling in excess of $60,000 to persons
who are directors or executive officers of the Corporation were outstanding
under the F&M Purchase Plan as of December 31, 2000 as follows:
- -----------------------------------------------------------------------------------------------------
NAME HIGHEST BALANCE(1) INTEREST RATE MATURITY
- -----------------------------------------------------------------------------------------------------
Gail E. Janssen $ 51,000 5.49% 02/02/01
Director $369,627 5.58% 04/29/03
- ----------------------------------------------------
John W. Johnson $ 18,000 4.81% 05/20/02
President - F&M Bank - Wisconsin $ 35,564 5.32% 08/13/02
$ 11,595 5.45% 08/04/03
$ 10,545 5.03% 10/19/03
$ 17,575 4.74% 03/29/04
- ----------------------------------------------------
(1) Highest balance since January 1, 2000 and, except for Mr. Janssen's $51,000
loan which was paid off at maturity, also represents the balance as of
February 28, 2001.
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During 2000, the firm of Winegarden, Shedd, Haley, Lindholm & Robertson, of
which director William C. Shedd served of counsel, rendered legal services to
Citizens Bank. Citizens Bank expects to employ this firm for additional services
in 2001.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Corporation's
directors, executive officers and any persons holding more than 10% of the
Common Stock (collectively, the "Reporting Persons") are required to report
their ownership of the Common Stock and any changes in that ownership to the
Commission. Specific due dates for these reports have been established and
pursuant to applicable rules, the Corporation is required to report in its proxy
statement any failure to file by these due dates. Based on certifications
received from the Reporting Persons and on copies of the reports that such
persons have filed with the Commission, all required reports of Reporting
Persons have been timely filed with the Commission.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
GENERAL
In 2000, Ernst & Young LLP performed audit and audit related services for
the Corporation and its subsidiaries which included examination of the
consolidated financial statements of the Corporation, and consultation with the
Corporation and its subsidiaries on accounting and reporting matters. Upon
recommendation of the audit committee, the board of directors has again selected
Ernst & Young LLP as independent auditors for 2001. Representatives of Ernst &
Young LLP will attend the annual meeting, will have an opportunity to make a
statement and will be available to answer questions that may be asked by
shareholders.
FEES
AUDIT FEES. Ernst & Young LLP billed the Corporation a total of $417,000
for professional services in connection with the audit of the 2000 financial
statements and review of the quarterly financial statements during the year.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES. Ernst &
Young LLP was not engaged and did not bill the Corporation for operating,
designing or supervising the Corporation's computer, financial or information
systems during 2000.
ALL OTHER FEES. Ernst & Young LLP billed the Corporation a total of
$1,558,000 for other services rendered during 2000. Substantially all of these
fees related to consultation for accounting, auditing and tax services as well
as the outsourcing of certain financial and credit audit procedures. The Audit
Committee does not consider the provision of the services described above by
Ernst & Young LLP to be incompatible with the maintenance of Ernst & Young LLP's
independence.
SHAREHOLDER PROPOSALS
Any proposal by a shareholder of the Corporation to be considered for
inclusion in the proxy statement for the 2002 annual meeting must be received by
Thomas W. Gallagher, the secretary of the Corporation, by the close of business
on November 15, 2001. In addition to applicable rules of the Commission for
inclusion of shareholder proposals in the Corporation's proxy statement, the
Corporation's bylaws provide that, in order for a shareholder proposal to be
properly brought before the annual meeting, written notice of such proposal must
be given by the shareholder to the secretary of the
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Corporation, either by personal delivery or by United States mail, postage
prepaid, not later than 90 days in advance of such meeting. If the annual
meeting date has been advanced to a date earlier than the last Thursday in
January, then in order to be brought properly before the annual meeting, notice
of such proposal must be given within 10 days after the first public disclosure
of the date of such meeting in accordance with the procedures set forth in the
Corporation's bylaws. The Corporation also expects the persons named as proxies
for the 2002 annual meeting of shareholders to use their discretionary voting
authority, to the extent permitted by law, with respect to any proposal
presented at that meeting by a shareholder who does not provide the Corporation
with written notice of such proposal during the period provided in the
Corporation's bylaws.
ANNUAL REPORT
Appendix B to this proxy statement contains the information required to be
included in an annual report pursuant to the rules of the Commission, including
audited financial statements, management's discussion and analysis of financial
condition, and results of operations and five year selected financial data. Upon
request, the Corporation will provide without charge a copy of its annual report
on Form 10-K.
OTHER MATTERS
The board of directors is not aware of any other matters which may come
before the meeting. However, should any such matters properly come before the
meeting, it is the intention of the persons named in the accompanying proxy to
vote in accordance with their judgment on such matters.
CITIZENS BANKING CORPORATION
/s/ Thomas W. Gallagher
Thomas W. Gallagher
Senior Vice President, General
Counsel and Secretary
Flint, Michigan
March 15, 2001
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Appendix A
CITIZEN BANKING CORPORATION AUDIT COMMITTEE CHARTER
Organization
This charter governs the operations of the audit committee. The committee shall
review and reassess the charter at least annually and obtain the approval of the
board of directors. The committee shall be appointed by the board of directors
and shall be comprised of at least three directors, each of whom are independent
of management and the Corporation. Members of the committee shall be considered
independent if they have no relationship that may interfere with the exercise of
their independence from management and the Corporation. All committee members
shall be financially literate, and at least one member shall have accounting or
related financial management expertise.
Statement of Policy
The audit committee shall provide assistance to the board of directors in
fulfilling their oversight responsibility to the shareholders, potential
shareholders, the investment community, regulatory agencies and others relating
to the Corporation's financial statements and the financial reporting process,
the systems of internal accounting and financial controls, the internal audit
function, the annual independent audit of the Corporation's financial
statements, and the legal, compliance and ethics programs as established by
management and the board of directors. In so doing, it is the responsibility of
the committee to maintain free and open communication between the committee,
independent auditors, the internal auditors and management of the Corporation.
In discharging its oversight role, the committee is empowered to investigate any
matter brought to its attention with full access to all books, records,
facilities, and personnel of the Corporation and the power to retain outside
counsel, or other experts for this purpose.
Responsibilities and Processes
The primary responsibility of the audit committee is to oversee the
Corporation's financial reporting process on behalf of the board of directors
and report the results of their activities to the board of directors. Management
is responsible for preparing the Corporation's financial statements, and the
independent auditors are responsible for auditing those financial statements.
The committee in carrying out its responsibilities believes its policies and
procedures should remain flexible, in order to best react to changing conditions
and circumstances. The committee should take the appropriate actions to set the
overall corporate tone for quality financial reporting, sound business risk
practices, and ethical behavior.
The following shall be the principal recurring processes of the audit committee
in carrying out its oversight responsibilities. The processes are set forth as a
guide with the understanding that the committee may supplement them as
appropriate.
- - The committee shall have a clear understanding with management and the
independent auditors that the independent auditors are ultimately accountable
to the board of directors and the audit committee, as representatives of the
Corporation's shareholders. The committee shall have the ultimate authority
and responsibility to evaluate and, where appropriate, replace the
independent auditors. The committee shall discuss with the auditors their
independence from management and the Corporation and the matters included in
the written disclosures required by the Independence Standards Board.
Annually, the committee shall review and recommend to the board the selection
of the Corporation's independent auditors.
A-1
28
- - The committee shall discuss with the internal auditors and the independent
auditors the overall scope and plans for their respective audits including
the adequacy of staffing and compensation. Also, the committee shall discuss
with management, the internal auditors, and the independent auditors the
adequacy and effectiveness of the accounting and financial controls,
including the Corporation's system to monitor and manage business risk, and
legal and ethical compliance programs. Further, the committee shall meet
separately with the internal auditors and the independent auditors, with and
without management present, to discuss the results of their examinations.
- - The committee shall discuss the results of the independent auditors review of
the Corporation's Quarterly Report on Form 10-Q and any other matters
required to be communicated to the committee by the independent auditors
under generally accepted auditing standards. The chair of the committee may
represent the entire committee for the purposes of this review.
- - The committee shall review with management and the independent auditors the
financial statements to be included in the Corporation's Annual Report on
Form 10-K (or the annual report to shareholders if distributed prior to the
filing of Form 10-K), including their judgment about the quality, not just
the acceptability, of accounting principles, the reasonableness of
significant judgments, and the clarity of the disclosures in the financial
statements. Also, the committee shall discuss the results of the annual audit
and any other matters required to be communicated to the committee by the
independent auditors under generally accepted auditing standards.
A-2
29
Appendix B
CITIZENS BANKING CORPORATION
ANNUAL REPORT INFORMATION
30
TABLE OF CONTENTS
I. Financial Review including
Management's Discussion and Analysis......................................... 3
Five-Year Summary of Selected Financial Data.............................. 3
Mergers, Acquisitions and Other Initiatives............................... 4
Financial Highlights...................................................... 5
Lines of Business Reporting............................................... 5
Net Interest Income....................................................... 6
Provision and Allowance for Loan Losses................................... 9
Noninterest Income and Expense............................................ 11
Financial Condition....................................................... 13
Liquidity and Debt Capacity, Interest Rate Risk
and Impact of Inflation................................................. 19
Recent Accounting Pronouncements.......................................... 21
Forward-Looking Statements................................................ 21
Selected Quarterly Information............................................ 22
Year Ended December 31, 1998
Compared with 1997...................................................... 23
II. Consolidated Financial Statements.............................................. 24
Consolidated Balance Sheets............................................... 24
Consolidated Statements of Income......................................... 25
Consolidated Statements of Changes
in Shareholders' Equity................................................. 26
Consolidated Statements of Cash Flow...................................... 27
III. Notes to Consolidated Financial Statements..................................... 28
IV. Report of Independent Auditors................................................. 47
V. Report of Management........................................................... 49
B-2
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------------------
TABLE 1. FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (1)
(in thousands, except per share data) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR
Net interest income $ 314,874 $ 309,642 $ 292,424 $ 274,134 $ 249,391
Provision for loan losses 20,983 24,675 16,528 20,511 15,725
Noninterest income before securities gains (losses) 90,344 85,044 71,413 59,692 58,298
Investment securities gains (losses) -- (3,052) 475 (572) 827
Noninterest expense before special charges 242,221 236,778 218,219 208,921 201,460
Special charge:
Before-tax 15,541 40,198 -- 23,734 --
After-tax 9,464 28,403 -- 17,263 --
Income taxes 35,813 27,989 39,283 25,197 26,727
Net income 90,660 61,994 90,282 54,891 64,604
Net operating income (2) 100,124 97,154 90,282 72,154 64,604
Cash dividends (3) 48,108 30,035 22,991 19,286 17,890
PER COMMON SHARE DATA
Net income:
Basic $ 1.92 $ 1.29 $ 1.86 $ 1.17 $ 1.41
Diluted 1.91 1.28 1.84 1.15 1.40
Diluted - net operating income (2) 2.11 2.00 1.84 1.51 1.40
Cash dividends (3) 1.015 0.915 0.82 0.74 0.67
Book value, end of year 14.62 13.32 14.07 12.93 12.36
Market value, end of year 29.06 22.38 33.75 34.50 21.00
AT YEAR END
Assets $ 8,405,091 $ 7,899,357 $ 6,930,533 $ 6,630,974 $ 6,173,515
Loans 6,422,806 5,917,483 5,264,706 5,074,230 4,517,814
Deposits 6,244,141 6,128,998 5,772,792 5,514,313 5,176,033
Long-term debt 471,117 127,104 226,171 179,191 114,732
Shareholders' equity 679,979 633,669 680,501 610,775 565,264
AVERAGE FOR THE YEAR
Assets $ 8,073,021 $ 7,342,167 $ 6,792,829 $ 6,439,737 $ 5,972,417
Earning assets 7,584,932 6,875,643 6,367,284 6,033,874 5,550,463
Loans 6,202,157 5,528,963 5,159,584 4,843,507 4,258,404
Deposits 6,121,373 5,906,664 5,616,894 5,359,464 5,012,387
Interest-bearing deposits 5,175,252 5,002,135 4,787,143 4,602,093 4,284,919
Repurchase agreements and other short-term borrowings 920,323 478,920 202,639 259,040 227,415
Long-term debt 303,597 210,289 228,969 144,306 107,669
Shareholders' equity 650,251 672,227 655,034 597,242 546,463
FINANCIAL RATIOS
Return on average:(4)
Shareholders' equity 13.94% 9.22% 13.78% 9.19% 11.82%
Earning assets 1.20 0.90 1.42 0.91 1.16
Assets 1.12 0.84 1.33 0.85 1.08
Average shareholders' equity/avg. assets 8.05 9.16 9.64 9.27 9.15
Dividend payout ratio (3) 53.06 59.13 40.49 61.21 42.17
Net interest margin (FTE) 4.32 4.68 4.78 4.73 4.68
Tier I leverage 7.11 7.21 8.95 8.00 N/A
Risk-based Tier I capital ratio 10.30 9.22 11.01 10.50 N/A
Risk-based Total capital ratio 9.05 10.47 12.26 11.76 N/A
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Except as indicated, all financial data have been restated for stock splits
and pooling of interests transactions. Results of operations for
acquisitions accounted for as purchases have been included effective with
the respective dates of acquisition.
(2) Net operating income is based on net income that excludes special charges,
restructuring and other one-time expenses incurred in the connection with
acquisitions and other corporate initiatives in 2000, 1999 and 1997, as
discussed herein.
(3) Cash dividends and cash dividends per share are for Citizens Banking
Corporation only, not restated for pooling of interests.
(4) Returns on average shareholders' equity, earning assets and total assets
computed on net operating income were 15.40%, 1.32% and 1.24%, respectively
in 2000; 14.45%, 1.41%, and 1.32%, respectively, in 1999; and 12.08%, 1.20%
and 1.12%, respectively in 1997.
B-3
32
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
The following commentary presents Management's discussion and analysis of
Citizens Banking Corporations' (Citizens) financial condition and results of
operations. All financial data have been restated to give effect to mergers
accounted for on a pooling of interests basis and stock splits in previous
periods. The results of other acquisitions, accounted for as purchases, have
been included effective with the respective dates of acquisition.
MERGERS, ACQUISITIONS AND OTHER INITIATIVES
MERGERS AND ACQUISITIONS
On May 12, 2000, Citizens purchased three Jackson, Michigan offices of
Great Lakes National Bank. The purchase added approximately $31 million in
deposits for which Citizens paid a premium of $3.9 million. On October 8, 1999,
Citizens completed the acquisition of seventeen former Bank One offices located
in the northern section of Michigan's Lower Peninsula. The purchase added
approximately $88 million in loans and $442 million in deposits. Citizens paid a
premium of $36.1 million or 10.13% of certain core deposits. These transactions
were accounted for as purchases.
On November 1, 1999, Citizens merged with F&M Bancorporation, Inc. (F&M)
headquartered in Kaukauna, Wisconsin. As part of the merger, Citizens issued
21.0 million shares of its common stock, based on a fixed exchange ratio of
1.303, for all of the outstanding shares of F&M. This transaction was accounted
for as a pooling of interests.
SPECIAL CHARGES AND OTHER ONE-TIME COSTS
During 2000, conversion and integration efforts resulting from the merger
with F&M were completed. Net costs of $12.3 million ($7.4 million after-tax)
incurred to complete these efforts (including system conversions, business unit
integration, branch closures and other items) were recorded in noninterest
expense as the "Special Charge". Also included were reversals of prior year
business restructuring reserves of $6.2 million, pre-tax, due to successful
settlement of a contract with a former vendor of F&M and favorable experience in
employee separations.
In the fourth quarter of 2000, Citizens recorded an additional pre-tax
charge of $3.2 million ($2.1 million after-tax) consisting of restructuring
costs of $2.0 million and asset impairment and other charges of $1.2 million
associated with new corporate and organizational re-engineering initiatives. The
restructuring plans include reorganization of Citizens' trust and investment
management business into one nationally chartered trust bank, streamlining of
Citizens' community bank organizational structure, consolidation of its direct
and indirect lending operations, and exiting of certain unprofitable indirect
lending dealer relationships. The related restructuring reserve at year-end 2000
totaled $1.8 million and consisted of involuntary employee termination benefits
for 44 employees.
In 1999, the Special Charge included a fourth quarter pre-tax charge of
$40.2 million consisting of $36.3 million ($25.9 million after-tax) in
merger-related integration costs and $3.9 million ($2.5 million after-tax) of
restructuring and other costs related to separate strategic initiatives and
impairment write-offs.
Merger-related integration costs recorded included employee termination
benefits of $7.1 million, transaction costs of $5.6 million, contract
termination and other conversion costs (primarily recognition of obligations
under existing contractual agreements related to system conversions) of $13.6
million, asset-related write-downs of $1.5 million, a $2.1 million write-down of
impaired goodwill at an F&M bank, a $2.5 million contribution to Citizens'
Charitable Trust for the acquired entities and other transaction related costs
of $3.9 million. Restructuring plans related to the strategic initiatives,
approved in the fourth quarter of 1999, included realignment of Citizens' branch
network, including closure of selected branches in Michigan and Illinois, and
transfer of certain financial and credit audit functions to a third party.
Also, in the fourth quarter of 1999, Citizens recorded $6.8 million ($4.4
million after-tax) of additional provision for loan losses and $3.6 million
($2.4 million after-tax) of securities losses related to the F&M merger. The
additional loan loss provision was provided to conform F&M's allowance to that
which results from applying Citizens' allowance methodology and credit risk
standards to F&M's loan portfolio. The security losses resulted from the sale of
$122.8 million of securities to reposition the portfolios of Citizens and F&M
after the merger to normalize investment exposure and reduce overall interest
rate risk.
Total deductions to Citizens' Special Charge reserve were $16.0 million
in 2000 and $22.8 million in 1999. Included in these deductions were cash
payments of $9.7 million and $15.4 million in 2000 and 1999, respectively. See
Note 3 to the Consolidated Financial Statements for additional information
regarding the Special Charges in 2000 and 1999.
NET OPERATING INCOME
"Net operating income" and "operating" results, as used in this report,
refers to Citizens' financial performance before the impact of special charges,
restructuring and other one-time expenses incurred in connection with the
acquisitions and other corporate initiatives as described above. The following
table reconciles net operating income to net income as reported in the
Consolidated Financial Statements.
(in thousands) 2000 1999 1998
- ------------------------------------------------------------------------------
NET OPERATING INCOME $ 100,124 $ 97,154 $ 90,282
--------- --------- ---------
Special charges 15,541 40,198 --
Additional loan loss provision -- 6,800 --
Securities loss to
reposition portfolio -- 3,596 --
--------- --------- ---------
Net pre-tax adjustments 15,541 50,594 --
Tax benefit (6,077) (15,434) --
--------- --------- ---------
NET INCOME AS REPORTED $ 90,660 $ 61,994 $ 90,282
========= ========= =========
- ------------------------------------------------------------------------------
B-4
33
FINANCIAL HIGHLIGHTS
Citizens reported record net income of $90.7 million, or $1.91 per diluted share
in 2000, compared with $62.0 million, or $1.28 per diluted share in 1999. Net
income included after-tax merger restructuring and other charges of $9.5 million
in 2000 and $35.2 million in 1999. Excluding these charges, Citizens' net
operating income was a record $100.1 million, or $2.11 per diluted share in
2000, compared with $97.2 million or $2.00 per diluted share in 1999. Operating
returns on average assets and equity were 1.24% and 15.40%, respectively, in
2000, as compared with 1.32% and 14.45% in 1999.
The improvement in operating income reflects higher net interest income
from growth in earning assets, increased noninterest income and lower taxes,
partially offset, by higher loan loss provision and noninterest expense. Average
shareholders' equity was $650.3 million or 8.05% of total average assets for
2000, compared with $672.2 million or 9.16% for 1999. At December 31, 2000,
Citizens' risk-based capital levels exceeded all regulatory requirements.
An analysis of the major components of net income in 2000 and 1999 is
presented below.
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, Changes in 2000
----------------------------- --------------------------
(in thousands) 2000 1999 Amount Percent
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income $ 622,008 $ 541,559 $ 80,449 14.9%
Interest expense 307,134 231,917 75,217 32.4
-------- -------- --------
Net interest income 314,874 309,642 5,232 1.7
Provision for loan losses (1) 20,983 17,875 3,108 17.4
Noninterest income (1) 90,344 85,588 4,756 5.6
Noninterest expense (1) 242,221 236,778 5,443 2.3
Income taxes (1) 41,890 43,423 (1,533) (3.5)
-------- -------- --------
NET OPERATING INCOME 100,124 97,154 2,970 3.1
-------- -------- --------
After-tax effect of Special Charges and other one-time expenses:
Special Charges 9,464 28,403 (18,939) (66.7)
Additional loan loss provision --- 4,420 (4,420) (100.0)
Securities loss to reposition portfolio --- 2,337 (2,337) (100.0)
-------- -------- --------
Subtotal 9,464 35,160 (25,696) (73.1)
-------- -------- --------
NET INCOME AS REPORTED $ 90,660 $ 61,994 $ 28,666 46.2
======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------
(1) presented on an operating basis before Special Charges and other one-time
expenses
Net interest income increased 1.7% in 2000 over 1999. Higher levels of
earning assets, partially offset by an increase in interest-bearing liabilities
and a lower net interest margin led to the increase. Noninterest income in 2000
reflects higher trust, brokerage, bankcard and deposit account revenues.
Excluding gains of $7.0 million from the sales in 1999 of an equity investment
and branch deposits, operating noninterest income was up 15.0% in 2000.
Operating noninterest expense, excluding a 1999 fraud loss of $6.1 million,
increased 5.0%. Growth from the October 1999 and May 2000 branch purchases,
partially offset by efficiencies achieved in 2000 from the conversion and
integration of F&M and other cost savings initiatives was primarily responsible
for the increase. Additional data on Citizens' performance during the past five
years appears in Table 1, "Five-Year Summary of Selected Financial Data".
LINES OF BUSINESS REPORTING
Citizens is managed along the following business lines: Commercial Banking,
Retail Banking, Financial Services, F&M and all Other. A description of each
business, selected financial performance and the methodologies used to measure
financial performance are presented in Note 18 to the Consolidated Financial
Statements. Prior year amounts have been restated to reflect the current
business unit structure and cost allocation methodology. The following table
summarizes net operating income by line of business for each of the last three
years:
- ----------------------------------------------------------------
Net Operating Income
----------------------------------
(in thousands) 2000 1999 1998
- ----------------------------------------------------------------
Commercial Banking $ 32,882 $ 28,635 $ 23,016
Retail Banking 36,308 22,205 26,536
Financial Services 6,354 4,794 3,161
F&M 33,639 37,950 33,497
Other (9,059) 3,570 4,072
--------- --------- ---------
Total $ 100,124 $ 97,154 $ 90,282
========= ========= =========
- ----------------------------------------------------------------
The increase in Commercial Banking operating income in 2000 reflects
increases in Citizens prime lending rate and growth in overall commercial
account relationships, including strong loan growth, increased deposits and
related service charges, and expanded cash management services. Retail Banking
operating income increased due to higher net interest income, higher noninterest
income and reduced loan charge-offs, offset in part, by higher operating
expenses. The increase
B-5
34
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
in net interest income reflected greater direct and indirect consumer loan
volumes, increased deposit levels from branch purchases, and improved spreads on
core deposits.
Financial Services operating income improved in 2000 due to growth in
trust, brokerage and investment advisory services and introduction of new
products and services offset, in part, by higher compensation and other
expenses. The decrease in F&M's operating income reflected lower net interest
income from a smaller deposit base, a declining net interest margin and a higher
provision for loan losses, partially offset by merger cost efficiencies.
Operating income in the Other category was affected by significantly
lower net interest income due to higher short-term interest rates and a shift in
funding composition caused by greater reliance on borrowed funds. The change in
funding mix and higher interest rates adversely effected Citizens' Treasury
unit, a component of Other, where changes in interest rates and their associated
risks are monitored and reported. Changes in net interest income due to changes
in interest rates for F&M are reported in the operating income of F&M. Operating
income in the Other category was also affected by higher goodwill and other
intangible amortization associated with the October 1999 and May 2000 branch
purchases.
As a result of system conversions at F&M and operational initiatives in
2000, Citizens is evaluating changes to its management model and organizational
structure which may result in changes to the reportable segments in the next
year.
NET INTEREST INCOME
The primary source of Citizens' traditional banking revenue is net interest
income. Net interest income is the difference between interest income on earning
assets, such as loans and securities, and interest expense on liabilities,
including interest-bearing deposits and borrowings, used to fund those assets.
Net interest income is affected by market interest rates on both earning assets
and interest-bearing liabilities, the level of earning assets being funded by
interest-bearing liabilities, noninterest-bearing liabilities and equity, and
the volume and composition of earning assets and funding sources. Other factors,
such as Federal Reserve Board monetary policy and changes in tax laws, may also
have an impact on changes in net interest income from one period to another.
Net interest income, on a fully-tax equivalent basis, was up 2.2%, to
$329.0 million in 2000, from $321.8 million in 1999. A higher level of earning
assets, partially offset by an increase in short-term borrowings and a lower net
interest margin, led to the increase in 2000. An analysis of how changes in
volume and rates have affected net interest income for the years ended December
31, 2000 and 1999 is presented in Table 2. A detailed analysis of net interest
income, with average balances and related interest rates for the past three
years, appears in Table 3.
Interest income was up $80.4 million in 2000 due to higher earning asset
volumes and yields. Average earning assets grew to $7.585 billion in 2000 from
$6.876 billion in 1999, an increase of 10.3%. Loans, principally commercial,
commercial real estate, home equity and other direct consumer loans contributed
to the growth in earning assets. Average loans, the highest yielding category of
earning assets, increased to 81.8% of average earning assets, compared with
80.4% in 1999. Investment securities, including money market investments,
comprised 18.2% of earning assets in 2000, down from 19.6% in 1999. The average
yield on earning assets increased to 8.36% in 2000 from 8.05% in 1999 reflecting
a rising interest rate environment in the first half of 2000 and a favorable
shift in the earning asset mix to higher-yielding loans.
Interest expense increased $75.2 million in 2000 reflecting higher
average interest-bearing liability balances and higher rates paid on funding
sources. Average deposits grew to $6.121 billion in 2000, from $5.907 billion in
1999, an increase of 3.6%. Average short- and long-term borrowings comprised
19.1% of interest bearing liabilities in 2000, up from 12.1% in 1999. Raising
deposits has proved challenging for Citizens as well as the banking industry at
large. As a result, strong loan growth outpaced deposit growth and Citizens used
short-term Federal Home Loan Bank (FHLB) advances and other purchased funds to
support the higher level of earning assets. The average rate paid on
interest-bearing deposits was 4.43%, up from 3.94% in 1999. The average rate on
long-term debt was 6.41% in 2000, up from 5.40% in 1999; and short-term
borrowing cost increased to 6.36% in 2000 from 4.95% in 1999. Higher rates paid
on interest-bearing deposits and borrowed funds increased the cost of interest
bearing funding sources to 4.80% in 2000 from 4.07% in 1999.
Net interest margin, the percentage of net interest income to average
earning assets, was 4.32% in 2000 and 4.68% in 1999. The decrease in net
interest margin resulted from a shift in funding mix and higher short-term
interest rates. The funding mix changed as Citizens supplemented lower deposit
growth with borrowings to fund the more robust loan growth.
B-6
35
- -------------------------------------------------------------------------------------------------------------------------------
TABLE 2. ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
2000 COMPARED TO 1999 1999 Compared to 1998
----------------------------------------------------------------------------------------------
INCREASE (DECREASE) Increase (Decrease)
Year Ended December 31 DUE TO CHANGE IN Due to Change in
NET -------------------------------- Net ------------------------------
(in thousands) CHANGE(1) RATE VOLUME(2) Change(1) Rate Volume(2)
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Money market investments $ (2,298) $ 493 $ (2,791) $ (2,800) $ (20) $ (2,780)
Investment securities:
Taxable 6,536 4,409 2,127 9,790 (1,641) 11,431
Tax-exempt 3,199 (163) 3,362 207 (822) 1,029
Loans:
Commercial 67,166 9,684 57,482 24,175 (6,131) 30,306
Real estate (8,734) 190 (8,924) (6,683) (7,654) 971
Consumer 14,580 1,724 12,856 (4,827) (2,361) (2,466)
-------- -------- -------- -------- -------- --------
Total 80,449 16,337 64,112 19,862 (18,629) 38,491
-------- -------- -------- -------- -------- --------
INTEREST EXPENSE:
Deposits:
Demand (479) (522) 43 (157) (524) 367
Savings 5,718 4,439 1,279 (907) (5,861) 4,954
Time 27,027 13,916 13,111 (8,673) (11,230) 2,557
Short-term borrowings 34,840 6,767 28,073 13,886 219 13,667
Long-term debt 8,111 2,129 5,982 (1,505) (88) (1,417)
-------- -------- -------- -------- -------- --------
Total 75,217 26,729 48,488 2,644 (17,484) 20,128
-------- -------- -------- -------- -------- --------
NET INTEREST INCOME $ 5,232 $(10,392) $ 15,624 $ 17,218 $ (1,145) $ 18,363
======== ======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------------
(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.
B-7
36
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
TABLE 3. AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
2000 1999 1998
--------------------------------- -------------------------------- ------------------------------
Year Ended December 31 AVERAGE AVERAGE Average Average Average Average
(in millions) BALANCE INTEREST(1) RATE(2) Balance Interest(1) Rate(2) Balance Interest(1) Rate(2)
- ------------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Money market investments $ 4.1 $ 0.3 5.67% $ 48.3 $ 2.5 5.24% $ 101.4 $ 5.3 5.26%
Investment securities (3):
Taxable 1,007.0 66.2 6.57 974.6 59.6 6.12 787.7 49.9 6.33
Tax-exempt 393.2 20.3 7.96 328.3 17.2 8.04 312.3 16.9 8.35
Loans (4):
Commercial 3,178.1 279.3 8.89 2,525.1 212.1 8.51 2,155.3 187.9 8.83
Real estate mortgage 1,485.4 113.8 7.66 1,601.9 122.6 7.65 1,589.7 129.3 8.13
Consumer 1,538.6 142.1 9.24 1,401.9 127.5 9.10 1,414.6 132.4 9.36
--------- ------- --------- ------- --------- ------
Total earning assets (3) 7,606.4 622.0 8.36 6,880.1 541.5 8.05 6,361.0 521.7 8.38
NONEARNING ASSETS
Cash and due from banks 222.6 231.3 214.4
Premises and equipment 141.5 135.1 120.5
Investment security
fair value adjustment (21.5) (4.5) 6.3
Other assets 204.2 171.6 160.6
Allowance for loan losses (80.2) (71.4) (70.0)
--------- --------- ---------
Total assets $ 8,073.0 $ 7,342.2 $ 6,792.8
========= ========= =========
INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing demand $ 581.5 8.5 1.46 $ 578.5 9.0 1.55 $ 547.4 $ 9.1 1.67
Savings 1,701.7 55.2 3.24 1,751.6 49.5 2.83 1,635.1 50.4 3.08
Time 2,892.1 165.4 5.72 2,672.0 138.4 5.18 2,604.6 147.1 5.65
Short-term borrowings 920.3 58.5 6.36 478.9 23.7 4.95 202.6 9.8 4.84
Long-term debt 303.6 19.5 6.41 210.3 11.3 5.40 229.0 12.9 5.62
--------- ------- --------- ------- --------- ------
Total interest-bearing
liabilities 6,399.2 307.1 4.80 5,691.3 231.9 4.07 5,218.7 229.3 4.39
NONINTEREST-BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 946.1 904.6 829.8
Other liabilities 77.5 74.1 89.3
Shareholders' equity 650.2 672.2 655.0
--------- --------- ---------
Total liabilities and
shareholders' equity $ 8,073.0 $ 7,342.2 $ 6,792.8
========= ========= =========
NET INTEREST INCOME $ 314.9 $ 309.6 $292.4
======= ======= ======
NET INTEREST INCOME AS A
PERCENT OF EARNING ASSETS 4.32% 4.68% 4.78%
====================================================================================================================================
(1) Interest income is shown on an unadjusted basis and therefore does not
include taxable equivalent adjustments.
(2) Average rates include taxable equivalent adjustments to interest income of
$14,097,000, $12,204,000 and $11,508,000 for the years ended December 31,
2000, 1999, and 1998, respectively, based on a 35% tax rate.
(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.
(4) Nonaccrual loans are included in average balances.
B-8
37
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 $21.0 million in 2000, down from $24.7 million in 1999. The 1999
provision included a $6.8 million special provision to conform F&M to Citizens'
allowance methodology and credit risk standards. Net charge-offs in 2000 as a
percentage of average loans were 0.28%, compared with 0.37% in 1999. The
improvement is the result of lower net charge-offs in Citizens' indirect
consumer loan portfolio and to a lessor extent, lower net charge-offs at the F&M
banks. A summary of Citizens' loan loss experience from 1996 through 2000
appears in Table 4.
- -----------------------------------------------------------------------------------------------------------------------
TABLE 4. SUMMARY OF LOAN LOSS EXPERIENCE
Year Ended December 31 (in thousands) 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Allowance for loan losses - January 1 $ 76,397 $ 69,740 $ 67,010 $ 59,029 $ 53,431
Allowance of acquired banks and branches -- 2,400 1,745 1,329 587
Provision for loan losses 20,983 24,675 16,528 20,511 15,725
CHARGE-OFFS:
Commercial 10,920 8,675 4,557 4,555 6,222
Real estate 169 436 359 861 114
Consumer 14,359 17,751 14,879 13,064 9,045
---------- ---------- ---------- ---------- ----------
Total charge-offs 25,448 26,862 19,795 18,480 15,381
---------- ---------- ---------- ---------- ----------
RECOVERIES:
Commercial 3,577 2,483 1,387 1,581 1,485
Real estate 45 149 28 12 33
Consumer 4,516 3,812 2,837 3,028 3,149
---------- ---------- ---------- ---------- ----------
Total recoveries 8,138 6,444 4,252 4,621 4,667
---------- ---------- ---------- ---------- ----------
Net charge-offs 17,310 20,418 15,543 13,859 10,714
---------- ---------- ---------- ---------- ----------
Allowance for loan losses - December 31 $ 80,070 $ 76,397 $ 69,740 $ 67,010 $ 59,029
========== ========== ========== ========== ==========
Loans outstanding at year-end $6,422,806 $5,917,483 $5,264,706 $5,074,230 $4,517,814
Average loans outstanding 6,202,157 5,528,963 5,159,584 4,843,507 4,258,404
Ratio of allowance for loan losses
to loans outstanding at year-end 1.25% 1.29% 1.32% 1.32% 1.31%
Ratio of net loans charged off as a
percentage of average loans outstanding 0.28 0.37 0.30 0.29 0.25
- -----------------------------------------------------------------------------------------------------------------------
Citizens' maintains what management believes is an adequate allowance
for possible loan losses to meet presently known credit risks in the loan
portfolio. The allowance also incorporates the results of measuring impaired
loans as provided in Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan-Income Recognition and Disclosures". At
December 31, 2000 total impaired loans were $52.9 million and the associated
impairment allowance was $5.1 million, compared with $27.5 million and $1.5
million, respectively, at December 31, 1999.
The allowance for loan losses at December 31, 2000 was $80.1 million,
or 1.25% of loans, compared with $76.4 million, or 1.29% of loans at the end of
1999. At December 31, 2000, the allowance equaled 130.5% of nonperforming loans,
compared with 245.8% at year-end 1999. The decline in the ratio of allowance for
loan losses to nonperforming loans primarily reflected increases in
nonperforming commercial (including commercial real estate) and residential real
estate loans at December 31, 2000. The increase in nonperforming loans in these
categories is reflected in the allowance for loan losses through specific and
formula based allocations, as discussed below under the caption "Allowance
Policy and Methodology".
As shown in Table 5, the allocation of the allowance for loan losses
related to commercial and commercial real estate loans increased $13.9 million
to $35.2 million at December 31, 2000 from the prior year-end. Nonperforming
commercial and commercial real estate loans increased to $37.2 million at
year-end 2000 from $18.0 million a year ago. Commercial real estate loans
represented $10.2 million in 2000 and $6.2 million in 1999 of such nonperforming
loans. Management believes the risk of loss in the commercial real estate
nonperforming loans is significantly less than the total principal balance, due
to the nature of the underlying collateral and the value of such collateral to
the total credit exposure.
B-9
38
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------------------
TABLE 5. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES(1)
2000 1999 1998 1997 1996
------------------ ------------------ ------------------ ------------------ ------------------
LOAN Loan Loan Loan Loan
December 31 (in millions) AMOUNT PERCENT(2) Amount Percent(2) Amount Percent(2) Amount Percent(2) Amount Percent(2)
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial $ 35.2 51.9% $ 21.3 48.6% $ 19.2 45.8% $16.7 40.7% $17.2 40.3%
Real estate construction 1.1 3.7 0.8 3.2 0.3 2.8 0.2 2.2 0.3 2.5
Real estate mortgage 5.9 20.0 6.0 24.3 8.2 26.9 7.9 28.4 5.6 28.6
Consumer 16.4 24.4 23.5 23.9 21.4 24.5 18.0 28.7 17.4 28.6
------ ----- ------ ----- ------ ------ ----- ----- ----- -----
Total allocated 58.6 100.0% 51.6 100.0% 49.1 100.0% 42.8 100.0% 40.5 100.0%
===== ===== ====== ===== =====
Unallocated 21.5 24.8 20.6 24.2 18.5
------ ------ ------ ----- -----
Total $ 80.1 $ 76.4 $ 69.7 $67.0 $59.0
====== ====== ====== ===== =====
==================================================================================================================================
(1) The allocation of the allowance for loan losses in the above table is based
upon ranges of estimates and are not intended to imply either limitations
on the usage of the allowance or precision of the specific amounts.
Citizens and its subsidiaries do not view the allowance for loan losses as
being divisible among the various categories of loans. The entire allowance
is available to absorb any future losses without regard to the category or
categories in which the charged-off loans are classified.
(2) Percentage reflects the ratio of outstanding loans by category to total
outstanding loans at the end of the respective year.
These loans are generally for owner-occupied properties and do not rely on the
performance of the real estate market to generate funds for repayment.
The allocation of allowance for loan losses on residential real estate
loans at December 31, 2000 remained essentially the same from the prior year.
While this portfolio saw a sharp increase in nonperforming loans in 2000,
historical loss ratios in this portfolio are very low and management expects
that favorable loss experience will continue despite the increase in
non-performing loans.
The level of the allowance was also impacted by a decline in the
allocation of the allowance for loan losses to the consumer loan portfolio. The
decline reflects fewer net loan losses in the consumer portfolio for the year
ended December 31, 2000 and expectation of stable net loan charge-offs in this
portfolio due to a new risk adjusted pricing structure implemented in 1999 and
improved collection efforts.
Citizens' loan portfolio has no significant concentrations in any one
industry or any exposure in foreign loans. Citizens has generally not extended
credit to finance highly leveraged transactions nor does it intend to do so in
the future. Employment levels and other economic conditions in Citizens' local
markets may have a significant impact on the level of credit losses. Management
continues to identify and devote attention to credits that may not be performing
as well as expected. Nonperforming loans are further discussed in the section
titled "Nonperforming Assets".
ALLOWANCE POLICY AND METHODOLOGY
Citizens maintains an allowance for credit losses to absorb losses
inherent in the loan portfolio. The allowance analysis is based on a regular,
quarterly assessment of the probable losses inherent in the loan portfolios. The
methodology for measuring the adequacy of the allowance relies on several key
elements, which include specific allowances for identified problem loans,
reserves by formula and the unallocated allowance.
Specific allowances are established in cases where management has
identified significant conditions or circumstances related to a credit that
management believes indicate it is probable that a loss has been or will be
incurred. Credits are identified based on quarterly reviews, by our Credit Risk
department, of all commercial and commercial real estate loans over a fixed
dollar amount where the internal credit rating is at or below a predetermined
classification. The allowance amount is determined by analyzing the financial
condition, collateral value and other qualitative factors as well as by a method
prescribed by SFAS No. 114, "Accounting by Creditors for Impairment of a Loan".
The formula allowance is calculated by applying loss factors to
outstanding loans (excluding specifically identified credits) based on loan
type, accrual status and internal risk grade of such loans and pools of loans.
The loss factors are determined based on industry averages adjusted quarterly
for recent and historical (generally three-year) loss experience in the specific
portfolios. In addition, adjustments are made to any loss factor used in the
computation of the formula allowance in the event that, in management's
judgment, significant factors, which affect the collectiblility of the portfolio
as of the valuation date, are not reflected in the loss factors.
The unallocated portion of the allowance is determined based upon
management's evaluation of various conditions, the effects of which are not
directly measured in the determination of the specific and formula allowances.
The evaluation of the inherent loss with respect to these conditions is subject
to a higher degree of uncertainty because they are not identified with specific
problem credits or portfolio segments. The conditions evaluated in connection
with the unallocated allowance at December 31, 2000, included general economic
and business conditions in Citizens' key lending markets, the level and
composition of nonperforming loans, underwriting standards within specific
portfolio segments, specific industry conditions within portfolio segments,
B-10
39
collateral values, loan volumes and concentrations, regulatory examination
results, internal credit examination results and other factors. Executive
management reviews these conditions quarterly in discussion with the Citizens'
senior credit officers. To the extent that any of these conditions is evidenced
by a specifically identifiable problem credit or portfolio segment, as of the
evaluation date, management's estimate of the effect of such condition may be
reflected as a specific allowance, applicable to such specific credit or
portfolio segment. Where any of these conditions is not evidenced by a
specifically identifiable problem credit or portfolio segment, as of the
evaluation date, management's evaluation of the probable loss related to such
condition is reflected in the unallocated allowance. An allocation of the ending
allowance for loan losses by major loan type is presented in Table 5.
CHANGES IN THE FORMULA AND SPECIFIC ALLOWANCES
The total allocation of the allowance for loan losses increased $7.0
million in 2000. This included an increase of $3.4 million in the specific
allowance due to growth in the commercial and commercial real estate portfolios
as well as increases in both the level of impaired loans and the degree of the
impairment. The formula allowance increased $3.6 million in 2000 reflecting
primarily an increase in classified credits.
At December 31, 2000, the allocated portion of the allowance for credit
losses included $21 million related to special mention and classified credits,
compared to $14.8 million at December 31, 1999. Special mention and classified
credits are those that are internally risk graded as a 7, "special mention", or
8 "substandard", or 9, "doubtful". Ten rated credits are considered a loss and
charged off. Special mention credits are potentially weak, as the borrower has
begun to exhibit deteriorating trends which, if not corrected, could jeopardize
repayment of the loan and result in further downgrade. Substandard credits have
well-defined weaknesses which, if not corrected, could jeopardize the full
satisfaction of the debt. A credit classified as "doubtful" has critical
weaknesses that make full collection improbable.
At December 31, 2000, the unallocated allowance decreased $3.3 million
from the previous year-end because management believed that the inherent losses
related to certain conditions, described previously under the caption "Allowance
Policy and Methodology" considered in its evaluation of the unallocated
allowance at December 31, 1999 had been recognized through charge-off, had been
reflected in the formula or specific allowance, or had declined.
NONINTEREST INCOME
Noninterest income, before nonrecurring income and securities gains and losses,
increased to $90.3 million in 2000 from $78.0 million in 1999, an improvement of
15.8%. On this same basis, noninterest income accounted for 22.3% of total
operating revenue in 2000, compared with 20.1% in 1999. Increases in most
categories reflect Citizens' continued emphasis on a relationship sales
strategy, "Clients First!(sm)", and client access to new financial products,
services and distribution channels due, in part, to our investments in
technology that support and enhance client service.
- --------------------------------------------------------------------------------
NONINTEREST INCOME
Year Ended
December 31, Changes in 2000
---------------------- -----------------------
(in thousands) 2000 1999 Amount Percent
- --------------------------------------------------------------------------------
Service charges
on deposit accounts $ 26,260 $ 21,378 $ 4,882 22.8%
Trust fees 24,253 21,701 2,552 11.8
Bankcard fees 11,258 9,163 2,095 22.9
Brokerage and
investment fees 7,693 4,325 3,368 77.9
Mortgage and
other loan income 4,997 6,078 (1,081) (17.8)
ATM network user fees 3,202 3,310 (108) (3.3)
Cash management services 2,651 2,556 95 3.7
Title insurance fees 1,121 987 134 13.6
Other 8,909 8,505 404 4.8
-------- -------- -------
TOTAL FEES & OTHER INCOME 90,344 78,003 12,341 15.8
Securities gains --- 544 (544) (100.0)
-------- -------- -------
TOTAL BEFORE
NONRECURRING ITEMS 90,344 78,547 11,797 15.0
Securities loss to
reposition the portfolio --- (3,596) 3,596 (100.0)
Equity investment gain --- 5,693 (5,693) (100.0)
Premium on sale of deposits --- 1,348 (1,348) (100.0)
-------- ------ -------
TOTAL NONINTEREST INCOME $ 90,344 $ 81,992 $ 8,352 10.2
======== ======== =======
================================================================================
Service charges on deposit accounts increased $4.9 million or 22.8%
reflecting new pricing structures, improved fee waiver practices, and impact of
the 2000 and 1999 branch purchases. Brokerage and investment fees were up $3.4
million or 77.9% propelled by successful retail sales efforts and introduction
of new products and services in 2000 and 1999. Personal banker annuity sales
through our branch network jumped 630%, licensed broker revenue was up 30% and
premiums on new credit insurance products grew more than 400%. Trust fees
increased $2.6 million or 11.8% in 2000 over 1999 as fee increases contributed
to higher personal trust and investment advisory fees. Total trust assets under
administration declined $395 million to $3.448 billion at December 31, 2000 from
the previous year-end. The decline in equity markets in the latter part of 2000
and the sale of the corporate bond servicing unit were the primary factors
causing the decline. Bankcard fees increased $2.1 million or 22.9% in 2000
reflecting higher transaction volume. Mortgage and
B-11
40
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
other loan income decreased $1.1 million or 17.8% in 2000 as higher interest
rates in the first half of 2000 reduced closing volume and refinance activity,
which in turn resulted in fewer gains on sale of residential mortgage loans and
the related servicing.
Nonrecurring income of $3.4 million was recognized in 1999. It was
comprised of a $1.3 million premium on the sale of deposits at one branch
office, a gain of $5.7 million from the sale of Citizens' equity investment in
Magic Line, Inc., and a securities loss of $3.6 million to reposition Citizens'
security portfolio following the merger with F&M as described below.
Citizens had no net gain or loss from sales of investment securities in
2000 and a net loss of $3.1 million in 1999. The year 1999 included a $3.6
million loss from the sale of $122.8 million of securities to reposition the
portfolios of Citizens and F&M after the merger to normalize investment exposure
and reduce overall interest rate risk. As presented in Note 5 to the
Consolidated Financial Statements, gross gains of $67,000 realized in 2000 on
sales of investment securities were offset by gross realized losses of the same
amount. The comparable amounts in 1999 were $561,000 and $3.613 million.
Generating additional fee income remains a priority and our "Clients
First!(sm)" relationship sales strategy, initiated in 1998, continues to be a
significant factor in the creation of new business volumes and fee revenue. Year
2000 marked the first year for full implementation of the sales process in
Citizens' Michigan and Illinois branch offices. Early in 2001, Citizens plans to
introduce the program in its Wisconsin and Iowa markets.
NONINTEREST EXPENSE
Excluding nonrecurring expenses, noninterest expense increased $11.5 million, or
5.0%, to $242.2 million from $230.7 million in 1999. Growth from the October
1999 and May 2000 branch purchases, partially offset by efficiencies achieved in
2000 from the conversion and integration of F&M and other cost savings
initiatives generated most of the increase.
Salaries and employee benefits were unchanged in 2000 over 1999 as the
full year effect of additional staff from the branch purchases, higher health
care costs, and increased incentive commissions were offset by decreased
staffing levels at F&M and lower pension costs. Occupancy and equipment expenses
were up a combined $4.0 million, or 12.4%, due to the branch purchases and
installation of new equipment and operating systems at F&M. Data processing
expenses increased 27.0% reflecting higher processing volumes and new services
and information technology costs associated with the branch purchases and
conversion of F&M onto Citizens' operating systems. Partially offsetting this
increase was lower compensation and other expenses related to the elimination of
"in-house" processing at several F&M banks.
Professional services were up 37.6% reflecting the outsourcing in 2000
of Citizens computer technology support functions and certain financial and
credit audit procedures as well as certain continuing costs associated with
revenue enhancing programs initiated in 1999. The increase was predominantly
offset by lower compensation costs due to the displacement of staff members
previously performing the outsourced functions.
Bankcard fees were up 19.8% due to higher transaction volume, primarily
increased merchant processing and consumer debit card transactions, and system
processing costs which include the full year effect of outsourcing bankcard
operations in the second quarter of 1999. Intangible asset amortization
increased $2.4 million, or 28.3%, due to additional goodwill and other
intangible assets attributable to the branch purchases. All other expenses,
excluding nonrecurring charges, declined $1.7 million from 1999 levels
reflecting lower fraud losses and lower costs at F&M.
- ---------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Year Ended
December 31, Changes in 2000
------------------------- ------------------------------
(in thousands) 2000 1999 Amount Percent
- ---------------------------------------------------------------------------------------
Salaries and
employee benefits $122,577 $122,572 $ 5 --%
Equipment 19,264 16,645 2,619 15.7
Occupancy 16,770 15,414 1,356 8.8
Data processing services 12,608 9,924 2,684 27.0
Intangible asset
amortization 10,733 8,363 2,370 28.3
Professional services 10,088 7,330 2,758 37.6
Bankcard fees 8,959 7,477 1,482 19.8
Telephone 6,364 5,601 763 13.6
Postage and delivery 6,924 5,985 939 15.7
Stationery and supplies 5,602 5,674 (72) (1.3)
Advertising and
public relations 5,034 5,223 (189) (3.6)
Other 17,298 20,475 (3,177) (15.5)
-------- -------- --------
SUBTOTAL 242,221 230,683 11,538 5.0
Check-kiting fraud loss -- 6,095 (6,095) (100.0)
Special Charge 15,541 40,198 (24,657) (61.3)
-------- -------- --------
TOTAL NONINTEREST
EXPENSE $257,762 $276,976 $(19,214) (6.9)
======== ======== ========
=======================================================================================
Nonrecurring expenses included the Special Charges for mergers,
acquisitions and other initiatives in 2000 and 1999 and a $6.1 million ($3.9
million, after-tax) fraud loss due to an illegal check-kiting scheme perpetrated
by a customer against Citizens in 1999. In response to the third quarter fraud
loss, Citizens took immediate action to review and strengthen its procedures in
an effort to prevent future occurrences.
The Special Charges in 2000 and 1999 included $12.3 million and $36.3
million, respectively of merger-related integration costs as more fully
described under the caption "Mergers, Acquisitions and Other Initiatives" on
page 4 of this report and in Note 3 of the Consolidated Financial Statements.
All system conversion activities related to the F&M merger were completed in
2000. The Special Charges also included an additional $3.2 million in 2000 and
$3.9 million in 1999 of
B-12
41
restructuring and other costs associated with separate strategic initiatives and
impairment write-offs.
During 1999 and 2000, Citizens continued to fine-tune its strategic
plan and took steps to make the Company more efficient. In the fourth quarter of
1999, management approved a series of initiatives, which included plans to
combine and integrate the operations of Citizens and F&M and institute other
efficiency measures. These initiatives included consolidation of all F&M
Wisconsin bank charters into one Wisconsin bank charter, conversion of data
processing systems to a common operating platform, elimination and consolidation
of various back room operations and business activities, consolidation of
Citizens' branch network through closure of selected Citizens Bank and F&M
branches in Michigan, Illinois, Wisconsin and Iowa, and transfer of certain
financial and credit audit review functions to a third party. Consolidation of
F&M's bank charters was completed in January 2000 and the final conversion to a
common operating platform was completed in November 2000. Citizens closed 30
branches and eliminated 34 ATMs during 2000, while at the same time opening 20
enhanced ATMs at new sites that are more convenient and have the potential for
greater use. Transfer of the financial and credit audit review functions was
completed in February 2000. In connection with these initiatives, Citizens
experienced a net reduction of 280 positions or 8.7% of its work force. The
remaining restructuring reserves related to these activities was $1.5 million at
year-end 2000.
In 2000, management set new initiatives and affirmed the following
objectives to guide Citizens and shape its actions in 2001 and beyond.
- Aggressively manage expenses,
- Continue to refine our organizational structure to better support
our sales initiative, and
- Streamline the Company to eliminate fragmentation, reduce
management layers, clarify roles, and become more responsive to
market needs.
As a result, in December 2000, management began to realign the Company
to create a more cohesive, responsive organization. The restructuring plans
include streamlining Citizens organizational structure by reorganizing the
Michigan community banks into three regions: Northern, Mid-Michigan and
Southeast. The new organization is expected to increase opportunities for growth
and profitability, and help Citizens focus its efforts on sales. In addition,
Citizen plans to reorganize its four trust bank charters and investment
management business into one nationally chartered trust bank. The single-purpose
trust bank will focus on business development across a much broader market than
the individual banks were able to do and will help Citizens create and market
common products throughout its bank network in a much more efficient and
market-responsive manner. Finally, the plan included a consolidation of
Citizens' direct and indirect lending operations, and exiting of certain
unprofitable indirect lending dealer relationships. The related restructuring
reserve at year-end 2000 totaled $1.8 million and consisted of involuntary
employee termination benefits for 44 employees.
FEDERAL INCOME TAXES
Income tax expense was $35.8 million in 2000, an increase of 27.9% over the 1999
total of $28.0 million. The increase reflected higher pre-tax earnings partially
offset by an increase in tax-exempt interest income and certain nondeductible
costs in the 1999 Special Charge. The Corporation's effective tax rate was 28.3%
in 2000 and 31.1% in 1999. On an operating basis, income tax expense was $41.9
million in 2000, down 3.5% from $43.4 million in 1999. Higher pre-tax operating
income in 2000 was more than offset by a higher level of tax-exempt income in
2000 over 1999.
FINANCIAL CONDITION
Proper management of the volume and composition of Citizens' earning assets and
funding sources is essential for ensuring strong and consistent earnings
performance, maintaining adequate liquidity and limiting exposure to risks
caused by changing market conditions. Citizens' investment securities portfolio
is structured to provide a source of liquidity through maturities and generate
an income stream with relatively low levels of principal risk. Loans comprise
the largest component of earning assets and are Citizens' highest yielding
assets. Client deposits are the primary source of funding for earning assets
while short-term debt and other managed sources of funds are utilized as market
conditions and liquidity needs change.
Average total assets for 2000 were $8.073 billion, an increase of $731
million or 10.0% from 1999. Average earning assets as a percent of average total
assets was 94.0% for 2000, up slightly from 93.6% in 1999. Average loans
comprised 76.8% of average assets during 2000, up from 75.3% in 1999.
Interest-bearing deposits comprised 80.9% of average interest-bearing
liabilities for 2000, decreasing from 87.9% in 1999. The ratio of average
noninterest-bearing deposits to average deposits increased to 15.5% in 2000,
from 15.3% in 1999.
INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
Average investment securities, including money market investments,
comprised 18.5% of total average earning assets in 2000, down from 19.6% in
1999. The decline as a percentage of earning assets reflects a relatively stable
investment portfolio and more rapid loan growth, especially commercial loans, as
Citizens' emphasized increasing higher yielding assets.
The investment portfolio decreased $13.2 million in 2000. Investment in
U.S. Treasury and Federal agency securities totaled $873.2 million, or 63.1% of
total investment securities at December 31, 2000, compared with $920.4 million,
or 65.9% at year-end 1999. Mortgage-backed and asset-backed securities,
including federal agency mortgage-backed securities, declined as a percentage of
total investment securities to 43.2% at December 31, 2000 from 48.1% at year end
1999. State and municipal securities were purchased during 2000 due to their
higher tax equivalent yields and
B-13
42
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Citizens' capacity to utilize tax-exempt income. At December 31, 2000, state and
municipal securities represented 31.1% of total investment securities, compared
with 26.4% in the prior year.
The change in composition of the investment portfolio represents a
de-emphasis of mortgage-backed assets in a declining rate environment when
prepayment rates may increase and become more volatile, and increased investment
in municipal and other federal agency securities. Generally, municipal and other
federal agency securities have higher yields, more certain maturities and cash
flows and tend to perform better in periods when market rates are unchanged or
decreasing. Other securities, consisting primarily of Federal Reserve stock,
Federal Home Loan Bank stock and privately issued asset-backed securities,
decreased to 5.8% of total investment securities from 7.7% a year ago.
In December 1999, in order to provide for more effective
asset/liability management, the entire held to maturity securities portfolio of
F&M was transferred to available for sale. The held to maturity portfolio had an
amortized cost of $208.3 million and fair value of $204.7 million at the date of
transfer.
Money market investments, primarily federal funds sold and commercial
paper, averaged $4.1 million for 2000, down from $48.3 million in 1999. The
amount of funds invested in these assets is based on the present and anticipated
interest rate environment, liquidity needs and other economic factors.
Citizens' present policies with respect to the classification of
investments in debt and equity securities are discussed in Note 1 to the
Consolidated Financial Statements. A summary of investment securities available
for sale at December 31, 2000 and 1999 is presented below. Maturities and
average yields of available for sale securities at year-end 2000 is presented in
Table 6. As of December 31, 2000, the estimated aggregate fair value of
Citizens' investment securities portfolio was $18.0 million above amortized cost
consisting of gross unrealized gains of $22.8 million and gross unrealized
losses of $4.8 million. A summary of estimated fair values and unrealized gains
and losses for the major components of the investment securities portfolio is
provided in Note 5 to the Consolidated Financial Statements.
- ------------------------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE SECURITIES Balances Changes in 2000
----------------------------------- ----------------------------
Year Ended December 31 (in thousands) 2000 1999 Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury $ 21,490 $ 34,487 $ (12,997) (37.7)%
Federal agencies
Mortgage-backed securities 582,618 643,219 (60,601) (9.4)
Other agencies 269,127 242,729 26,398 10.9
State and municipal:
Taxable 12,257 12,359 (102) (0.8)
Tax-exempt 418,518 356,373 62,145 17.4
Mortgage and asset-backed 15,755 28,421 (12,666) (44.6)
Other securities 64,343 79,759 (15,416) (19.3)
---------- ---------- ----------
Total $1,384,108 $1,397,347 $ (13,239) (0.9)
========== ========== ==========
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 6. MATURITIES AND AVERAGE YIELDS OF AVAILABLE FOR SALE SECURITIES AT DECEMBER 31, 2000
U.S. Treasury and
Federal Agency(1) State and Municipal(1),(2) Other(1) Total
-------------------------- -------------------------- ------------------------- -----------------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
(in millions) Cost Value Yield Cost Value Yield Cost Value Yield Cost Value Yield
- ------------------------------------------------------------------------------------------------------------------------------------
Due within one year $ 90.9 $ 91.0 6.34% $ 14.4 $ 14.6 8.41% $ 11.1 $ 11.2 7.20% $ 116.4 $ 116.8 6.75%
One to five years 508.2 512.0 6.22 74.8 76.4 8.15 7.7 7.5 6.60 590.7 595.9 6.48
Five to ten years 218.7 222.4 6.74 148.1 152.8 8.10 0.1 0.1 6.33 366.9 375.3 7.12
After ten years 47.2 47.8 7.09 183.5 187.0 7.77 61.4 61.3 7.30 292.1 296.1 7.53
------ ------ ------ ------ ------ ------ -------- --------
Total $865.0 $873.2 6.47 $420.8 $430.8 7.96 $ 80.3 $ 80.1 7.10 $1,366.1 $1,384.1 6.90
====== ====== ====== ====== ====== ====== ======== ========
Average maturity(3) 4.56 yrs. 7.90 yrs. 1.41 yrs. 5.40 yrs.
====================================================================================================================================
(1) Maturities for Federal agency, collateralized mortgage obligations and
asset-backed securities are based upon projections of independent cash flow
models. Maturities for state and municipal securities incorporate early call
features, if applicable.
(2) Yields for state and municipal securities are calculated on a tax equivalent
basis using a 35% tax rate.
(3) Average maturity information excludes Federal Reserve and Federal Home Loan
Bank stocks with no stated maturity.
B-14
43
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 7. LOAN PORTFOLIO
(in millions) 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
LOANS OUTSTANDING AT DECEMBER 31
Commercial $ 2,127.2 $ 1,822.4 $ 1,619.9 $ 1,370.3 $ 1,176.8
Commercial real estate 1,205.0 1,053.0 790.5 694.0 642.8
Real estate construction 235.0 185.4 149.5 113.5 112.9
Real estate mortgage 1,282.9 1,440.1 1,417.9 1,439.4 1,291.8
Consumer 1,572.7 1,416.6 1,286.9 1,457.0 1,293.5
--------- --------- --------- --------- ---------
Total $ 6,422.8 $ 5,917.5 $ 5,264.7 $ 5,074.2 $ 4,517.8
========= ========= ========= ========= =========
LOAN MATURITIES AND INTEREST RATE SENSITIVITY AT DECEMBER 31, 2000
Within One to After
One Year Five Years Five Years Total
- ------------------------------------------------------------------------------------------------------------------------
Commercial and commercial real estate $ 1,442.8 $ 1,620.3 $ 269.1 $ 3,332.2
Real estate construction 235.0 --- --- 235.0
--------- --------- ------- ---------
Total $ 1,677.8 $ 1,620.3 $ 269.1 $ 3,567.2
========= ========= ======= =========
Loans above:
With floating interest rates $ 939.8 $ 280.8 $ 114.5 $ 1,335.1
With predetermined interest rates 738.0 1,339.5 154.6 2,232.1
--------- --------- ------- ---------
Total $ 1,677.8 $ 1,620.3 $ 269.1 $ 3,567.2
========= ========= ======= =========
========================================================================================================================
LOANS
Citizens extends credit primarily within the local markets of its
banking subsidiaries located in Michigan, Wisconsin, Iowa, Illinois and
Minnesota. Citizens' loan portfolio contains no loans to foreign governments,
enterprises or foreign operations of domestic companies and is widely
diversified by borrowers with no concentration within a single industry that
exceeds 10% of total loans. Loan balances at December 31 and an analysis of the
maturity and interest rate sensitivity of commercial and real estate
construction loans is presented above.
Total loans increased $505.3 million or 8.5% in 2000 with average loans
comprising 81.8% of total average earning assets during 2000, as compared with
80.4% during 1999. Enhanced sales efforts and strong demand for commercial
credit in Citizens' markets increased commercial and commercial real estate
portfolio balances by $456.8 million, or 15.9% in 2000 from year-end 1999.
Consumer loans, which include installment and home equity loans, increased
$156.1 million, or 11.0%, to $1.573 billion at year-end 2000 reflecting
increased sales efforts, higher marine loan balances and strong demand for home
equity and recreational vehicle loans. Residential mortgage loan balances
declined $157.2 million, or 10.9% in 2000 primarily due to loan sales and a
rising interest rate environment in the first half of 1999, which reduced demand
for new residential real estate loans. Prior to the F&M merger, Citizens did not
service any of its residential mortgage portfolio and servicing rights were sold
with the related loans. At December 31, 2000 and 1999, $362.3 million and $378.8
million, respectively, of residential real estate loans originated and
subsequently sold in the secondary market were being serviced. Capitalized
servicing rights relating to the serviced loans totaled $2.7 million at December
31, 2000 and $3.3 million at year-end 1999. Citizens intends to continue to
service these loans and may sell a portion of its future residential mortgage
production with servicing rights retained.
NONPERFORMING ASSETS
A five-year history of nonperforming assets is presented in Table 8.
Nonperforming assets are comprised of nonaccrual, restructured loans and
repossessed assets. Although these assets have more than a normal risk of loss,
they will not necessarily result in a higher level of losses in the future.
Nonperforming assets totaled $66.3 million as of December 31, 2000, an increase
of 88.9% from the year-end 1999 balance of $35.1 million. As a percentage of
total assets, nonperforming assets increased to 0.79% at December 31, 2000, from
0.45% at December 31, 1999. The increase is primarily attributable to changes in
the underlying portfolios and earlier identification of non-performing loans at
the F&M banks following conversion of their portfolios to Citizens' systems
during the year.
Nonperforming commercial and commercial real estate loans increased to
$37.2 million at year-end 2000 from $18.0 million a year ago. Commercial real
estate loans represented $10.2 million in 2000 and $6.2 million in 1999 of such
nonperforming loans. These loans comprised 60.7%, of total nonperforming loans
at December 31, 2000, compared with 57.9% in 1999. The increase in nonperforming
commercial
B-15
44
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 8. NONPERFORMING ASSETS AND PAST DUE LOANS
December 31 (in thousands) 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING LOANS(1),(2)
Nonaccrual
Less than 30 days past due $ 7,237 $ 1,661 $ 2,016 $ 5,128 $ 5,555
From 30 to 89 days past due 7,297 772 1,641 2,021 1,370
90 or more days past due 44,881 26,498 31,485 28,813 33,025
-------- ------- ------- ------- -------
Total 59,415 28,931 35,142 35,962 39,950
90 days past due and still accruing 889 2,139 2,474 3,022 2,773
Restuctured (1) 1,068 9 114 446 718
-------- ------- ------- ------- -------
Total nonperforming loans 61,372 31,079 37,730 39,430 43,441
OTHER REPOSSESSED ASSETS ACQUIRED 4,917 4,039 4,790 4,869 4,996
-------- ------- ------- ------- -------
Total nonperforming assets $ 66,289 $35,118 $42,520 $44,299 $48,437
======== ======= ======= ======= =======
Nonperforming assets as a percent of total loans
plus other repossessed assets acquired 1.03% 0.59% 0.81% 0.87% 1.07%
Nonperforming assets as a percent of total assets 0.79 0.45 0.61 0.67 0.78
NONPERFORMING LOANS BYTYPE(3)
Commercial $ 37,229 $18,005 $19,830 $23,031 $13,299
Real estate mortgage 17,057 7,366 8,032 9,487 4,273
Consumer 7,086 5,708 9,868 6,912 4,585
-------- ------- ------- ------- -------
Total $ 61,372 $31,079 $37,730 $39,430 $22,157
======== ======= ======= ======= =======
====================================================================================================================================
(1) Nonperforming loans include loans on which interest is being recognized only
upon receipt (nonaccrual), those on which interest has been renegotiated to
lower than market rates because of the financial condition of the borrowers
(restructured), and loans 90 days past due and still accruing.
(2) Gross interest income that would have been recorded in 2000 for nonaccrual
and restructured loans, as of December 31, 2000, assuming interest had been
accrued throughout the year in accordance with original terms was $4.953
million. The comparable 1999 and 1998 totals were $3.383 million, and $3.315
million, respectively. Interest collected on these loans and included in
income was $3.045 million in 2000, $1.861 million in 1999 and $1.845 million
in 1998. Therefore, on a net basis, total income foregone due to these loans
was $1.908 million in 2000, $1.522 million in 1999 and $1.470 million in
1998.
(3) Nonperforming loans by type for F&M were not available in 1996 and have,
therefore, been excluded.
and commercial real estate loans is reflected in the allowance for loan losses
through specific and formula based loss allocations as of December 31, 2000. The
loss allocation for commercial and commercial real estate loans increased $13.9
million to $35.2 million at December 31, 2000 from the prior year-end.
Management believes the risk of loss in the commercial real estate nonperforming
loans is significantly less than the total principal balance, due to the nature
of the underlying collateral and the value of such collateral to the total
credit exposure. These loans are generally for owner-occupied properties and do
not rely on the performance of the real estate market to generate funds for
repayment.
Nonperforming loans in the real estate mortgage portfolio increased
$9.7 million at December 31, 2000 from the prior year-end. Residential real
estate loans comprise the majority of these nonperforming loans. Historical loss
ratios in this portfolio are very low and management expects that favorable loss
experience will continue to be experienced despite the increase in nonperforming
loans.
The consumer portfolio is comprised of automobile, personal, marine,
home equity and bankcard loans of which automobile and home equity comprise
55.3% of 2000 average balances. At December 31, 2000, consumer loans represented
11.5% of nonperforming loans, down from 18.4% in 1999.
Citizens maintains formal policies and procedures to control and
monitor credit risk within these portfolios. Based upon present information,
management believes the allowance for loan losses is adequate to meet presently
known credit risks.
The level and composition of nonperforming assets are affected by
economic conditions in Citizens' local markets. Nonperforming assets,
charge-offs and provisions for loan losses tend to decline in a strong economy
and increase in a weak economy, potentially impacting Citizens' results. In
addition to loans classified as nonperforming, management carefully 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 December 31, 2000, such loans amounted to $70.2 million or 1.1% of
total loans compared with $18.9 million or 0.3% of total loans as of December
31, 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. The majority of the increase represents additional credits
monitored at the F&M banks.
B-16
45
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 Citizens' nonperforming loans included in Table 8 are
considered to be impaired. Citizens 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.
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 December 31, 2000, loans considered to be impaired totaled $52.9
million of which $36.3 million were on a nonaccrual basis. Included within this
amount is $32.5 million of impaired loans for which the related allowance for
loan losses is $5.1 million and $20.4 million of impaired loans for which fair
value exceeded the recorded investment in the loan. The average recorded
investment in impaired loans during the year ended December 31, 2000 was
approximately $38.9 million. For the year ended December 31, 2000, Citizens
recognized interest income of $2.5 million on impaired loans. Cash collected on
nonaccrual impaired loans totaled $2.3 million of which $1.2 million was applied
to principal and $1.1 million was recognized using the cash basis method of
income recognition.
At December 31, 1999, loans considered to be impaired totaled $27.5
million of which $18.5 million were on a nonaccrual basis. Included with this
amount is $13.1 million of impaired loans for which the related allowance for
loan losses is $1.5 million and $14.4 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 year ended December 31, 1999 was
approximately $32.5 million. For the year ended December 31, 1999, Citizens
recognized interest income of $1.3 million on impaired loans. Cash collected on
nonaccrual impaired loans totaled $1.5 million of which $0.9 million was applied
to principal and $0.6 million was recognized using the cash basis method of
income recognition.
During 2000, Citizens' banking subsidiaries received a normally
scheduled examination by their governing regulatory agencies. There was no
material reclassification of assets as nonperforming resulting from these
examinations.
- -------------------------------------------------------------------------------------------------------------------------
TABLE 9. AVERAGE DEPOSITS
2000 1999 1998
---------------------- --------------------------- ------------------------
AVERAGE AVERAGE Average Average Average Average
Year Ended December 31 (in millions) BALANCE RATE Balance Rate Balance Rate
- ------------------------------------------------------------- -------------------------------------------------------
Noninterest-bearing demand $ 946.1 --- % $ 904.6 --- % $ 829.8 --- %
Interest-bearing demand 581.5 1.46 578.5 1.55 547.4 1.67
Savings 1,701.7 3.24 1,751.6 2.83 1,635.1 3.08
Time 2,892.1 5.72 2,672.0 5.18 2,604.6 5.65
--------- -------- --------
Total $ 6,121.4 3.74 $5,906.7 3.33 $5,616.9 3.68
========= ======== =========
=========================================================================================================================
DEPOSITS
Average deposit balances and rates for the past three years are
summarized in Table 9. Total average deposits were 3.6% higher in 2000 as
compared with 1999. Deposits increased in all categories except savings
accounts. Average noninterest-bearing demand balances increased 4.6% in 2000
versus the prior year. The increase is due to commercial account growth and the
branch purchases. Time deposits increased 8.2% in 2000 as compared with 1999 due
to the branch purchases and to a lesser extent, an increase in average brokered
deposit balances. Savings accounts decreased 2.8% in 2000 due to a shift in
client preferences from savings accounts to higher rate time deposits and
annuity products. The overall average rate for the deposit portfolio increased
in 2000 to 3.74% from 3.33% in 1999. The increase was the result of the rising
overall interest rate environment in 2000 and a change in the composition of
deposits to higher cost time accounts from lower cost savings accounts. As of
December 31, 2000, certificates of deposits of $100,000 or more accounted for
approximately 15.6% of total deposits.
B-17
46
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
The maturities of these deposits are summarized in Table 10.
- ------------------------------------------------------------
TABLE 10. MATURITY OF TIME CERTIFICATES OF DEPOSIT OF
$100,000 OR MORE AT DECEMBER 31, 2000
(in thousands)
- ------------------------------------------------------------
Three months or less $369,393
After three but within six months 222,109
After six but within twelve months 255,688
After twelve months 124,061
---------
Total $ 971,251
=========
============================================================
Citizens gathers deposits primarily from the local markets of its banking
subsidiaries and has not traditionally relied on purchased deposits for any
significant funding. However, Citizens has begun to more extensively use
brokered deposits as an ancillary source of funding. During 2000 average
brokered deposit balances were $88.3 million compared with $14.9 million in
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.
BORROWED FUNDS
Short-term borrowings are comprised primarily of Federal funds purchased,
securities sold under agreements to repurchase, FHLB advances and Treasury Tax
and Loan notes. Total short-term borrowings averaged $920.3 million in 2000, or
14.4% of total average interest-bearing liabilities, compared with $478.9
million or 8.4% during 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. Additional short-term
FHLB advances borrowed throughout 2000 were used to support continued loan
growth in Citizens' core markets.
As of December 31, 2000, Citizens' Parent company also maintained a
short-term revolving $100 million credit facility with an unused commitment of
$52.0 million. The current facility will mature on August 30, 2001 and is
expected to renew at that time for another 364 day term. The interest rate on
the $48 million outstanding at December 31, 2000 reprices daily and is based on
the Federal funds rate. The Parent company services the debt's principal and
interest payments with dividends from the subsidiary banks. The agreement also
requires Citizens to maintain certain financial covenants. Citizens is in full
compliance with all debt covenants as of December 31, 2000.
Long-term debt, comprised primarily of FHLB notes, accounted for $303.6
million, or 4.7%, of average interest-bearing funds during 2000, increasing from
$210.3 million, or 3.7% during 1999. A summary of long-term debt balances as of
December 31, 2000 and 1999 appears in Note 11 to the Consolidated Financial
Statements. 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 December 31, 2000, shareholders' equity was $680.0 million, compared with
$633.7 million at December 31, 1999. Book value per common share at December 31,
2000 and 1999 was $14.62 and $13.32, respectively.
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 for the past three years are presented below.
- -----------------------------------------------------------------------
Regulatory Minimum
------------------ December 31,
"Well ----------------------------
Required Capitalized" 2000 1999 1998
- -----------------------------------------------------------------------
Risk based:
Tier I capital 4.00% 6.00% 9.05% 9.22% 11.01%
Total capital 8.00 10.00 10.30 10.47 12.26
Tier I leverage 4.00 5.00 7.11 7.21 8.95
=======================================================================
During 2000, Citizens maintained two stock repurchase plans. The stock
repurchase plan initiated in May 1998, 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. As of December 31,
1999, 567,200 shares had been repurchased under this plan. Citizens repurchased
the remaining 32,800 shares under this plan in the first quarter of 2000. In May
2000, Citizens initiated an additional stock repurchase plan that provided for
the repurchase of up to 3,000,000 shares of its common stock for general bank
purposes. As of December 31, 2000, 1,234,100 shares were repurchased under this
plan. A third program authorized and completed in 1999 provided for the
repurchase of 1,400,000 shares. For the year ended December 31, 2000, a total of
1,266,900 shares were purchased under the plans at an average price of $21.55.
Citizens declared cash dividends of $1.015 per share in 2000, an increase
of 10.9% over 1999 dividends of $0.915 per share. Citizens Banking Corporation
or its predecessor, Citizens Commercial & Savings Bank, have paid dividends
every year since 1892 except for several years during the depression of the
1930's.
B-18
47
LIQUIDITY AND DEBT CAPACITY
The liquidity position of Citizens is monitored for its subsidiaries and its
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. 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 profitably.
The subsidiary banks manage liquidity to meet client cash flow needs
while maintaining funds available for loan and investment opportunities. As
discussed in Note 19 to the Consolidated Financial Statements, the Federal
Reserve Bank requires Citizens' banking subsidiaries to maintain certain
noninterest-bearing deposits with the Federal Reserve Bank. These balance
requirements averaged $56.8 million and $45.7 million during 2000 and 1999,
respectively, and were primarily satisfied with cash balances maintained by
Citizens' subsidiaries. The liquidity of the Parent company is managed to
provide funds to pay dividends to shareholders, service debt, invest in
subsidiaries and to satisfy other operating requirements. The primary source of
liquidity for the Parent company is dividends and returns of investment from its
subsidiaries. During 2000, the Parent company received $50.4 million in
dividends from subsidiaries and paid $48.1 million in dividends to its
shareholders. The amount of dividends to the Parent still allowed the subsidiary
banks to maintain sufficient capital to be designated well-capitalized.
As discussed in Note 19 to the Consolidated Financial Statements,
approximately $59.4 million was available as of January 1, 2001 for payment to
the Parent company as dividends by Citizens' banking subsidiaries without
further regulatory approval. Amounts earned by subsidiaries in 2001 will also
become available for such dividend payments. Additional amounts may be available
for payment subject to regulatory approval.
Citizens' long-term debt to equity ratio was 69.3% as of December 31,
2000 compared to 20.1% in 1999. Changes in long-term debt during 2000 are
discussed in the section titled "Borrowed Funds". Management believes that
Citizens has sufficient liquidity and capacity sources 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 differ significantly. Asset/liability
management, used by Citizens to address 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. Table 11 depicts
Citizens' asset/liability static sensitivity (GAP) as of December 31, 2000 and
1999.
As shown, Citizens' interest rate risk position at December 31, 2000 is
liability sensitive in the less than one year time frame with rate sensitive
liabilities exceeding rate sensitive assets by $1.251 billion. 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 could 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, Table 11 does
incorporate appropriate adjustments as indicated in footnotes 1 and 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.
INTEREST RATE SENSITIVITY
A number of measures are used to monitor and manage interest rate risk,
including income simulation and interest sensitivity GAP analyses. An income
simulation model is management's primary tool used to assess the direction and
magnitude of variations in net interest income resulting from changes in
interest rates. Key assumptions in the model include prepayment speeds on
various loan and investment assets; cash flows and maturities of financial
instruments held for purposes other than trading; changes in market conditions,
loan volumes, and pricing; deposit sensitivity; client preferences; and
management's financial capital plans. These assumptions are inherently
uncertain, subject to fluctuation
B-19
48
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------------------------------------
TABLE 11. INTEREST RATE SENSITIVITY
TOTAL
0 - 3 4 - 6 7 - 12 WITHIN 1 - 5 Over
(dollars in millions) Months Months Months 1 YEAR Years 5 Years Total
- -----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
RATE SENSITIVE ASSETS(1)
Loans and leases $ 2,128.9 $ 350.2 $ 669.6 $ 3,148.7 $2,581.4 $ 692.7 $6,422.8
Investment securities 64.1 40.1 30.0 134.2 589.7 660.2 1,384.1
Short-term investments 27.5 --- --- 27.5 --- --- 27.5
--------- ------- --------- --------- -------- --------- --------
Total $ 2,220.5 $ 390.3 $ 699.6 $ 3,310.4 $3,171.1 $ 1,352.9 $7,834.4
========= ======= ========= ========= ======== ========= ========
RATE SENSITIVE LIABILITIES
Deposits (2) $ 990.2 $ 842.5 $ 1,414.2 $ 3,246.9 $1,799.6 $ 223.7 $5,270.2
Other interest bearing liabilities 1,029.1 75.0 210.2 1,314.3 81.5 8.6 1,404.4
--------- ------- --------- --------- -------- --------- --------
Total $ 2,019.3 $ 917.5 $ 1,624.4 $ 4,561.2 $1,881.1 $ 232.3 $6,674.6
========= ======= ========= ========= ======== ========= ========
Period GAP (3) $ 201.2 $(527.2) $ (924.8) $(1,250.8) $1,290.0 $ 1,120.6 $1,159.8
Cumulative GAP 201.2 (326.0) (1,250.8) 39.2 1,159.8
Cumulative GAP to total assets 2.39% (3.88)% (14.88)% (14.88)% 0.47% 13.80% 13.80%
Multiple of rate sensitive assets to liabilities 1.10 0.43 0.43 0.73 1.69 5.82 1.17
- -----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
RATE SENSITIVE ASSETS(1)
Loans and leases $ 1,699.8 $ 355.9 $ 549.9 $ 2,605.6 $2,601.9 $ 710.0 $5,917.5
Investment securities 131.7 40.1 49.0 220.8 522.3 654.3 1,397.4
Short-term investments 63.7 --- --- 63.7 0.1 --- 63.8
--------- ------- --------- --------- -------- --------- --------
Total $ 1,895.2 $ 396.0 $ 598.9 $ 2,890.1 $3,124.3 $ 1,364.3 $7,378.7
========= ======= ========= ========= ======== ========= ========
RATE SENSITIVE LIABILITIES
Deposits (2) $ 1,037.5 $ 689.7 $ 1,122.4 $ 2,849.6 $2,036.7 $ 276.8 $5,163.1
Other interest bearing liabilities 937.9 81.3 0.4 1,019.6 14.7 30.1 1,064.4
--------- ------- --------- --------- -------- --------- --------
Total $ 1,975.4 $ 771.0 $ 1,122.8 $ 3,869.2 $2,051.4 $ 306.9 $6,227.5
========= ======= ========= ========= ======== ========= ========
Period GAP (3) $ (80.2) $(375.0) $ (523.9) $ (979.1) $1,072.9 $ 1,057.4 $1,151.2
Cumulative GAP (80.2) (455.2) (979.1) 93.8 1,151.2
Cumulative GAP to total assets (1.00)% (5.76)% (12.39)% (12.39)% 1.19% 14.57% 14.57%
Multiple of rate sensitive assets to liabilities 0.96 0.51 0.53 0.75 1.52 4.45 1.18
===================================================================================================================================
(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 without contractual
maturities of $779 million in the less than one year category and $1.414
billion in the over one year category as of December 31, 2000. The same
amounts as of December 31, 1999 were $839 million and $1.581 billion,
respectively. This runoff is based on historical trends, which reflects
industry standards.
(3) GAP is the excess of rate sensitive assets (liabilities).
and revision in a dynamic environment and, as a result, the model cannot
precisely estimate net interest income or exactly predict the impact of higher
or lower interest rates on net interest income. Actual results will differ from
simulated results due to timing, magnitude, and frequency of balance sheet
component and interest rate changes, differences in client behavior, market
conditions and management strategies, among other factors.
Results of the multiple simulations done as of December 31, 2000 suggest
that Citizens could expect net interest income to increase by $17.0 million (if
asset and liability balances remain static and interest rates gradually decline
by 200 basis points over the next twelve months) and, to decrease by $4.5
million (if asset and liability balances remain static and interest rates
gradually increase by 200 basis points over the next twelve months) from 2000
levels of net interest income. These variances in net interest income were well
within Citizens' policy parameters established to manage such risk. Management
performed a large number of net interest income simulations using varying
balance sheet
B-20
49
scenarios and differing interest rate environments. The model results presented
herein are intended to illustrate the potential variation in net interest income
from the indicated changes in interest rates, and not to project future levels
of net interest income. In addition to changes in interest rates, the level of
future net interest income is also dependent on a number of other variables,
including the growth, composition and absolute levels of deposits, loans, and
other earning assets and interest bearing liabilities, economic and competitive
conditions, client preferences and other factors.
IMPACT OF INFLATION
Substantially all of the assets and liabilities of a financial institution are
monetary. Therefore, inflation generally has a less significant impact on
financial institutions than fluctuations in market interest rates. Inflation can
lead to accelerated growth in noninterest expenses, which can adversely impact
results of operations. Additionally, inflation may impact the rate of deposit
growth and necessitate increased growth in equity to maintain a strong capital
position. Management believes the most significant impact on financial results
is Citizens' ability to respond to changes in interest rates.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, establishes accounting and reporting standards for hedging activities
and for derivative instruments, including certain derivative instruments
embedded in other contracts. This statement 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. For derivative instruments not accounted for as hedges, changes in
fair value are required to be recognized in earnings. If Citizens elects to
apply hedge accounting, offsetting changes in fair value or cash flows of both
the derivative and the hedged asset or liability would be recognized in earnings
in the same period. Changes in fair value or cash flow that represent the
ineffective portion of a hedge are required to be recognized in earnings and
cannot be deferred. Citizens is also 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. Citizens adopted this statement, as amended, effective January 1,
2001. At year-end 2000, Citizens did not have any outstanding derivatives or
hedging activities. Therefore the impact of adopting the provisions of this
statement on Citizens' financial position, results of operations and cash flow
was not material.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities--A Replacement of FASB Statement 125" was
issued in September 2000 and replaces SFAS No. 125. SFAS No. 140, like SFAS No.
125, establishes accounting and reporting standards to assist in determining
when to recognize or derecognize financial assets and liabilities in the
financial statements after a transfer of financial assets has occurred. SFAS
140, however, requires certain additional disclosures related to transferred
assets and is more restrictive in defining what constitutes a qualified special
purpose entity (QSPE) as well as when transfers to a QSPE will be accorded sales
treatment. SFAS 140 is effective for transfers occurring after March 31, 2001.
The expanded disclosures, however, are effective for years ending after December
15, 2000, but are not required to be applied to prior periods. Citizens has
adopted this statement to the extent permitted and will adopt the remaining
provisions, effective April 1, 2001. The impact of the adoption is not expected
to be material.
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.
B-21
50
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------------------------------------
TABLE 12. SELECTED QUARTERLY INFORMATION
2000 1999
--------------------------------------------- ----------------------------------------------
(in thousands except per share data) FOURTH THIRD SECOND FIRST Fourth Third Second First
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income $161,169 $160,347 $153,406 $147,086 $ 144,422 $ 138,174 $ 130,439 $ 128,524
Interest expense 84,909 80,722 73,878 67,625 63,391 59,773 54,403 54,350
Net interest income 76,260 79,625 79,528 79,461 81,031 78,401 76,036 74,174
Provision for loan losses (1) 5,895 4,642 5,162 5,284 11,422 4,370 4,812 4,071
Noninterest income before
securities gains (losses) 23,015 23,215 22,819 21,295 19,499 19,531 25,429 20,585
Investment securities gains (losses) (1) 6 (5) --- (1) (3,584) 39 301 192
Noninterest expense before special charge 57,579 61,670 61,928 61,044 59,105 59,551 61,416 56,706
Special charges: (2)
Before-tax 8,352 (99) 3,289 3,999 40,198 --- --- ---
After-tax 5,101 (40) 1,994 2,409 28,403 --- --- ---
Net income (loss) 20,355 25,729 22,691 21,885 (9,229) 23,425 24,355 23,443
Net operating income (3) 25,456 25,689 24,685 24,294 25,931 23,425 24,355 23,443
PER SHARE OF COMMON STOCK
Net income (loss):
Basic 0.44 0.54 0.48 0.46 (0.19) 0.49 0.50 0.48
Diluted 0.44 0.54 0.47 0.46 (0.19) 0.49 0.50 0.47
Diluted - net operating (3) 0.54 0.54 0.52 0.51 0.54 0.49 0.50 0.47
Cash dividends declared 0.260 0.260 0.260 0.235 0.235 0.235 0.235 0.21
Market value:(4)
High 29.81 23.94 20.00 22.50 29.94 31.25 42.25 36.06
Low 21.19 16.00 16.00 15.50 21.25 25.19 28.63 31.00
Close 29.06 23.00 16.23 19.50 22.38 26.13 30.06 36.00
===================================================================================================================================
(1) In addition to the special charge, fourth quarter 1999 results include a
$3.6 million loss on sale of securities and an additional $6.8 million loan
loss provision related to the F&M merger.
(2) Includes merger, restructuring, conversion, integration and other
non-recurring costs incurred in connection with mergers, acquisitions and
other corporate initiatives.
(3) 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.
(4) Citizens Banking Corporation common stock is traded on the National Market
tier of the Nasdaq stock market (trading symbol: CBCF). At December 31,
2000, there were approximately 17,558 shareholders of the Corporation's
common stock.
B-22
51
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH 1998
Citizens reported net income of $62.0 million, or $1.28 per diluted share, in
1999 compared with $90.3 million, or $1.84 per diluted share, in 1998. Reported
net income for 1999 included F&M merger-related charges, restructuring and other
costs recorded in the fourth quarter totaling $50.6 million ($35.2 million after
tax). This included a special charge of $40.2 million, $6.8 million of
additional provision for loan losses, and $3.6 million of securities losses.
Excluding these nonrecurring items, Citizens' net operating income for 1999
totaled $97.2 million, an increase of 7.6% over the $90.3 million earned in
1998. On this same basis, operating returns on average assets and equity were
1.32% and 14.45%, respectively, in 1999 as compared with 1.33% and 13.78% in
1998. Overall, the increase in net operating income in 1999 reflects improvement
in net interest income from growth in earning assets and higher noninterest
income, partially offset by an increased provision for loan losses and higher
noninterest expenses.
Net interest income increased 5.9% in 1999 to $309.6 million as compared
with $292.4 million in 1998. Higher levels of earning assets, particularly
commercial and commercial real estate loans, resulted in higher net interest
income. Yields on earning assets decreased to 8.05%, from 8.38% in 1998
reflecting a lower interest rate environment in the first half of 1999 and
growth in relatively lower yielding investment securities in the second half of
1999. Loan growth outpaced deposit growth and Citizens used short-term FHLB
advances and other purchased funds to support the higher level of earning
assets. This change in the funding mix increased average borrowings to 12.1% of
interest-bearing liabilities in 1999, up from 8.3% in 1998. Lower rates on
interest-bearing deposits and long-term debt decreased the cost of
interest-bearing funding sources to 4.07% in 1999 from 4.39% in 1998. Net
interest margin declined to 4.68% in 1999 as compared with 4.78% in 1998.
The provision for loan losses increased to $24.7 million in 1999 from
$16.5 million in 1998. Excluding the additional $6.8 million to conform F&M's
allowance for loan losses to Citizens' methodology and credit risk standards,
the provision was $17.9 million in 1999, an increase of 8.5% over 1998. Net loan
charge-offs to average total loans increased seven basis points to 0.37% as
compared to 0.30% in 1998. The increase is largely due to $4.9 million of loan
losses recorded at F&M after the merger. Additionally, during the year, losses
in the direct and indirect consumer loan portfolios were higher in 1999 than in
the previous year. The allowance for loan losses as a percentage of total loans
was 1.29% at December 31, 1999 compared to 1.32% at the end of 1998.
Noninterest income, before nonrecurring income and securities gains and
losses, increased to $78.0 million in 1999 from $70.2 million in 1998, an
improvement of 11.1%. On the same basis, noninterest income accounted for 20.1%
of total operating revenues in 1999, compared with 19.3% in 1998. Noninterest
income increased $7.8 million from 1998 primarily due to growth in brokerage and
investment fees, bankcard fees, trust fees and deposit service charges.
Excluding nonrecurring items, noninterest expense increased $12.5 million
or 5.7% to $230.7 million in 1999, up from $218.2 million in 1998. This increase
is primarily due to higher compensation, data processing fees, intangible asset
amortization, and bankcard fees. Higher compensation was due to the 1999 branch
acquisition, increased incentive compensation related to pay for performance
sales activity and higher health-care costs. Higher data processing costs
reflects a full year of outsourced data processing, increased volume from the
1999 branch purchase, Year 2000 and other technology initiatives. Intangible
asset amortization increased due to the 1999 branch purchase and bankcard fees
were higher due to additional transaction volume and costs associated with the
outsourcing of bankcard operations.
Citizens had total average assets of $7.342 billion during 1999, up from
1998 average assets of $6.793 billion. Total loans increased $652.8 million or
12.4% in 1999 with average loans comprising 80.4% of total earning assets in
1999, down from 81.0% in 1998. Growth occurred primarily in the commercial loan
and commercial real estate portfolios due to focused sales efforts and the
acquisition of approximately $88 million of commercial loans from the purchase
of seventeen former Bank One offices in the northern part of Michigan's Lower
Peninsula on October 8, 1999. Average investment securities, including money
market investments, comprised 19.6% of total average earning assets in 1999, up
from 19.0% in 1998.
Total average deposits were 5.2% higher in 1999 as compared with 1998 and
included the effect of acquiring $442 million in deposits from the branch
purchase in 1999. Average short-term borrowings, comprised primarily of FHLB
advances, Federal funds purchased, and securities sold under agreements to
repurchase; averaged $478.9 million in 1999, or 8.4% of total average
interest-bearing liabilities, compared with $202.6 million or 3.9% during 1998.
The increase reflects additional borrowings to fund loan growth and Citizens
strategy of leveraging deposit growth from the branch purchase through
utilization of short-term FHLB advances to fund purchases of Federal agency
securities. Long-term debt accounted for $210.3 million or 3.7% of average
interest-bearing funds during 1998, decreasing from $229.0 million or 4.4% in
1998. Average shareholders' equity was $672.2 million in 1999, a 2.6% increase
over the 1998 average of $655.0 million.
B-23
52
CONSOLIDATED BALANCE SHEETS
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
December 31,
(in thousands, except share amounts) 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 318,115 $ 250,745
Money market investments:
Interest-bearing deposits with banks 2,547 755
Federal funds sold 24,986 63,048
---------- ----------
Total money market investments 27,533 63,803
Securities available for sale (amortized cost $1,366,063 in 2000; $1,424,173 in 1999) 1,384,108 1,397,347
Loans:
Commercial 3,332,156 2,875,387
Real estate construction 235,096 185,352
Real estate mortgage 1,282,834 1,440,104
Consumer 1,572,720 1,416,640
---------- ----------
Total loans 6,422,806 5,917,483
Less: Allowance for loan losses (80,070) (76,397)
---------- ----------
Net loans 6,342,736 5,841,086
Premises and equipment 137,094 141,460
Intangible assets 90,808 97,032
Other assets 104,697 107,884
---------- ----------
TOTAL ASSETS $8,405,091 $7,899,357
========== ==========
LIABILITIES
Noninterest-bearing deposits $ 973,938 $ 965,849
Interest-bearing deposits 5,270,203 5,163,149
---------- ----------
Total deposits 6,244,141 6,128,998
Federal funds purchased and securities sold
under agreements to repurchase 394,466 276,805
Other short-term borrowings 538,784 660,474
Other liabilities 76,604 72,307
Long-term debt 471,117 127,104
---------- ----------
Total liabilities 7,725,112 7,265,688
SHAREHOLDERS' EQUITY
Preferred stock - no par value:
Authorized - 5,000,000 shares; Issued - none
Common stock - no par value:
Authorized - 100,000,000 shares
Issued and outstanding - 46,510,111 in 2000; 47,567,809 in 1999 201,549 226,972
Retained earnings 466,692 424,140
Other accumulated comprehensive income (loss) 11,738 (17,443)
---------- ----------
Total shareholders' equity 679,979 633,669
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,405,091 $7,899,357
========== ==========
===================================================================================================================================
See Notes to Consolidated Financial Statements.
B-24
53
CONSOLIDATED STATEMENTS OF INCOME
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
(in thousands, except share amounts) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 535,235 $ 462,223 $ 449,558
Interest and dividends on investment securities:
Taxable 66,190 59,654 49,864
Tax-exempt 20,350 17,151 16,944
Money market investments 233 2,531 5,331
--------- --------- ---------
Total interest income 622,008 541,559 521,697
INTEREST EXPENSE
Deposits 229,137 196,871 206,608
Short-term borrowings 58,532 23,692 9,806
Long-term debt 19,465 11,354 12,859
--------- --------- ---------
Total interest expense 307,134 231,917 229,273
--------- --------- ---------
NET INTEREST INCOME 314,874 309,642 292,424
Provision for loan losses 20,983 24,675 16,528
--------- --------- ---------
Net interest income after provision for loan losses 293,891 284,967 275,896
--------- --------- ---------
NONINTEREST INCOME
Service charges on deposit accounts 26,260 21,378 18,803
Trust fees 24,253 21,701 19,627
Bankcard fees 11,258 9,163 7,899
Brokerage and investment fees 7,693 4,325 2,677
Mortgage and other loan income 4,997 6,078 7,918
Cash management services 2,651 2,556 2,405
Investment securities gains (losses) --- (3,052) 475
Equity security gain --- 5,693 ---
Premium from sale of deposits --- 1,348 ---
Other 13,232 12,802 12,084
--------- --------- ---------
Total noninterest income 90,344 81,992 71,888
--------- --------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits 122,577 122,572 115,088
Equipment 19,264 16,645 17,088
Occupancy 16,770 15,414 15,074
Data processing fees 12,608 9,924 7,943
Intangible asset amortization 10,733 8,363 7,631
Bankcard fees 8,959 7,477 5,894
Postage and delivery 6,924 5,985 5,925
Telephone 6,364 5,601 5,168
Stationery and supplies 5,602 5,674 5,609
Advertising and public relations 5,034 5,223 5,842
Special charges 15,541 40,198 ---
Other 27,386 33,900 26,957
--------- --------- ---------
Total noninterest expense 257,762 276,976 218,219
--------- --------- ---------
INCOME BEFORE INCOME TAXES 126,473 89,983 129,565
Income taxes 35,813 27,989 39,283
--------- --------- ---------
NET INCOME $ 90,660 $ 61,994 $ 90,282
========= ========= =========
NET INCOME PER SHARE:
Basic $ 1.92 $ 1.29 $ 1.86
Diluted 1.91 1.28 1.84
AVERAGE SHARES OUTSTANDING:
Basic 47,310,375 48,169,121 48,426,590
Diluted 47,542,815 48,617,207 49,084,509
==================================================================================================================================
See Notes to Consolidated Financial Statements.
B-25
54
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Accumulated
Other
Common Retained Comprehensive
(in thousands, except per share amounts) Stock Earnings Income (loss) Total
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE - JANUARY 1, 1998 $ 220,939 $ 384,178 $ 5,658 $ 610,775
Net income 90,282 90,282
Net unrealized gain on securities available-for-sale,
net of tax effect of $1,266 1,888 1,888
---------
Total comprehensive income 92,170
Exercise of stock options, net of
shares purchased 4,738 4,738
Cash dividends - $0.82 per share (22,991) (22,991)
Cash dividends of pooled company, pre-merger (12,572) (12,572)
Shares acquired for retirement (8,846) (8,846)
Pre-merger transactions of pooled company 59,608 (42,381) 17,227
--------- --------- -------- ---------
BALANCE - DECEMBER 31, 1998 276,439 396,516 7,546 680,501
Net income 61,994 61,994
Net unrealized loss on securities available-for-sale,
net of tax effect of $13,913 (24,989) (24,989)
---------
Total comprehensive income 37,005
Exercise of stock options, net of
shares purchased 3,349 3,349
Cash dividends - $0.915 per share (30,035) (30,035)
Cash dividends of pooled company, pre-merger (11,766) (11,766)
Shares acquired for retirement (53,866) (53,866)
Pre-merger transactions of pooled company 1,050 7,431 8,481
--------- --------- -------- ---------
BALANCE - DECEMBER 31, 1999 226,972 424,140 (17,443) 633,669
Net income 90,660 90,660
Net unrealized gain on securities available-for-sale,
net of tax effect of $15,718 29,181 29,181
---------
Total comprehensive income 119,841
Exercise of stock options, net of
shares purchased 1,879 1,879
Cash dividends - $1.015 per share (48,108) (48,108)
Shares acquired for retirement (27,302) (27,302)
--------- --------- -------- ---------
Balance - December 31, 2000 $ 201,549 $ 466,692 $ 11,738 $ 679,979
========= ========= ======== =========
=============================================================================================================================
See Notes to Consolidated Financial Statements.
B-26
55
CONSOLIDATED STATEMENTS OF CASH FLOWS
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31,
(in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 90,660 $ 61,994 $ 90,282
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 20,983 24,675 16,528
Depreciation 15,995 14,148 12,391
Amortization of goodwill and other intangibles 10,733 8,363 7,631
Intangible asset impairment -- 2,349 --
Deferred income tax (credit) 3,585 (7,953) 1,836
Net amortization on investment securities (147) 2,743 1,748
Investment securities losses (gains) -- 3,052 (475)
Loans originated for sale (132,878) (117,603) (219,269)
Proceeds from loan sales 133,050 118,477 220,674
Donation of equity security 1,116 -- --
Equity security gain -- (5,693) --
Premium on sale of branch deposits -- (1,348) --
Accrued merger related and other charges (14,050) 17,387 --
Other (85) (8,909) (12,857)
--------- --------- ---------
Net cash provided by operating activities 128,962 111,682 118,489
INVESTING ACTIVITIES:
Net (increase) decrease in money market investments 36,270 45,745 (42,887)
Securities available-for-sale:
Proceeds from sales 6,755 85,288 14,114
Proceeds from maturities 183,185 373,228 468,672
Purchases (131,311) (697,238) (526,756)
Securities held-to-maturity:
Proceeds from maturities -- 25,304 28,330
Purchases -- (71,454) (12,311)
Net increase in loans and leases (522,569) (520,999) (117,974)
Net increase in properties and equipment (10,519) (20,221) (23,228)
Proceeds from sale of Magic Line, Inc. stock -- 5,693 --
Acquisitions (net of cash acquired) 26,008 317,214 (1,066)
--------- --------- ---------
Net cash used by investing activities (412,181) (457,440) (213,106)
FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings deposits (231,753) (115,749) 228,647
Net increase (decrease) in time deposits 315,889 (70,131) (89,132)
Net increase (decrease) in short-term borrowings (4,029) 751,888 (64,982)
Proceeds from issuance of long-term debt 740,150 58,598 129,256
Principal reductions in long-term debt (396,137) (157,665) (85,978)
Cash dividends paid (48,108) (41,801) (35,563)
Proceeds from stock options exercised 1,879 3,349 4,738
Shares acquired for retirement (27,302) (53,866) (8,846)
--------- --------- ---------
Net cash provided by financing activities 350,589 374,623 78,140
--------- --------- ---------
Net increase (decrease) in cash and due from banks 67,370 28,865 (16,477)
Cash and due from banks at beginning of period 250,745 221,880 238,357
--------- --------- ---------
Cash and due from banks at end of period $ 318,115 $ 250,745 $ 221,880
========= ========= =========
Supplemental Cash Flow Information:
Interest paid $ 297,396 $ 233,689 $ 233,443
Income taxes paid 30,647 38,444 38,814
================================================================================================================
See Notes to Consolidated Financial Statements.
B-27
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Citizens Banking Corporation (Citizens)
and its subsidiaries conform to generally accepted accounting principles in the
United States. Management makes estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from these estimates. The following describes Citizens'
policies:
CONSOLIDATION: The Consolidated Financial Statements include the accounts
of Citizens and its subsidiaries after elimination of all material intercompany
transactions and accounts.
INVESTMENT SECURITIES: Citizens classifies all debt and equity securities
as available for sale. Available for sale securities are reported at fair value
with unrealized gains and losses included in shareholders' equity. In the event
that an investment security is sold, the adjusted cost of the specific security
sold is used to compute the applicable gain or loss.
ALLOWANCE FOR LOAN LOSSES: Citizens maintains an allowance for credit
losses to absorb losses inherent in the loan portfolio. The allowance is based
on a regular, quarterly assessment of the probable losses inherent in the loan
portfolios. The allowance is increased by the provision charged to income and
reduced by the amount charged-off, net of recoveries. Citizens' methodology for
measuring the adequacy of the allowance relies on several key elements, which
include specific allowances for identified problem loans, reserves by formula
and the unallocated allowance.
Specific allowances are established in cases where management has
identified significant conditions or circumstances related to a credit that
management believes indicate it is probable that a loss has been or will be
incurred. The specific credit allocations are based on a regular analysis of all
commercial and commercial mortgage loans over a fixed dollar amount where the
internal credit rating is at or below a predetermined classification. The
allowance amount is determined by analyzing the financial condition, collateral
value and other qualitative factors as well as by a method prescribed by
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan".
The formula allowance is calculated by applying loss factors to
outstanding loans (excluding specifically identified credits) based on loan
type, accrual status and internal risk grade of such loans and pools of loans.
The loss factors are determined based on industry averages adjusted quarterly
for recent and historical (generally three-year) loss experience in the specific
portfolios.
The unallocated portion of the allowance is determined based upon
management's assessment of general economic conditions, as well as specific
economic factors in the individual markets in which Citizens operates. This
determination inherently involves a higher degree of uncertainty and considers
current risk factors that may not have yet manifested themselves in the
Company's specific allowances or in the historical loss factors used to
determine the formula allowances.
The allowance also incorporates the results of measuring impaired loans
as provided in SFAS No. 114. Reserve allocations established for impaired loans
are determined based on the fair value of the investment measured using either
the present value of expected future cash flows discounted at the initial
effective interest rate on the loan, the observable market price of the loan, or
the fair value of the collateral if the loan is collateral dependent. A loan is
considered impaired when management determines it is probable that all the
principal and interest due under the contractual terms of the loan will not be
collected.
PREMISES AND EQUIPMENT: Premises and equipment, including leasehold
improvements, are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed principally on a
straight-line basis and are charged to expense over the lesser of the estimated
useful life of the assets or lease term. Maintenance and repairs as well as
gains and losses on dispositions are charged to expense as incurred.
OTHER REAL ESTATE: Other real estate includes properties acquired in
satisfaction of a debt. These properties are carried at the lower of cost or
fair value, net of estimated costs to sell, based upon current appraised value.
Losses arising from the acquisition of such properties are charged against the
allowance for loan losses. Subsequent valuation adjustments and gains or losses
on disposal of these properties are charged to other expenses as incurred.
INTANGIBLE ASSETS: Goodwill, the excess of cost over the fair value of
net identifiable tangible and intangible assets acquired in acquisitions
accounted for as purchases, is amortized on a straight-line basis over periods
ranging from 10 to 20 years. The carrying amount of goodwill is reviewed for
impairment as events or changes in facts and circumstances warrant. Impairment
of goodwill is evaluated by geographic region and is based on a comparison of
the recorded balance of goodwill to the applicable discounted cash flows over
the remaining amortization period of the associated goodwill. To the extent that
impairment may exist, the current carrying amount is reduced by the estimated
shortfall.
LOAN SALES AND SERVICING RIGHTS: Gains and losses on the sales of loans
are determined using the specific-identification method. When servicing is
retained, the servicing rights are amortized in proportion to, and over the
period of, estimated net servicing revenues. Impairment of servicing rights is
assessed based on the fair value of those rights. Fair values are estimated
using discounted cash flows based on a current market interest rate. For
purposes of measuring impairment, the rights are stratified by rate in the
quarter in which the related loans were sold.
B-28
57
INCOME TAXES: Citizens and its subsidiaries file a consolidated federal
income tax return. Income tax expense is based on income as reported in the
Consolidated Statements of Income. When income and expenses are recognized in
different periods for tax purposes, applicable deferred taxes are provided in
the Consolidated Financial Statements.
LOAN INTEREST AND FEE INCOME: Interest on loans is generally accrued and
credited to income based upon the principal amount outstanding. Loans are placed
on nonaccrual status when the collection of principal or interest is considered
doubtful, or payment of principal or interest is past due 90 days or more and
the loan is not well secured and in the process of collection. When these loans
(including a loan impaired) are placed on nonaccrual status, all interest
previously accrued but unpaid is reversed against current year interest income.
Interest payments received on nonaccrual loans are credited to income if future
collection of principal is probable. Loans are normally restored to accrual
status when interest and principal payments are current and it is believed that
the financial condition of the borrower has improved to the extent that future
principal and interest payments will be met on a timely basis. Loan origination
fee income, net of direct origination costs and certain incremental direct
costs, is deferred and amortized as a yield adjustment over the estimated term
of the related loans by methods that approximate the level yield method.
NET INCOME PER SHARE: Basic net income per share is based on net income
divided by the weighted average number of shares outstanding in each period.
Diluted net income per share shows the dilutive effect of additional common
shares issuable upon the assumed exercise of stock options granted under
Citizens' stock option plans, using the treasury stock method.
CASH FLOWS: For purposes of reporting cash flows, cash and cash
equivalents include cash on hand and amounts due from banks.
RECLASSIFICATIONS: Certain amounts have been reclassified to conform to
the current year presentation.
NOTE 2. MERGERS AND ACQUISITIONS
On May 12, 2000, Citizens purchased three Jackson, Michigan offices of Great
Lakes National Bank. The purchase added approximately $31 million in deposits,
for which Citizens paid a premium of $3.9 million. On October 8, 1999, Citizens
acquired seventeen offices of Bank One located in the northern section of
Michigan's Lower Peninsula. This purchase added approximately $88 million in
loans and $442 million in deposits, for which Citizens paid a premium of $36.1
million or 10.13% of certain core deposits. These transactions were accounted
for as purchases; accordingly, the financial statements include their results of
operations only since the acquisition dates.
On November 1, 1999, Citizens acquired F&M Bancorporation, Inc. (F&M)
headquartered in Kaukauna, Wisconsin. As part of the acquisition, Citizens
issued 21 million shares of its common stock, based on a fixed exchange ratio of
1.303, for all of the outstanding shares of F&M. This transaction was accounted
for as a pooling of interests and, accordingly, all periods presented include
the results of F&M.
Unaudited details of the results of operations of the previously separate
corporations for the periods prior to combinations are as follows:
- -----------------------------------------------------------------
(unaudited) Year Ended
(in thousands,except Ten Months Ended December 31,
per share data) October 31, 1999 1998
- -----------------------------------------------------------------
Net Interest Income
Citizens $169,351 $197,846
F&M Bancorporation 87,201 95,198
-------- --------
Combined $256,552 $293,044
======== ========
Net Income
Citizens $ 48,459 $ 56,785
F&M Bancorporation 31,084 33,497
-------- --------
Combined $ 79,543 $ 90,282
======== ========
Diluted net income per
common share
Citizens $ 1.75 $ 1.98
F&M Bancorporation 1.93 2.15
Combined 1.63 1.84
=================================================================
B-29
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. MERGER, BUSINESS RESTRUCTURING AND OTHER CHARGES
The following provides details on the reserves recorded in 2000 and 1999
in connection mergers, business restructuring and other charges associated with
various corporate initiatives.
- ------------------------------------------------------------------------------------------------------------------------------------
Fourth Reserve Additional Reserve
Quarter Amount Utilized Balance 4th Qtr. 2000 Amount Utilized Balance
1999 --------------------- December 31, Restructuring ------------------- December 31,
(in thousands) Charge Cash Non-cash 1999 Charge Cash Non-cash 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Employee benefits and severance $ 7,482 $ (144) $ --- $ 7,338 $ 1,962 $(3,660) $ (2,324) $ 3,316
Contract termination and
other conversion costs 13,598 (4,241) 9,357 (5,387) (3,951) 19
Professional fees 6,345 (5,711) 634 (607) (25) 2
Facilities and equipment 3,355 (3,355) --- ---
Goodwill & core deposit ---
premium write-downs 2,349 (2,349) --- ---
Equity investment write-down 520 (520) --- ---
Charitable trust contribution 2,500 (2,500) --- ---
Other 4,049 (2,788) (1,203) 58 (30) (28) ---
-------- -------- -------- -------- ------- ------- -------- -------
Total $ 40,198 $(15,384) $ (7,427) $ 17,387 $ 1,962 $(9,684) $ (6,328) $ 3,337
======== ======== ======== ======== ======= ======= ======== =======
====================================================================================================================================
In the fourth quarter of 1999, Citizens recorded a pre-tax charge of
$40.2 million consisting of $36.3 million (25.9 million after-tax) in
merger-related integration costs and $3.9 million ($2.5 million after-tax) of
restructuring and other costs related to separate strategic initiatives and
impairment write-offs. The charge was recorded as a separate component of
noninterest expense, the "Special Charge."
Merger-related integration costs recorded included employee termination
benefits, transaction costs, contract termination and other conversion costs
(primarily recognition of obligations under existing contractual agreements
related to system conversions), asset-related write-downs, a write-down of
impaired goodwill at an F&M bank, a contribution to Citizens' Charitable Trust
for the acquired entities and other transaction related costs. Restructuring and
other costs for non-merger activities consisted of employee termination benefits
of $0.4 million, professional fees of $0.7 million, asset related write-downs of
$1.8 million, and other costs of $0.1 million for strategic initiatives approved
in the fourth quarter of 1999 as well as a write-down of a core deposit premium
from a previous acquisition of $0.3 million and a loss for an other than
temporary decline in the market value of an equity investment of $0.5 million.
The approved initiatives included realignment of Citizens branch network,
including closure of selected branches in Michigan and Illinois, and transfer of
certain financial and credit audit functions to a third party.
Also, in the fourth quarter of 1999, Citizens recorded $6.8 million ($4.4
million after-tax) of additional provision for loan losses and $3.6 million
($2.4 million after-tax) of securities losses related to the F&M merger. The
additional loan loss provision was provided to conform F&M's allowance to that
which results from applying Citizens' allowance methodology and credit risk
standards to F&M's loan portfolio. The security losses resulted from the sale of
$122.8 million of securities to reposition the portfolios of Citizens and F&M
after the merger to normalize investment exposure and reduce overall interest
rate risk.
In 2000, net merger-related integration costs of $12.3 million ($7.4
million after-tax) were charged to the Special Charge for system conversions,
business unit integration, branch closures and other items associated with the
F&M merger. Included in this amount were reversals of prior year business
restructuring reserves of $6.2 million due to successful settlement of a
contract with a former vendor of F&M and favorable experience in employee
separations. All system conversion activities related to the F&M merger were
completed in 2000. At December 31, 2000, the remaining reserve balance related
to the F&M merger and initiatives approved in 1999 totaled $1.5 million.
In the fourth quarter of 2000, Citizens recorded an additional pre-tax
charge of $3.2 million ($2.1 million after-tax) for restructuring costs of $2.0
million and asset impairment and other charges of $1.2 million associated with
new corporate and organizational re-engineering initiatives. The restructuring
plans included reorganization of Citizens' trust and investment management
business into one nationally chartered trust bank, streamlining of the Company's
community bank organizational structure, consolidation of its direct and
indirect lending operations, and exiting of certain unprofitable indirect
lending dealer relationships. The related restructuring reserve at year-end 2000
totaled $1.8 million and consisted of involuntary employee termination benefits
for 44 employees.
As shown in the table above, total deductions to Citizens' Special Charge
reserve were $16.0 million in 2000 and $22.8 million in 1999. Included in these
deductions were cash payments of $9.7 million and $15.4 million in 2000 and
1999, respectively.
B-30
59
The components of the Special Charges in 2000 and 1999 recorded in
noninterest expense were as follows:
- -----------------------------------------------------------------------------
(in thousands) 2000 1999
- -----------------------------------------------------------------------------
MERGER, RESTRUCTURING & OTHER COSTS
RELATED TO 1999 ACQUISITIONS &
STATEGIC INITIATIVES APPROVED IN 1999
Employee salaries, benefits & severence $ 2,098 $ 7,482
Contract termination and
other conversion costs 9,981 13,598
Professional fees 477 6,345
Charitable Trust contribution --- 2,500
Other merger integration costs 3,838 2,845
Asset impairment and other writeoffs:
Facilities and equipment 1,207 3,355
Goodwill & core deposit premium --- 2,349
Other real estate --- 964
Equity investment --- 520
Other writeoffs 982 240
Changes in 1999 reserve estimates:
Contract settlement less than
amount accrued (3,900) ---
Changes in benefits and
severence estimates (2,324) ---
-------- --------
Subtotal 12,359 40,198
ADDITIONAL RESTRUCTURING & OTHER COSTS
FOR STATEGIC INITIATIVES APPROVED IN 2000
Employee benefits and severence 1,962 ---
Software & equipment writeoffs 654 ---
Professional fees 463 ---
Other 103 ---
-------- --------
Subtotal 3,182 ---
-------- --------
Total $ 15,541 $ 40,198
======== ========
=============================================================================
NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended,
establishes accounting and reporting standards for hedging activities and for
derivative instruments, including certain derivative instruments embedded in
other contracts. This statement requires a company to recognize all derivatives
as either assets or liabilities in its balance sheet and measure those
instruments at fair value. Citizens adopted this statement as amended effective
January 1, 2001. At year-end 2000, Citizens did not have any outstanding
derivatives or hedging activities. Therefore the impact of adopting the
provisions of this statement on Citizens' financial position, results of
operations and cash flow was not material.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES: SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities--A Replacement
of FASB Statement 125" was issued in September 2000 and replaces SFAS No. 125.
SFAS No. 140, like SFAS No. 125, establishes accounting and reporting standards
to assist in determining when to recognize or derecognize financial assets and
liabilities in the financial statements after a transfer of financial assets has
occurred. SFAS 140, however, requires certain additional disclosures related to
transferred assets and is more restrictive in defining what constitutes a
qualified special purpose entity (QSPE) as well as when transfers to a QSPE will
be accorded sales treatment. SFAS No. 140 is effective for transfers occurring
after March 31, 2001. The expanded disclosures, however, are effective for years
ending after December 15, 2000, but are not required to be applied to prior
periods. Citizens has adopted this statement to the extent permitted and will
adopt the remaining provisions, effective April 1, 2001. The impact of the
adoption is not expected to be material.
B-31
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. INVESTMENT SECURITIES
The amortized cost, estimated fair value and gross unrealized gains and losses
of investment securities follow:
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000 December 31, 1999
------------------------------------------------- -------------------------------------------------
ESTIMATED GROSS GROSS Estimated Gross Gross
AMORTIZED FAIR UNREALIZED UNREALIZED Amortized Fair Unrealized Unrealized
(in thousands) COST VALUE GAINS LOSSES Cost Value Gains Losses
- -------------------------------------------------------------------------------- -------------------------------------------------
AVAILABLE FOR SALE:
U.S. Treasury $ 21,555 $ 21,490 $ 27 $ 92 $ 35,014 $ 34,487 $ 12 $ 539
Federal agencies:
Mortgage-backed 579,096 582,618 5,659 2,137 657,795 643,219 683 15,259
Other 264,348 269,127 5,205 426 248,000 242,729 16 5,287
State and municipal 420,835 430,775 11,925 1,985 375,866 368,732 2,946 10,080
Mortgage and asset-backed 15,884 15,755 9 138 28,761 28,421 18 358
Other 64,345 64,343 4 6 78,737 79,759 1,094 72
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total available for sale $1,366,063 $1,384,108 $ 22,829 $ 4,784 $1,424,173 $1,397,347 $ 4,769 $ 31,595
========== ========== ========== ========== ========== ========== ========== ==========
====================================================================================================================================
The amortized cost and estimated fair value of debt securities by
contractual maturity at December 31, 2000 are shown below.
- ----------------------------------------------------------------
Estimated
Amortized Fair
(in thousands) Cost Value
- ----------------------------------------------------------------
Due within one year $ 63,373 $ 63,504
One to five years 264,906 268,831
Five to ten years 197,814 204,875
After ten years 183,495 187,033
---------- ----------
709,588 724,243
Equity securities 61,495 61,492
Mortgage and asset-backed
securities 594,980 598,373
---------- ----------
Total $1,366,063 $1,384,108
========== ==========
================================================================
Sales of investment securities resulted in realized gains and losses as
follows:
- --------------------------------------------------------------------------------
Year Ended December 31,
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Securities gains $ 67 $ 561 $ 504
Securities losses (67) (3,613) (29)
------- ------- -------
Net gain (loss) $ --- $(3,052) $ 475
======= ======= =======
================================================================================
Securities with amortized cost of $530.4 million at December 31, 2000,
and $717.2 million at December 31, 1999, were pledged to secure public deposits,
repurchase agreements, and other liabilities. Except for obligations of the U.S.
Government and its agencies, no holdings of securities of any single issuer
exceeded 10% of consolidated shareholders' equity at December 31, 2000 or 1999.
In December 1999, in order to provide for more effective asset/liability
management, the entire held to maturity securities portfolio of F&M was
transferred to available for sale. The held to maturity portfolio had an
amortized cost of $208.3 million and fair value of $204.7 million at the date of
transfer. The unrealized loss of $3.6 million is included, net of tax, in
accumulated other comprehensive income.
NOTE 6. LOANS AND NONPERFORMING ASSETS
Citizens extends credit primarily within the Midwestern states of Michigan,
Wisconsin, Illinois, Iowa, and Minnesota. In Michigan the primary market
includes most parts of the Lower Peninsula. In Wisconsin the primary market area
is the Fox Valley region extending from Green Bay to Appleton to Oshkosh as well
as northeastern and southwestern Wisconsin. Other primary market areas are
central Iowa; the western suburban market of Chicago, Illinois; and Dundas,
Minnesota. Citizens seeks to limit its credit risk by establishing guidelines to
review its aggregate outstanding commitments and loans to particular borrowers,
industries and geographic areas. Collateral is secured based on the nature of
the credit and management's credit assessment of the customer. Citizens' loan
portfolio is widely diversified by borrowers with no concentration within a
single industry that exceeds 10% of total loans. Citizens has no loans to
foreign countries and generally does not participate in large national loan
syndications or highly leveraged transactions. Most of Citizens' commercial real
estate loans consist of mortgages on owner-occupied properties. Those borrowers
are involved in business activities other than real estate, and the sources of
repayment are not dependent on the performance of the real estate market.
B-32
61
A summary of nonperforming assets follows:
- --------------------------------------------------------------------
December 31,
(in thousands) 2000 1999
- --------------------------------------------------------------------
Nonperforming loans:
Nonaccrual $59,415 $28,931
Loans 90 days past due (still accruing) 889 2,139
Restructured 1,068 9
------- -------
Total nonperforming loans 61,372 31,079
Other real estate 3,734 3,040
Other assets acquired by repossession 1,183 999
------- -------
Total nonperforming assets $66,289 $35,118
======= =======
====================================================================
The effect of nonperforming loans on interest income follows:
- ---------------------------------------------------------------------
Year Ended December 31,
(in thousands) 2000 1999 1998
- ---------------------------------------------------------------------
Interest income:
At original contract rates $4,953 $3,383 $3,315
As actually recognized 3,045 1,861 1,845
------ ------ ------
Interest foregone $1,908 $1,522 $1,470
====== ====== ======
=====================================================================
There are no significant commitments outstanding to lend additional funds
to clients whose loans were classified as nonaccrual or restructured at December
31, 2000.
At December 31, 2000, loans considered to be impaired totaled $52.9
million of which $36.3 million were on a nonaccrual basis. Included within this
amount is $32.5 million of impaired loans for which the related allowance for
loan losses is $5.1 million and $20.4 million of impaired loans for which fair
value exceeded the recorded investment in the loan. The average recorded
investment in impaired loans during the year ended December 31, 2000 was
approximately $38.9 million. For the year ended December 31, 2000, Citizens
recognized interest income of $2.5 million on impaired loans. Cash collected on
nonaccrual impaired loans totaled $2.3 million of which $1.2 million was applied
to principal and $1.1 million was recognized using the cash basis method of
income recognition.
At December 31, 1999, loans considered to be impaired totaled $27.5
million of which $18.5 million were on a nonaccrual basis. Included with this
amount is $13.1 million of impaired loans for which the related allowance for
loan losses is $1.5 million and $14.4 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 year ended December 31, 1999 was
approximately $32.5 million. For the year ended December 31, 1999, Citizens
recognized interest income of $1.3 million on impaired loans. Cash collected on
nonaccrual impaired loans totaled $1.5 million of which $0.9 million was applied
to principal and $0.6 million was recognized using the cash basis method of
income recognition.
Certain directors and executive officers of Citizens and its significant
subsidiaries, including their families and entities in which they have 10% or
more ownership, were clients of the banking subsidiaries. Total loans to these
clients aggregated $19.1 million and $20.0 million at December 31, 2000 and
1999, respectively. During 2000, new loans of $4.2 million were made and
repayments totaled $5.1 million. Substantially all such loans were made in the
ordinary course of business on substantially the same terms, including interest
rates and collateral, as those for comparable transactions with unrelated
parties and did not involve more than normal risk of collectibility.
The consolidated financial statements do not include loans serviced for
others, which totaled $362.3 million and $374.8 million at December 31, 2000 and
1999, respectively. The carrying value of mortgage servicing rights approximates
fair value at December 31, 2000 and 1999. At year-end 2000, Citizens recognized
impairment of $260,000 on mortgage servicing rights to mark them to market.
Changes in originated mortgage servicing rights for the years ended
December 31 were as follows:
- ------------------------------------------------------------
(in thousands) 2000 1999
- ------------------------------------------------------------
Balance - January 1 $ 3,335 $ 2,603
Mortgage servicing rights capitalized 161 1,468
Amortization (556) (736)
Impairment loss (260) --
------- -------
Balance - December 31 $ 2,680 $ 3,335
======= =======
============================================================
NOTE 7. ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses follows:
- -------------------------------------------------------------------
(in thousands) 2000 1999 1998
- -------------------------------------------------------------------
Balance - January 1 $ 76,397 $ 69,740 $ 67,010
Allowance of acquired banks
and branches --- 2,400 1,745
Provision for loan losses 20,983 24,675 16,528
Charge-offs (25,448) (26,862) (19,795)
Recoveries 8,138 6,444 4,252
-------- -------- --------
Net charge-offs (17,310) (20,418) (15,543)
-------- -------- --------
Balance - December 31 $ 80,070 $ 76,397 $ 69,740
======== ======== ========
===================================================================
B-33
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
- -------------------------------------------------------------
December 31,
(in thousands) 2000 1999
- -------------------------------------------------------------
Land $ 21,812 $ 21,433
Buildings 142,814 140,126
Leasehold improvements 6,221 6,111
Furniture and equipment 132,026 125,333
--------- ---------
302,873 293,003
Accumulated depreciation
and amortization (165,779) (151,543)
--------- ---------
Total $ 137,094 $ 141,460
========= =========
=============================================================
Certain branch facilities and equipment are leased under various
operating leases. Total rental expense, including expenses related to these
operating leases, was $4.8 million in 2000, $4.1 million in 1999 and $4.7
million in 1998. Future minimum rental commitments under non-cancelable
operating leases are as follows at December 31, 2000: $4.0 million in 2001, $3.6
million in 2002, $2.9 million in 2003, $1.1 million in 2004, $0.7 million in
2005, and $2.6 million after 2005.
NOTE 9. DEPOSITS
A summary of deposits follows:
- --------------------------------------------------------------------------
December 31,
(in thousands) 2000 1999
- --------------------------------------------------------------------------
Noninterest-bearing demand $ 973,938 $ 965,849
Interest-bearing demand 574,029 609,578
Savings 1,618,884 1,811,142
Time deposits over $100,000 971,251 695,315
Other time deposits 2,106,039 2,047,114
---------- ----------
Total $6,244,141 $6,128,998
========== ==========
==========================================================================
Excluded from total deposits are demand deposit account overdrafts, which
have been reclassified as loans. At December 31, 2000 and 1999, these overdrafts
totaled $7.4 million and $6.1 million, respectively. Time deposits with
remaining maturities of one year or more are $606.0 million at December 31,
2000. The maturities of these time deposits are as follows: $421.4 million in
2002, $118.5 million in 2003, $29.4 million in 2004, $15.0 million in 2005 and
$21.7 million after 2005.
NOTE 10. SHORT-TERM BORROWINGS
Short-term borrowings consist of Federal funds purchased and securities sold
under agreements to repurchase, Federal Home Loan Bank (FHLB) borrowings, other
bank borrowings, and demand notes to the U.S. Treasury. Federal funds purchased
are overnight borrowings from other financial institutions. Securities sold
under agreements to repurchase are secured transactions done principally with
clients and generally mature within thirty days.
Citizens' Parent company maintains a short-term line of credit with four
banks totaling $100 million. The interest rate on the outstanding balance of $48
million at December 31, 2000 reprices daily and is based upon the Federal funds
rate. Interest is payable monthly and the remaining principal is due in August
2001. The Parent company services the debt's principal and interest payments
with dividends from the subsidiary banks. The agreement also requires Citizens
to maintain certain financial covenants. Citizens is in full compliance with all
debt covenants as of December 31, 2000.
Information relating to federal funds purchased and securities sold under
agreements to repurchase follows:
- ----------------------------------------------------------------
(in thousands) 2000 1999 1998
- ----------------------------------------------------------------
At December 31:
Balance $394,466 $276,805 $172,183
Weighted average
interest rate paid 6.35% 5.20% 4.14%
During the year:
Maximum outstanding
at any month-end $540,652 $326,339 $233,684
Daily average 305,402 256,718 179,147
Weighted average
interest rate paid 6.18% 4.74% 4.78%
=================================================================
A significant amount of short-term borrowings also consisted of FHLB
advances and lines of credit to Citizens' subsidiary banks. Information relating
to short-term FHLB borrowings follows:
- ---------------------------------------------------
(in thousands) 2000 1999 (1)
- ---------------------------------------------------
At December 31:
Balance $450,074 $555,874
Weighted average
interest rate paid 6.54% 5.34%
During the year:
Maximum outstanding
at any month-end $622,874 $555,874
Daily average 581,467 196,055
Weighted average
interest rate paid 6.47% 5.26%
===================================================
(1) Prior year amounts were immaterial.
B-34
63
NOTE 11. LONG-TERM DEBT
A summary of long-term debt follows:
- --------------------------------------------------------
December 31,
(in thousands) 2000 1999
- --------------------------------------------------------
CITIZENS SUBSIDIARIES:
FHLB Notes $470,767 $126,854
Other 350 250
-------- --------
Total long-term debt $471,117 $127,104
======== ========
========================================================
Long-term advances from the FHLB are at fixed and variable rates ranging
from 4.90% to 7.73% and have maturities ranging from three to fifteen years.
Interest is paid monthly. At December 31, 2000 and 1999, qualifying mortgage
loans of $1.649 billion and $1.330 billion, respectively, as well as FHLB stock
collateralized long and short-term advances from the FHLB.
Maturities of long-term debt during the next five years follow:
- ------------------------------------------
(in thousands)
- ------------------------------------------
2001 $ ---
2002 125,500
2003 100,500
2004 331
2005 120,219
Over 5 Years 124,567
---------
Total $ 471,117
=========
==========================================
NOTE 12. EMPLOYEE BENEFIT PLANS
PENSION AND POSTRETIREMENT BENEFITS: Citizens maintains defined benefit
pension plans covering the majority of its employees, and postretirement benefit
plans for retirees that include health care benefits and life insurance
coverage. Pension retirement benefits are based on the employee's length of
service and salary levels. Actuarially determined pension costs are charged to
current operations. It is Citizens' policy to fund pension costs in an amount
sufficient to meet or exceed the minimum funding requirements of applicable laws
and regulations, plus such additional amounts as Citizens deems appropriate up
to that allowable by federal tax regulations.
Citizens also maintains nonqualified supplemental benefit plans for
certain key employees. These plans are provided for by charges to earnings
sufficient to meet the projected benefit obligation. The defined pension
benefits provided under these plans are unfunded and any payments to plan
participants are made by Citizens.
In 2000, Citizens changed its pension plan benefit for its F&M employees.
Previously only two of the 24 former F&M banks provided defined benefit plans to
their employees ( the "F&M Plans"). Effective January 1, 2000, Citizens extended
coverage to substantially all F&M employees. These employees receive a pension
benefit under a new cash balance plan. The assets and benefit obligation
liabilities of the previous F&M Plans were rolled into the new plan. The benefit
obligation and expenses related to the cash balance plan are included in the
following pension plan activity and cost schedules. A plan amendment to
retroactively provide benefits as of January 1, 2000 increased the projected
benefit obligation by $0.8 million.
Citizens' postretirement benefit plan, as amended, is available to
full-time employees who retire at normal retirement age, were age 50 prior to
January 1, 1993 and have at least 15 years of credited service under Citizens'
defined benefit pension plan. The medical portion of the plan is contributory to
the participants. The life insurance coverage is noncontributory and provided on
a reducing basis for 5 years. Those retired prior to January 1, 1993 receive
benefits provided by the plan prior to its amendment. That plan included dental
care, had some retiree contribution requirements, and had less restrictive
eligibility requirements.
B-35
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following information summarizes activity in the pension and
postretirement benefit plans of the Company, except for the former F&M Plans in
1999, which are separately presented.
- -----------------------------------------------------------------------------------------
Pension Postretirement
Benefits Benefits
-------------------- -----------------------
(in thousands) 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation,
beginning of year $ 47,846 $ 49,464 $ 14,423 $ 13,231
Benefit obligation of former
F&M Plans, January 1 6,621 --- --- ---
Service cost 2,922 2,304 12 12
Interest cost 4,420 3,504 1,094 919
Participant contribution -- -- 150 135
Actuarial (gains) losses 3,453 (5,084) 1,285 1,313
Curtailment gain --- (84) --- ---
Plan amendments 2,561 --- --- ---
Benefits paid (3,998) (2,258) (1,351) (1,187)
-------- -------- -------- --------
Benefit obligation,
end of year $ 63,825 $ 47,846 $ 15,613 $ 14,423
======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets,
beginning of year $ 63,647 $ 56,793 $ --- $ ---
Actual return
on plan assets 943 8,967 --- ---
Employer contribution 288 234 1,201 1,052
Participant contribution --- --- 150 135
Assets of F&M Plans 8,260 --- --- ---
Expenses paid (104) (89) --- ---
Benefits paid (3,998) (2,258) (1,351) (1,187)
-------- -------- -------- --------
Fair value of plan
assets, end of year $ 69,036 $ 63,647 $ --- $ ---
======== ======== ======== ========
FUNDED STATUS RECONCILIATION
Funded status
of the plans $ 5,211 $ 15,801 $(15,613) $(14,423)
Unrecognized:
Net asset at transition-
16 yr amortization (163) (329) --- ---
Prior service
cost (benefit) 2,908 463 (42) (426)
Net actuarial (gain) loss (11,544) (19,634) 793 (515)
-------- -------- -------- --------
Pension liability recognized
in the consolidated
balance sheets $ (3,588) $ (3,699) $(14,862) $(15,364)
======== ======== ======== ========
=========================================================================================
Pension plan assets consisted primarily of mutual and money market funds,
and listed bonds and equity securities, including $606,000 and $467,000 of
Citizens common stock at December 31, 2000 and 1999, respectively.
The accrued pension benefit cost shown above includes the pension
liabilities for plans where accumulated plan benefits exceed assets. The
projected benefit obligation and accumulated benefit obligation for these
supplemental benefit plans were approximately $5.2 and $4.7 million,
respectively, as of December 31, 2000 and $3.1 and $2.9 million, respectively,
as of December 31, 1999. During 2000, the supplemental benefit plans were
amended to enhance the benefit for active employees. This amendment increased
Citizens' projected benefit obligation at December 31, 2000 by $1.8 million.
The assumptions used in determining the actuarial present value of the
benefit obligations and the net periodic pension expense follow:
- ------------------------------------------------------------
Pension Postretirement
Benefits Benefits
------------------ ------------------
2000 1999 2000 1999
- ------------------------------------------------------------
WEIGHTED-AVERAGE
ASSUMPTIONS
DECEMBER 31
Discount rate 7.75% 8.00% 7.75% 8.00%
Expected return on
plan assets 9.75 9.75 --- ---
Rate of compensation
increase (1) (1) --- ---
============================================================
(1) Scaled by age of plan participant - 9.00% at age 24 or under declining to
4.00% at age 50 or older.
A summary of activity in 1999 for the defined benefit F&M Plans follows:
- -----------------------------------------------------------------------
F&M Bank
FOR THE YEAR 1999 Waushara BancSecurity
(in thousands) County Corporation
- -----------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year $ 2,048 $ 6,924
Service cost --- ---
Interest cost 119 395
Actuarial gains (509) (1,891)
Benefits paid (124) (341)
------- -------
Benefit obligation, end of year $ 1,534 $ 5,087
======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets,
beginning of year $ 1,330 $ 6,900
Actual return on plan assets 74 322
Employer contribution 99 ---
Benefits paid (124) (341)
------- -------
Fair value of plan assets,
end of year $ 1,379 $ 6,881
======= =======
FUNDED STATUS RECONCILIATION
Funded (unfunded) status of the plans $ (155) $ 1,794
Unrecognized:
Net asset at transition --- (53)
Prior service cost --- 62
Net actuarial gain (328) (1,579)
------- -------
Pension asset (liability) recognized
in the consolidated balance sheets $ (483) $ 224
======= =======
=======================================================================
B-36
65
The weighted average discount rate and expected return on plan assets for
the F&M plans were 8.0% and 9.75%, respectively, in 1999. The plans assumed no
increase in compensation and participants did not accrue any additional benefit
for service. Plan assets of these defined benefit pension plans consisted
primarily of mutual and money market funds, and listed bonds and equity
securities.
The components of net periodic benefit cost charged to operations each
year for all plans follow:
- --------------------------------------------------------------------------
Year Ended December 31,
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------
DEFINED BENEFIT PENSION PLANS
Service cost $ 2,922 $ 2,304 $ 2,377
Interest cost 4,420 4,018 3,894
Expected return on plan assets (6,568) (5,554) (4,894)
Amortization of unrecognized:
Net transition asset (218) (218) (174)
Prior service cost 180 114 117
Net actuarial gain (808) (464) (195)
------- ------- -------
Net pension cost (income) (72) 200 1,125
------- ------- -------
POSTRETIREMENT BENEFIT PLANS
Service cost 12 12 16
Interest cost 1,094 919 936
Amortization of unrecognized:
Prior service cost (385) (460) (460)
Net actuarial gain --- (57) (62)
------- ------- -------
Net postretirement benefit cost 721 414 430
------- ------- -------
DEFINED CONTRIBUTION RETIREMENT
AND 401(K) PLANS
Employer contributions 3,584 4,662 3,894
------- ------- -------
Total periodic benefit cost $ 4,233 $ 5,276 $ 5,449
======= ======= =======
========================================================================
In the third quarter of 1999, Citizens adopted an alternative
market-related value methodology for pension plan assets to better reflect plan
asset earnings, a component of pension expense, in 1999 and future years. The
change reduced 1999 annual pension expense by approximately $556,000.
Prior service pension costs are amortized on a straight-line basis over
the average remaining service period of employees expected to receive benefits
under the plans. For postretirement health care benefit plans, Citizens assumed
a constant 5% annual health care cost trend rate in 2000 and for all future
years. This assumption can have a significant effect on the amounts reported. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects:
- ------------------------------------------------------------------
One Percentage One Percentage
(in thousands) Point Increase Point Decrease
- ------------------------------------------------------------------
Effect on total of service and
interest cost components $ 100 $ (92)
Effect on the postretirement
benefit obligation 1,309 (1,215)
==================================================================
DEFINED CONTRIBUTION SAVINGS AND RETIREMENT PLANS: Substantially all
employees are eligible to contribute a portion of their pre-tax salary to a
defined contribution 401(k) savings plan. Under the plan, employee contributions
are partially matched by Citizens. The employer matching contribution is 75
percent of the first 6% (100 percent of the first 3% plus 50 percent of the next
3%) of each eligible employee's qualifying salary contributed to the plan. In
addition, one third of these matching contributions are used to fund a
postretirement medical savings account established within the plan for each
contributing employee. Plan assets from a defined contribution 401(k) savings
plan and an Employee Stock Ownership Plan maintained by F&M and one of its
subsidiaries prior to the merger were transferred into Citizens' plan during
2000. Employer matching contributions for the F&M 401(k) savings plan were based
on the company's return on equity and incorporated a discretionary
profit-sharing contribution.
NOTE 13. INCOME TAXES
Significant components of income taxes are as follows:
- ------------------------------------------------------------------
Year Ended December 31,
(in thousands) 2000 1999 1998
- ------------------------------------------------------------------
Current tax expense:
Federal $ 31,773 $ 33,870 $ 35,021
State 455 2,072 2,426
-------- -------- --------
Total current tax expense 32,228 35,942 37,447
Deferred tax expense (credit) 3,585 (7,953) 1,836
-------- -------- --------
Total income tax expense $ 35,813 $ 27,989 $ 39,283
======== ======== ========
==================================================================
B-37
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of Citizens' deferred tax assets and liabilities as of December 31,
2000 and 1999 follow:
- --------------------------------------------------------------------
(in thousands) 2000 1999
- --------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $29,211 $27,771
Accrued special charges 1,227 6,321
Accrued postemployment
benefits other than pensions 5,395 5,589
Net unrealized losses on securities --- 9,412
Other deferred tax assets 7,794 6,465
------- -------
Deferred tax assets 43,627 55,558
------- -------
Deferred tax liabilities:
Tax over book depreciation 4,551 3,893
Acquisition premium on loans 3,689 3,684
Net unrealized gains on securities 6,306 ---
Other deferred tax liabilities 3,851 3,448
------- -------
Deferred tax liabilities 18,397 11,025
------- -------
Net deferred tax assets $25,230 $44,533
======= =======
====================================================================
A reconciliation of income tax expense to the amount computed by applying
the federal statutory rate of 35% to income before income taxes follows:
- -----------------------------------------------------------------
Year Ended December 31,
(in thousands) 2000 1999 1998
- -----------------------------------------------------------------
Tax at federal statutory rate
applied to income before
income taxes $ 44,266 $ 31,494 $ 45,348
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (8,229) (7,230) (6,703)
Other (224) 3,725 638
-------- -------- --------
Total income tax expense $ 35,813 $ 27,989 $ 39,283
======== ======== ========
=================================================================
NOTE 14. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations follows:
- -----------------------------------------------------------------
Year Ended December 31,
(in thousands) 2000 1999 1998
- -----------------------------------------------------------------
NUMERATOR:
Numerator for basic and
dilutive earnings per share --
net income available to
common shareholders $90,660 $61,994 $90,282
======= ======= =======
DENOMINATOR:
Denominator for basic
earnings per share --
weighted average shares 47,310 48,169 48,427
Effect of dilutive
securities - potential
conversion of employee
stock options 233 448 658
------- ------- -------
Denominator for diluted
earnings per share --
adjusted weighted-average
shares and assumed 47,543 48,617 49,085
======= ======= =======
BASIC EARNINGS PER SHARE $ 1.92 $ 1.29 $ 1.86
======= ======= =======
DILUTED EARNINGS PER SHARE $ 1.91 $ 1.28 $ 1.84
======= ======= =======
=================================================================
All employee stock options were dilutive except for options granted in
1998 and 1999. See Note 15 for additional disclosures regarding employee stock
options.
NOTE 15. SHAREHOLDERS' EQUITY
RIGHTS AGREEMENT: Citizens is a party to a Rights Agreement, dated May
23, 2000, designed to protect shareholders from unfair takeover offers by
encouraging a potential buyer to negotiate with Citizens' board prior to
attempting a takeover. Owners of Citizens' common shares have been granted
rights under the Rights Agreement to purchase one one-thousandth of a share of
Series B Preferred Stock at an exercise price of $65, subject to adjustment. The
rights are not exercisable or separately tradable until after a public
announcement that a person or group, without board approval, has acquired 15% or
more of Citizens' common shares or has commenced a tender offer to do so. If a
person
B-38
67
or group acquires 15% or more of the common shares, the rights (other than those
held by the acquiror, which become void) become exercisable to purchase common
shares having a fair value of $130 for $65, or the board may exchange one common
share for each outstanding right (other than those held by the acquiror). If the
acquiror merges Citizens into another entity, the rights become exercisable for
common shares of the surviving entity having a fair value of $130 for $65. The
rights are redeemable by the board at any time prior to May 23, 2010 for $.001
per right. The Rights Agreement may be amended by the board without shareholder
or right holder approval at any time prior to the acquisition by a person or
group of 15% or more of the common shares. The rights will cause substantial
dilution to a person or group attempting to acquire Citizens without action by
Citizens' board to deactivate the rights.
STOCK REPURCHASE PLANS: Citizens initiated a stock repurchase program in
May 2000. This program authorizes Citizens to purchase up to 3,000,000 shares
for treasury. During the year, 1,234,100 shares were purchased under this plan.
Also, 32,800 shares were purchased in January 2000, completing a repurchase
program of 600,000 shares that began in May 1998. A third program authorized and
completed in 1999 provided for the repurchase of 1,400,000 shares. For the year
ended December 31, 2000, a total of 1,266,900 shares were purchased under the
plans at an average price of $21.55. As of December 31, 2000, there were
1,765,900 shares available for purchase under the May 2000 program. The treasury
shares have been accorded the accounting treatment as if retired.
STOCK OPTION PLAN: Citizens' stock option plan, as amended and restated
in April 1997, authorizes the granting of incentive and nonqualified stock
options, tandem stock appreciation rights, restricted stock and performance
share grants to key employees. Aggregate grants under the plan may not exceed
3,000,000 shares within any six-year period and are limited annually to 3% of
Citizens' outstanding common stock as of the first day of the year, plus any
unused shares that first become available for grants in the prior year. The
exercise price of all options granted under the plan is equal to the market
price of Citizens' stock on the date of grant.
Options may be granted until January 16, 2002 and expire ten years from
the date of grant. Options granted since April 1992 are exercisable subject to a
predetermined vesting schedule based on achievement of certain return on average
asset or earnings per share targets. At December 31, 2000, options outstanding
under the plan totaled 2,500,164 shares of which 1,058,999 shares were not
exercisable subject to future achievement of the performance targets. These
options become exercisable after five years if the performance targets are not
met. Canceled or expired options become available for future grants.
OTHER STOCK OPTIONS: On May 18, 2000, Citizens granted stock options to
all employees who did not receive grants under the key employee stock option
plan. Each full-time employee received 200 shares and each part-time employee
received 100 shares. The $16.66 exercise price of the grant was the market price
of Citizens' stock on May 18. The options are exercisable subject to Citizens
achieving $2.65 earnings per share on a rolling four-quarter basis or three
years, whichever comes first. No shares of this option grant are yet
exercisable. The options expire ten years from the date of grant. A total of
550,700 shares were granted of which 478,700 shares were outstanding as of
December 31, 2000.
Citizens maintains a stock option plan for its directors. Under this
plan, each non-employee director of Citizens serving on the board immediately
following an annual meeting of shareholders receives an option grant of 1,500
shares. Options outstanding under the plan totaled 108,000 shares as of December
31, 2000. Other stock options of Citizens include those granted by F&M to its
directors and key employees and converted into Citizens' options at the time of
the merger. A total of 104,140 shares of these options were outstanding at
year-end 2000.
Citizens has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options as permitted by
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation." Under APB 25, no compensation expense is recognized
by Citizens because the exercise price of the stock options equals the market
price of the underlying stock on the date of grant.
Statement 123 requires certain pro forma disclosures regarding net income
and earnings per share as if Citizens had accounted for its stock options under
the fair value method of that statement. The following table provides these
disclosures along with significant assumptions used to estimate the fair value
of these options:
- ------------------------------------------------------------------
2000 1999 1998
- ------------------------------------------------------------------
Pro forma amounts:
Net income (in thousands) $ 89,020 $ 60,590 $ 89,257
Net income per share:
Basic 1.88 1.26 1.84
Diluted 1.87 1.25 1.82
Assumptions:
Dividend yield 3.5% 3.0% 3.0%
Expected volatility 25.0% 19.5% 18.7%
Risk-free interest rate 6.80% 5.59% 5.72%
Expected lives 5 YRS. 5 yrs. 5 yrs.
==================================================================
B-39
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of stock option transactions under the plans for 2000, 1999 and 1998
follows:
- ---------------------------------------------------------------------------------------------
Options Option Price
---------------------------- ----------------------------
Available Per Share
for Grant Outstanding Range Average
- ---------------------------------------------------------------------------------------------
January 1, 1998 413,767 2,062,406 $ 5.40-22.00 $ 16.82
Authorized 810,872 --- --- ---
Granted (388,329) 388,329 27.51-36.31 34.77
Exercised -- (313,182) 5.40-21.83 14.91
Canceled 9,092 (9,092) 17.33-35.63 27.79
---------- ---------- ------------- ---------
December 31, 1998 845,402 2,128,461 5.40-36.31 20.33
Authorized 201,237 --- --- ---
Granted (455,229) 455,229 22.93-32.59 29.99
Exercised --- (287,906) 5.40-27.51 11.70
Canceled 29,287 (29,287) 24.85-35.63 31.88
---------- ---------- ------------- ---------
December 31, 1999 620,697 2,266,497 5.40-36.31 23.22
AUTHORIZED 803,897 --- --- ---
GRANTED (1,224,350) 1,224,350 16.66-16.91 16.67
EXERCISED --- (158,544) 5.40-21.83 12.32
CANCELED 52,336 (141,299) 16.66-35.63 20.54
---------- ---------- ------------- ---------
DECEMBER 31, 2000 252,580 3,191,004 $ 8.50-36.31 $ 21.36
========== ========== ============= =========
=============================================================================================
The following table summarizes information on stock options outstanding as of
December 31, 2000:
-----------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------------- -------------------------------
Weighted- Weighted- Weighted-
Average Average Exercise Average
Range Amount Remaining Life Price Amount Exercise Price
-----------------------------------------------------------------------------------------------------------
$ 8.50 - 15.00 156,402 1.5 years $ 11.13 156,402 $ 11.13
15.00 - 21.00 1,790,124 7.4 17.45 694,817 18.70
21.00 - 36.31 1,244,478 6.6 28.28 802,086 26.15
---------- ----------
$ 8.50 - 36.31 3,191,004 6.8 21.36 1,653,305 21.60
========== ==========
===========================================================================================================
NOTE 16. COMMITMENTS AND CONTINGENT LIABILITIES
The Consolidated Financial Statements do not reflect various loan commitments
(unfunded loans and unused lines of credit) and letters of credit originated in
the normal course of business. Loan commitments are made to accommodate the
financial needs of clients. Generally, new loan commitments do not extend beyond
90 days and unused lines of credit are reviewed at least annually. Letters of
credit guarantee future payment of client financial obligations to third
parties. They are issued primarily for services provided or to facilitate the
shipment of goods, and generally expire within one year. Both arrangements have
essentially the same level of credit risk as that associated with extending
loans to clients and are subject to Citizens' normal credit policies. Inasmuch
as these arrangements generally have fixed expiration dates or other termination
clauses, most expire unfunded and do not necessarily represent future liquidity
requirements. Collateral is obtained based on management's assessment of the
client and may include receivables, inventories, real property and equipment.
Amounts available to clients under loan commitments and letters of credit
follow:
- ----------------------------------------------------------------
December 31,
(in thousands) 2000 1999
- ----------------------------------------------------------------
LOAN COMMITMENTS
AND LETTERS OF CREDIT:
Commitments to extend credit $ 1,699,174 $ 1,665,872
Standby letters of credit 55,469 36,405
Commercial letters of credit 95,385 77,295
================================================================
Loan commitments outstanding include $247.4 million of credit card
commitments and $230.0 million of home equity
B-40
69
credit lines in 2000. The same amounts for 1999 were $240.1 million and $211.1
million, respectively.
Citizens and its subsidiaries are parties to litigation arising in the
ordinary course of business. Management believes that the aggregate liability,
if any, resulting from these proceedings would not have a material effect on
Citizens' consolidated financial position.
NOTE 17. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosure About Fair
Value of Financial Instruments". Where quoted market prices are not available,
as is the case for a significant portion of Citizens' financial instruments, the
fair values are based on estimates using present value or other valuation
techniques. These techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Accordingly, the
derived fair value estimates presented herein cannot be substantiated by
comparison to independent markets and are not necessarily indicative of the
amounts Citizens could realize in a current market exchange.
In addition, the fair value estimates are based on existing on- and
off-balance sheet financial instruments without attempting to estimate the value
of anticipated future business and the value of assets and liabilities that are
not considered financial instruments. For example, Citizens has a substantial
trust department that contributes net fee income annually. The trust department
is not considered a financial instrument and its value has not been incorporated
into the fair value estimates. Other significant assets and liabilities that are
not considered financial assets or liabilities include Citizens' brokerage
network, net deferred tax asset, premises and equipment, goodwill and deposit
based intangibles. In addition, tax ramifications related to the recognition of
unrealized gains and losses such as those within the investment securities
portfolio can also have a significant effect on estimated fair values and have
not been considered in the estimates. Accordingly, the aggregate fair value
amounts do not represent the underlying value of Citizens. The estimated fair
values of Citizens' financial instruments follow:
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000 December 31, 1999
------------------------- ------------------------
CARRYING ESTIMATED Carrying Estimated
(in millions) AMOUNT FAIR VALUE Amount Fair Value
- -----------------------------------------------------------------------------------------------------------------------------
Financial assets
Cash and money market investments $ 345.6 $ 345.6 $ 314.6 $ 314.6
Investment securities 1,384.1 1,384.1 1,397.3 1,397.3
Net loans 6,342.7 6,376.5 5,841.1 5,845.3
Financial liabilities
Deposits 6,244.1 6,256.4 6,129.0 6,112.7
Short-term borrowings 933.3 933.5 937.3 937.6
Long-term debt 471.1 471.5 127.1 122.1
Off-balance sheet financial instrument liabilities:
Loan commitments --- 2.5 --- 2.3
Standby and commercial letters of credit --- 0.8 --- 0.6
- -----------------------------------------------------------------------------------------------------------------------------
The various methods and assumptions used by Citizens in estimating fair
value for its financial instruments are set forth below:
CASH AND MONEY MARKET INVESTMENTS: The carrying amounts reported in the
balance sheet for cash and money market investments approximate those assets'
fair values because they mature within six months and do not present
unanticipated credit concerns.
INVESTMENT SECURITIES: The carrying amounts reported in the balance sheet
for investment securities approximate those assets' fair values as all
investment securities are classified as available for sale. SFAS No. 115
requires securities carried in the available for sale category to be carried at
fair value -- see Note 5. The fair values are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
LOANS RECEIVABLE: Fair values are estimated for portfolios of loans
with similar financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential mortgage, credit card, and other
consumer. Each loan category is further segmented into fixed and variable-rate
interest types and for certain categories by performing and nonperforming. For
performing variable-rate loans that reprice frequently (within twelve months)
and with no significant change in credit risk, fair values are based on carrying
values. Similarly, for credit card loans with no significant credit concerns and
average interest rates approximating current market origination rates, the
carrying amount is a reasonable estimate of fair value. Fair values of other
loans (e.g., fixed-rate commercial, commercial real estate, residential mortgage
and other consumer loans) are estimated by discounting the future cash flows
using interest rates currently being offered by Citizens for loans with similar
terms and remaining maturities (new loan rates). Management
B-41
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
believes the risk factor embedded in the new loan rates adequately represents
the credit risk within the portfolios. Fair values for nonperforming loans are
estimated after giving consideration to credit risk and estimated cash flows and
discount rates based on available market and specific borrower information. The
carrying amount of accrued interest for all loan types approximates its fair
value.
DEPOSIT LIABILITIES: Under SFAS 107, the fair value of demand deposits
(e.g., interest and noninterest checking, passbook savings and certain types of
money market accounts) are, by definition, equal to the amount payable on demand
at the reporting date (i.e., their carrying amounts). Fair values for
certificates of deposit are based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
certificates of similar remaining maturities.
SHORT-TERM BORROWINGS: The carrying amounts of federal funds purchased,
securities sold under agreement to repurchase and other short-term borrowings
approximate their fair values.
LONG-TERM DEBT: The carrying value of Citizens' variable-rate long-term
debt approximates its fair value. The fair value of fixed-rate long-term debt is
estimated using discounted cash flow analyses, based on Citizens' current
incremental borrowing rates for similar types of borrowing arrangements.
LOAN COMMITMENTS AND LETTERS OF CREDIT: The fair value of loan
commitments and letter of credit guarantees is based on fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
NOTE 18. LINES OF BUSINESS
The financial performance of Citizens is monitored by an internal profitability
measurement system, which provides line of business results and key performance
measures. The profitability measurement system is based on internal management
methodologies designed to produce consistent results and reflect the underlying
economics of the businesses. The development and application of these
methodologies is a dynamic process. Accordingly, these measurement tools and
assumptions may be revised periodically to reflect methodological, product,
and/or management organizational changes. Further, these policies measure
financial results that support the strategic objectives and internal
organizational structure of Citizens. Consequently, the information presented is
not necessarily comparable with similar information for other institutions.
Citizens is managed along the following business lines: Commercial
Banking, Retail Banking, Financial Services, F&M and all Other.
COMMERCIAL BANKING: Commercial Banking provides a full range of credit
and related financial services to middle market corporate, government and
leasing clients. Products and services offered include commercial loans,
commercial mortgages, letters of credit, deposit accounts, cash management and
international trade services.
RETAIL BANKING: Retail Banking includes consumer lending and deposit
gathering, electronic banking, residential mortgage loan origination and
servicing, and small business banking. This line of business offers a variety of
retail financial products and services including deposit accounts, direct and
indirect installment loans, small business loans, debit and credit cards, home
equity lines of credit, residential mortgage loans and ATM network services.
FINANCIAL SERVICES: Financial Services provides commercial and retail
clients with private banking, trust and investment, retirement plan, and
brokerage and insurance services. Private banking focuses on high net-worth
customers and offers a broad array of asset management, estate settlement and
administration, deposit and credit products. Trust and investment includes
personal trust and planning services, investment management services, estate
settlement, administration and advises the Golden Oak family of mutual funds.
Retirement plan services focus on investment management and fiduciary activities
with special emphasis on 401(k) plans. The brokerage and insurance businesses
deliver Citizens' retail mutual funds, other securities, variable and fixed
annuities, personal disability and life insurance products and discounted
brokerage services.
F&M: F&M provides a full range of consumer and commercial banking
services to individuals, and commercial and agricultural businesses, in
Wisconsin, Iowa and Minnesota through a network of subsidiary banks. Products
and services offered include deposit accounts; commercial, commercial mortgage,
agricultural, residential mortgage and consumer loans; financial planning and
trust; brokerage, insurance, ATM, credit card and cash management services.
ALL OTHER: All other includes activities that are not directly
attributable to one of the four major lines of business. Included in this
category is the parent company, Citizens' securities portfolio and asset
liability management activities, inter-company eliminations, and the economic
impact of certain assets, capital and support functions not specifically
identifiable with the four primary lines of business.
The accounting policies on the individual business units are the same
as those of Citizens described in Note 1 to the Consolidated Financial
Statements. Funds transfer pricing is used in the determination of net interest
income by assigning a cost for funds used or credit for funds provided to assets
and liabilities within each business unit. Assets and liabilities are
match-funded based on their maturity, prepayment and/or repricing
characteristics. As a result, the Commercial, Retail and Financial Services
units are insulated from changes in interest rates. Changes in net interest
income due to changes in interest rates are reported in Citizens' Treasury unit,
which is a component of "Other". Changes in net interest income due to changes
in interest rates for F&M are included in the operating income of F&M.
Noninterest income and expenses directly attributable to a line of business are
assigned to that business. Expenses for centrally provided services are
allocated to the business lines as follows: product processing and technology
expenditures are allocated based on standard unit costs applied to actual volume
measurements; corporate
B-42
71
overhead is allocated based on the ratio of a line of business' noninterest
expenses to total noninterest expenses incurred by all business lines. The
provision for loan losses was allocated in an amount based primarily upon the
actual net charge-offs of each respective line of business, adjusted for loan
growth and changes in risk profile. Selected segment information is included in
the following table.
- ---------------------------------------------------------------------------------------------------------------
LINE OF BUSINESS INFORMATION
Commercial Retail Financial
(in thousands) Banking Banking Services F&M Other
- ---------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY - 2000
Net interest income (taxable equivalent) $ 87,125 $ 137,175 $ 1,330 $ 104,177 $ (857)
Provision for loan losses 5,828 10,494 -- 4,103 558
--------- --------- --------- --------- ---------
Net interest income after provision 81,297 126,681 1,330 100,074 (1,415)
Noninterest income 11,162 33,104 26,618 16,633 2,827
Noninterest expense 41,871 103,928 18,174 63,733 14,515
--------- --------- --------- --------- ---------
Income (loss) before income taxes 50,588 55,857 9,774 52,974 (13,103)
Income tax expense (taxable equivalent) 17,706 19,549 3,420 19,335 (4,044)
--------- --------- --------- --------- ---------
Net income (loss) $ 32,882 $ 36,308 $ 6,354 $ 33,639 $ (9,059)
Allocation of special charge and
related items -- -- -- (7,672) (1,792)
--------- --------- --------- --------- ---------
Net income (loss) $ 32,882 $ 36,308 $ 6,354 $ 25,967 $ (10,851)
========= ========= ========= ========= =========
AVERAGE ASSETS (IN MILLIONS) $ 2,025 $ 2,596 $ 17 $ 2,745 $ 690
========= ========= ========= ========= =========
===============================================================================================================
EARNINGS SUMMARY - 1999
Net interest income (taxable equivalent) $ 73,845 $ 115,832 $ 1,357 $ 110,718 $ 20,095
Provision for loan losses 1,509 14,455 -- 2,975 (1,064)
--------- --------- --------- --------- ---------
Net interest income after provision 72,336 101,377 1,357 107,743 21,159
Noninterest income 9,709 29,317 24,177 15,994 6,391
Noninterest expense 37,991 96,533 18,159 63,002 21,093
--------- --------- --------- --------- ---------
Income (loss) before income taxes 44,054 34,161 7,375 60,735 6,457
Income tax expense (taxable equivalent) 15,419 11,956 2,581 22,785 2,887
--------- --------- --------- --------- ---------
Net income (loss) $ 28,635 $ 22,205 $ 4,794 $ 37,950 $ 3,570
Allocation of special charge and
related items -- -- -- (26,748) (8,412)
--------- --------- --------- --------- ---------
Net income (loss) $ 28,635 $ 22,205 $ 4,794 $ 11,202 $ (4,842)
========= ========= ========= ========= =========
AVERAGE ASSETS (IN MILLIONS) $ 1,655 $ 2,138 $ 16 $ 2,602 $ 931
========= ========= ========= ========= =========
===============================================================================================================
EARNINGS SUMMARY - 1998
Net interest income (taxable equivalent) $ 69,163 $ 115,115 $ 1,844 $ 100,701 $ 17,109
Provision for loan losses 4,780 9,099 -- 2,438 211
--------- --------- --------- --------- ---------
Net interest income after provision 64,383 106,016 1,844 98,263 16,898
Noninterest income 8,588 26,364 21,090 15,016 830
Noninterest expense 37,563 91,555 18,071 59,928 11,102
--------- --------- --------- --------- ---------
Income before income taxes 35,408 40,825 4,863 53,351 6,626
Income tax expense (taxable equivalent) 12,392 14,289 1,702 19,854 2,554
--------- --------- --------- --------- ---------
Net income $ 23,016 $ 26,536 $ 3,161 $ 33,497 $ 4,072
========= ========= ========= ========= =========
AVERAGE ASSETS (IN MILLIONS) $ 1,445 $ 2,112 $ 21 $ 2,343 $ 872
========= ========= ========= ========= =========
===============================================================================================================
- ---------------------------------------------------------------------------------------
Special
Charge
Net And
Operating Related
Income Items Total
- ---------------------------------------------------------------------------------------
EARNINGS SUMMARY - 2000
Net interest income (taxable equivalent) $ 328,950 $ -- $ 328,950
Provision for loan losses 20,983 -- 20,983
--------- --------- ---------
Net interest income after provision 307,967 -- 307,967
Noninterest income 90,344 90,344
Noninterest expense 242,221 15,541 257,762
--------- --------- ---------
Income (loss) before income taxes 156,090 (15,541) 140,549
Income tax expense (taxable equivalent) 55,966 (6,077) 49,889
--------- --------- ---------
Net income (loss) $ 100,124 $ (9,464) $ 90,660
Allocation of special charge and
related items 9,464 --
--------- ---------
Net income (loss) $ -- $ 90,660
========= =========
AVERAGE ASSETS (IN MILLIONS) $ 8,073
=========
=======================================================================================
EARNINGS SUMMARY - 1999
Net interest income (taxable equivalent) $ 321,847 $ -- $ 321,847
Provision for loan losses 17,875 6,800 24,675
--------- --------- ---------
Net interest income after provision 303,972 (6,800) 297,172
Noninterest income 85,588 (3,596) 81,992
Noninterest expense 236,778 40,198 276,976
--------- --------- ---------
Income (loss) before income taxes 152,782 (50,594) 102,188
Income tax expense (taxable equivalent) 55,628 (15,434) 40,194
--------- --------- ---------
Net income (loss) $ 97,154 $ (35,160) $ 61,994
Allocation of special charge and
related items 35,160 --
--------- ---------
Net income (loss) $ -- $ 61,994
========= =========
AVERAGE ASSETS (IN MILLIONS) $ 7,342
=========
EARNINGS SUMMARY - 1998
Net interest income (taxable equivalent) $ 303,932 $ 303,932
Provision for loan losses 16,528 16,528
--------- ---------
Net interest income after provision 287,404 287,404
Noninterest income 71,888 71,888
Noninterest expense 218,219 218,219
--------- ---------
Income before income taxes 141,073 141,073
Income tax expense (taxable equivalent) 50,791 50,791
--------- ---------
Net income $ 90,282 $ 90,282
========= =========
AVERAGE ASSETS (IN MILLIONS) $ 6,793
=========
B-43
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. REGULATORY MATTERS
The Federal Reserve Bank requires Citizens' banking subsidiaries to maintain
certain noninterest-bearing deposits. These reserve balances vary depending upon
the level of client deposits in the subsidiary banks. During 2000 and 1999, the
average reserve balances were $56.8 million and $45.7 million, respectively.
The bank subsidiaries are also subject to limitations under banking laws
on extensions of credit to members of the affiliate group and on dividends that
can be paid to Citizens. Generally extensions of credit are limited to 10% to
any one affiliate and 20% in aggregate to all affiliates of a subsidiary bank's
capital and surplus (net assets) as defined. Unless prior regulatory approval is
obtained, dividends declared in any calendar year may not exceed the retained
net profit, as defined, of that year plus the retained net profit of the
preceding two years. At January 1, 2001, the bank subsidiaries could distribute
to Citizens approximately $59.4 million in dividends without regulatory
approval. Their 2001 net income will also become available for such dividends.
Citizens and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, specific
capital guidelines must be met that involve quantitative measures of the assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require Citizens and its banking subsidiaries to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier I capital to
risk-weighted assets (as defined in the regulations), and of Tier I capital to
average assets (as defined). Management believes, as of December 31, 2000, that
Citizens and its banking subsidiaries meet all capital adequacy requirements to
which it is subject.
As of December 31, 2000, the most recent notification from the Federal
Reserve Board categorized Citizens and its banking subsidiaries as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized Citizens and its banking subsidiaries must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes would result in a change.
- ------------------------------------------------------------------------------------------------------------------------------
RISK BASED CAPITAL REQUIREMENTS To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- ------------------------- -------------------------
(in thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------
CITIZENS BANKING CORPORATION
AS OF DECEMBER 31, 2000:
Total Capital (1) $ 659,901 10.3% $ 512,362 > 8.0% $ 640,453 > 10.0%
- -
Tier I Capital (1) 579,844 9.1 256,181 > 4.0 384,272 > 6.0
- -
Tier I Leverage (2) 579,844 7.1 326,142 > 4.0 407,677 > 5.0
- -
As of December 31, 1999:
Total Capital (1) $ 628,674 10.5% $ 480,229 > 8.0% $ 600,287 > 10.0%
- -
Tier I Capital (1) 553,621 9.2 240,115 > 4.0 360,172 > 6.0
- -
Tier I Leverage (2) 553,621 7.2 307,021 > 4.0 383,776 > 5.0
- -
CITIZENS BANK
AS OF DECEMBER 31, 2000:
Total Capital (1) $ 435,996 10.6% $ 330,086 > 8.0% $ 412,608 > 10.0%
- -
Tier I Capital (1) 384,417 9.3 165,043 > 4.0 247,565 > 6.0
- -
Tier I Leverage (2) 384,417 7.5 205,479 > 4.0 256,849 > 5.0
- -
As of December 31, 1999:
Total Capital (1) $ 390,956 10.1% $ 308,720 > 8.0% $ 385,900 > 10.0%
- -
Tier I Capital (1) 343,917 8.9 154,360 > 4.0 231,540 > 6.0
- -
Tier I Leverage (2) 343,917 7.2 190,192 > 4.0 237,740 > 5.0
- -
==============================================================================================================================
(1) To risk weighted assets.
(2) To quarterly average assets.
B-44
73
NOTE 20. CITIZENS BANKING CORPORATION (PARENT ONLY) STATEMENTS
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS
CITIZENS BANKING CORPORATION (PARENT ONLY)
December 31,
(in thousands) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash $ 5 $ 5
Money market investments 7,916 1,102
Investment securities 63 132
Investment in subsidiaries - principally banks 715,726 672,041
Goodwill - net 1,061 1,857
Other assets 5,771 4,630
---------- ---------
TOTAL ASSETS $ 730,542 $ 679,767
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term revolving credit $ 48,000 $ 42,000
Other liabilities 2,563 4,098
---------- ---------
Total liabilities 50,563 46,098
Shareholders' equity 679,979 633,669
---------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 730,542 $ 679,767
========== =========
=================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME
CITIZENS BANKING CORPORATION (PARENT ONLY)
Year Ended December 31,
(in thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
INCOME
Dividends from subsidiaries - principally banks $ 79,400 $ 54,686 $ 61,207
Interest from bank subsidiary 18 193 159
Service fees from bank subsidiaries 9,517 9,668 9,221
Equity security gain --- 5,693 ---
Other 646 205 381
--------- ---------- ---------
Total 89,581 70,445 70,968
--------- ---------- ---------
EXPENSES
Interest 3,099 1,486 1,734
Amortization of goodwill 796 796 796
Salaries and employee benefits 9,333 9,780 9,524
Service fees paid to bank subsidiaries 1,215 1,156 1,060
Special charge (211) 3,464 ---
Other noninterest expense 1,884 1,474 1,528
--------- ---------- ---------
Total 16,116 18,156 14,642
--------- ---------- ---------
Income before income taxes and equity in undistributed earnings of subsidiaries 73,465 52,289 56,326
Income tax benefit 2,727 846 2,476
Equity in undistributed earnings of subsidiaries 14,468 8,859 31,480
--------- ---------- ---------
NET INCOME $ 90,660 $ 61,994 $ 90,282
========= ========== =========
==============================================================================================================================
B-45
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
CITIZENS BANKING CORPORATION (PARENT ONLY)
Year Ended December 31,
(in thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 90,660 $ 61,994 $ 90,282
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill 796 796 796
Equity security gain --- (5,693) ---
Accrued merger related charges --- 1,669 ---
Equity in undistributed earnings of subsidiaries (14,468) (8,859) (31,480)
Other (2,657) (3,114) (332)
--------- --------- --------
Net cash provided by operating activities 74,331 46,793 59,266
--------- --------- --------
INVESTING ACTIVITIES
Net decrease in interest-bearing deposit at subsidiary bank --- 4,500 2,500
Net (increase) decrease in money market investments (6,814) 6,333 (3,459)
Purchases of investment securities (19) (5,996) (44)
Proceeds from sales and maturities of investment securities 33 5,995 40
Proceeds from sale of Magic Line, Inc. stock --- 5,693 ---
--------- --------- --------
Net cash provided (used) by investing activities (6,800) 16,525 (963)
--------- --------- --------
FINANCING ACTIVITIES
Proceeds from short-term borrowings 6,000 42,000 ---
Proceeds from issuance of long-term debt --- 22,000 ---
Principal reductions in long-term debt --- (35,000) (19,991)
Cash dividends paid (48,108) (41,801) (35,563)
Proceeds from stock options exercised 1,879 3,349 4,234
Shares acquired for retirement (27,302) (53,866) (6,983)
--------- --------- --------
Net cash used by financing activities (67,531) (63,318) (58,303)
--------- --------- --------
Net increase in cash --- --- ---
Cash at beginning of year 5 5 5
--------- --------- --------
Cash at end of year $ 5 $ 5 $ 5
========= ========= ========
================================================================================================================================
B-46
75
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS CITIZENS BANKING CORPORATION
We have audited the accompanying consolidated balance sheets of
Citizens Banking Corporation and subsidiaries as of December 31, 2000 and 1999,
and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
our audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Citizens Banking Corporation and subsidiaries at December 31, 2000 and 1999, and
the consolidated results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States.
We previously audited and reported on the consolidated statements of
income, changes in shareholders' equity, and cash flows of Citizens Banking
Corporation and subsidiaries for the year ended December 31, 1998 prior to their
restatement for the 1999 pooling of interests as described in Note 2. The
contribution of Citizens Banking Corporation to revenues and net income
represented 65% and 63%, respectively of the 1998 restated totals. Financial
statements of the other pooled company included in the 1998 restated
consolidated statements were audited and reported on separately by other
auditors. We also have audited, as to combination only, the accompanying
consolidated statements of income, changes in shareholders' equity, and cash
flows for the year ended December 31, 1998, after restatement for the 1999
pooling of interests, in our opinion, such consolidated financial statements
have been properly combined on the basis described in Note 2 to the consolidated
financial statements.
/s/ Ernst & Young LLP
Detroit, Michigan
January 19, 2001
B-47
76
REPORT OF WIPFLI ULLRICH BERTELSON LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS F&M BANCORPORATION, INC.
We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows of F&M Bancorporation, Inc. and
Subsidiaries for the year ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to in
the first paragraph present fairly, in all material respects, the consolidated
results of operations and cash flows of F&M Bancorporation, Inc. and
Subsidiaries for the year ended December 31, 1998 in conformity with accounting
principles generally accepted in the United States.
/s/ Wipfli Ullrich Bertelson LLP
Green Bay, Wisconsin
February 4, 1999
B-48
77
REPORT OF MANAGEMENT
MANAGEMENT'S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
Management is responsible for the preparation of the Consolidated
Financial Statements and all other financial information appearing in this
Annual Report. The Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles in the United States.
SYSTEM OF INTERNAL CONTROLS
Citizens maintains a system of internal controls designed to provide
reasonable assurance that assets are safe-guarded and that the financial records
are reliable for preparing Consolidated Financial Statements. The selection and
training of qualified personnel and the establishment and communication of
accounting and administrative policies and procedures are elements of this
control system. The effectiveness of the internal control system is monitored by
a program of internal audit and by independent certified public accountants
("independent auditors").
Management recognizes that the cost of a system of internal controls
should not exceed the benefits derived and that there are inherent limitations
to be considered in the potential effectiveness of any system. Management
believes Citizens' system provides the appropriate balance between costs of
controls and the related benefits.
AUDIT COMMITTEE OF THE BOARD
The Audit Committee of the Board of Directors, comprised entirely of
outside directors, recommends the independent auditors who are engaged upon
approval by the Board of Directors. The committee meets regularly with the
internal auditor and the independent auditors to review timing and scope of
audits and review audit reports. The internal auditor and the independent
auditors have free access to the Audit Committee.
INDEPENDENT AUDITORS
The Consolidated Financial Statements in this Annual Report have been
audited by Citizens' independent auditors, Ernst & Young LLP, for the purpose of
determining that the Consolidated Financial Statements are free of material
misstatement. Their audit considered Citizens' internal control structure to the
extent necessary to determine the scope of their auditing procedures.
/s/ John W. Ennest /s/ Robert J. Vitito
John W. Ennest Robert J. Vitito
Vice Chairman, Chairman,
Chief Financial Officer and Treasurer President and Chief Executive
Officer
B-49
78
CITIZENS BANKING CORPORATION
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY.
[ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE NOMINEES LISTED.
1. ELECTION OF DIRECTORS -- CLASS III (THREE YEAR TERM): For Withhold For All
Nominees: 01-Richard J. Dolinski, All All Except
02-Stephen J. Lazaroff, 03-William C. Shedd, / / / / / /
04-Charles R. Weeks, 05-Kendall B. Williams
--------------------------------------------
(Except nominees written above)
Dated: , 2001
-----------------------
-----------------------------------
Signature
-----------------------------------
Signature if held jointly
Please sign exactly as name appears
hereon. When shares are held by
joint tenants, both must sign. When
signing as Attorney, Executor,
Personal Representative,
Administrator, Trustee or Guardian,
please give full title as such. If
signing on behalf of a corporation,
please sign in full corporate name
by President or other authorized
officer. If signing on behalf of a
partnership, please sign in
partnership name by authorized
person.
- ------------------------------------------------------------------------------------------------------------------------------------
CONTROL NUMBER /\ FOLD AND DETACH HERE /\
---------------------------------------------------------------------------------------
TELEPHONE VOTING Call toll free 888-515-6262 in the United States or Canada any time on a touch
INSTRUCTIONS: tone telephone. There is NO CHARGE to you for the call.
Enter the 6-digit CONTROL NUMBER located above.
Option #1: To vote as the Board of Directors recommends on ALL nominees: Press 1
When asked, please confirm your vote by pressing 1
Option #2: If you choose to vote on each nominee separately, press 0 and
follow the simple recorded instructions.
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
INTERNET VOTING Go to the following website: HTTP://WWW.COMPUTERSHARE.COM/US/PROXY.
INSTRUCTIONS:
Enter the information requested on your proxy screen, including your 6-digit
Control Number found above.
---------------------------------------------------------------------------------------
IF YOU VOTE BY TELEPHONE OR THE INTERNET, DO NOT MAIL BACK YOUR PROXY CARD.
REMINDER
Dear Shareholder(s):
Enclosed you will find material relative to the Corporation's 2001 Annual
Meeting of Shareholders. The Notice of the Annual Meeting and proxy statement
describes the formal business to be transacted at the meeting, as summarized on
the attached proxy card.
Whether or not you expect to attend the Annual Meeting, please complete and
return promptly the attached proxy card in the accompanying envelope, which
requires no postage if mailed in the United States, or cast your vote by
telephone, or by Internet, using the instructions found above. Please remember
that your vote is important to us. We look forward to hearing from you.
Ryan P. Mathews
Investor Relations Manager
5681-CITIZENS BANKING CORPORATION
79
PROXY CITIZENS BANKING CORPORATION PROXY
FLINT, MICHIGAN
PROXY BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS -- APRIL 17, 2001
The undersigned shareholder of Citizens Banking Corporation (the
"Corporation") hereby appoints Edward P. Abbott and Joseph P. Day, or either of
them, my proxies or proxy, with full power of substitution to vote all shares of
stock of the Corporation that the undersigned would be entitled to vote at the
annual meeting of shareholders of the Corporation to be held in the Presidential
Ballroom located in the Holiday Inn, Gateway Centre, Flint, Michigan, on
Tuesday, April 17, 2001, at 10:00 a.m. local time, and at any adjournments
thereof, and upon the election of directors as set forth on the reverse side of
this proxy, all of whom are being proposed by the Board of Directors, and in
their discretion, upon such other matters as may properly come before the
meeting including the election of any person to the board of directors where a
nominee named in the proxy statement dated March 15, 2001 is unable to serve or,
for good cause, will not serve. UNLESS A CONTRARY INSTRUCTION IS PROVIDED, THIS
PROXY WHEN PROPERLY EXECUTED WILL BE VOTED FOR EACH NOMINEE NAMED ON THE REVERSE
SIDE OF THIS PROXY.
For participants in the Corporation's Amended and Restated Section 401(K)
Plan ("Plan"), this card also provides voting instructions to the Trustee under
the Plan for the undersigned's allowable portion, if any, of the total number of
shares of Common Stock of the Corporation held by such Plan as indicated on the
reverse side hereof. These voting instructions are solicited and will be carried
out in accordance with the applicable provisions of the Plan.
The undersigned acknowledges receipt of the Notice of Annual Meeting of
Shareholders and the Proxy Statement dated March 15, 2001 and ratifies all that
the proxies or either of them or their substitutes may lawfully do or cause to
be done by virtue hereof and revokes all former proxies.
(Continued and to be signed on reverse side.)
- --------------------------------------------------------------------------------
VOTE YOUR SHARES BY PHONE OR OVER THE INTERNET
We encourage you to vote by telephone or over the Internet. These are two
quick and easy methods to vote your shares that are available 24 hours a day,
seven days a week, and your vote is recorded as if you mailed in your proxy
card. On the reverse side of this card are instructions on how to vote by
telephone and over the Internet. Voting by one of these convenient methods will
also save the Corporation money.
We also ask you to notify the Corporation if you are receiving multiple
copies of the Summary Annual Report at your household. You can do so by checking
the box under the signature block of the proxy card if you are mailing in your
proxy card, by following the prompt if you are voting by telephone, or by
checking the appropriate box on the electronic Internet proxy card. If you do
so, the Corporation can save money by reducing the number of Summary Annual
Reports it must print and mail.
Map to: Holiday Inn Gateway Centre
US 23/Hill Road
Flint, Michigan 48507
(Park in Rear For Conference Centre)
- FROM NORTH: I-75 South to
South U.S. 23. Exit Hill Road
(East)
[MAP]
- FROM EAST AND WEST: I-69 to
I-75 South to U.S. 23 South.
Exit Hill Road (East)
- FROM WEST: I-94 to U.S. 23
North. Exit Hill Road (East)
- FROM SOUTh: I-75 North to
I-475 North to Hill Road
(West). Exit Hill Road west
(left).
5681-CITIZENS BANKING CORPORATION