EXHIBIT 13
(FORM 10-K)
CITIZENS BANKING CORPORATION
ANNUAL REPORT INFORMATION
TABLE OF CONTENTS
I. Financial Review including
Management's Discussion and Analysis......................................... 3
Five-Year Summary of Selected Financial Data.............................. 3
Mergers, Acquisitions, Divestitures and Other Initiatives................. 4
Financial Highlights...................................................... 4
Lines of Business Reporting............................................... 5
Net Interest Income....................................................... 6
Provision and Allowance for Loan Losses................................... 9
Noninterest Income ....................................................... 11
Noninterest Expense....................................................... 12
Federal Income Taxes...................................................... 12
Financial Condition....................................................... 12
Liquidity and Debt Capacity and Interest Rate Risk ....................... 18
Interest Rate Sensitivity................................................. 20
Recent Accounting Pronouncements.......................................... 20
Forward-Looking Statements................................................ 20
Selected Quarterly Information............................................ 21
Year Ended December 31, 2000
Compared with 1999...................................................... 22
II. Consolidated Financial Statements.............................................. 23
Consolidated Balance Sheets............................................... 23
Consolidated Statements of Income......................................... 24
Consolidated Statements of Changes
in Shareholders' Equity................................................. 25
Consolidated Statements of Cash Flows..................................... 26
III. Notes to Consolidated Financial Statements..................................... 27
IV. Report of Independent Auditors................................................. 46
V. Report of Management........................................................... 47
A-2
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) 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR
Net interest income $ 307,981 $ 314,874 $ 309,642 $ 292,424 $ 274,134
Provision for loan losses 26,407 20,983 24,675 16,528 20,511
Noninterest income before securities gains (losses) 111,286 90,344 85,044 71,413 59,692
Investment securities gains (losses) 6,195 --- (3,052) 475 (572)
Noninterest expense before special charges 251,183 242,221 236,778 218,219 208,921
Special charge --- 15,541 40,198 --- 23,734
Income taxes 43,215 35,813 27,989 39,283 25,197
Net income 104,657 90,660 61,994 90,282 54,891
Cash dividends (2) 50,158 48,108 30,035 22,991 19,286
PER COMMON SHARE DATA
Net income:
Basic $ 2.27 $ 1.92 $ 1.29 $ 1.86 $ 1.17
Diluted 2.25 1.91 1.28 1.84 1.15
Cash dividends (2) 1.085 1.015 0.915 0.82 0.74
Book value, end of year 15.46 14.62 13.32 14.07 12.93
Market value, end of year 32.88 29.06 22.38 33.75 34.50
AT YEAR END
Assets $ 7,678,875 $ 8,405,091 $ 7,899,357 $6,930,533 $6,630,974
Loans 5,922,406 6,422,806 5,917,483 5,264,706 5,074,230
Deposits 5,965,126 6,244,141 6,128,998 5,772,792 5,514,313
Long-term debt 629,099 471,117 127,104 226,171 179,191
Shareholders' equity 697,464 679,979 633,669 680,501 610,775
AVERAGE FOR THE YEAR
Assets $ 7,935,843 $ 8,073,021 $ 7,342,167 $6,792,829 $6,439,737
Earning assets 7,510,332 7,584,932 6,875,643 6,367,284 6,033,874
Loans 6,109,111 6,202,157 5,528,963 5,159,584 4,843,507
Deposits 6,008,096 6,121,373 5,906,664 5,616,894 5,359,464
Interest-bearing deposits 5,126,928 5,175,252 5,002,135 4,787,143 4,602,093
Repurchase agreements and other short-term borrowings 538,673 920,323 478,920 202,639 259,040
Long-term debt 596,380 303,597 210,289 228,969 144,306
Shareholders' equity 702,381 650,251 672,227 655,034 597,242
FINANCIAL RATIOS
Return on average:
Shareholders' equity 14.90% 13.94% 9.22% 13.78% 9.19%
Earning assets 1.39 1.20 0.90 1.42 0.91
Assets 1.32 1.12 0.84 1.33 0.85
Average shareholders' equity/avg. assets 8.85 8.05 9.16 9.64 9.27
Dividend payout ratio (2) 47.93 53.06 59.13 40.49 61.21
Net interest margin (FTE) 4.32 4.32 4.68 4.78 4.73
Tier I leverage 7.79 7.11 7.21 8.95 8.00
Risk-based Tier I capital ratio 9.87 9.05 9.22 11.01 10.50
Risk-based Total capital ratio 11.12 10.30 10.47 12.26 11.76
- ---------------------------------------------------------------------------------------------------------------------------------
(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) Cash dividends and cash dividends per share are for Citizens Banking
Corporation only, not restated for pooling of interests.
A-3
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, DIVESTITURES AND OTHER INITIATIVES
MERGERS, ACQUISITIONS AND DIVESTITURES
In November 2001, Citizens sold F&M Bank-Minnesota with assets of $27
million. The bank was Citizens' sole location in Minnesota.
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),
a $2.7 billion bank holding company 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". The net costs included 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 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. These initiatives were completed by year-end 2001.
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 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.
At year-end 2001 Citizens' Special Charge reserve was fully utilized.
Total deductions to the Special Charge reserve were $3.3 million in 2001, and
$16.0 million in 2000 and $22.8 million in 1999. Included in these deductions
were cash payments of $3.3 million, $9.7 million and $15.4 million in 2001, 2000
and 1999, respectively. See Note 3 to the Consolidated Financial Statements for
additional information regarding the Special Charges in 2000 and 1999.
FINANCIAL HIGHLIGHTS
Citizens reported net income of $104.7 million, or $2.25 per diluted
share in 2001, compared with $90.7 million, or $1.91 per diluted share in 2000.
Net income increased 15.4% over the prior year while net income per diluted
share increased 17.8%. The corresponding returns on average assets and equity
were 1.32% and 14.90%, respectively, in 2001, as compared with 1.12% and 13.94%
in 2000. Net income for 2001 included after tax gains of $13.5 million or $0.29
per share from sales of securitized mortgage loans, sale of NYCE stock, sale of
credit card assets and the sale of F&M Bank-Minnesota. Net income for 2000
included after-tax merger, restructuring and other charges of $9.5 million, or
$0.20 per diluted share.
A-4
The improvement in net income reflects increased noninterest income
partially offset by lower net interest income, a higher loan loss provision and
higher noninterest expenses. Net interest income decreased 2.2% in 2001 from
2000. The decline in net interest income in 2001 was primarily due to a decline
in earning assets as a result of balance sheet restructuring. Noninterest
income, before nonrecurring gains of $19.8 million in 2001 (see Noninterest
Income table on page 11), reflects increases in mortgage fees, title insurance
fees, deposit account revenues, annuity sales and bankcard fees, partially
offset by a decline in trust fees. Operating noninterest expense, excluding a
special charge of $15.5 million in 2000, increased 3.7%.
Average shareholders' equity was $702.4 million or 8.85% of total average
assets for 2001, compared with $650.3 million or 8.05% for 2000. At December 31,
2001, Citizens' risk-based capital levels exceeded all regulatory requirements
to be designated "well capitalized".
An analysis of the major components of net income in 2001, 2000 and 1999
is presented below. Additional data on Citizens' performance during the past
five years appear in Table 1, "Five-Year Summary of Selected Financial Data".
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------
(in thousands) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income $ 573,559 $ 622,008 $541,559
Interest expense 265,578 307,134 231,917
---------- --------- --------
Net interest income 307,981 314,874 309,642
Provision for loan losses 26,407 20,983 17,875
Noninterest income 97,676 90,344 79,895
Noninterest expense 251,183 242,221 230,683
Income taxes 36,878 41,890 43,825
---------- --------- --------
NET INCOME BEFORE NONRECURRING ITEMS 91,189 100,124 97,154
---------- --------- --------
Nonrecurring gains on sale of equity investments and assets 19,805 --- 5,693
Nonrecurring expenses, special charges and merger related expenses:
Special charge --- 15,541 40,198
Other merger related expenses --- --- 10,396
Check kiting fraud loss --- --- 6,095
Tax expense (benefit) on nonrecurring items 6,337 (6,077) (15,836)
---------- --------- --------
Subtotal 13,468 (9,464) (35,160)
---------- --------- --------
NET INCOME AS REPORTED $ 104,657 $ 90,660 $ 61,994
========== ========= ========
- -----------------------------------------------------------------------------------------------------------------------------------
LINES OF BUSINESS REPORTING
Citizens is managed along the following business lines: Commercial Banking,
Retail Banking, Financial Services, F&M and 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 income by line of business for each of the last three years:
- -------------------------------------------------------------
Net Income
------------------------------
(in thousands) 2001 2000 1999
- -------------------------------------------------------------
Commercial Banking $ 35,723 $ 35,789 $ 30,410
Retail Banking 40,409 33,401 20,430
Financial Services 6,508 6,354 4,794
F&M 20,065 25,967 11,202
Other 1,952 (10,851) (4,842)
-------- -------- --------
Total $104,657 $ 90,660 $ 61,994
======== ======== ========
- -------------------------------------------------------------
Commercial Banking net income in 2001 was consistent with the prior year
as higher net interest income and noninterest income were offset by an increased
provision for loan losses and higher operating expenses. Net interest income
increased due to higher average commercial loan balances in 2001. The
improvement in noninterest income reflects greater deposit service charges and
increased cash management fees. The increased loan loss provision is the result
of higher loan charge-offs. Operating expenses increased due to higher
compensation and loan collection costs.
Retail Banking net income improved due to increased noninterest income,
nonrecurring gains on sale of assets and a lower provision for loan losses
offset, in part, by a decline in net interest income and higher operating
expenses. The growth in noninterest income before nonrecurring gains reflects
increased mortgage income from higher mortgage loan origination volume and
increased sales of new mortgage production into the secondary market.
Noninterest income also increased due to greater title insurance fees and higher
annuity sales by licensed retail bankers. In 2001, nonrecurring gains from the
sale of securitized mortgages and the sale of the
A-5
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Michigan-based credit card portfolio totaled $5.2 million after tax. The
provision for loan loss declined due to lower net charge-offs in the indirect
loan and credit card portfolio. The decline in net interest income was due in
part to the sale of the Michigan-based credit card portfolio in June 2001 and
narrower interest spreads on retail deposits due to the lower interest rate
environment. Net interest income also declined as a result of lower average
balances in the mortgage portfolio. Mortgage loan balances declined due to the
securitization and sale of $247 million of seasoned mortgage loans in the first
half of 2001 and the sale of most new mortgage loan production throughout 2001.
Financial Services net income improved slightly in 2001 despite lower
revenue as operating expenses decreased more than the decline in noninterest
income. Noninterest income decreased due to lower trust and brokerage revenues.
Trust fees were impacted by the weak equity markets, which reduced asset values
upon which fees are based. Lower transaction volume led to the decline in
brokerage revenue. Operating expenses decreased due to lower volume-oriented
incentive compensation and efficiencies achieved from the strategic realignment
of the financial services organizational structure.
The decline in net income at F&M reflects lower net interest income, a
higher provision for loan losses and higher operating expenses, partially offset
by an increase in noninterest income. The decrease in net interest income
resulted from a decline in earning assets and a lower net interest margin. The
higher loan loss provision resulted primarily from an increase in commercial
loan net charge-offs.
Net income in the Other category was favorably affected by an improvement
in net interest income. Net interest income improved due to a decline in the
cost of borrowed funds. The lower cost of borrowed funds resulted from the
decrease in interest rates and a reduced reliance on borrowed funds due to the
balance sheet restructuring activities. Net income was also favorably affected
by a nonrecurring gain of $7.2 million after tax, on the sale of NYCE stock, an
ATM network provider in which Citizens held an equity position.
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-taxable equivalent basis, decreased 1.9%
to $322.8 million in 2001 from $329.0 million in 2000. A lower level of earning
assets led to the decline. Earning assets were lower during 2001 due to balance
sheet restructuring initiated to reduce interest rate risk and decrease reliance
on borrowed funds. This balance sheet restructuring included the securitization
and sale of $247 million of seasoned mortgage loans, the sale of most new
mortgage loan production into the secondary market, the sale of the $30 million
Michigan-based credit card portfolio, and the sale of the $27 million F&M
Bank-Minnesota. Additionally, Citizens limited growth in its indirect lending
portfolio and refocused the commercial loan portfolio in Wisconsin to
de-emphasize certain types of commercial real estate lending. This resulted in
lower earning assets in 2001 but improved net interest margin throughout the
year. Net interest margin improved from 4.10% in the fourth quarter of 2000 to
4.48% in the fourth quarter of 2001. For the full year, net interest margin was
4.32%, unchanged from the prior year. An analysis of how changes in volume and
rates have affected net interest income for the years ended December 31, 2001
and 2000 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 declined $48.4 million in 2001 due primarily to the lower
interest rate environment and, to a lesser extent, the balance sheet
restructuring. Yields on commercial loans were particularly impacted by lower
interest rates as many of these loans vary directly with the prime interest
rate. The prime rate was reduced 475 basis points throughout 2001 in response to
the slower economy and Federal Reserve Board monetary policy. Certain consumer
home equity loan yields, which vary with prime, were also negatively affected by
the lower interest rate environment. The ratio of average loans to total earning
assets declined slightly in 2001 to 81.3% from 81.8% in the prior year.
Investment securities, including money market investments, comprise the
remaining 18.7% of earning assets, up from 18.2% in 2000. The average yield on
earning assets decreased to 7.87% in 2001 from 8.36% in 2000.
Interest expense decreased $41.5 million in 2001 reflecting the lower
interest rate environment and the reduction in borrowed funds due to the balance
sheet restructuring. The average rates paid on all categories of interest
bearing liabilities, except interest bearing demand deposits, decreased
significantly in 2001 from the prior year reflecting the lower interest rate
environment. Average rates paid on interest bearing demand accounts increased
due to growth of a highly successful new product offering with a tiered rate
structure, which pays higher rates of interest. Average interest bearing
deposits declined $48.3 million or 0.9% in 2001 from the prior year as clients
sought higher yielding investment alternatives such as fixed and variable
annuities offered through Citizens' retail and brokerage units and to a lesser
extent the sale of F&M Bank-Minnesota. Average short-term and long-term
borrowings comprised 18.1% of interest bearing liabilities in 2001 down from
19.1% in the prior year. Average short-term borrowings declined
A-6
$381.6 million as Citizens reduced reliance on borrowed funds through the
balance sheet restructuring and extended maturities of borrowed funds as long
term debt in the lower interest rate environment.
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 2. ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
2001 COMPARED TO 2000 2000 Compared to 1999
--------------------------------------------- ------------------------------------------
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 $ 2,091 $ (120) $ 2,211 $ (2,298) $ 493 $ (2,791)
Investment securities:
Taxable (9,107) (653) (8,454) 6,536 4,409 2,127
Tax-exempt 1,365 21 1,344 3,199 (163) 3,362
Loans:
Commercial (9,614) (32,461) 22,847 67,166 9,684 57,482
Real estate (27,914) (943) (26,971) (8,734) 190 (8,924)
Consumer (5,270) (4,384) (886) 14,580 1,724 12,856
-------- -------- -------- -------- -------- --------
Total (48,449) (38,540) (9,909) 80,449 16,337 64,112
-------- -------- -------- -------- -------- --------
INTEREST EXPENSE:
Deposits:
Demand 5,495 2,774 2,721 (479) (522) 43
Savings (20,410) (16,786) (3,624) 5,718 4,439 1,279
Time (9,293) (10,473) 1,180 27,027 13,916 13,111
Short-term borrowings (31,074) (10,060) (21,014) 34,840 6,767 28,073
Long-term debt 13,726 (2,866) 16,592 8,111 2,129 5,982
-------- -------- -------- -------- -------- --------
Total (41,556) (37,411) (4,145) 75,217 26,729 48,488
-------- -------- -------- -------- -------- --------
NET INTEREST INCOME $ (6,893) $ (1,129) $ (5,764) $ 5,232 $(10,392) $ 15,624
======== ======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
(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.
A-7
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
TABLE 3. AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
2001 2000 1999
-------------------------------- -------------------------------- ----------------------------
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 $ 65.9 $ 2.3 3.50% $ 4.1 $ 0.3 5.67% $ 48.3 $ 2.5 5.24%
Investment securities (3):
Taxable 877.1 57.1 6.51 1,007.0 66.2 6.57 974.6 59.6 6.12
Tax-exempt 419.2 21.7 7.97 393.2 20.3 7.96 328.3 17.2 8.04
Loans (4):
Commercial 3,440.8 269.7 7.93 3,178.2 279.3 8.89 2,525.1 212.1 8.51
Real estate mortgage 1,133.1 85.9 7.57 1,488.7 113.8 7.64 1,601.9 122.6 7.65
Consumer 1,535.2 136.8 8.91 1,535.2 142.1 9.26 1,401.9 127.5 9.10
-------- ------- -------- -------- ---------- -------
Total earning assets (3) 7,471.3 573.6 7.87 7,606.4 622.0 8.36 6,880.1 541.5 8.05
NONEARNING ASSETS
Cash and due from banks 201.8 222.6 231.3
Premises and equipment 132.5 141.5 135.1
Investment security
fair value adjustment 39.0 (21.5) (4.5)
Other assets 172.4 204.2 171.6
Allowance for loan losses (81.2) (80.2) (71.4)
-------- -------- ----------
Total assets $7,935.8 $8,073.0 $ 7,342.2
======== ======== ==========
INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing demand $ 744.8 14.0 1.88 $ 581.5 8.5 1.46 $ 578.5 9.0 1.55
Savings 1,474.5 34.8 2.36 1,701.7 55.2 3.24 1,751.6 49.5 2.83
Time 2,907.6 156.2 5.37 2,892.1 165.4 5.72 2,672.0 138.4 5.18
Short-term borrowings 538.7 27.5 5.09 920.3 58.5 6.36 478.9 23.7 4.95
Long-term debt 596.4 33.2 5.57 303.6 19.5 6.41 210.3 11.3 5.40
-------- ------- -------- -------- ---------- -------
Total interest-bearing liabilities 6,262.0 265.6 4.24 6,399.2 307.1 4.80 5,691.3 231.9 4.07
NONINTEREST-BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 881.2 946.1 904.6
Other liabilities 90.3 77.5 74.1
Shareholders' equity 702.4 650.2 672.2
-------- -------- ----------
Total liabilities and
shareholders' equity $7,935.8 $8,073.0 $ 7,342.2
======== ======== ==========
NET INTEREST INCOME $ 308.0 $ 314.9 $ 309.6
======= ======== =======
NET INTEREST INCOME AS A
PERCENT OF EARNING ASSETS 4.32% 4.32% 4.68%
- ------------------------------------------------------------------------------------------------------------------------------------
(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
$14,835,000, $14,097,000, and $12,204,000 for the years ended December 31,
2001, 2000, and 1999, 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.
A-8
- --------------------------------------------------------------------------------------------------------------------------------
TABLE 4. SUMMARY OF LOAN LOSS EXPERIENCE
Year Ended December 31 (in thousands) 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses - January 1 $ 80,070 $ 76,397 $ 69,740 $ 67,010 $ 59,029
Allowance of acquired (sold) banks and branches (240) -- 2,400 1,745 1,329
Provision for loan losses 26,407 20,983 24,675 16,528 20,511
CHARGE-OFFS:
Commercial 18,265 10,920 8,675 4,557 4,555
Real estate 189 169 436 359 861
Consumer 14,278 14,359 17,751 14,879 13,064
----------- ----------- ----------- ----------- -----------
Total charge-offs 32,732 25,448 26,862 19,795 18,480
----------- ----------- ----------- ----------- -----------
RECOVERIES:
Commercial 1,950 3,577 2,483 1,387 1,581
Real estate 47 45 149 28 12
Consumer 4,797 4,516 3,812 2,837 3,028
----------- ----------- ----------- ----------- -----------
Total recoveries 6,794 8,138 6,444 4,252 4,621
----------- ----------- ----------- ----------- -----------
Net charge-offs 25,938 17,310 20,418 15,543 13,859
----------- ----------- ----------- ----------- -----------
Allowance for loan losses - December 31 $ 80,299 $ 80,070 $ 76,397 $ 69,740 $ 67,010
=========== =========== =========== =========== ===========
Loans outstanding at year-end $ 5,922,406 $ 6,422,806 $ 5,917,483 $ 5,264,706 $ 5,074,230
Average loans outstanding 6,109,111 6,202,157 5,528,963 5,159,584 4,843,507
Ratio of allowance for loan losses
to loans outstanding at year-end 1.36% 1.25% 1.29% 1.32% 1.32%
Ratio of net loans charged off as a
percentage of average loans outstanding 0.42 0.28 0.37 0.30 0.29
- --------------------------------------------------------------------------------------------------------------------------------
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 $26.4 million in 2001, up from $21.0 million in 2000. Net charge-offs
in 2001 as a percentage of average loans were 0.42%, compared with 0.28% in
2000. The increase is the result of higher net charge-offs in the commercial
loan portfolio, particularly in the F&M markets. A summary of Citizens' loan
loss experience from 1997 through 2001 appears in Table 4.
The allowance for loan losses at December 31, 2001 was $80.3 million, or
1.36% of loans, compared with $80.1 million, or 1.25% of loans at the end of
2000. At December 31, 2001, the allowance equaled 109.6% of nonperforming loans,
compared with 130.5% at year-end 2000. The decline in the ratio of allowance for
loan losses to nonperforming loans primarily reflects increases in nonperforming
commercial and commercial real estate loans in 2001. 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".
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". At December 31, 2001 total
impaired loans were $62.1 million and the associated impairment allowance was
$10.4 million, compared with $52.9 million and $5.1 million, respectively, at
December 31, 2000.
Citizens' maintains what management believes is an adequate allowance for
possible loan losses to meet presently known credit risks in the loan portfolio.
Citizens' loan portfolio has no significant concentrations in any one industry
nor 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.
A-9
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 5. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES(1)
2001 2000 1999 1998 1997
----------------- ----------------- ----------------- ----------------- -----------------
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 $ 42.0 54.8% $ 35.2 51.9% $ 21.3 48.6% $ 19.2 45.8% $ 16.7 40.7%
Real estate construction 0.5 3.7 1.1 3.7 0.8 3.2 0.3 2.8 0.2 2.2
Real estate mortgage 3.5 16.4 5.9 20.0 6.0 24.3 8.2 26.9 7.9 28.4
Consumer 16.2 25.1 16.4 24.4 23.5 23.9 21.4 24.5 18.0 28.7
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total allocated 62.2 100.0% 58.6 100.0% 51.6 100.0% 49.1 100.0% 42.8 100.0%
======= ======= ======= ======= =======
Unallocated 18.1 21.5 24.8 20.6 24.2
------- ------- ------- ------- -------
Total $ 80.3 $ 80.1 $ 76.4 $ 69.7 $ 67.0
======= ======= ======= ======= =======
====================================================================================================================================
(1) The allocation of the allowance for loan losses in the above table is based
upon ranges of estimates and is 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.
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.
Minimum loss factors for criticized loan categories are consistent with
regulatory agency factors. Loss factors for non-criticized loan categories are
determined based on historical (generally three-year) averages adjusted
quarterly for recent 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 collectibility 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. The conditions evaluated in connection with the unallocated
allowance at December 31, 2001, 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, collateral values, loan
volumes and concentrations, regulatory examination results, internal credit
examination results and other factors. Management reviews these conditions
quarterly in discussion with 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 allowance for loan losses by major loan type at
year-end for each of the last five years is presented in Table 5.
CHANGES IN THE ALLOWANCE ALLOCATION
The total "allocated" portion of the allowance for loan losses increased
$3.6 million in 2001. This included an increase of $4.0 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 based allocated allowance decreased $0.4 million
reflecting primarily a lower allocation factor for 2001 in the mortgage
portfolio, offset in part, by an increase in classified credits.
At December 31, 2001, the allocated portion of the allowance for credit
losses included $29.8 million related to classified credits, compared to $21.0
million at December 31, 2000. Classified credits are those that are internally
risk rated, special mention, or 8, substandard, or doubtful. Credits considered
a loss are charged off. Special mention credits are potentially weak, as the
borrower has begun to exhibit deteriorating trends which, if not corrected,
could jeopardize
A-10
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.
The allocation methods used for December 31, 2001 and 2000 were
consistent. As shown in Table 5, the allocation of the allowance for loan losses
related to commercial and commercial real estate loans, increased $6.8 million
to $42.0 million at December 31, 2001 from the prior year-end. The increase was
a function of changes in the commercial and commercial real estate category,
including: a greater amount of loans in criticized categories and a
corresponding increase in specific allocations in 2001 compared to 2000.
Nonperforming commercial and commercial real estate loans increased to $48.0
million, or 1.5% of total commercial loans, at year-end 2001 from $37.2 million,
or 1.1%, a year ago. Commercial real estate loans represented $11.1 million in
2001 and $12.5 million in 2000 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. 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 amount allocated to residential construction and real estate loans at
December 31, 2001 decreased to 5.0% of the allowance for loan losses from 8.7%
in 2000. This decrease was predominately a function of lower loan balances from
balance sheet restructuring efforts in 2001 and a reduction in the allocation
factor. Nonperforming loans in this portfolio remained essentially the same from
the prior year and historical loss ratios in this portfolio are very low.
The decrease in amount allocated to the consumer loan portfolio in 2001
was predominantly a function of the sale of $30 million of credit card
receivables in mid 2001 and fewer net loan losses in the remaining consumer
portfolio for the year ended December 31, 2001. Nonperforming consumer loans
comprised 0.54% of total consumer loans at year-end 2001, up from 0.45% a year
ago. Management expects net loan charge-offs in this portfolio to remain stable,
primarily due to a risk-adjusted pricing structure and aggressive collection
efforts.
At December 31, 2001, the unallocated allowance decreased $3.4 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, 2000 had been recognized through charge-off, had been
reflected in the formula or specific allowance, or had declined.
NONINTEREST INCOME
Noninterest income, before nonrecurring items and securities gains and losses,
increased to $96.9 million in 2001 from $90.3 million in 2000, an improvement of
7.2%. On this same basis, noninterest income accounted for 23.9% of total
operating revenue in 2001, compared with 22.3% in 2000. The increase is
primarily due to higher mortgage loan originations and the subsequent sale of
those mortgages in the secondary market.
- --------------------------------------------------------------------------------
NONINTEREST INCOME
Year Ended
December 31, Changes in 2001
---------------------- ------------------------
(in thousands) 2001 2000 Amount Percent
- -----------------------------------------------------------------------------------
Service charges
on deposit accounts $ 27,773 $ 26,260 $ 1,513 5.8%
Trust fees 21,028 24,253 (3,225) (13.3)
Mortgage and
other loan income 13,159 4,997 8,162 163.3
Bankcard fees 11,799 11,258 541 4.8
Brokerage and
investment fees 8,157 7,693 464 6.0
ATM network user fees 3,448 3,202 246 7.7
Cash management services 2,855 2,651 204 7.7
Title insurance fees 1,906 1,121 785 70.0
Other 6,728 8,909 (2,181) (24.5)
-------- -------- -------
TOTAL FEES & OTHER INCOME 96,853 90,344 6,509 7.2
Securities gains 823 -- 823 --
-------- -------- -------
TOTAL BEFORE
NONRECURRING ITEMS 97,676 90,344 7,332 8.1
Equity investment gain 11,017 -- 11,017 --
Gain on securitized mortgages 5,372 -- 5,372 --
Gain on sale of credit card 2,623 -- 2,623 --
Gain on sale of bank 793 -- 793 --
-------- -------- --------
TOTAL NONINTEREST INCOME $117,481 $ 90,344 $ 27,137 30.0
======== ======== ========
===============================================================================
Service charges on deposit accounts increased $1.5 million or 5.8%
reflecting new marketing strategies and pricing structures. Trust fees were down
$3.2 million in 2001 as the value of managed assets upon which fees are based
declined due to the weak equity markets. Total trust assets under administration
were $3.162 billion at December 31, 2001 compared to $3.448 billion at December
31, 2000. Mortgage and other loan income was up $8.2 million, or 163.3% in 2001
due to higher gains on the sale of loans. Mortgage originations totaled $1.1
billion in 2001 compared to $457 million in 2000. The majority of all new
mortgage loan originations were sold in the secondary market during 2001
resulting in higher gains on the sale of such loans and the related servicing.
The higher mortgage loan volume also resulted in increased title insurance fees
of 70.0% in 2001 over the comparable period in 2000. Bankcard fees increased
4.8% in 2001 generated by higher volume of debit card and merchant transactions,
offset in part by lower credit card fees due to the midyear sale of the Michigan
credit card portfolio. Brokerage and investment fees increased 6.0% to $8.2
million in 2001 compared to $7.7 million in 2000 due to successful
A-11
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
retail efforts.
Citizens recorded a gain of $5.4 million from the sale of $247 million of
securitized mortgage loans in the first half of 2001. This sale was part of
Citizens' strategy to restructure the balance sheet to decrease reliance on
borrowed funds and minimize interest rate risk. In addition to the gain on sale
of securitized mortgages, Citizens recorded net gains of $823,000 on other
investment securities during 2001. As presented in Note 5 to the Consolidated
Financial Statements, Citizens realized gross gains on sale of investment
securities of $6.2 million and gross losses of $7,000 in 2001. In 2000 gross
realized gains of $67,000 were offset by losses realized of $67,000.
Nonrecurring income in 2001 consisted of a $793,000 gain on the sale of
F&M Bank-Minnesota, $2.6 million gain on sale of credit card assets, the
aforementioned $5.4 million gain from the securitization and subsequent sale of
$247 million of portfolio mortgage loans and a gain on the sale of NYCE stock of
$11.0 million. NYCE Corporation was an ATM network provider in which Citizens
held an equity interest.
NONINTEREST EXPENSE
Excluding the Special Charge in 2000, noninterest expense increased $9.0
million, or 3.7%, to $251.2 million in 2001 from $242.2 million in the prior
year. Increased incentive-based compensation, pension costs and professional
service expenses generated the majority of the increase.
Salaries and employee benefits increased $3.7 million, or 3.0%, in 2001
over 2000 due to normal merit increases, higher incentive-based compensation and
increased pension costs. Occupancy costs were up $943,000 or 5.6% due to
increased maintenance and energy costs. Professional services increased $2.2
million, or 21.7% due to higher legal costs associated with loan and other
collection activities, increased technology support costs at F&M and other
Corporate initiatives. Postage and delivery expenses increased 11.9% due to
centralization of the check processing operations and outsourcing of the cash
vault function. Partially offsetting this increase were reductions in staffing
costs. Telephone and stationery and supplies expense decreased $2.0 million due
to efficiencies from the F&M merger and expense reduction initiatives. Other
expenses increased to $19.2 million in 2001 from $17.3 million in the prior year
primarily due to an increase of $1.6 million in forgery, fraud and other losses.
The Special Charge in 2000 included $12.3 million of merger-related
integration costs and an additional $3.2 million of restructuring and other
costs associated with separate strategic initiatives and impairment write-offs.
These charges are more fully described under the caption "Mergers, Acquisitions,
Divestitures and Other Initiatives" on page 4 of this report and in Note 3 of
the Consolidated Financial Statements. All initiatives in respect to these
Special Charges were completed by December 31, 2001.
- --------------------------------------------------------------------------------
NONINTEREST EXPENSE
Year Ended
December 31, Changes in 2001
-------------------------- ------------------------------
(in thousands) 2001 2000 Amount Percent
- ------------------------------------------------------------------------------------------
Salaries and
employee benefits $126,278 $122,577 $ 3,701 3.0%
Equipment 19,317 19,264 53 0.3
Occupancy 17,713 16,770 943 5.6
Data processing services 13,101 12,608 493 3.9
Professional services 12,277 10,088 2,189 21.7
Intangible asset
amortization 11,063 10,733 330 3.1
Bankcard fees 9,308 8,959 349 3.9
Postage and delivery 7,746 6,924 822 11.9
Telephone 5,556 6,364 (808) (12.7)
Advertising and
public relations 5,219 5,034 185 3.7
Stationery and supplies 4,426 5,602 (1,176) (21.0)
Other 19,179 17,298 1,881 10.9
-------- -------- --------
SUBTOTAL 251,183 242,221 8,962 3.7
Special Charge -- 15,541 (15,541) (100.0)
-------- -------- --------
TOTAL NONINTEREST
EXPENSE $251,183 $257,762 $ (6,579) (2.6)
======== ======== ========
- --------------------------------------------------------------------------------
FEDERAL INCOME TAXES
Income tax expense was $43.2 million in 2001, an increase of 20.7% over the 2000
total of $35.8 million. The increase reflected higher pre-tax earnings. The
Corporation's effective tax rate was 29.2% in 2001 and 28.3% in 2000. The
Corporation's effective tax rate is lower than the statutory tax rate due to
tax-exempt interest income.
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 2001 were $7.936 billion, a decrease of $137
million or 1.7% from 2000. Average earning assets as a percent of average total
assets was 94.6% for 2001, up from 94.0% in 2000. Average loans comprised 77.0%
of average assets during 2001, up slightly from 76.8% in 2000. Interest-bearing
deposits comprised 81.9% of average interest-bearing liabilities for 2001,
increasing from 80.9% in 2000. The ratio of average noninterest-bearing deposits
to average deposits decreased to 14.7% in 2001, from 15.5% in 2000.
A-12
INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
Average investment securities, including money market investments,
comprised 18.7% of total average earning assets in 2001, up from 18.2% in 2000.
The increase is consistent with the overall balance sheet restructuring
initiatives and the decline in loans as a percentage of earning assets.
Mortgage-backed assets declined $22.4 million or 3.7% in 2001 as
prepayment rates increased on these securities in the declining rate
environment. State and municipal securities were purchased during 2001 due to
their higher tax equivalent yields and Citizens' capacity to utilize tax-exempt
income. At December 31, 2001, state and municipal securities represented 35.2%
of total investment securities, compared with 31.1% in the prior year. Other
securities, consisting primarily of Federal Reserve stock, Federal Home Loan
Bank stock and privately issued asset-backed securities, remained virtually
unchanged from 2000 as a percentage of total investment securities.
Money market investments primarily federal funds sold and government
money market investments averaged $65.9 million for 2001, up from $4.1 million
in 2000. 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, 2001 and 2000 is presented below. Maturities and
average yields of available for sale securities at year-end 2001 is presented in
Table 6. As of December 31, 2001, the estimated aggregate fair value of
Citizens' investment securities portfolio was $34.3 million above amortized cost
consisting of gross unrealized gains of $36.9 million and gross unrealized
losses of $2.6 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 2001
------------------------------ ----------------------------
Year Ended December 31 (in thousands) 2001 2000 Amount Percent
- -----------------------------------------------------------------------------------------------------------------
U.S. Treasury $ 8,163 $ 21,490 $ (13,327) (62.0)%
Federal agencies
Mortgage-backed securities 565,393 582,618 (17,225) (3.0)
Other agencies 166,236 269,127 (102,891) (38.2)
State and municipal:
Taxable 10,776 12,257 (1,481) (12.1)
Tax-exempt 433,180 418,518 14,662 3.5
Mortgage and asset-backed 10,558 15,755 (5,197) (33.0)
Other securities 65,200 64,343 857 1.3
---------- ---------- ----------
Total $1,259,506 $1,384,108 $ (124,602) (9.0)
========== ========== ==========
==================================================================================================================
- ------------------------------------------------------------------------------------------------------------------
TABLE 6. MATURITIES AND AVERAGE YIELDS OF AVAILABLE FOR SALE SECURITIES AT
DECEMBER 31, 2001
U.S. Treasury and
Federal Agency(1) State and Municipal(1), (2)
--------------------------------- ------------------------------------------
Amortized Fair Amortized Fair
(in millions) Cost Value Yield Cost Value Yield
- ----------------------------------------------------------------------------------------------------------
Due within one year $ 114.6 $ 115.7 4.96% $18.8 $ 19.1 7.80%
One to five years 493.6 515.6 6.60 79.1 82.3 7.71
Five to ten years 94.7 94.3 6.92 157.6 163.5 8.00
After ten years 14.3 14.2 4.98 176.9 179.1 7.46
-------- -------- -------- --------
Total $ 717.2 $ 739.8 6.35 $ 432.4 $ 444.0 7.66
======== ======== ======== ======== =======
Average maturity (3) 3.62 yrs 7.63 yrs.
Other(1) Total
---------------------------------- --------------------------------------------
Amortized Fair Amortized Fair
Cost Value Yield Cost Value Yield
--------------------------------------------------------------------------------
Due within one year $ 4.3 $ 4.7 6.27% $ 137.7 $ 139.5 5.39%
One to five years 7.7 6.0 5.70 580.4 603.9 6.74
Five to ten years 1.4 2.5 5.46 253.7 260.3 7.58
After ten years 62.2 62.5 6.21 253.4 255.8 7.02
------ ------- --------- ---------
Total $ 75.6 $ 75.7 6.18 $ 1,225.2 $ 1,259.5 6.82
====== ======= ========= =========
Average maturity (3) 3.25 yrs. 5.09 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.
A-13
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 7. LOAN PORTFOLIO
(in millions) 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
LOANS OUTSTANDING AT DECEMBER 31
Commercial $ 1,923.4 $ 2,127.2 $ 1,822.4 $ 1,619.9 $ 1,370.3
Commercial real estate 1,323.0 1,205.0 1,053.0 790.5 694.0
Real estate construction 216.0 235.1 185.4 149.5 113.5
Real estate mortgage 971.5 1,282.8 1,440.1 1,417.9 1,439.4
Consumer 1,488.5 1,572.7 1,416.6 1,286.9 1,457.0
---------- ---------- ---------- ---------- ----------
Total $ 5,922.4 $ 6,422.8 $ 5,917.5 $ 5,264.7 $ 5,074.2
========== ========== ========== ========== ==========
LOAN MATURITIES AND INTEREST RATE SENSITIVITY AT DECEMBER 31, 2001
Within One to After
One Year Five Years Five Years Total
- ---------------------------------------------------------------------------------------------------------------
Commercial and commercial real estate $ 1,363.7 $ 1,669.6 $ 213.1 $ 3,246.4
Real estate construction 216.0 -- -- 216.0
---------- ---------- -------- ----------
Total $ 1,579.7 $ 1,669.6 $ 213.1 $ 3,462.4
========== ========== ======== ==========
Loans above:
With floating interest rates $ 994.5 $ 414.9 $ 96.4 $ 1,505.8
With predetermined interest rates 585.2 1,254.7 116.7 1,956.6
---------- ---------- -------- ----------
Total $ 1,579.7 $ 1,669.6 $ 213.1 $ 3,462.4
========== ========== ======== ==========
===============================================================================================================
LOANS
Citizens extends credit primarily within the local markets of its banking
subsidiaries located in Michigan, Wisconsin, Iowa and Illinois. 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 decreased $500.4 million or 7.8% in 2001 with average loans
comprising 81.3% of total average earning assets during 2001, as compared with
81.8% during 2000. Commercial and commercial real estate loans decreased $85.8
million, or 2.6%, in 2001 from year-end 2000. A reduction of $182.0 million in
commercial loans occurred within the F&M markets as a result of business loan
portfolio restructuring and the implementation of Citizens' credit standards and
loan structuring criteria in these markets. Commercial loans in the Michigan
market grew 4.9% in 2001 from the prior year-end, a slower rate than the
previous year due to the slowing economy. Residential mortgage loan balances
declined $311.3 million, or 24.3% in 2001 from the prior year-end. The decline
in mortgage loans reflects the securitization and sale of $247 million of
portfolio mortgage loans and the sale of new mortgage loan production into the
secondary market as part of the balance sheet restructuring initiatives.
Consumer loans, which include installment and home equity loans,
decreased $84.2 million, or 5.4%, to $1.489 billion at year-end 2001. The
decline in consumer loans reflects the sale of $30 million of credit card
assets, declines in the indirect lending portfolio and decreased direct auto
loans, partially offset by growth in home equity loans.
At December 31, 2001 and 2000, $257.9 million and $362.3 million,
respectively, of residential real estate loans originated and subsequently sold
in the secondary market were being serviced by Citizens bank. Capitalized
servicing rights relating to the service loans totaled $1.7 million at December
31, 2001 and $2.7 million at year-end 2000.
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 $79.2 million as of December 31, 2001, an increase
of 19.5% from the year-end 2000 balance of $66.3 million. As a percentage of
total assets, nonperforming assets increased to 1.03% at December 31, 2001, from
0.79% at December 31, 2000. The increase is primarily attributable to higher
nonperforming commercial loans at the F&M Banks.
A-14
- ------------------------------------------------------------------------------------------------------------------------
TABLE 8. NONPERFORMING ASSETS AND PAST DUE LOANS
December 31 (in thousands) 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
NONPERFORMING LOANS(1),(2)
Nonaccrual
Less than 30 days past due $ 6,528 $ 7,237 $ 1,661 $ 2,016 $ 5,128
From 30 to 89 days past due 5,218 7,297 772 1,641 2,021
90 or more days past due 57,047 44,881 26,498 31,485 28,813
------- ------- ------- ------- -------
Total 68,793 59,415 28,931 35,142 35,962
90 days past due and still accruing 4,168 889 2,139 2,474 3,022
Restuctured (1) 337 1,068 9 114 446
------- ------- ------- ------- -------
Total nonperforming loans 73,298 61,372 31,079 37,730 39,430
OTHER REPOSSESSED ASSETS ACQUIRED 5,947 4,917 4,039 4,790 4,869
------- ------- ------- ------- -------
Total nonperforming assets $79,245 $66,289 $35,118 $42,520 $44,299
======= ======= ======= ======= =======
Nonperforming assets as a percent of total loans
plus other repossessed assets acquired 1.34% 1.03% 0.59% 0.81% 0.87%
Nonperforming assets as a percent of total assets 1.03 0.79 0.45 0.61 0.67
NONPERFORMING LOANS BY TYPE
Commercial $47,978 $37,229 $18,005 $19,830 $23,031
Real estate mortgage 17,304 17,057 7,366 8,032 9,487
Consumer 8,016 7,086 5,708 9,868 6,912
------- ------- ------- ------- -------
Total $73,298 $61,372 $31,079 $37,730 $39,430
======= ======= ======= ======= =======
========================================================================================================================
(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 2001 for nonaccrual
and restructured loans, as of December 31, 2001, assuming interest had been
accrued throughout the year in accordance with original terms was $6.392
million. The comparable 2000 and 1999 totals were $4.953 million, and $3.383
million, respectively. Interest collected on these loans and included in
income was $3.344 million in 2001, $3.045 million in 2000 and $1.861 million
in 1999. Therefore, on a net basis, total income foregone due to these loans
was $3.048 million in 2001, $1.908 million in 2000 and $1.522 million in
1999.
Nonperforming commercial and commercial real estate loans increased to
$48.0 million at year-end 2001 from $37.2 million a year ago. These loans
comprised 65.5% of total nonperforming loans at December 31, 2001, compared with
60.7% in 2000. Commercial real estate loans represented $11.1 million in 2001
and $12.5 million in 2000 of such nonperforming loans. The increase in
nonperforming commercial and commercial real estate loans is reflected in the
allowance for loan losses through specific and formula based loss allocations as
of December 31, 2001. The loss allocation for commercial and commercial real
estate loans increased $6.8 million to $42.0 million at December 31, 2001 from
the prior year-end. Management believes, as previously stated, that 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.
The consumer portfolio is comprised of automobile, personal, marine and
other recreational vehicle, home equity and credit card loans of which
automobile and home equity comprise 50.0% of 2001 average balances. At December
31, 2001, consumer loans represented 10.9% of nonperforming loans, down from
11.5% in 2000.
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, 2001, such loans amounted to $78.9 million or 1.3% of
total loans compared with $70.2 million or 1.1% of total loans as of December
31, 2000. 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.
Under Citizens' credit policies and practices, a loan is placed on
nonaccrual status when there is doubt regarding
A-15
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
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 may 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 lower 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, 2001, loans considered to be impaired totaled $62.1
million of which $43.5 million were on a nonaccrual basis. Included within this
amount is $39.8 million of impaired loans for which the related allowance for
loan losses is $10.4 million and $22.3 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, 2001 was
approximately $78.0 million. For the year ended December 31, 2001, Citizens
recognized interest income of $3.3 million on impaired loans. Cash collected on
nonaccrual impaired loans totaled $3.1 million which was applied to principal.
At December 31, 2000, loans considered to be impaired totaled $52.9
million of which $36.3 million were on a nonaccrual basis. Included with 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 the
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.
During 2001, 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
2001 2000 1999
-------------------- ---------------------- ----------------------
AVERAGE AVERAGE Average Average Average Average
Year Ended December 31 (in millions) BALANCE RATE Balance Rate Balance Rate
- --------------------------------------------------------------- ---------------------- ----------------------
Noninterest-bearing demand $ 881.2 --% $ 946.1 --% $ 904.6 --%
Interest-bearing demand 744.8 1.88 581.5 1.46 578.5 1.55
Savings 1,474.5 2.36 1,701.7 3.24 1,751.6 2.83
Time 2,907.6 5.37 2,892.1 5.72 2,672.0 5.18
---------- ---------- ----------
Total $ 6,008.1 3.41 $ 6,121.4 3.74 $ 5,906.7 3.33
========== ========== ==========
============================================================================================================================
DEPOSITS
Average deposit balances and rates for the past three years are
summarized in Table 9. Total average deposits were 1.9% lower in 2001 as
compared with 2000. Time and interest bearing demand deposits increased while
savings deposits and noninterest bearing demand deposits decreased. Average
interest-bearing demand balances increased 28.1% in 2001 versus the prior year
primarily due to growth of a highly successful new product offering which pays
higher rates of interest. Time deposits increased 0.5% in 2001 as compared with
2000 primarily due to an increase in average brokered deposit balances. Savings
accounts and noninterest bearing demand deposits declined 13.4% and 6.9%,
respectively, in 2001 due to a shift in client preferences, particularly in
F&M's Wisconsin market, from noninterest bearing demand and money market savings
accounts to the new higher-rate interest bearing demand product. The overall
average rate for the deposit portfolio declined in 2001 to 3.41% from 3.74% in
2000. The decrease was the result of the lower interest rate environment in
2001. As of December 31, 2001, certificates of deposits of $100,000 or more
accounted for approximately 13.7% of total deposits. The maturities of these
deposits are summarized in Table 10.
A-16
- --------------------------------------------------------------------------------
TABLE 10. MATURITY OF TIME CERTIFICATES OF DEPOSIT OF
$100,000 OR MORE AT DECEMBER 31, 2001
(in thousands)
- --------------------------------------------------------------------------------
Three months or less $314,552
After three but within six months 90,901
After six but within twelve months 261,996
After twelve months 150,926
---------
Total $818,375
=========
================================================================================
Citizens gathers deposits primarily from the local markets of its banking
subsidiaries and has not traditionally relied on purchased deposits for any
significant funding. Brokered deposits and time deposits greater than $100,000
declined $219 million at December 31, 2001 from the prior year end due to the
balance sheet restructuring initiatives. 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 $538.7 million in 2001 or
8.6% of total average interest-bearing liabilities, compared with $920.3 million
or 14.4% during 2000. The decline in short-term borrowings is a result of the
balance sheet restructuring and the extension of debt maturities in the lower
interest rate environment. See Note 10 to the Consolidated Financial Statements
for additional information on short-term borrowings.
As of December 31, 2001, Citizens' Parent company maintained a $75
million short-term revolving credit facility with three unaffiliated banks,
which had an unused commitment of $45 million. The current facility will mature
on August 29, 2002 and is expected to renew at that time. The interest rate on
the $30 million outstanding at December 31, 2001 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, 2001.
Long-term debt comprised primarily of FHLB notes, accounted for $596.4
million, or 9.5%, of average interest-bearing funds during 2001 increasing from
$303.6 million or 4.7% during 2000. This increase reflects an extension of
wholesale funding maturities in the low interest rate environment. A summary of
long-term debt balances as of December 31, 2001 and 2000 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.
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, 2001, shareholders' equity was $697.5 million, compared with
$680.0 million at December 31, 2000. Book value per common share at December 31,
2001 and 2000 was $15.46 and $14.62, 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
----------------------
"Well- December 31,
----------------------------
Required Capitalized" 2001 2000 1999
- -------------------------------------------------------------------
Risk based:
Tier 1 capital 4.00% 6.00% 9.87% 9.05% 9.22%
Total capital 8.00 10.00 11.12 10.30 10.47
Tier 1 leverage 4.00 5.00 7.79 7.11 7.21
- -------------------------------------------------------------------
During 2001, Citizens maintained two stock repurchase plans. The stock
repurchase plan initiated in May 2000 allowed for the repurchase of up to
3,000,000 shares of common stock for general bank purposes. As of December 31,
2000, 1,234,100 shares had been purchased under this plan. Citizens purchased
the remaining 1,765,900 shares under this plan in 2001. In October 2001, a new
plan was approved to repurchase up to an additional 3,000,000 shares of Citizens
common stock for general corporate purposes. At December 31, 2001, 187,700
shares of common stock had been purchased under this plan. For the year ended
December 31, 2001 a total of 1,953,600 shares were purchased under the plans at
an average price of $29.94.
Citizens declared cash dividends of $1.085 per share in 2001, an increase
of 6.9% over 2000 dividends of $1.015 per share. Citizens has paid dividends
every year since 1892 except for several years during the depression of the
1930's.
A-17
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
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 $41.9 million and $56.8 million during 2001 and 2000,
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 2001, the Parent company received $107.4 million in
dividends from subsidiaries and paid $50.2 million in dividends to its
shareholders. Despite the higher level of dividends to the Parent, all Citizens'
subsidiary banks maintained sufficient capital to be designated well
capitalized.
As discussed in Note 19 to the Consolidated Financial Statements,
approximately $24.8 million was available as of January 1, 2002 for payment to
the Parent company as dividends by Citizens' banking subsidiaries without
further regulatory approval. Amounts earned by subsidiaries in 2002 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 90.2% as of December 31,
2001 compared to 69.3% in 2000. Changes in long-term debt during 2001 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, 2001 and
2000.
As shown, Citizens' interest rate risk position at December 31, 2001 is
asset sensitive in the less than one-year time frame with rate sensitive assets
exceeding rate sensitive liabilities by $308.5 million. Application of GAP
theory would suggest that with such a position Citizens' net interest income
could decline if interest rates fall; i.e., assets are likely to reprice faster
than liabilities, resulting in a decrease in net income in a declining rate
environment. Conversely, net income could increase in a rising 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.
A-18
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CITIZEN'S BANKCORP CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 11. INTEREST RATE SENSITIVITY TOTAL
0 - 3 4 - 6 7 - 12 WITHIN 1 - 5
(dollars in millions) Months Months Months 1 YEAR Years
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001
RATE SENSITIVE ASSETS(1)
Loans and leases $ 2,486.5 $ 271.4 $ 516.5 $ 3,274.4 $ 2,175.6
Investment securities 95.5 21.5 47.1 164.1 568.0
Short-term investments 42.5 -- -- -- 42.5
----------- ----------- ----------- ----------- -----------
Total $ 2,624.5 $ 292.9 $ 563.6 $ 3,481.0 $ 2,743.6
=========== ========== ========== ========== ===========
RATE SENSITIVE LIABILITIES
Deposits (2) $ 873.6 $ 666.4 $ 1,192.5 $ 2,732.5 $ 2,029.2
Other interest bearing liabilities 320.2 19.7 100.1 440.0 221.0
----------- ----------- ----------- ----------- -----------
Total $ 1,193.8 $ 686.1 $ 1,292.6 $ 3,172.5 $ 2,250.2
=========== ========== ========== ========== ===========
Period GAP (3) $ 1,430.7 $ (393.2) $ (729.0) $ 308.5 $ 493.4
Cumulative GAP 1,430.7 1,037.5 308.5 801.9 1,219.7
Cumulative GAP to total assets 18.63% 13.51% 4.02% 4.02% 10.44%
Multiple of rate sensitive assets to liabilities 2.20 0.43 0.44 1.10 1.22
- --------------------------------------------------------------------------------
Over
5 Years Total
- --------------------------------------------------------------------------------
DECEMBER 31, 2001
RATE SENSITIVE ASSETS(1)
Loans and leases $ 472.4 $ 5,922.4
Investment securities 527.4 1,259.5
Short-term investments -- 42.5
--------- -----------
Total $ 999.8 $ 7,224.4
========= ===========
RATE SENSITIVE LIABILITIES
Deposits (2) $ 299.5 $ 5,061.2
Other interest bearing liabilities 282.5 943.5
--------- -----------
Total $ 582.0 $ 6,004.7
========= ===========
Period GAP (3) $ 417.8 $ 1,219.7
Cumulative GAP
Cumulative GAP to total assets 15.88% 15.88%
Multiple of rate sensitive assets to liabilities 1.72 1.20
====================================================================================================================================
DECEMBER 31, 2000
RATE SENSITIVE ASSETS(1)
Loans and leases $ 2,128.9 $ 350.2 $ 669.6 $ 3,148.7 $ 2,581.4
Investment securities 64.1 40.1 30.0 134.2 589.7
Short-term investments 27.5 -- -- -- 27.5
----------- --------- ----------- ----------- -----------
Total $ 2,220.5 $ 390.3 $ 699.6 $ 3,310.4 $ 3,171.1
=========== ========= =========== =========== ===========
RATE SENSITIVE LIABILITIES
Deposits (2) $ 990.2 $ 842.5 $ 1,414.2 $ 3,246.9 $ 1,799.6
Other interest bearing liabilities 1,029.1 75.0 210.2 1,314.3 81.5
----------- --------- ----------- ----------- -----------
Total $ 2,019.3 $ 917.5 $ 1,624.4 $ 4,561.2 $ 1,881.1
=========== ========= =========== =========== ===========
Period GAP (3) $ 201.2 $ (527.2) $ (924.8) $ (1,250.8) $ 1,290.0
Cumulative GAP 201.2 (326.0) (1,250.8) 39.2
Cumulative GAP to total assets 2.39% (3.88)% (14.88)% (14.88)% 0.47%
Multiple of rate sensitive assets to liabilities 1.10 0.43 0.43 0.73 1.69
DECEMBER 31, 2000
RATE SENSITIVE ASSETS(1)
Loans and leases $ 692.7 $ 6,422.8
Investment securities 660.2 1,384.1
Short-term investments -- 27.5
----------- -----------
Total $ 1,352.9 $ 7,834.4
=========== ===========
RATE SENSITIVE LIABILITIES
Deposits (2) $ 223.7 $ 5,270.2
Other interest bearing liabilities 8.6 1,404.4
----------- -----------
Total $ 232.3 $ 6,674.6
=========== ===========
Period GAP (3) 1,120.6 $ 1,159.8
Cumulative GAP 1,159.8
Cumulative GAP to total assets 13.80% 13.80%
Multiple of rate sensitive assets to liabilities 5.82 1.17
================================================================================
(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 $770 million in the less than one year category and $1.636
billion in the over one year category as of December 31, 2001. The same
amounts as of December 31, 2000 were $779 million and $1.414 billion,
respectively. This runoff is based on historical trends, which reflects
industry standards.
(3) GAP is the excess of rate sensitive assets (liabilities).
A-19
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 and revision in a dynamic environment and, as
a result, the model cannot precisely estimate net interest income nor 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, 2001 suggest
that Citizens could expect net interest income to decrease by $3.7 million (if
asset and liability balances remain static and interest rates gradually decline
by 200 basis points over the next twelve months) and, to increase by $8.3
million (if asset and liability balances remain static and interest rates
gradually increase by 200 basis points over the next twelve months) from 2001
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 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.
RECENT ACCOUNTING PRONOUNCEMENTS
Please refer to Note 4 of the Consolidated Financial Statements "Recent
Accounting Pronouncements".
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.
A-20
- -------------------------------------------------------------------------------------------------------------------------
TABLE 12. SELECTED QUARTERLY INFORMATION
2001 2000
----------------------------------------- -----------------------------------
(in thousands except, per share data) FOURTH THIRD SECOND FIRST Fourth Third
- -------------------------------------------------------------------------------------------------------------------------
Interest income $ 129,335 $ 140,406 $ 147,260 $ 156,558 $ 161,169 $ 160,347
Interest expense 51,659 62,146 70,835 80,938 84,909 80,722
Net interest income 77,676 78,260 76,425 75,620 76,260 79,625
Provision for loan losses 7,496 8,500 6,362 4,049 5,895 4,642
Noninterest income before
securities gains (losses) (1) 25,599 34,658 28,587 22,442 23,015 23,215
Investment securities gains (losses) (2) 423 49 3,504 2,219 6 (5)
Noninterest expense before special charge 60,586 64,270 63,616 62,711 57,579 61,670
Special charges (3) -- -- -- -- 8,352 (99)
Net income (loss) 25,742 27,962 27,148 23,805 20,355 25,729
PER SHARE OF COMMON STOCK
Net income (loss):
Basic 0.57 0.60 0.59 0.51 0.44 0.54
Diluted 0.56 0.60 0.58 0.51 0.44 0.54
Cash dividends declared 0.275 0.275 0.275 0.260 0.260 0.260
Market value:(4)
High 34.02 32.75 30.55 29.38 29.81 23.94
Low 27.70 27.30 24.51 23.69 21.19 16.00
Close 32.88 32.08 29.25 26.69 29.06 23.00
- ------------------------------------------------------------------------
2000
Second First
- ------------------------------------------------------------------------
Interest income $ 153,406 $ 147,086
Interest expense 73,878 67,625
Net interest income 79,528 79,461
Provision for loan losses 5,162 5,284
Noninterest income before
securities gains (losses) (1) 22,819 21,295
Investment securities gains (losses) (2) -- (1)
Noninterest expense before special charge 61,928 61,044
Special charges (3) 3,289 3,999
Net income (loss) 22,691 21,885
PER SHARE OF COMMON STOCK
Net income (loss):
Basic 0.48 0.46
Diluted 0.47 0.46
Cash dividends declared 0.260 0.235
Market value:(4)
High 20.00 22.50
Low 16.00 15.50
Close 16.23 19.50
================================================================================
(1) Noninterest income in 2001 includes a $2.6 million gain on the sale of the
credit card portfolio in the second quarter, an $11.0 million gain on sale
of NYCE stock in the third quarter and a $793,000 gain on the sale of F&M
Bank-Minnesota in the fourth quarter.
(2) In 2001 investment securities gains include $2.1 million in the first
quarter and $3.3 million in the second quarter from the securitization of
mortgages and subsequent sale of mortgage-backed securities.
(3) Special charges in 2000 includes restructuring, conversion, integration and
other non-recurring costs incurred in connection with mergers, 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,
2001, there were approximately 16,354 shareholders of the Corporation's
common stock.
A-21
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CITIZEN'S BANKCORP CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH 1999
Citizens reported 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, conversion and other
non-recurring items of $9.5 million in 2000 and $35.2 million in 1999. Returns
on average assets and equity were 1.12% and 13.94%, respectively, in 2000, as
compared with 0.84% and 9.22% in 1999. Excluding nonrecurring items, the
increase in net income in 2000 reflects improvement in net interest income from
growth in earning assets and higher noninterest income, partially offset, by
higher loan loss provision and noninterest expense.
Net interest income increased 1.7% in 2000 to $314.9 million as compared
with $309.6 million in 1999. Higher levels of earning assets, particularly
commercial and commercial real estate loans, partially offset by an increase in
short-term borrowings and a lower net interest margin, led to the increase in
2000. Yields on earning assets increased to 8.36%, 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. 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 19.1% of interest-bearing liabilities in
2000, up from 12.1% in 1999. Higher rates paid on interest-bearing deposits and
long-term debt increased the cost of interest-bearing funding sources to 4.80%
in 2000 from 4.07% in 1999. Net interest margin declined to 4.32% in 2000 as
compared with 4.68% in 1999.
The provision for loan losses decreased to $21.0 million in 2000 from
$24.7 million in 1999. The 1999 provision included a $6.8 million special
provision to conform F&M's allowance for loan losses to Citizens' methodology
and credit risk standards. Net loan charge-offs to average total loans decreased
nine basis points to 0.28% as compared to 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. The allowance
for loan losses as a percentage of total loans was 1.25% at December 31, 2000
compared to 1.29% at the end of 1999.
Noninterest income, before nonrecurring income and securities gains and
losses, increased to $90.3 million in 2000 from $79.9 million in 1999, an
improvement of 13.1%. On the same basis, noninterest income accounted for 22.3%
of total operating revenues in 2000, compared with 20.5% in 1999. Noninterest
income increased $10.4 million from 1999 primarily due to growth in deposit
service charges, trust fees, bankcard fees and brokerage and investment fees.
Excluding nonrecurring items, noninterest expense increased $11.5 million
or 5.0% to $242.2 million in 2000, up 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. Compensation was unchanged
from 1999 as the full year effect of additional staff from the branch purchases,
higher health care costs and increased incentive pay 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. Higher data
processing costs reflect increased processing volumes and new services and
information technology costs associated with the branch purchases and conversion
of F&M onto Citizens' operating systems. Professional services were up due to
the outsourcing in 2000 of Citizens' computer technology support functions and
certain financial and credit audit procedures. Intangible asset amortization
increased due to additional goodwill from the branch purchases and bankcard fees
were higher due to additional transaction volume and costs from the full year
effect of outsourcing bankcard operations in 1999.
Citizens had total average assets of $8.073 billion during 2000, up from
1999 average assets of $7.342 billion. Total loans increased $505.3 million or
8.5% in 2000 with average loans comprising 81.8% of total earning assets in
2000, up from 80.4% in 1999. Growth occurred primarily in the commercial loan
and commercial real estate portfolios due to enhanced sales efforts and strong
loan demand. Average investment securities, including money market investments,
comprised 18.2% of total average earning assets in 2000, down from 19.6% in
1999.
Total average deposits were 3.6% higher in 2000 as compared with 1999.
Average short-term borrowings, comprised primarily of FHLB advances, Federal
funds purchased, and securities sold under agreements to repurchase; 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 reflects
additional borrowings to fund growth in loans and other earning assets.
Long-term debt accounted for $303.6 million or 4.7% of average interest-bearing
funds during 2000, increasing from $210.3 million or 3.7% in 1999. Average
shareholders' equity was $650.2 million in 2000, a 3.3% decrease over the 1999
average of $672.2 million.
A-22
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
December 31,
(in thousands, except share amounts) 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 224,416 $ 318,115
Money market investments:
Interest-bearing deposits with banks 3,455 2,547
Short-term government fund 38,190 ---
Federal funds sold 891 24,986
------------ ------------
Total money market investments 42,536 27,533
Securities available for sale (amortized cost $1,225,230 in 2001; $1,366,063 in 2000) 1,259,506 1,384,108
Loans:
Commercial 3,246,380 3,332,156
Real estate construction 216,041 235,096
Real estate mortgage 971,533 1,282,834
Consumer 1,488,452 1,572,720
------------ ------------
Total loans 5,922,406 6,422,806
Less: Allowance for loan losses (80,299) (80,070)
------------ ------------
Net loans 5,842,107 6,342,736
Premises and equipment 128,805 137,094
Intangible assets 79,405 90,808
Other assets 102,100 104,697
------------ ------------
TOTAL ASSETS $ 7,678,875 $ 8,405,091
============ ============
LIABILITIES
Noninterest-bearing deposits $ 903,900 $ 973,938
Interest-bearing deposits 5,061,226 5,270,203
------------ ------------
Total deposits 5,965,126 6,244,141
Federal funds purchased and securities sold
under agreements to repurchase 233,077 394,466
Other short-term borrowings 81,353 538,784
Other liabilities 72,756 76,604
Long-term debt 629,099 471,117
------------ ------------
Total liabilities 6,981,411 7,725,112
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 - 45,097,614 in 2001; 46,510,111 in 2000 155,720 201,549
Retained earnings 521,191 466,692
Other accumulated comprehensive net income 20,553 11,738
------------ ------------
Total shareholders' equity 697,464 679,979
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,678,875 $ 8,405,091
============ ============
- ----------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
A - 23
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
(in thousands, except share amounts) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 492,437 $ 535,235 $ 462,223
Interest and dividends on investment securities:
Taxable 57,083 66,190 59,654
Tax-exempt 21,715 20,350 17,151
Money market investments 2,324 233 2,531
----------- ----------- ------------
Total interest income 573,559 622,008 541,559
INTEREST EXPENSE
Deposits 204,929 229,137 196,871
Short-term borrowings 27,458 58,532 23,692
Long-term debt 33,191 19,465 11,354
----------- ----------- ------------
Total interest expense 265,578 307,134 231,917
----------- ----------- ------------
NET INTEREST INCOME 307,981 314,874 309,642
Provision for loan losses 26,407 20,983 24,675
----------- ----------- ------------
Net interest income after provision for loan losses 281,574 293,891 284,967
----------- ----------- ------------
NONINTEREST INCOME
Service charges on deposit accounts 27,773 26,260 21,378
Trust fees 21,028 24,253 21,701
Mortgage and other loan income 13,159 4,997 6,078
Bankcard fees 11,799 11,258 9,163
Brokerage and investment fees 8,157 7,693 4,325
Investment securities gains (losses) 6,195 -- (3,052)
Equity security gains 11,017 -- 5,693
Gain on sale of credit card assets 2,623 -- --
Gain on sale of bank 793 -- --
Other 14,937 15,883 16,706
----------- ----------- ------------
Total noninterest income 117,481 90,344 81,992
----------- ----------- ------------
NONINTEREST EXPENSE
Salaries and employee benefits 126,278 122,577 122,572
Equipment 19,317 19,264 16,645
Occupancy 17,713 16,770 15,414
Data processing fees 13,101 12,608 9,924
Professional services 12,277 10,088 7,330
Intangible asset amortization 11,063 10,733 8,363
Bankcard fees 9,308 8,959 7,477
Postage and delivery 7,746 6,924 5,985
Telephone 5,556 6,364 5,601
Advertising and public relations 5,219 5,034 5,223
Stationery and supplies 4,426 5,602 5,674
Special charges -- 15,541 40,198
Other 19,179 17,298 26,570
----------- ----------- ------------
Total noninterest expense 251,183 257,762 276,976
----------- ----------- ------------
INCOME BEFORE INCOME TAXES 147,872 126,473 89,983
Income taxes 43,215 35,813 27,989
----------- ----------- ------------
NET INCOME $ 104,657 $ 90,660 $ 61,994
=========== =========== ============
NET INCOME PER SHARE:
Basic $ 2.27 $ 1.92 $ 1.29
Diluted 2.25 1.91 1.28
AVERAGE SHARES OUTSTANDING:
Basic 46,085,405 47,310,375 48,169,121
Diluted 46,589,962 47,542,815 48,617,207
- --------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
A - 24
- -----------------------------------------------------------------------------------------------------------------------------
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, 1999 $ 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
Net income 104,657 104,657
Net unrealized gain on securities available-for-sale,
net of tax effect of $5,690 10,542
Minimum pension liability (1,727)
----------
Total comprehensive income 8,815 8,815
Exercise of stock options, net of
shares purchased 12,662 12,662
Cash dividends - $1.085 per share (50,158) (50,158)
Shares acquired for retirement (58,491) (58,491)
---------- ---------- --------- ---------
BALANCE - DECEMBER 31, 2001 $ 155,720 $ 521,191 $ 20,553 $ 697,464
========== ========== ========= =========
- -----------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
A - 25
- ---------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31,
(in thousands) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 104,657 $ 90,660 $ 61,994
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 26,407 20,983 24,675
Depreciation and amortization 16,241 15,995 14,148
Amortization of goodwill and other intangibles 11,063 10,733 8,363
Intangible asset impairment -- -- 2,349
Deferred income tax (credit) (279) 3,585 (7,953)
Net amortization on investment securities (563) (147) 2,743
Investment securities losses (gains) (6,195) -- 3,052
Loans originated for sale (824,449) (132,878) (117,603)
Proceeds from sales of mortgage loans held for sale 831,138 134,020 120,283
Gains from loan sales (6,689) (1,142) (2,471)
Donation of equity security -- 1,116 --
Gains on sale of equity securities, credit card assets and bank (14,433) -- (5,693)
Accrued merger related and other charges (3,337) (14,050) 17,387
Other (4,720) 87 (9,592)
--------- --------- ---------
Net cash provided by operating activities 128,841 128,962 111,682
INVESTING ACTIVITIES:
Net (increase) decrease in money market investments (15,003) 36,270 45,745
Securities available-for-sale:
Proceeds from sales 297,492 6,755 85,288
Proceeds from maturities 352,369 183,185 373,228
Purchases (502,261) (131,311) (697,238)
Securities held-to-maturity:
Proceeds from maturities -- -- 25,304
Purchases -- -- (71,454)
Sale of credit card assets 29,454
Net (increase) decrease in loans and leases 444,768 (522,569) (520,999)
Net increase in properties and equipment (7,952) (10,519) (20,221)
Proceeds from sale of equity securities, credit card assets and bank 14,433 -- 5,693
Acquisitions (net of cash acquired) -- 26,008 317,214
--------- --------- ---------
Net cash used by investing activities 613,300 (412,181) (457,440)
FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings deposits 143,669 (231,753) (115,749)
Net increase (decrease) in time deposits (422,684) 315,889 (70,131)
Net increase (decrease) in short-term borrowings (618,820) (4,029) 751,888
Proceeds from issuance of long-term debt 183,182 740,150 58,598
Principal reductions in long-term debt (25,200) (396,137) (157,665)
Cash dividends paid (50,158) (48,108) (41,801)
Proceeds from stock options exercised 12,662 1,879 3,349
Shares acquired for retirement (58,491) (27,302) (53,866)
--------- --------- ---------
Net cash provided by financing activities (835,840) 350,589 374,623
--------- --------- ---------
Net increase (decrease) in cash and due from banks (93,699) 67,370 28,865
Cash and due from banks at beginning of period 318,115 250,745 221,880
--------- --------- ---------
Cash and due from banks at end of period $ 224,416 $ 318,115 $ 250,745
========= ========= =========
Supplemental Cash Flow Information:
Interest paid $ 278,979 $ 297,396 $ 233,689
Income taxes paid 40,481 30,647 38,444
- ---------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
A - 26
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.
Minimum loss factors for criticized loan categories are consistent with
regulatory agency factors. For non-criticized loan categories loss factors are
determined based on historical averages (generally three-year) adjusted
quarterly for recent 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. Effective January 1, 2002 with the adoption of Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets",
goodwill will no longer be amortized. See Note 4. Recent Accounting
Pronouncements, "Accounting for Goodwill and Other Intangible Assets."
A - 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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, ACQUISITIONS AND DIVESTITURES
In November 2001, Citizens sold F&M Bank-Minnesota with assets of $27 million.
The bank was Citizens' sole location in Minnesota.
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) a
$2.7 billion bank holding company 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.
A - 28
NOTE 3. MERGER, BUSINESS RESTRUCTURING AND OTHER CHARGES
The following provides details on reserve activity in 2001, 2000 and 1999
in connection with mergers, business restructuring and other charges associated
with various corporate initiatives.
- ------------------------------------------------------------------------------------------------------------------------------------
Contract
termination Goodwill &
Employee and other Facilities core deposit Equity Charitable
benefits and conversion Professional and premium investment trust
(in thousands) severance costs fees equipment write-downs write-down contribution Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
FOURTH QUARTER 1999 CHARGE $ 7,482 $ 13,598 $ 6,345 $ 3,355 $ 2,349 $ 520 $ 2,500 $ 4,049 $ 40,198
Amount Utilized:
Cash Payments (144) (4,241) (5,711) (2,500) (2,788) (15,384)
Noncash -- -- -- (3,355) (2,349) (520) -- (1,203) (7,427)
-------- -------- ------- ------- -------- ----- ------- ------- --------
RESERVE BALANCE AT
DECEMBER 31, 1999 7,338 9,357 634 -- -- -- -- 58 17,387
Additional 4th Qtr. Reserve 1,962 1,962
Amount Utilized:
Cash Payments (3,660) (5,387) (607) (30) (9,684)
Noncash (2,324) (3,951) (25) -- -- -- -- (28) (6,328)
-------- -------- ------- ------- -------- ----- ------- ------- --------
RESERVE BALANCE AT
DECEMBER 31, 2000 3,316 19 2 -- -- -- -- -- 3,337
Amount Utilized:
Cash Payments (3,316) (19) (2) (3,337)
Noncash -- -- -- -- -- -- -- -- --
-------- -------- ------- ------- -------- ----- ------- ------- --------
RESERVE BALANCE AT
DECEMBER 31, 2001 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
======== ======== ======= ======= ======== ===== ======= ======= ========
- ------------------------------------------------------------------------------------------------------------------------------------
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.
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
A - 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. These initiatives were completed by year-end 2001.
As shown in the table above, total deductions to Citizens' Special Charge
reserve were $3.3 million in 2001, $16.0 million in 2000 and $22.8 million in
1999. Included in these deductions were cash payments of $3.3 million, $9.7
million and $15.4 million in 2001, 2000 and 1999, respectively.
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 &
STRATEGIC INITIATIVES APPROVED IN 1999
Employee salaries, benefits & severance $ 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
severance estimates (2,324) --
-------- --------
Subtotal 12,359 40,198
ADDITIONAL RESTRUCTURING & OTHER COSTS
FOR STRATEGIC INITIATIVES APPROVED IN 2000
Employee benefits and severance 1,962 --
Software & equipment writeoffs 654 --
Professional fees 463 --
Other 103 --
-------- --------
Subtotal 3,182 --
-------- --------
Total $ 15,541 $ 40,198
======== ========
- --------------------------------------------------------------------------------
No special charges were recorded in 2001.
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 2001, Citizens did not have any outstanding
material 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. There was no impact to Citizens upon adoption of this statement as
Citizens does not use unconsolidated special purpose entities.
ACCOUNTING FOR BUSINESS COMBINATIONS: SFAS No. 141, "Business
Combinations" supercedes APB Opinion No. 16, "Business Combinations", and FASB
No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises",
establishes financial accounting and reporting for all business combinations.
This statement requires all business combinations be accounted for by a single
method, the purchase method. The statement also requires that intangible assets
be recognized apart from goodwill if they meet certain criteria and the
disclosure of the primary reasons for the business combination and the
allocation of the purchase price paid to the assets acquired and liabilities
assumed by major balance sheet caption. The statement is effective for all
business combinations initiated after June 30, 2001. Citizens adopted this
statement July 1, 2001 and will apply its provisions to any future business
combination.
A - 30
ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS: SFAS No. 142,
"Goodwill and Other Intangible Assets" - a replacement of APB Opinion No. 17,
"Intangible Assets", addresses how intangible assets should be accounted for
that are acquired outside of a business combination and also addresses how
intangibles should be accounted for once the intangibles have been initially
recognized in the financial statements. The statement no longer assumes a finite
life for all intangibles, but now requires that intangible assets with
indefinite lives be tested at least annually for impairment with impairment
losses recognized immediately and intangible assets with finite lives be
amortized over an appropriate period. Citizens has adopted this statement
effective January 1, 2002. Citizens anticipates no impairment under Statement
No. 142. The effect of this statement will be to reduce goodwill amortization by
$7.2 million ($5.4 million after tax) in 2002 from the prior year.
NOTE 5. INVESTMENT SECURITIES
The amortized cost, estimated fair value and gross unrealized gains and losses
of investment securities follow:
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001 December 31, 2000
--------------------------------------------------- ---------------------------------------------------
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 $ 7,949 $ 8,163 $ 214 $ -- $ 21,555 $ 21,490 $ 27 $ 92
Federal agencies:
Mortgage-backed 551,377 565,393 14,714 698 579,096 582,618 5,659 2,137
Other 157,921 166,236 8,316 1 264,348 269,127 5,205 426
State and municipal 432,425 443,956 13,378 1,847 420,835 430,775 11,925 1,985
Mortgage and asset-backed 10,448 10,558 170 60 15,884 15,755 9 138
Other 65,110 65,200 90 -- 64,345 64,343 4 6
---------- ---------- ---------- -------- ---------- ---------- ---------- ----------
Total available for sale $1,225,230 $1,259,506 $ 36,882 $ 2,606 $1,366,063 $1,384,108 $ 22,829 $ 4,784
========== ========== ========== ========== ========== ========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
The amortized cost and estimated fair value of debt securities by
contractual maturity at December 31, 2001 are shown below.
- --------------------------------------------------------
Estimated
Amortized Fair
(in thousands) Cost Value
- --------------------------------------------------------
Due within one year $ 57,419 $ 57,877
One to five years 175,845 189,789
Five to ten years 191,407 194,878
After ten years 176,869 179,060
---------- ----------
601,540 621,604
Equity securities 61,865 61,951
Mortgage and asset-backed
securities 561,825 575,951
---------- ----------
Total $1,225,230 $1,259,506
========== ==========
- --------------------------------------------------------
Sales of investment securities resulted in realized gains and losses as
follows:
- ------------------------------------------------------------
Year Ended December 31,
(in thousands) 2001 2000 1999
- ------------------------------------------------------------
Securities gains $ 6,202 $ 67 $ 561
Securities losses (7) (67) (3,613)
-------- ------ ---------
Net gain (loss) $ 6,195 $ --- $ (3,052)
======== ====== =========
- ------------------------------------------------------------
Securities with amortized cost of $799.3 million at December 31, 2001,
and $530.4 million at December 31, 2000, 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, 2001 or 2000.
A - 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. LOANS AND NONPERFORMING ASSETS
Citizens extends credit primarily within the Midwestern states of Michigan,
Wisconsin, Illinois and Iowa. 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 and the
western suburban market of Chicago, Illinois. 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.
A summary of nonperforming assets follows:
- --------------------------------------------------------------
December 31,
(in thousands) 2001 2000
- --------------------------------------------------------------
Nonperforming loans:
Nonaccrual $68,793 $59,415
Loans 90 days past due (still accruing) 4,168 889
Restructured 337 1,068
------- -------
Total nonperforming loans 73,298 61,372
Other real estate 4,463 3,734
Other assets acquired by repossession 1,484 1,183
------- -------
Total nonperforming assets $79,245 $66,289
======= =======
- --------------------------------------------------------------
The effect of nonperforming loans on interest income follows:
- --------------------------------------------------------------
Year Ended December 31,
(in thousands) 2001 2000 1999
- --------------------------------------------------------------
Interest income:
At original contract rates $6,392 $4,953 $3,383
As actually recognized 3,344 3,045 1,861
------ ------ ------
Interest foregone $3,048 $1,908 $1,522
====== ====== ======
- --------------------------------------------------------------
There are no significant commitments outstanding to lend additional funds
to clients whose loans were classified as nonaccrual or restructured at December
31, 2001.
At December 31, 2001, loans considered to be impaired totaled $62.1
million of which $43.5 million were on a nonaccrual basis. Included within this
amount is $39.8 million of impaired loans for which the related allowance for
loan losses is $10.4 million and $22.3 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, 2001 was
approximately $78.0 million. For the year ended December 31, 2001, Citizens
recognized interest income of $3.3 million on impaired loans. Cash collected on
nonaccrual impaired loans totaled $3.1 million which was applied to principal.
At December 31, 2000, loans considered to be impaired totaled $52.9
million of which $36.3 million were on a nonaccrual basis. Included with 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 the
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.
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 $13.2 million and $19.1 million at December 31, 2001 and
2000, respectively. During 2001, new loans of $4.5 million were made and
repayments totaled $10.4 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 $257.9 million and $362.3 million at December 31, 2001 and
2000, respectively. The carrying value of mortgage servicing rights approximates
fair value at December 31, 2001 and 2000. 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) 2001 2000
- -----------------------------------------------------------------------------
Balance - January 1 $ 2,680 $ 3,335
Mortgage servicing rights capitalized -- 161
Amortization (947) (556)
Impairment loss -- (260)
------- -------
Balance - December 31 $ 1,733 $ 2,680
======= =======
- -----------------------------------------------------------------------------
A - 32
NOTE 7. ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses follows:
- -------------------------------------------------------------------------------
(in thousands) 2001 2000 1999
- -------------------------------------------------------------------------------
Balance - January 1 $ 80,070 $ 76,397 $ 69,740
Allowance of acquired (sold)
banks and branches (240) -- 2,400
Provision for loan losses 26,407 20,983 24,675
Charge-offs (32,732) (25,448) (26,862)
Recoveries 6,794 8,138 6,444
-------- -------- --------
Net charge-offs (25,938) (17,310) (20,418)
-------- -------- --------
Balance - December 31 $ 80,299 $ 80,070 $ 76,397
======== ======== ========
- -------------------------------------------------------------------------------
NOTE 8. PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
- -------------------------------------------------------------
December 31,
(in thousands) 2001 2000
- -------------------------------------------------------------
Land $ 21,806 $ 21,812
Buildings 146,775 142,814
Leasehold improvements 5,750 6,221
Furniture and equipment 124,939 132,026
--------- ---------
299,270 302,873
Accumulated depreciation
and amortization (170,465) (165,779)
--------- ---------
Total $ 128,805 $ 137,094
========= =========
- -------------------------------------------------------------
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 2001, $4.8 million in 2000 and $4.1
million in 1999. Future minimum rental commitments under non-cancelable
operating leases are as follows at December 31, 2001: $4.3 million in 2002, $3.5
million in 2003, $1.6 million in 2004, $1.1 million in 2005, $0.8 million in
2006, and $2.2 million after 2006.
NOTE 9. DEPOSITS
A summary of deposits follows:
- ---------------------------------------------------------------
December 31,
(in thousands) 2001 2000
- ---------------------------------------------------------------
Noninterest-bearing demand $ 903,900 $ 973,938
Interest-bearing demand 995,191 574,029
Savings 1,411,429 1,618,884
Time deposits over $100,000 818,375 971,251
Other time deposits 1,836,231 2,106,039
---------- ----------
Total $5,965,126 $6,244,141
========== ==========
- ---------------------------------------------------------------
Excluded from total deposits are demand deposit account overdrafts, which
have been reclassified as loans. At December 31, 2001 and 2000, these overdrafts
totaled $5.6 million and $7.4 million, respectively. Time deposits with
remaining maturities of one year or more are $686.9 million at December 31,
2001. The maturities of these time deposits are as follows: $441.9 million in
2003, $156.7 million in 2004, $52.4 million in 2005, $28.9 million in 2006 and
$7.0 million after 2006.
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.
Information relating to federal funds purchased and securities sold under
agreements to repurchase follows:
- -----------------------------------------------------------------------------
(in thousands) 2001 2000 1999
- -----------------------------------------------------------------------------
At December 31:
Balance $233,077 $394,466 $276,805
Weighted average
interest rate paid 1.81% 6.35% 5.20%
During the year:
Maximum outstanding
at any month-end $354,612 $540,652 $326,339
Daily average 242,945 305,402 256,718
Weighted average
interest rate paid 4.32% 6.18% 4.74%
- -----------------------------------------------------------------------------
A - 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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) 2001 2000 1999
- ------------------------------------------------------------------------------
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 $425,200 $622,874 $555,874
Daily average 222,310 581,467 196,055
Weighted average
interest rate paid 6.25% 6.47% 5.26%
- ------------------------------------------------------------------------------
Citizens' Parent company maintains a short-term line of credit with three
unaffiliated banks totaling $75 million. The interest rate on the outstanding
balance of $30 million at December 31, 2001 reprices daily and is based upon the
Federal funds rate. Interest is payable monthly and the remaining principal is
due in August 2002. 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, 2001.
NOTE 11. LONG-TERM DEBT
A summary of long-term debt follows:
- -------------------------------------------------------------
December 31,
(in thousands) 2001 2000
- -------------------------------------------------------------
CITIZENS SUBSIDIARIES:
FHLB Notes $628,818 $ 470,767
Other 281 350
-------- ---------
Total long-term debt $629,099 $ 471,117
======== =========
- -------------------------------------------------------------
Long-term advances from the FHLB are at fixed and variable rates ranging
from 2.13% to 7.73% and have original maturities ranging from three to fifteen
years. Interest is paid monthly. At December 31, 2001 and 2000, qualifying
mortgage loans of $899 million and $1.3 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)
- --------------------------------------------------------------
2002 $ 125,729
2003 101,209
2004 973
2005 120,769
2006 981
Over 5 Years 279,438
---------
Total $ 629,099
=========
- --------------------------------------------------------------
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.
Effective January 1, 2002 the defined benefit plan for Citizens' Michigan
and Illinois employees (CBC Plan) was amended to provide for a new cash balance
pension benefit. This amendment increased the projected benefit obligation of
the CBC Plan by $1.1 million. Full-time employees that retire within the next
five years with at least 10 years of service under the CBC Plan may elect to
receive a benefit under the old formula, which is, in part, based on the
employees' final five-year average base pay.
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. 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
two previous F&M Plans were rolled into the new plan. 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
A - 34
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.
The following information summarizes activity in Citizens' pension and
postretirement benefit plans.
- ----------------------------------------------------------------------------------------------------
Pension Postretirement
Benefits Benefits
------------------------------------------------------------
(in thousands) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation,
beginning of year $ 63,825 $ 47,846 $ 15,613 $ 14,423
Benefit obligation of former
F&M plans, January 1 -- 6,621 -- --
Service cost 2,988 2,922 12 12
Interest cost 4,878 4,420 1,148 1,094
Participant contribution -- -- 304 150
Actuarial (gains) losses 3,916 3,453 160 1,285
Plan amendments 1,123 2,561 -- --
Benefits paid (3,200) (3,998) (1,523) (1,351)
-------- -------- -------- --------
Benefit obligation,
end of year $ 73,530 $ 63,825 $ 15,714 $ 15,613
======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets,
beginning of year $ 69,036 $ 63,647 $ -- $ --
Actual return
on plan assets (3,813) 943 -- --
Employer contribution 1,439 288 1,219 1,201
Participant contribution -- -- 304 150
Assets of F&M plans -- 8,260 -- --
Expenses paid (335) (104) -- --
Benefits paid (3,200) (3,998) (1,523) (1,351)
-------- -------- -------- --------
Fair value of plan
assets, end of year $ 63,127 $ 69,036 $ -- $ --
======== ======== ======== ========
RECONCILIATION OF FUNDED STATUS
(Under)/Over funded $(10,403) $ 5,211 $(15,714) $(15,613)
Unrecognized:
Net transition asset -
16 yr amortization (42) (163) -- --
Prior service
cost (benefit) 3,404 2,908 (37) (42)
Net actuarial (gain) loss 4,001 (11,544) 930 793
Adjustment to recognize
minimum liability (5,961) -- -- --
-------- -------- -------- --------
Net amount recognized
in the consolidated
balance sheets $ (9,001) $ (3,588) $(14,821) $(14,862)
======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------
Pension plan assets consisted primarily of mutual and money market funds,
and listed bonds and equity securities, including $686,000 and $606,000 of
Citizens common stock at December 31, 2001 and 2000, respectively.
The accrued pension benefit cost shown above includes the pension
liabilities for plans where accumulated plan benefits exceed assets. In 2001,
all plans had accumulated plan benefits in excess of assets. In 2000, only the
supplemental benefit plans were under funded. The projected benefit obligation
and accumulated benefit obligation for these plans were approximately $5.2 and
$4.7 million, respectively, as of December 31, 2000. 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
----------------- -------------------
2001 2000 2001 2000
- ---------------------------------------------------------------------
WEIGHTED-AVERAGE
ASSUMPTIONS
DECEMBER 31
Discount rate 7.25% 7.75% 7.25% 7.75%
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.
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 2001 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 $ 97 $ (86)
Effect on the postretirement
benefit obligation 1,389 (1,234)
- ---------------------------------------------------------------
A - 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of net periodic benefit cost charged to operations each
year for all plans follow:
- ------------------------------------------------------------------------------------
Year Ended December 31,
(in thousands) 2001 2000 1999
- ------------------------------------------------------------------------------------
DEFINED BENEFIT PENSION PLANS
Service cost $ 2,988 $ 2,922 $ 2,304
Interest cost 4,878 4,420 4,018
Expected return on plan assets (6,873) (6,568) (5,554)
Amortization of unrecognized:
Net transition asset (123) (218) (218)
Prior service cost 626 180 114
Net actuarial gain (586) (808) (464)
------- ------- -------
Net pension cost (income) 910 (72) 200
------- ------- -------
POSTRETIREMENT BENEFIT PLANS
Service cost 12 12 12
Interest cost 1,148 1,094 919
Amortization of unrecognized:
Prior service cost (5) (385) (460)
Net actuarial gain -- -- (57)
------- ------- -------
postretirement
benefit cost 1,155 721 414
------- ------- -------
DEFINED CONTRIBUTION RETIREMENT
AND 401(K) PLANS
Employer contributions 2,850 3,584 4,662
------- ------- -------
Total periodic benefit cost $ 4,915 $ 4,233 $ 5,276
======= ======= =======
- ------------------------------------------------------------------------------------
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.
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) 2001 2000 1999
- ----------------------------------------------------------------------
Current tax expense:
Federal $ 42,926 $ 31,773 $ 33,870
State 568 455 2,072
--------- --------- --------
Total current tax expense 43,494 32,228 35,942
Deferred tax expense (credit) (279) 3,585 (7,953)
--------- -------- --------
Total income tax expense $ 43,215 $ 35,813 $ 27,989
========= ========= ========
- ----------------------------------------------------------------------
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, 2001 and 2000
follow:
- --------------------------------------------------------------------
(in thousands) 2001 2000
- --------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $29,349 $29,211
Accrued special charges -- 1,227
Accrued postemployment
benefits other than pensions 5,288 5,395
Other deferred tax assets 9,366 7,794
------- -------
Deferred tax assets 44,003 43,627
------- -------
Deferred tax liabilities:
Tax over book depreciation 4,212 4,551
Acquisition premium on loans 4,027 3,689
Net unrealized gains on securities 11,067 6,306
Other deferred tax liabilities 3,949 3,851
------- -------
Deferred tax liabilities 23,255 18,397
------- -------
Net deferred tax assets $20,748 $25,230
======= =======
- --------------------------------------------------------------------
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) 2001 2000 1999
- --------------------------------------------------------------------------------
Tax at federal statutory rate
applied to income before
income taxes $ 51,755 $ 44,266 $ 31,494
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (8,793) (8,229) (7,230)
Other 253 (224) 3,725
-------- -------- --------
Total income tax expense $ 43,215 $ 35,813 $ 27,989
======== ======== ========
- --------------------------------------------------------------------------------
A - 36
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) 2001 2000 1999
- -------------------------------------------------------------------------------
NUMERATOR:
Numerator for basic and
dilutive earnings per share --
net income available to
common shareholders $ 104,657 $ 90,660 $ 61,994
========= ======== ========
DENOMINATOR:
Denominator for basic
earnings per share --
weighted average shares 46,085 47,310 48,169
Effect of dilutive
securities - potential
conversion of employee
stock options 505 233 448
--------- -------- --------
Denominator for diluted
earnings per share --
adjusted weighted-average
shares and assumed 46,590 47,543 48,617
========= ======== ========
BASIC EARNINGS PER SHARE $ 2.27 $ 1.92 $ 1.29
========= ======== ========
DILUTED EARNINGS PER SHARE $ 2.25 $ 1.91 $ 1.28
========= ======== ========
- --------------------------------------------------------------------------------
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 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 purchased shares under a stock
repurchase program initiated May 2000. This program authorized Citizens to
purchase up to 3,000,000 shares for treasury. During the year, 1,765,900 shares
were purchased under this plan, completing that program. Citizens initiated a
new stock repurchase program of 3,000,000 shares in October 2001. A total of
187,700 shares were purchased under this program through year-end. For the year
ended December 31, 2001, a total of 1,953,600 shares were purchased under the
plans at an average price of $29.94. As of December 31, 2001, there were
2,812,300 shares available for purchase under the current 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, 2001, options outstanding
under the plan totaled 2,502,940 shares of which 1,115,941 shares are
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 the grant date. 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
A - 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the date of grant. A total of 550,700 shares were granted of which 398,900
shares were outstanding as of December 31, 2001.
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 90,000 shares as of December
31, 2001. 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 51,033 shares of these options were outstanding at
year-end 2001.
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:
- ------------------------------------------------------------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------------------------
Pro forma amounts:
Net income (in thousands) $ 102,808 $ 89,020 $ 60,590
Net income per share:
Basic 2.23 1.88 1.26
Diluted 2.21 1.87 1.25
Assumptions:
Dividend yield 3.5% 3.5% 3.0%
Expected volatility 28.0% 25.0% 19.5%
Risk-free interest rate 5.02% 6.80% 5.59%
Expected lives 5 YRS. 5 yrs. 5 yrs.
- ------------------------------------------------------------------------------------------
A summary of stock option transactions under the plans for 2001, 2000 and 1999
follows:
- ---------------------------------------------------------------------------------------------------------------------------
Options Option Price
------------------------------------- ---------------------------------------
Available Per Share
for Grant Outstanding Range Average
- ---------------------------------------------------------------------------------------------------------------------------
January 1, 1999 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
AUTHORIZED 566,858 -- -- --
GRANTED (651,200) 651,200 25.42-25.72 25.43
EXERCISED -- (591,602) 8.50-28.21 18.07
CANCELED 117,277 (207,729) 16.66-36.31 20.45
---------- ---------- ------------- ---------
DECEMBER 31, 2001 285,515 3,042,873 $ 11.75-36.31 $ 22.94
========== ========== ============= =========
- ---------------------------------------------------------------------------------------------------------------------------
A - 38
The following table summarizes information on stock options outstanding as of
December 31, 2001:
---------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range Amount Life Exercise Price Amount Exercise Price
---------------------------------------------------------------------------------------------------------
$ 11.75 - 17.00 1,007,535 8.0 years $ 16.54 194,350 $16.03
17.00 - 25.00 717,801 4.5 20.22 717,801 20.22
25.00 - 36.31 1,317,537 7.8 29.31 615,881 31.22
--------- --------
$ 11.75 - 36.31 3,042,873 7.1 22.94 1,528,032 24.12
-----------------------------------------------------------------------------------------------------------
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) 2001 2000
- -------------------------------------------------------------
LOAN COMMITMENTS
AND LETTERS OF CREDIT:
Commitments to extend credit $ 1,683,239 $1,699,174
Standby letters of credit 53,718 55,469
Commercial letters of credit 91,807 95,385
- -------------------------------------------------------------
Loan commitments outstanding include $75.6 million of credit card
commitments and $263.2 million of home equity credit lines in 2001. The same
amounts for 2000 were $247.4 million and $230.0 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.
A-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values of Citizens' financial instruments follow:
- ---------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001 December 31, 2000
--------------------------- ---------------------------
CARRYING ESTIMATED Carrying Estimated
(in millions) AMOUNT FAIR VALUE Amount Fair Value
- ---------------------------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and money market investments $ 267.0 $ 267.0 $ 345.6 $ 345.6
Investment securities 1,259.5 1,259.5 1,384.1 1,384.1
Net loans 5,842.1 5,965.8 6,342.7 6,376.5
Financial liabilities:
Deposits 5,965.1 6,008.6 6,244.1 6,256.4
Short-term borrowings 314.4 314.6 933.3 933.5
Long-term debt 629.1 648.0 471.1 471.5
Off-balance sheet financial instrument liabilities:
Loan commitments --- 3.2 --- 2.5
Standby and commercial letters of credit --- 0.7 --- 0.8
- ---------------------------------------------------------------------------------------------------------------------------------
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 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.
A-40
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 Other.
COMMERCIAL BANKING: Commercial Banking provides a full range of credit
and related financial services to middle market corporate, small business,
government and leasing clients. Products and services offered include commercial
loans, commercial mortgages, small business loans, letters of credit, deposit
accounts, cash management and international trade services.
RETAIL BANKING: Retail Banking includes consumer lending and deposit
gathering, electronic banking and residential mortgage loan origination and
servicing. This line of business offers a variety of retail financial products
and services including deposit accounts, direct and indirect installment loans,
debit and credit cards, home equity lines of credit, residential mortgage loans,
fixed and variable annuities 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 and Iowa through a network of branch locations. Products and services
offered include deposit accounts; commercial, commercial mortgage, agricultural,
small business, residential mortgage and consumer loans; financial planning and
trust; brokerage, insurance, ATM, credit card and cash management services.
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 largely
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
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.
A-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
LINE OF BUSINESS INFORMATION Net Income
Before
Non- Non-
Commercial Retail Financial recurring recurring
(in thousands) Banking Banking Services F&M Other Items Items Total
- -----------------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY - 2001
Net interest income (taxable equivalent) $ 92,714 $ 125,418 $ 1,140 $ 94,000 $ 9,544 $ 322,816 $ -- $ 322,816
Provision for loan losses 6,949 7,046 -- 13,033 (621) 26,407 -- 26,407
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after provision 85,765 118,372 1,140 80,967 10,165 296,409 -- 296,409
Noninterest income 13,777 40,532 23,139 19,326 902 97,676 19,805 117,481
Noninterest expense 44,584 104,732 14,267 70,580 17,020 251,183 -- 251,183
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes 54,958 54,172 10,012 29,713 (5,953) 142,902 19,805 162,707
Income tax expense (taxable equivalent) 19,235 18,960 3,504 10,758 (744) 51,713 6,337 58,050
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 35,723 $ 35,212 $ 6,508 $ 18,955 $ (5,209) $ 91,189 $ 13,468 $ 104,657
Allocation of nonrecurring items -- 5,197 -- 1,110 7,161 (13,468) --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 35,723 $ 40,409 $ 6,508 $ 20,065 $ 1,952 $ -- $ 104,657
========= ========= ========= ========= ========= ========= =========
AVERAGE ASSETS (IN MILLIONS) $ 2,128 $ 2,804 $ 9 $ 2,633 $ 363 $ 7,936
========= ========= ========= ========= ========= =========
- -----------------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY - 2000
Net interest income (taxable equivalent) $ 91,718 $ 132,582 $ 1,330 $ 104,177 $ (857) $ 328,950 $ -- $ 328,950
Provision for loan losses 6,044 10,278 -- 4,103 558 20,983 -- 20,983
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after provision 85,674 122,304 1,330 100,074 (1,415) 307,967 -- 307,967
Noninterest income 12,352 31,914 26,618 16,633 2,827 90,344 -- 90,344
Noninterest expense 42,965 102,834 18,174 63,733 14,515 242,221 15,541 257,762
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes 55,061 51,384 9,774 52,974 (13,103) 156,090 (15,541) 140,549
Income tax expense (taxable equivalent) 19,272 17,983 3,420 19,335 (4,044) 55,966 (6,077) 49,889
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 35,789 $ 33,401 $ 6,354 $ 33,639 $ (9,059) $ 100,124 $ (9,464) $ 90,660
Allocation of special charge and
related items -- -- -- (7,672) (1,792) 9,464 --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 35,789 $ 33,401 $ 6,354 $ 25,967 $ (10,851) $ -- $ 90,660
========= ========= ========= ========= ========= ========= =========
AVERAGE ASSETS (IN MILLIONS) $ 2,025 $ 2,596 $ 17 $ 2,745 $ 690 $ 8,073
========= ========= ========= ========= ========= =========
- -----------------------------------------------------------------------------------------------------------------------------------
EARNINGS SUMMARY - 1999
Net interest income (taxable equivalent) $ 76,788 $ 112,889 $ 1,357 $ 110,718 $ 20,095 $ 321,847 $ -- $ 321,847
Provision for loan losses 1,708 14,256 -- 2,975 (1,064) 17,875 6,800 24,675
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after provision 75,080 98,633 1,357 107,743 21,159 303,972 (6,800) 297,172
Noninterest income 10,526 28,500 24,177 15,994 6,391 85,588 2,097 87,685
Noninterest expense 38,821 95,703 18,159 63,002 21,093 236,778 46,293 283,071
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes 46,785 31,430 7,375 60,735 6,457 152,782 (50,996) 101,786
Income tax expense (taxable equivalent) 16,375 11,000 2,581 22,785 2,887 55,628 (15,836) 39,792
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 30,410 $ 20,430 $ 4,794 $ 37,950 $ 3,570 $ 97,154 $ (35,160) $ 61,994
Allocation of special charge and
related items -- -- -- (26,748) (8,412) 35,160 --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ 30,410 $ 20,430 $ 4,794 $ 11,202 $ (4,842) $ -- $ 61,994
========= ========= ========= ========= ========= ========= =========
AVERAGE ASSETS (IN MILLIONS) $ 1,655 $ 2,138 $ 16 $ 2,602 $ 931 $ 7,342
========= ========= ========= ========= ========= =========
- -----------------------------------------------------------------------------------------------------------------------------------
A-42
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 2001 and 2000, the
average reserve balances were $41.9 million and $56.8 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, 2002, the bank subsidiaries could distribute
to Citizens approximately $24.8 million in dividends without regulatory
approval. Their 2002 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 1 capital to
risk-weighted assets (as defined in the regulations), and of Tier 1 capital to
average assets (as defined). Management believes, as of December 31, 2001, that
Citizens and its banking subsidiaries meet all capital adequacy requirements to
which it is subject.
As of December 31, 2001, 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 1 risk-based, and Tier 1 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, 2001:
Total Capital to risk
weighted assets (1) $ 669,332 11.1% $ 481,512 greater than or $ 601,889 greater than or
equal to 8.0% equal to 10.0%
Tier 1 Capital to risk
weighted assets (1) 594,033 9.9 240,756 greater than or 361,134 greater than or
equal to 4.0 equal to 6.0
Tier 1 Leverage (2) 594,033 7.8 304,854 greater than or 381,068 greater than or
equal to 4.0 equal to 5.0
As of December 31, 2000:
Total Capital to risk
weighted assets (1) $ 659,901 10.3% $ 512,362 greater than or $ 640,453 greater than or
equal to 8.0% equal to 10.0%
Tier 1 Capital to risk
weighted assets (1) 579,844 9.1 256,181 greater than or 384,272 greater than or
equal to 4.0 equal to 6.0
Tier 1 Leverage (2) 579,844 7.1 326,142 greater than or 407,677 greater than or
equal to 4.0 equal to 5.0
CITIZENS BANK
AS OF DECEMBER 31, 2001:
Total Capital to risk
weighted assets (1) $ 425,456 10.4% $ 327,353 greater than or $ 409,191 greater than or
equal to 8.0% equal to 10.0%
Tier 1 Capital to
risk weighted assets (1) 374,294 9.2 163,676 greater than or 245,515 greater than or
equal to 4.0 equal to 6.0
Tier 1 Leverage (2) 374,294 7.5 199,801 greater than or 249,751 greater than or
equal to 4.0 equal to 5.0
As of December 31, 2000:
Total Capital to
risk weighted assets (1) $ 435,996 10.6% $ 330,086 greater than or $ 412,608 greater than or
equal to 8.0% equal to 10.0%
Tier 1 Capital to
risk weighted assets (1) 384,417 9.3 165,043 greater than or 247,565 greater than or
equal to 4.0 equal to 6.0
Tier 1 Leverage (2) 384,417 7.5 205,479 greater than or 256,849 greater than or
equal to 4.0 equal to 5.0
- -----------------------------------------------------------------------------------------------------------------
(1) Total Capital is comprised of Tier 1 Capital plus a portion of the
allowance for loan losses. Tier 1 Capital consists of total equity less
unrealized gains and losses accumulated in other comprehensive income,
certain intangible assets and adjustments related to the valuation of
mortgage servicing assets.
(2) Tier 1 Capital to quarterly average assets
A-43
NOTE 20. CITIZENS BANKING CORPORATION (PARENT ONLY) STATEMENTS
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS
CITIZENS BANKING CORPORATION (PARENT ONLY)
December 31,
(in thousands) 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash $ 5 $ 5
Money market investments 2,969 7,916
Investment securities 73 63
Investment in subsidiaries - principally banks 719,422 715,726
Goodwill - net 265 1,061
Other assets 5,349 5,771
---------- ----------
TOTAL ASSETS $ 728,083 $ 730,542
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term revolving credit $ 30,000 $ 48,000
Other liabilities 619 2,563
---------- ---------
Total liabilities 30,619 50,563
Shareholders' equity 697,464 679,979
---------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 728,083 $ 730,542
========== =========
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME
CITIZENS BANKING CORPORATION (PARENT ONLY)
Year Ended December 31,
(in thousands) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
INCOME
Dividends from subsidiaries - principally banks $107,400 $ 79,400 $ 54,686
Interest from bank subsidiary 32 18 193
Service fees from bank subsidiaries 9,435 9,517 9,668
Equity security gain 11,017 --- 5,693
Other 890 646 205
-------- -------- --------
Total 128,774 89,581 70,445
-------- -------- --------
EXPENSES
Interest 1,904 3,099 1,486
Amortization of goodwill 796 796 796
Salaries and employee benefits 9,955 9,333 9,780
Service fees paid to bank subsidiaries 1,265 1,215 1,156
Special charge --- (211) 3,464
Other noninterest expense 3,888 1,884 1,474
-------- ------ --------
Total 17,808 16,116 18,156
-------- ------- --------
Income before income taxes and equity in undistributed earnings of subsidiaries 110,966 73,465 52,289
Income tax benefit (1,197) 2,727 846
Equity in undistributed earnings of subsidiaries (5,112) 14,468 8,859
-------- -------- --------
NET INCOME $104,657 $ 90,660 $ 61,994
======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------
A-44
- ----------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
CITIZENS BANKING CORPORATION (PARENT ONLY)
Year Ended December 31,
(in thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 104,657 $ 90,660 $ 61,994
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill 796 796 796
Equity security gain (11,017) --- (5,693)
Accrued merger related charges --- --- 1,669
Equity in undistributed earnings of subsidiaries 5,112 (14,468) (8,859)
Other (1,525) (2,657) (3,114)
------- -------- -------
Net cash provided by operating activities 98,023 74,331 46,793
------- -------- -------
INVESTING ACTIVITIES
Net decrease in interest-bearing deposit at subsidiary bank --- --- 4,500
Net (increase) decrease in money market investments 4,947 (6,814) 6,333
Purchases of investment securities --- (19) (5,996)
Proceeds from sales and maturities of investment securities --- 33 5,995
Proceeds from sale of Magic Line, Inc. stock --- --- 5,693
Proceeds from sale of NYCE stock 11,017 --- ---
------- -------- --------
Net cash provided (used) by investing activities 15,964 (6,800) 16,525
------- -------- --------
FINANCING ACTIVITIES
Proceeds from short-term borrowings 6,000 6,000 42,000
Principal reductions in short-term borrowings (24,000) --- ---
Proceeds from issuance of long-term debt --- --- 22,000
Principal reductions in long-term debt --- --- (35,000)
Cash dividends paid (50,158) (48,108) (41,801)
Proceeds from stock options exercised 12,662 1,879 3,349
Shares acquired for retirement (58,491) (27,302) (53,866)
--------- -------- --------
Net cash used by financing activities (113,987) (67,531) (63,318)
--------- -------- --------
Net increase in cash --- --- ---
Cash at beginning of year 5 5 5
--------- -------- --------
Cash at end of year $ 5 $ 5 $ 5
========= ======== ========
- ----------------------------------------------------------------------------------------------------------------------------
A - 45
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, 2001 and 2000,
and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 2001. 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, 2001 and 2000, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
Ernst & Young LLP
Detroit, Michigan
January 17, 2002
A-46
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
A - 47