UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-1
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31, 2002.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ________________
to __________________
Commission file Number 000-10535
CITIZENS BANKING CORPORATION
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(Exact name of Registrant as specified in its charter)
MICHIGAN 38-2378932
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
328 S. Saginaw Street, Flint, Michigan 48502
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(Address of Principal Executive Offices) (ZIP Code)
Registrant's telephone number, including area code: (810) 766-7500
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no
par value
Preferred Stock
Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
The aggregate market value of the voting common stock held by non-affiliates of
the Registrant as of June 28, 2002 was $1,260,719,708.
The number of shares outstanding of the Registrant's no par value Common Stock
as of March 14, 2003 was 43,298,093.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Citizens Banking Corporation's 2002 Annual Report to Shareholders
are incorporated by reference into Part I and II of this Annual Report on Form
10-K, as amended. Portions of Citizens Banking Corporation's Proxy Statement for
its annual meeting of shareholders held April 15, 2003 are incorporated by
reference into Part III of the Registrant's Annual Report on Form 10-K, as
amended.
This Form 10-K/A-1 is being filed to amend Part I, Item 1. "Business"
(specifically, "General" and "Competition") and certain portions of Exhibit 13
"2002 Annual Report Information and Financial Statements" incorporated herein by
reference (specifically, "Managements Discussion and Analysis of Financial
Condition and Results of Operations" and Notes 1, 4, 6 and 17 of Notes to
Consolidated Financial Information.
PART I
ITEM 1. BUSINESS
Unless the context indicates otherwise, all references in this Form 10-K, as
amended, to "Citizens," the "Company," "our," "us" and "we" refer to Citizens
Banking Corporation and its subsidiaries. Our common stock is traded on the
National Market tier of the Nasdaq Stock Market under the symbol "CBCF." Our
principal executive offices are located at 328 South Saginaw Street, Flint,
Michigan 48502, and our telephone number is (810) 766-7500. We maintain an
internet website at www.citizensonline.com where our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments
to those reports are available without charge, as soon as reasonably practicable
after we file each such report with, or furnish it to, the U.S. Securities and
Exchange Commission. The information in our website does not constitute a part
of this Form 10-K, as amended.
GENERAL
Citizens Banking Corporation, incorporated in the State of Michigan in 1980, is
a diversified banking and financial services company that is registered as a
bank holding company under the Bank Holding Company Act of 1956, as amended. We
provide a full range of banking and financial services to individuals and
businesses through our Citizens Bank and F&M Bank subsidiaries. We also provide
wealth management services through Citizens Bank Wealth Management, N.A., and
also through affiliate trust departments of F&M Bank - Wisconsin and F&M Bank -
Iowa. We operate in the following three major business segments:
- - Business Banking - Business Banking provides a full range of credit and
related financial services to a wide range of 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. We extend credit to clients within the
commercial, commercial mortgage, real estate construction and lease
financing categories.
- - Consumer Banking - Consumer 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. Consumer loans are primarily composed of automobile, personal,
marine, recreational vehicle, home equity and credit card loans.
- - Wealth Management - Wealth Management provides services to both our
business and consumer clients. 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
services include personal trust and planning services, investment
management services, estate settlement and administration services and
investment advisory services for the Golden Oak family of mutual funds,
which we distribute through our banking offices. Retirement plan services
focus on investment management and fiduciary activities with special
emphasis on 401(k) plans. The brokerage and insurance businesses deliver
retail mutual funds, other securities, variable and fixed annuities,
personal disability and life insurance products and discounted brokerage
services.
As of December 31, 2002, we had 2,520 full-time equivalent employees and
conducted our operations through 188 banking offices, 208 ATM locations and 28
brokerage centers located in Michigan, Wisconsin, Iowa and Illinois. In
Michigan, the primary market includes much of the central and southern parts of
the state. 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 market areas are central Iowa and the western
suburban market of Chicago, Illinois. Many of our offices are located in small
cities and rural areas that have diverse economies and a mix of manufacturing,
service, retailing and agricultural businesses. In many of these localities, we
are the largest bank, which we believe to be a competitive advantage.
2
At December 31, 2002 we directly or indirectly owned the following subsidiaries:
Total Date
Principal Number of Assets Acquired /
Subsidiary Office Offices (in millions) Established
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Citizens Bank (a) Flint, MI 122 $5,071.0 01/01/82
Citizens Bank - Illinois, N.A. Berwyn, IL 3 219.4 05/01/87
F&M Bancorporation, Inc. Kaukauna, WI 11/01/99
F&M Bank - Wisconsin (a) Kaukauna, WI 52 1,813.7 01/03/00
F&M Bank - Iowa (a) Marshalltown, IA 11 485.5 11/01/99
Citizens Bank Wealth Management, N.A. Flint, MI (b) (b) 03/01/02
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(a) Consolidated totals of the Bank include its non-bank subsidiaries.
(b) Citizens Bank Wealth Management conducts business at most Citizens Bank
locations and had total assets under administration of $2.555 billion at
December 31, 2002.
Citizens Bank, our principal bank subsidiary, directly owned the following
non-bank subsidiaries:
- CB Financial Services, Inc. (100% owned) - a seller of life insurance
and annuity products to clients subject to certain restrictions,
- Citizens Bank Mortgage Company, LLC (99% owned) - a provider of
mortgage financing and servicing to individuals and businesses,
- Citizens Title Services, Inc. (100% owned) - an issuer of title
insurance to buyers and sellers of residential and commercial mortgage
properties including those occurring due to loan refinancing,
- Citizens Commercial Leasing Corporation (100% owned) - a participant
in high quality indirect lease participations,
- Citizens Service Company, Inc (100% owned) - a holding company owning
1% of Citizens Bank Consumer Finance, LLC and 1% of Citizens Bank
Mortgage Company, LLC.,
- Citizens Bank Consumer Finance, LLC (99% owned) - a partnership
established to provide indirect consumer lending services to clients
in Citizens' markets, and
- CB Capital Management, Inc. (100% owned) - a registered broker-dealer
for our Golden Oak mutual funds.
F&M Bank - Wisconsin directly owned Pulaski Capital Corporation, a wholly owned
nonbank subsidiary organized and existing under the laws of the State of Nevada
that holds and manages the majority of F&M Bank - Wisconsin's investment
portfolio. F&M Bank - Iowa directly owned Security Bancservices, Inc, a wholly
owned non-bank subsidiary that sells property and casualty insurance to clients
in the Wisconsin and Iowa markets.
Our loan sales and securitization activities are conducted within our subsidiary
banks. Our bank in Michigan has been the bank that has coordinated and executed
such transactions on behalf of our other subsidiaries. We sell substantially all
of the fixed-rate single-family mortgage loans we originate, including
adjustable-rate loans that convert to fixed-rate loans. These sales are
accomplished through cash sales to Federal Home Loan Mortgage Corporation
("FHLMA"), Federal National Mortgage Association ("FNMA") and other third-party
investors, as well as through securitizations with FHLMC and FNMA. In general,
mortgage-backed securities ("MBSs") received from FHMLC or FNMA in exchange for
fixed-rate mortgage loans are sold immediately in the securities market. From
time to time, we also exchange fixed and variable rate mortgage loans held in
portfolio for FHLMC or FNMA MBSs backed by the same loans. The resulting MBSs
are sold to third party investors or classified as held for sale in our
investment security portfolio.
If MBSs are retained in the investment portfolio, any gain or loss at time of
sale is recorded as a security gain or loss. All other gains or losses
associated with sales of single-family mortgage loans are recorded as a
component of mortgage banking revenue. Typically, we do not service the loans
after they are sold or exchanged, but sell the mortgage servicing rights, in a
separate transaction, before or at the time of the securitization. Sales or
securitizations of mortgage loans through FHLMC and FNMA are done under terms
that do not provide for any material recourse to us by the investor. We do not
retain any interest in these securitized mortgage loans.
3
During 2002, we identified a number of strategic initiatives and took certain
key actions to strengthen our franchise. These initiatives and actions are
described on pages 28 and 29 of Exhibit 13 under the caption "Strategic
Initiatives and Other Key Actions" and are incorporated herein by reference.
PRINCIPAL SOURCES OF REVENUE
The primary source of our revenue is interest income. The table below shows the
amount of our total consolidated revenues resulting from interest and fees on
loans, interest and dividends on investment securities and other interest and
noninterest income for each of the last three years:
Year Ended December 31,
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(in thousands) 2002 2001 2000
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Interest and fees on loans $ 385,812 $ 492,437 $ 535,235
Interest and dividends on investment securities 76,748 79,348 $86,540
Other interest and noninterest income 102,600 119,255 90,577
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Total revenues $ 565,160 $ 691,040 $ 712,352
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LINES OF BUSINESS
Our performance is monitored by an internal profitability measurement system
that provides line of business results and key performance measures. Prior to
2002, we operated along the following business lines: Commercial Banking, Retail
Banking, Financial Services, F&M, and Other. Beginning in 2002, the F&M business
line was integrated into our other lines of business and the three major
business lines were renamed Business Banking, Consumer Banking and Wealth
Management, respectively. The activities of the renamed business lines remained
the same. Additional information regarding our business lines is incorporated
herein by reference from Exhibit 13 on pages 38 and 39, and on pages 83 through
85 of such document under the captions, "Line of Business Results" and "Note 19.
Lines of Business", respectively.
COMPETITION
The financial services industry is highly competitive. Our banking subsidiaries
compete with other commercial banks, many of which are subsidiaries of other
bank holding companies, for loans, deposits, trust accounts and other business
on the basis of interest rates, fees, convenience and quality of service. Major
competitors include banking subsidiaries of Bank One Corporation, Comerica
Incorporated, National City Corporation, Fifth Third Bancorp, Marshall and
Ilsley Corporation and Associated Banc-Corp, among others. They also actively
compete with a variety of other financial service organizations including
savings associations, finance companies, mortgage banking companies, brokerage
firms, credit unions and other organizations. The non-banking subsidiaries
compete with other companies in related industries including other leasing
companies, title insurance companies, mortgage banking companies, insurance
companies, consumer finance companies and other organizations.
Mergers between financial institutions and the expansion of financial
institutions both within and outside of our primary Midwest banking markets have
provided significant competitive pressure in those markets. In addition, the
passage of Federal interstate banking legislation has expanded the banking
market and heightened competitive forces. The effect of this legislation is
further discussed under the caption "Supervision and Regulation".
Many of our offices are located in small cities and rural areas that have
diverse economies and a mix of manufacturing, service, retailing and
agricultural businesses. In many of these localities, we are the largest bank,
which we believe to be a competitive advantage. In other markets our competitors
may enjoy a competitive advantage, including greater financial resources, more
aggressive marketing campaigns, better brand recognition and more branch
locations. Our competitors may also offer higher interest rates than we do,
which could decrease the deposits that we attract or require us to increase our
rates or attract new deposits.
Other factors such as employee relations and environmental laws also impact our
competitiveness. We maintain a favorable relationship with our employees and
none of our employees are represented by a collective bargaining group. The
impact of environmental laws is further discussed in "Item 3. Legal Proceedings"
of this document.
4
SUPERVISION AND REGULATION
General
We are a bank holding company registered with the Federal Reserve Board and are
subject to regulation under the Bank Holding Company Act of 1956, as amended
(the "Bank Holding Company Act"). The Bank Holding Company Act requires the
Federal Reserve Board's prior approval of an acquisition of assets or of
ownership or control of voting shares of any bank or bank holding company if the
acquisition would give us more than 5% of the voting shares of that bank or bank
holding company. It also imposes restrictions, summarized below, on the assets
or voting shares of non-banking companies that we may acquire.
Our subsidiary banks are subject to the provisions of the banking laws of their
respective states or the National Bank Act. They are under the supervision of,
and are subject to periodic examination by, their respective state banking
departments (in the case of state-chartered banks) or the Office of the
Comptroller of the Currency ("OCC") (in the case of national banks), and are
subject to the rules and regulations of the OCC, the Federal Reserve Board and
the Federal Deposit Insurance Corporation ("FDIC"). Citizens Bank (our principal
bank subsidiary), F&M Bank-Wisconsin and F&M Bank-Iowa are state-chartered banks
and are therefore subject to supervision, regulation and examination by the
Michigan Office of Financial and Insurance Services, the Wisconsin Department of
Financial Institutions and the Iowa Division of Banking, respectively, as well
as by the Federal Reserve Board. Citizens Bank-Illinois, N.A., is a national
bank and CB Wealth Management, N.A., is a national, non-depository trust bank
and are subject to supervision, regulation and examination by the OCC. All of
our depository banks are subject to supervision and examination by the FDIC,
because the FDIC insures their deposits to the extent provided by law. In
addition, all of our banks are members of the Federal Reserve System. Our
non-bank subsidiaries are supervised and examined by the Federal Reserve Board
and various other federal and state agencies.
Consistent with the requirements of the Bank Holding Company Act, our only lines
of business consist of providing our customers with banking, trust and other
financial services and products. These services include commercial banking
through our four subsidiary banks, trust services through CB Wealth Management,
N.A., mortgage origination and servicing through Citizens Bank Mortgage Company,
LLC, equipment leasing through Citizens Commercial Leasing Corporation,
brokerage and investment advisory services through CB Capital Management, Inc.,
property and casualty insurance brokerage services through Security
Bancservices, Inc., life insurance and annuity products through CB Financial
Services, Inc., title insurance through Citizens Title Services, Inc. and
portfolio management services for the majority of F&M Bank - Wisconsin's
investment portfolio through Pulaski Capital Corporation. Commercial banking
activities account for substantially all of our gross revenues.
Regulations governing Citizens and our subsidiary depository institutions
restrict extensions of credit by such institutions to Citizens and, with some
exceptions, our other affiliates. For these purposes, extensions of credit
include loans and advances to and guarantees and letters of credit on behalf of
Citizens and such affiliates. These regulations also restrict investments by our
depository institution subsidiaries in the stock or other securities of Citizens
and the covered affiliates, as well as the acceptance of such stock or other
securities as collateral for loans to any borrower, whether or not related to
Citizens.
Our insured depository institution subsidiaries are subject to comprehensive
federal and state regulations dealing with a wide variety of subjects, including
capital and reserve requirements, loan limitations, restrictions as to interest
rates on loans and deposits, restrictions as to dividend payments, requirements
governing the establishment of branches and numerous other aspects of their
operations. These regulations generally have been adopted to protect depositors
and creditors rather than shareholders or holders of subordinated debt.
Information concerning capital adequacy guidelines for Citizens and its banking
subsidiaries including our regulatory capital position at December 31, 2002 and
maintenance of minimum average reserve balances by the banking subsidiaries with
the Federal Reserve Bank are incorporated herein by reference from Exhibit 13 on
page 51 of such document under the captions, "Capital Resources" and "Liquidity
and Debt Capacity," and pages 85 through 86 of such document under the caption
"Note 20 Regulatory Matters."
Our insured depository institution subsidiaries are also subject to
cross-guaranty liability under federal law. This means that if one FDIC-insured
depository institution subsidiary of a multi-institution bank holding company
fails or requires FDIC assistance, the FDIC may assess "commonly controlled"
depository institutions for the estimated losses suffered by the FDIC. Such
liability could have a material adverse effect on the financial condition of any
assessed subsidiary institution and on Citizens as the common parent. While the
FDIC's cross-guaranty claim is generally junior to the claims of depositors,
holders of secured liabilities, general creditors and subordinated creditors, it
is generally superior to the claims of shareholders and affiliates.
5
Under Federal Reserve Board policy, a bank holding company is expected to serve
as a source of financial strength to each of its subsidiary banks and to stand
prepared to commit resources to support each of them. There are no specific
quantitative rules on the holding company's potential liability. If one of our
subsidiary banks were to encounter financial difficulty, the Federal Reserve
Board could invoke the doctrine and require a capital contribution from us. In
addition, and as a separate legal matter, a holding company is required to
guarantee the capital plan of an undercapitalized subsidiary bank. See "FDICIA"
below.
Payment of Dividends
There are various statutory restrictions on the ability of our banking
subsidiaries to pay dividends or make other payments to Citizens' parent
company, which are described below. Because of these statutory dividend
constraints and our net loss in the third quarter of 2002 due to the large loan
loss provision and restructuring and other charges recorded, our banking
subsidiaries are expected to be unable to pay significant dividends to us during
the first half of 2003 without prior regulatory approval. We expect that the
dividend paying capacity of our bank subsidiaries will return to historical
levels by the fourth quarter of 2003, although there can be no assurance to that
effect. In each of the years ended December 31, 2000, 2001 and 2002, our
subsidiaries paid cash dividends to us of $79.4 million, $107.4 million and
$90.5 million, respectively.
Each of our banking subsidiaries is subject to dividend limits under the laws of
the state in which it is chartered. In addition, all of our subsidiary banks are
member banks of the Federal Reserve System, subject to the dividend limits of
the Federal Reserve Board. The Federal Reserve Board allows a member bank to
make dividends or other capital distributions in an amount not exceeding the
current calendar year's net income, plus retained net income of the preceding
two years. Distributions in excess of this limit require prior approval of the
Federal Reserve Board. Federal Reserve Board policy provides that, as a matter
of prudent banking, a bank holding company generally should not maintain a rate
of cash dividends unless its net income available to common shareholders has
been sufficient to fully fund the dividends, and the prospective rate of
earnings retention appears to be consistent with the holding company's capital
needs, asset quality and overall financial condition.
Dividends from a national banking association may be declared only from the
bank's undivided profits, and until the bank's surplus fund equals its common
capital, no dividends may be declared unless at least 10% of the bank's net
income for a given time period has been carried to the surplus fund, depending
on the frequency of dividend payments in a given year. The OCC's approval is
required if the total of all dividends declared in any calendar year exceeds the
sum of the association's net income of that year combined with its retained net
income of the preceding two years.
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires federal regulators to take prompt corrective action against any
undercapitalized institution. FDICIA establishes five capital categories:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. "Well capitalized"
institutions significantly exceed the required minimum level for each capital
measure (currently, risk-based and leverage). "Adequately capitalized"
institutions include depository institutions that meet the required minimum
level for each capital measure. "Undercapitalized" institutions consist of those
that fail to meet the required minimum level for one or more relevant capital
measures. "Significantly undercapitalized" characterizes depository institutions
with capital levels significantly below the minimum requirements. "Critically
undercapitalized" refers to depository institutions with minimal capital and at
serious risk for government seizure.
Under certain circumstances, a well-capitalized, adequately capitalized or
undercapitalized institution may be treated as if the institution were in the
next lower capital category. A depository institution is generally prohibited
from making capital distributions, including paying dividends, or paying
management fees to a holding company if the institution would thereafter be
undercapitalized. Institutions that are adequately but not well capitalized
cannot accept, renew or rollover brokered deposits except with a waiver from the
FDIC and are subject to restrictions on the interest rates that can be paid on
such deposits. Undercapitalized institutions may not accept, renew or rollover
brokered deposits.
The banking regulatory agencies are permitted or, in certain cases, required to
take certain actions with respect to institutions falling within one of the
three undercapitalized categories. Depending on the level of an institution's
capital, the agency's corrective powers include, among other things:
6
- - prohibiting the payment of principal and interest on subordinated debt;
- - prohibiting the holding company from making distributions without prior
regulatory approval;
- - placing limits on asset growth and restrictions on activities;
- - placing additional restrictions on transactions with affiliates;
- - restricting the interest rate the institution may pay on deposits;
- - prohibiting the institution from accepting deposits from correspondent
banks; and
- - in the most severe cases, appointing a conservator or receiver for the
institution.
A banking institution that is undercapitalized is required to submit a capital
restoration plan, and such a plan will not be accepted unless, among other
things, the banking institution's holding company guarantees the plan up to a
certain specified amount. Any such guarantee from a depository institution's
holding company is entitled to a priority of payment in bankruptcy.
FDICIA also contains a variety of other provisions that may affect our
operations, including reporting requirements, regulatory standards for real
estate lending, "truth in savings" provisions, the requirement that a depository
institution give 90 days prior notice to customers and regulatory authorities
before closing any branch.
At December 31, 2002 and 2001, the most recent notification from the Federal
Reserve Board categorized Citizens and all of its depository institution
subsidiaries as "well capitalized" under the regulatory framework for prompt
corrective action.
FDIC Insurance Assessments
The FDIC's deposit insurance assessments currently are calculated under a
risk-based system. The risk-based system places a bank in one of nine risk
categories, principally on the basis of its capital level and an evaluation of
the bank's risk to the relevant deposit insurance fund, and bases premiums on
the probability of loss to the FDIC with respect to each individual bank. Under
the Federal Deposit Insurance Act, depository institutions such as our
subsidiary banks may not pay interest on indebtedness, if such interest is
required to be paid out of net profits, or distribute any of its capital assets
while it remains in default on any assessment due to the FDIC.
The adjusted assessment rates for FDIC-insured institutions currently range from
0.00% to 0.27% depending on the assessment category into which a bank is placed.
We did not pay any regular insurance assessments to the FDIC in 2002 and do not
expect to be required to pay significant insurance assessments in 2003. However,
the FDIC retains the ability to increase regular insurance assessments and to
levy special additional assessments.
Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994,
as amended ("Riegle-Neal Act"), a bank holding company may acquire banks in
states other than its home state, subject to any state requirement that the bank
has been organized and operating for a minimum period of time (not to exceed
five years) and the requirement that the bank holding company not control, prior
to or following the proposed acquisition, more than 10% of the total amount of
deposits of insured depository institutions nationwide or, unless the
acquisition is the bank holding company's initial entry into the state, more
than 30% of such deposits in the state, or such lesser or greater amount set by
the state. The Riegle-Neal Act also authorizes banks to merge across state
lines, thereby creating interstate branches. Banks are also permitted to acquire
and to establish de novo branches in other states where authorized under the
laws of those states.
Transactions with Affiliates
Transactions between our subsidiary banks and their affiliates are governed by
Sections 23A and 23B of the Federal Reserve Act. The affiliates of our banks
include Citizens and any entity controlled by Citizens. Generally, Sections 23A
and 23B (i) limit the extent to which our subsidiary banks may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of our
capital stock and surplus, and maintain an aggregate limit on all such
transactions with affiliates to an amount equal to 20% of the bank's capital
stock and surplus, (ii) require that a bank's extensions of credit to such
affiliates be fully collateralized (with 100% to 130% collateral coverage,
depending on the type of collateral), (iii) prohibit the bank from purchasing or
accepting as collateral from an affiliate any "low quality assets" (including
non-performing loans) and (iv) require that all "covered transactions" be on
terms substantially the same, or at least as favorable, to the bank or its
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other type of similar transactions.
7
Loans to Insiders
The Federal Reserve Act and related regulations impose specific restrictions on
loans to directors, executive officers and principal stockholders of banks.
Under Section 22(h) of the Federal Reserve Act and its implementing regulations,
loans to a director, an executive officer and to a principal stockholder of a
bank, and some affiliated entities of any of the foregoing, may not exceed,
together with all other outstanding loans to such person and affiliated
entities, the bank's loan-to-one-borrower limit. Loans in the aggregate to
insiders and their related interests as a class may not exceed the bank's
unimpaired capital and unimpaired surplus. Section 22(h) and its implementing
regulations also prohibit loans, above amounts prescribed by the appropriate
federal banking agency, to directors, executive officers and principal
stockholders of a bank or bank holding company, and their respective affiliates,
unless such loan is approved in advance by a majority of the board of directors
of the bank with any "interested" director not participating in the voting.
Section 22(h) generally requires that loans to directors, executive officers and
principal stockholders be made on terms and underwriting standards substantially
the same as offered in comparable transactions to other persons.
Community Reinvestment Act
Under the Community Reinvestment Act and related regulations, depository
institutions have an affirmative obligation to assist in meeting the credit
needs of their market areas, including low and moderate income areas, consistent
with safe and sound banking practice. The Community Reinvestment Act requires
the adoption by each institution of a Community Reinvestment Act statement for
each of its market areas describing the depository institution's efforts to
assist in its community's credit needs. Depository institutions are periodically
examined for compliance with the Community Reinvestment Act and are periodically
assigned ratings in this regard. Banking regulators consider a depository
institution's Community Reinvestment Act rating when reviewing applications to
establish new branches, undertake new lines of business, and/or acquire part or
all of another depository institution. An unsatisfactory rating can
significantly delay or even prohibit regulatory approval of a proposed
transaction by a bank holding company or its depository institution subsidiary.
Fair Lending; Consumer Laws
In addition to the Community Reinvestment Act, other federal and state laws
regulate various lending and consumer aspects of the banking business.
Governmental agencies, including the Department of Housing and Urban
Development, the Federal Trade Commission and the Department of Justice, have
become concerned that in some cases prospective borrowers experience unlawful
discrimination in their efforts to obtain loans from depository and other
lending institutions. These agencies have brought litigation against some
depository institutions alleging discrimination against borrowers. Many of these
suits have been settled, in some cases for material sums, short of a full trial.
Recently, these governmental agencies have clarified what they consider to be
lending discrimination and have specified various factors that they will use to
determine the existence of lending discrimination under the Equal Credit
Opportunity Act and the Fair Housing Act. These factors include evidence that a
lender discriminated on a prohibited basis, evidence that a lender treated
applicants differently based on prohibited factors in the absence of evidence
that the treatment was the result of prejudice or a conscious intention to
discriminate, and evidence that a lender applied an otherwise neutral
non-discriminatory policy uniformly to all applicants, but the practice had a
discriminatory effect, unless the practice could be justified as a business
necessity.
Banks and other depository institutions also are subject to numerous
consumer-oriented laws and regulations. These laws, which include the Truth in
Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures
Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, and
the Fair Housing Act, require compliance by depository institutions with various
disclosure requirements and requirements regulating the availability of funds
after deposit or the making of certain loan, to customers.
Gramm-Leach-Bliley Act of 1999
The Gramm-Leach-Bliley Act of 1999 (the "GLBA") was signed into law on November
12, 1999. The GLBA covers a broad range of issues, including a repeal of most of
the restrictions on affiliations among depository institutions, securities firms
and insurance companies. The following description summarizes some of its
significant provisions.
The GLBA repeals sections 20 and 32 of the Glass-Steagall Act, thus permitting
unrestricted affiliations between banks and securities firms. It also permits
bank holding companies to elect to become financial holding companies. A
financial holding company may engage in or acquire companies that engage in a
broad range of financial services,
8
including securities activities such as underwriting, dealing, investment,
merchant banking, insurance underwriting, sales and brokerage activities. In
order to become a financial holding company, the bank holding company and all of
its affiliated depository institutions must be well-capitalized, well-managed
and have at least a satisfactory Community Reinvestment Act rating. We have
determined not to become certified as a financial holding company at this time.
We may reconsider this determination in the future.
The GLBA provides that the states continue to have the authority to regulate
insurance activities, but prohibits the states in most instances from preventing
or significantly interfering with the ability of a bank, directly or through an
affiliate, to engage in insurance sales, solicitations or cross-marketing
activities. Although the states generally must regulate bank insurance
activities in a nondiscriminatory manner, the states may continue to adopt and
enforce rules that specifically regulate bank insurance activities in specific
areas identified under the law. Under the new law, the federal bank regulatory
agencies adopted insurance consumer protection regulations that apply to sales
practices, solicitations, advertising and disclosures.
The GLBA repeals the broad exemption of banks from the definitions of "broker"
and "dealer" for purposes of the Securities Exchange Act of 1934, as amended. It
also identifies a set of specific activities, including traditional bank trust
and fiduciary activities, in which a bank may engage without being deemed a
"broker," and a set of activities in which a bank may engage without being
deemed a "dealer." Additionally, the new law makes conforming changes in the
definitions of "broker" and "dealer" for purposes of the Investment Company Act
of 1940, as amended, and the Investment Advisers Act of 1940, as amended.
The GLBA also contains extensive customer privacy protection provisions. Under
these provisions, a financial institution must provide to its customers, both at
the inception of the customer relationship and on an annual basis, the
institution's policies and procedures regarding the handling of customers'
nonpublic personal financial information. The new law provides that, except for
specific limited exceptions, an institution may not provide such personal
information to unaffiliated third parties unless the institution discloses to
the customer that such information may be so provided and the customer is given
the opportunity to "opt out" of such disclosure. An institution may not disclose
to a non-affiliated third party, other than to a consumer reporting agency,
customer account numbers or other similar account identifiers for marketing
purposes. The GLBA also provides that the states may adopt customer privacy
protections that are more strict than those contained in the GLBA.
Future Legislation
Because federal and state regulation of financial institutions changes regularly
and is the subject of constant legislative debate, we cannot forecast how
federal and state regulation of financial institutions may change in the future
and impact our operations. Although Congress in recent years has sought to
reduce the regulatory burden on financial institutions with respect to the
approval of specific transactions, we fully expect that the financial services
industry will remain heavily regulated in the near future and that additional
laws or regulations may be adopted further regulating specific banking
practices.
ECONOMIC FACTORS AND MONETARY POLICY
Our earnings and business are affected by the general economic and political
conditions in the United States and abroad and by the monetary and fiscal
policies of various federal regulatory authorities, including the Federal
Reserve System. Through open market securities transactions, variations in the
Federal Funds rate and the establishment of reserve requirements, the Board of
Governors of the Federal Reserve System exerts considerable influence on
interest rates and the supply of money and credit. The effect of fluctuating
economic conditions and federal regulatory policies on our future profitability
cannot be predicted with any certainty. The effect of the economy and changes in
the Federal Funds rate on our net interest margin and net interest income in
2001 and 2002 and their potential affect on future periods is discussed in
Exhibit 13 on pages 31 through 34 under the caption "Net Interest Income" and is
incorporated herein by reference. Our sensitivity to changes in interest rates
and the potential affect of changes in interest rates on net interest income is
presented in Exhibit 13 on pages 52 through 54 under the captions "Interest Rate
Risk" and "Interest Rate Sensitivity" and is incorporated herein by reference.
ENVIRONMENTAL MATTERS
Our primary exposure to environmental risk is through our trust services and our
lending activities. In each instance, we have policies and procedures in place
to mitigate our environmental risk exposures. With respect to lending
activities, we require environmental site assessments at the time of loan
origination to confirm collateral quality on commercial real
9
estate parcels posing higher than normal potential for environmental impact, as
determined by reference to present and past uses of the subject property and
adjacent sites. Environmental assessments are also mandated prior to any
foreclosure activity involving non-residential real estate collateral. In the
case of trust services, we utilizes various types of environmental transaction
screening to identify actual and potential risks arising from any proposed
holding of non-residential real estate for trust accounts. Consequently we do
not anticipate any material effect on capital expenditures, earnings or the
competitive position of Citizens or any of our subsidiaries with regard to
compliance with federal, state or local environmental protection laws or
regulations. Additional information is provided in "Item 3. Legal Proceedings."
10
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations required by this item is incorporated herein by reference from
Exhibit 13 on pages 27 through 57 of such document.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are incorporated herein by reference from Exhibit 13 on
pages 58 through 94 of such document.
Supplementary data of Citizens' quarterly results of operations required by this
item are incorporated herein by reference from Exhibit 13 on page 57 of such
document under the caption "Table 14. Selected Quarterly Information."
11
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The following consolidated financial statements of Citizens and Report
of Ernst & Young LLP, Independent Auditors are incorporated by
reference under Item 8 "Financial Statements and Supplementary Data" of
this document:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
2. Financial Statement Schedules:
All schedules are omitted - see Item 15(d) below.
3. Exhibits:
The exhibits listed on the "Exhibit Index" on pages 16 and 17 of this
report are filed herewith and are incorporated herein by reference.
(b) Reports on Form 8-K
A report on Form 8-K, dated October 18, 2002 and filed on October 22,
2002 announcing Citizens' results of operations for the three and nine
month periods ending September 30, 2002 under items 5 and 9.
(c) Exhibits:
The "Exhibit Index" is filed herewith on pages 16 and 17 of this report
and is incorporated herein by reference.
(d) Financial Statement Schedules:
All financial statement schedules normally required by Article 9 of
Regulation S-X are omitted since they are either not applicable or the
required information is shown in the consolidated financial statements
or notes thereto.
12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Amendment No. 1 to the Report
on Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.
CITIZENS BANKING CORPORATION
(Registrant)
by /s/ William R. Hartman Date: June 6, 2003
- -----------------------------------------------
William R. Hartman
Chairman, President and Chief Executive Officer
13
CERTIFICATIONS
I, WILLIAM R. HARTMAN, CHIEF EXECUTIVE OFFICER, PRESIDENT AND CHAIRMAN OF
CITIZENS BANKING CORPORATION, CERTIFY THAT:
1. I have reviewed this Amendment No. 1 to annual report on Form 10-K of
Citizens Banking Corporation;
2. Based on my knowledge, this Amendment No. 1 to annual report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this Amendment No. 1 to annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Amendment No. 1 to annual report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this Amendment No. 1 to annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have;
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Amendment No. 1 to annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Amendment No. l to annual report (the
"Evaluation Date"); and
c) Presented in this Amendment No. 1 to annual report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this Amendment No. 1 to annual report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 6, 2003
/s/ William R. Hartman
--------------------------------
William R. Hartman
Chairman, President and Chief
Executive Officer
14
CERTIFICATIONS (CONTINUED)
I, CHARLES D. CHRISTY, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER OF
CITIZENS BANKING CORPORATION, CERTIFY THAT:
1. I have reviewed this Amendment No. 1 to annual report on Form 10-K of
Citizens Banking Corporation;
2. Based on my knowledge, this Amendment No. 1 to annual report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this Amendment No. 1 to annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Amendment No. 1 to annual report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this Amendment No. 1 to annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have;
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Amendment No. 1 to annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Amendment No. 1 to annual report (the
"Evaluation Date"); and
c) Presented in this Amendment No. 1 to annual report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this Amendment No. 1 to annual report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 6, 2003
/s/ Charles D. Christy
-------------------------------
Charles D. Christy
Executive Vice President and
Chief Financial Officer
15
EXHIBIT INDEX
The following documents are filed as part of this report. Those exhibits
previously filed and incorporated herein by reference are identified below.
Exhibits not required for this report have been omitted. Citizens' Commission
file number is 000-10535.
Exhibit
No. Exhibit
- ------- -----------------------------------------------------------------------
3.1 Restated Articles of Incorporation, as amended. (incorporated
by reference from Exhibit 3(a) of Citizens' 2002 Second
Quarter Quarterly Report on Form 10-Q).
3.2 Amended and Restated Bylaws dated March 28, 2003.**
4 Rights Agreement, dated May 23, 2000, between Citizens and Citizens
Bank, as Rights Agent (incorporated by reference from Exhibit 4.1
of Citizens' Current Report on Form 8-K filed June 8, 2000).
10.1* Citizens Banking Corporation Second Amended Stock Option Plan
(incorporated by reference from Exhibit 4 of Citizens'
registration statement on Form S-8 filed May 5, 1992,
Registration No. 33-47686).
10.2* Citizens Banking Corporation Third Amended Stock Option Plan
(incorporated by reference from Exhibit 10(r) of Citizens' 1997
Second Quarter Report on Form 10-Q).
10.3* First Amendment to Citizens Banking Corporation Third Amended
Stock Option Plan (incorporated by reference from Exhibit 10.2
of Citizens' 2000 Second Quarter Report on Form 10-Q).
10.4* Citizens Banking Corporation All-Employee Stock Option Plan
(incorporated by reference from Exhibit 99 of Citizens'
registration statement on Form S-8 filed June 26, 2000,
Registration No. 333-40100).
10.5* Citizens Banking Corporation Stock Option Plan for Directors
(incorporated by reference from Exhibit 99 of Citizens'
registration statement on Form S-8 filed July 21, 1995,
Registration No. 33-61197).
10.6* First Amendment to Citizens Banking Corporation Stock Option
Plan for Directors (incorporated by reference from Exhibit 10.3
of Citizens' 2000 Second Quarter Report on Form 10-Q).
10.7* Citizens Banking Corporation Stock Compensation Plan
(incorporated by reference from exhibit 10.13 of Citizens' 2001
Annual Report on Form 10-K).
10.8* Post Effective Amendment No. 1 to Form S-4 on Form S-8 pertaining
to "F&M Bancorporation, Inc. 1993 Incentive Stock Option Plan"
and "F&M Bancorporation, Inc. 1993 Stock Option Plan for
Non-employee Directors" (incorporated by reference to Form S-8
filed December 22, 1999, file number 333-86569).
10.9* Citizens Banking Corporation Amended and Restated Section 401(k)
Plan (incorporated by reference from Exhibit 99.1 of Citizens'
registration statement on Form S-8 filed August 2, 1996 -
Registration No. 333-09455).
10.10* Citizens Banking Corporation Management Incentive Compensation
Plan (incorporated by reference from Exhibit 10.8 of Citizens'
2001 Annual Report on Form 10-K).
10.11* Citizens Banking Corporation Amended and Restated Director's Deferred
Compensation Plan.**
10.12* Amended and Restated Citizens Banking Corporation Supplemental
Retirement Benefits Plan for John W. Ennest (incorporated by
reference from Exhibit 10.10 of Citizens' 2001 Annual Report on
Form 10-K).
16
EXHIBIT INDEX (Continued)
Exhibit
No. Exhibit
- ------ -----------------------------------------------------------------------
10.13* Amended and Restated Citizens Banking Corporation Supplemental
Retirement Benefits Plan for Robert J. Vitito (incorporated by
reference from Exhibit 10.11 of Citizens' 2001 Annual Report on
Form 10-K).
10.14* Amended and Restated Change in Control Agreement (incorporated by
reference from Exhibit 10.12 of Citizens' 2001 Annual Report on
Form 10-K).
10.15* Employment Agreement between William R. Hartman and Citizens
Banking Corporation dated February 11, 2002 together with A.
Form of Stock Compensation Plan, B. Restricted Stock Award
Agreement, C. Nonqualified Stock Option Agreement, D. Management
Incentive Plan, E. Supplemental Executive Retirement Plan, F.
Change in Control Agreement, and G. Director Indemnification
Agreement (incorporated by reference from Exhibit 10.14 of
Citizens' 2001 Annual Report on Form 10-K).
10.16* First Amendment to Employment Agreement between William R. Hartman
and Citizens Banking Corporation dated December 13, 2002**
10.17* Second Amendment to Employment Agreement between William R. Hartman
and Citizens Banking Corporation dated January 23, 2003**
11 Computation of Per Share Earnings (incorporated by reference from
Exhibit 13 on page 82 of such document under the caption "Note
15. Earnings Per Share").
13 Citizens Banking Corporation 2002 Annual Report - financial
information pages 25 through 90 only (except as to portions
expressly incorporated herein, said Annual Report information is
included only for the information of the Commission).
21 Subsidiaries of the Registrant**
23 Consent of Ernst & Young LLP
99.1 Certification of Chief Executive Officer pursuant to U.S.C. Section
1350
99.2 Certification of Chief Financial Officer pursuant to U.S.C. Section
1350
- -------------------------------------------------------------------------------
* Current management contracts or compensatory plans or arrangements.
** Filed with Citizens' Form 10-K for the fiscal year ended December 31, 2002.
17