1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended March 31, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________________ to _______________________
Commission file Number 0-10535
CITIZENS BANKING CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2378932
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Citizens Banking Center, Flint, Michigan 48502
(Address of principal executive offices) (Zip Code)
(313) 766-7500
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes ___ No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 2, 1995
Common Stock, No Par Value 14,171,349 Shares
(This report contains 19 pages)
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Citizens Banking Corporation
Index to Form 10-Q
Page
------
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II - OTHER INFORMATION
Item 5 - Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 18
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PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
MARCH 31, December 31,
(in thousands) 1995 1994
- - - - - - ------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 139,751 $ 132,092
Money market investments:
Interest-bearing deposits with banks 148 20,135
Federal funds sold 110,000 60,000
Term federal funds and other 66,919 25,000
---------- ----------
Total money market investments 177,067 105,135
Securities available-for-sale:
U.S. Treasury and federal agency securities 330,668 331,001
State and municipal securities 223,490 226,424
Other securities 12,914 6,574
---------- ----------
Total investment securities 567,072 563,999
Loans:
Commercial loans 896,985 748,318
Real estate - construction 35,788 24,947
Real estate - mortgage 425,151 384,401
Consumer installment 921,159 581,252
Lease financing 68,458 77,303
---------- ----------
Total loans 2,347,541 1,816,221
Less: Allowance for loan losses (32,916) (24,714)
---------- ----------
Net loans 2,314,625 1,791,507
Premises and equipment 63,229 52,533
Cost-in-excess of assets acquired 72,380 15,830
Other assets 50,471 42,727
---------- ----------
TOTAL ASSETS $3,384,595 $2,703,823
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits: $ 468,422 $ 416,395
Noninterest-bearing --- ---
Interest-bearing 2,338,613 1,835,923
---------- ----------
Total deposits 2,807,035 2,252,318
Federal funds purchased and securities sold
under agreements to repurchase 123,321 125,581
Other short-term borrowings 13,767 20,850
Other liabilities 47,494 41,095
Long-term debt 123,407 5,249
---------- ----------
Total liabilities 3,115,024 2,445,093
SHAREHOLDERS' EQUITY
Preferred stock - No par value --- ---
Common stock - No par value 89,303 89,243
Retained earnings 185,814 181,393
Net unrealized losses on securities available-for-sale, net of tax
benefit (5,546) (11,906)
---------- ----------
Total shareholders' equity 269,571 258,730
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,384,595 $2,703,823
========== ==========
See notes to consolidated financial statements.
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4
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Three Months Ended
March 31,
(in thousands) 1995 1994
---------------------------
INTEREST INCOME
Interest and fees on loans $42,491 $34,273
Interest and dividends on investment securities:
Taxable 5,191 5,343
Nontaxable 2,438 2,770
Money market investments 1,701 389
---------- ----------
Total interest income 51,821 42,775
INTEREST EXPENSE
Deposits 17,828 13,593
Short-term borrowings 1,558 1,066
Long-term debt 882 121
---------- ----------
Total interest expense 20,268 14,780
---------- ----------
NET INTEREST INCOME 31,553 27,995
Provision for loan losses 1,420 1,058
---------- ----------
Net interest income after provision for loan losses 30,133 26,937
NONINTEREST INCOME
Trust fees 2,659 2,448
Service charges on deposit accounts 2,191 2,136
Bankcard fees 1,178 1,636
Investment securities gains 91 179
Other 1,943 2,094
--------- ---------
Total noninterest income 8,062 8,493
NONINTEREST EXPENSE
Salaries and employee benefits 14,801 13,907
Equipment 2,245 2,064
Occupancy 2,045 1,992
FDIC insurance premiums 1,356 1,236
Bankcard fees 664 1,186
Stationery and supplies 737 657
Postage and delivery 660 627
Other 5,572 5,788
---------- ----------
Total noninterest expense 28,080 27,457
---------- ----------
INCOME BEFORE INCOME TAXES 10,115 7,973
Income taxes 2,731 1,764
---------- ----------
NET INCOME $ 7,384 $ 6,209
========== ==========
Primary and Fully Diluted Income Per Share: $0.51 $0.43
===== =====
Average Shares Outstanding:
Primary 14,477,417 14,482,705
Fully Diluted 14,485,260 14,482,877
See notes to consolidated financial statements.
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5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
1995 1994
----------- ----------------------------------------------
FIRST Fourth Third Second
(in thousands) QUARTER Quarter Quarter Quarter
----------- ----------------------------------------------
COMMON STOCK
Balance, beginning of quarter $89,243 $89,202 $89,050 $89,909
Exercise of stock options, net of shares purchased 60 41 687 500
Shares acquired for retirement --- --- 535 1,359
-------- -------- -------- --------
Balance, end of quarter 89,303 89,243 90,272 89,050
-------- -------- -------- --------
RETAINED EARNINGS
Balance, beginning of quarter 181,393 176,119 171,331 167,069
Net income 7,384 8,234 7,745 7,226
Cash dividends (2,963) (2,960) (2,957) (2,964)
-------- -------- -------- --------
Balance, end of quarter 185,814 181,393 176,119 171,331
-------- -------- -------- --------
UNREALIZED GAIN (LOSS) ON
SECURITIES AVAILABLE-FOR-SALE
Balance, beginning of quarter (11,906) (7,516) (6,164) (2,962)
Net unrealized gain (loss), net of tax benefit 6,360 (4,390) (1,352) (3,202)
-------- -------- -------- --------
Balance, end of quarter (5,546) (11,906) (7,516) (6,164)
-------- -------- -------- --------
TOTAL SHAREHOLDERS' EQUITY $269,571 $258,730 $257,805 $254,217
======== ======== ======== ========
See notes to consolidated financial statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Three Months Ended
March 31,
(In thousands) 1995 1994
-------- --------
OPERATING ACTIVITIES:
Net income $7,384 $6,209
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 1,420 1,058
Depreciation and amortization 1,696 1,545
Amortization of goodwill and other intangibles 697 375
Net amortization on securities 830 682
Investment securities gains (91) (179)
Other (3,040) (4,123)
--------- ---------
Net cash provided by operating activities 8,896 5,567
INVESTING ACTIVITIES:
Net decrease (increase) in money market investments (48,832) 30,993
Securities available-for-sale:
Proceeds from sales 5,983 102,975
Proceeds from maturities 52,347 32,738
Purchases (17,130) (166,417)
Net increase in loans and leases (3,134) (19,608)
Purchases of premises and equipment (1,416) (2,086)
Net cash used for acquisition of banks (59,434) ---
--------- ---------
Net cash used by investing activities (71,616) (21,405)
FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings deposits (64,660) 26,496
Net increase in time deposits 78,691 14,839
Net increase (decrease) in short-term borrowings (54,351) 11,573
Proceeds from issuance of long-term debt 115,000 ---
Principal reductions in long-term debt (1,398) (1,073)
Cash dividends paid (2,963) (2,676)
Proceeds from stock options exercised 60 374
Shares acquired for retirement --- (2,092)
--------- ---------
Net cash provided by financing activities 70,379 47,441
--------- ---------
Net increase in cash and due from banks 7,659 31,603
Cash and due from banks at beginning of period 132,092 113,303
--------- ---------
Cash and due from banks at end of period $139,751 $144,906
======== ========
See notes to consolidated financial statements.
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CITIZENS BANKING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions for Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three
month period ended March 31, 1995 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1995. For
further information, refer to the consolidated financial statements and notes
thereto included in the Corporation's annual report on Form 10-K for the year
ended December 31, 1994.
NOTE 2. IMPAIRED LOANS
Effective January 1, 1995 the Corporation adopted Financial Accounting
Standards Board Statements No. 114 and 118, "Accounting by Creditors for
Impairment of a Loan". The Statements require that impaired loans be carried
at market value computed by one of three methods: market quotes, if
available; the fair value of the underlying collateral, if collateral
dependent; or the present value of expected future cash flows discounted at
the loan's contractual effective interest rate. The Corporation maintains an
allowance for loan losses for the difference between the market and book
value of these impaired loans. The Corporation's income recognition policy
on loan interest and fee income remains unchanged with the adoption of the
Statements. See additional discussion under the section entitled
"Underperforming Assets" in this filing.
NOTE 3. ACQUISITION OF BANKS
The first quarter results reflect one month of operations for the four
Michigan affiliates of Banc One Corporation purchased at the close of
business on February 28, 1995. The transaction was accounted for as a
purchase and the four banks ("acquired banks") were merged into Citizens
Commercial and Savings Bank headquartered in Flint, Michigan effective
immediately after the acquisition. The required pro-forma disclosures for a
business combination accounted for as a purchase are incorporated by
reference from Form 8K/A filed on April 27, 1995.
NOTE 4. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year financial statement presentation.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a review of the Corporation's performance during the
three-month period ended March 31, 1995. This discussion should be read in
conjunction with the accompanying unaudited financial statements and notes
thereto appearing on pages 3 through 7 of this report and the Corporation's
1994 Annual Report on Form 10-K.
SELECTED FINANCIAL DATA
Three Months Ended
March 31,
(in thousands, except per share data) 1995 1994
- - - - - - -------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
Interest income $51,821 $42,775
Net interest income 31,553 27,995
Provision for loan losses 1,420 1,058
Investment securities gains (losses) 91 179
Other noninterest income 7,971 8,314
Noninterest expense 28,080 27,457
Income taxes 2,731 1,764
Net income 7,384 6,209
Cash dividends 2,963 2,676
PER SHARE DATA
Primary and fully diluted net income $0.51 $0.43
Cash dividends 0.21 0.19
Book value (end of period) 19.06 18.06
Market value (end of period close) 26.50 22.75
FINANCIAL RATIOS (ANNUALIZED)
Return on average:
Shareholders' equity 11.40% 9.71%
Earning assets 1.12 1.01
Assets 1.03 0.93
Net interest margin (FTE) 4.95 4.78
Net loan charge-offs to average loans 0.09 0.09
Average equity to average total assets 9.02 9.60
Nonperforming assets to loans plus other real estate
(end of period) 0.95 1.32
Nonperforming assets to total assets (end of period) 0.66 0.86
BALANCE SHEET TOTALS Percent
At Period End (March 31) Change
--------
Assets 22.6% $3,384,595 $2,761,047
Loans 30.5 2,347,541 1,799,279
Deposits 22.7 2,807,035 2,288,021
Shareholders' equity 6.1 269,571 254,016
Average balances
Assets 7.8 2,914,172 2,703,151
Loans 12.6 1,998,318 1,774,031
Deposits 7.9 2,424,378 2,246,695
Shareholders' equity 1.3 262,741 259,374
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PERFORMANCE SUMMARY
Selected financial data as of March 31, 1995 and 1994 and for the three month
periods then ended are presented in the table on page 8. As shown, earnings
increased in 1995 resulting from higher net interest income. This improvement
was offset in part by lower noninterest income, higher noninterest expense,
provision for loan losses and income taxes. The first quarter results reflect
one month of operations for the four Michigan affiliates of Banc One
Corporation purchased at the close of business on February 28, 1995. The
transaction was accounted for as purchase and the four banks ("acquired
banks") were merged into Citizens Commercial and Savings Bank headquartered in
Flint, Michigan effective immediately after the acquisition.
THREE MONTHS, 1995 VERSUS 1994
NET INTEREST INCOME
Net interest income and average balances and yields on major categories of
interest-earning assets and interest-bearing liabilities during the first three
months of 1995 and 1994 are summarized on page 10. The effects of changes in
average market rates of interest ("rate") and average balances ("volume") are
quantified in the table below.
ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
1995 Compared With 1994
---------------------------
Increase (Decrease)
Due to Change in
Three Months Ended March 31 Net -------------------
(in thousands) Change(1) Rate(2) Volume
- - - - - - ------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Money market investments:
Time deposits with banks $ 139 $ 89 $ 50
Federal funds sold 909 540 369
Term federal funds sold 264 72 192
Investment securities:
Taxable (152) 583 (735)
Tax-exempt (332) 201 (533)
Loans 8,218 3,406 4,812
------ ------ ------
Total 9,046 4,891 4,155
------ ------ ------
INTEREST EXPENSE:
Deposits:
Demand 124 46 78
Savings 540 853 (313)
Time 3,571 1,976 1,595
Short-term borrowings 492 571 (79)
Long-term debt 761 30 731
------ ------ ------
Total 5,488 3,476 2,012
------ ------ ------
NET INTEREST INCOME $3,558 $1,415 $2,143
====== ====== ======
(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 rate.
Net favorable rate and volume related variances in net interest income resulted
in a 17 basis point improvement in net interest margin and a $3,558,000
increase in net interest income for the first three months of 1995 compared
with the same period of 1994. The higher volume resulted primarily from the
acquisition of the four new banks. These newly acquired banks contributed
$1,655,000 to the increase in the net interest income for the period. A higher
overall interest rate environment during the first quarter of 1995 when
compared with the first quarter of 1994 resulted in increased yields on all
categories of earning assets. The increased yields reflect the shift in
monetary policy by the Federal Reserve Board which has prompted an increase in
money market interest rates and a 2.75% increase in the prime lending rate
since March 1994. Average yields on interest-bearing liabilities increased
from 2.94% to 3.74% for the first quarter 1995 compared to the same period for
1994. If market rates were to either increase or decrease in 1995,
corresponding changes in funding costs would be considered to avoid a negative
impact on net interest income. The Corporation's policies in this regard are
further discussed in the section titled "Interest Rate Risk."
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10
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
1995 1994
Three Months Ended March 31 ------------------------------ ----------------------------
(in thousands) AVERAGE AVERAGE Average Average
BALANCE INTEREST(1) RATE(2) Balance Interest(1) Rate(2)
- - - - - - -----------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Money market investments:
Interest earning deposits with banks $14,143 $206 5.91% $8,107 $67 3.35%
Federal funds sold 82,134 1,207 5.96 36,722 298 3.29
Term federal funds sold 20,096 288 5.82 2,889 24 3.34
Investment securities(3):
Taxable 385,004 5,191 5.43 446,725 5,343 4.82
Nontaxable 181,985 2,438 8.28 225,210 2,770 7.42
Loans and leases:
Commercial 817,953 18,314 9.13 721,054 13,164 7.51
Real estate 404,815 8,309 8.21 419,673 8,432 8.04
Consumer 703,906 14,764 8.51 542,780 11,220 8.37
Lease financing 71,644 1,104 6.16 90,525 1,457 6.14
---------- ------- ----- ---------- ------- -----
Total earning assets(3) 2,681,680 51,821 8.02 2,493,685 42,775 7.18
------- -------
NONEARNING ASSETS
Cash and due from banks 138,607 121,636
Bank premises and equipment 56,420 54,072
Other nonearning assets 65,131 56,586
Allowance for loan losses (27,666) (22,828)
----------- ----------
Total assets $2,914,172 $2,703,151
========== ==========
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits $278,712 1,260 1.83 $260,485 1,136 1.77
Savings deposits 875,036 5,948 2.76 923,582 5,407 2.37
Time deposits 864,666 10,620 4.98 704,097 7,050 4.06
Repurchase agreements and other short-term
borrowings 131,220 1,558 4.82 143,296 1,066 3.02
Long-term debt 45,940 882 7.78 10,573 121 4.62
---------- ------- ----- ---------- ------- -----
Total interest-bearing liabilities 2,195,574 20,268 3.74 2,042,033 14,780 2.94
------- -------
NONINTEREST-BEARING LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits 405,964 358,531
Other liabilities 49,893 43,213
Shareholders' equity 262,741 259,374
---------- ----------
Total liabilities and shareholders'
equity $2,914,172 $2,703,151
========== ==========
NET INTEREST INCOME $31,553 $27,995
======= =======
NET INTEREST INCOME AS A PERCENT OF EARNING
ASSETS 4.95% 4.78%
(1) Interest income shown on actual basis and does not include taxable
equivalent adjustments.
(2) Average rates are presented on an annual basis and include taxable
equivalent adjustments to interest income of $1,511 and $1,769 for the
three months ended March 31, 1995 and 1994, respectively, based on a tax
rate of 35%.
(3) For presentation in this table, average balances and the corresponding
average rates for investment securities are based upon historical cost,
adjusted for amortization of premiums and accretion of discounts.
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PROVISION AND ALLOWANCE FOR LOAN LOSSES
Management provides for possible loan losses at a rate considered appropriate
based on judgments regarding economic conditions, historical loss experience,
the size and composition of the loan portfolio, the amount and character of
nonperforming assets, estimated future net charge-offs and other factors. A
summary of loan loss experience during the three months ended March 31, 1995
and 1994 is provided below. The provision for loan losses increased $362,000
during the first quarter of 1995 compared with the same period of 1994. The
allowance for loan losses increased $9,713,000 at March 31, 1995 compared to
the prior year primarily due to the allowance of the acquired banks and lower
net charge-offs during the past year.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended
March 31,
(In thousands) 1995 1994
- - - - - - -----------------------------------------------------------------------------------------------------------
Allowance for loan losses - beginning of period $ 24,714 $ 22,547
Allowance of Acquired Banks 7,235 ---
Charge-offs 1,507 1,309
Recoveries 1,054 907
---------- ----------
Net charge-offs 453 402
Provision for loan losses 1,420 1,058
---------- ----------
Allowance for loan losses - end of period $32,916 $23,203
Loans outstanding at period end $2,347,541 $1,799,279
Average loans outstanding during period 1,998,318 1,774,031
Allowance for loan losses as a percentage of loans outstanding at period end 1.40% 1.29%
Ratio of net charge-offs during period to average loans outstanding (annualized) 0.09 0.09
Loan loss coverage (allowance as a multiple of net charge-offs, annualized) 18.2 x 14.4 x
The Corporation maintains formal policies and procedures to monitor and control
credit risk. The Corporation's loan portfolio has no significant
concentrations in any one industry nor any exposure to foreign loans. The
Corporation has generally not extended credit to finance highly leveraged
transactions nor does it intend to do so in the future. Based on present
information, management believes the allowance for loan losses is adequate to
meet presently known risks in the loan portfolio.
Employment levels and other economic conditions in the Corporation's local
markets may have a significant impact on the level of credit losses.
Management has identified and devotes appropriate attention to credits which
may not be performing as well as expected. Nonperforming loans are further
discussed in the section entitled "Underperforming Assets."
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NONINTEREST INCOME
A summary of significant sources of noninterest income during the first three
months of 1995 and 1994 follows:
NONINTEREST INCOME Three Months Ended Changes in 1995
March 31, -----------------
(in thousands) 1995 1994 Amount Percent
- - - - - - -------------------------------------------------------------------------------------------------------------
Trust fees $2,659 $2,448 $211 8.6%
Service charges on deposit accounts 2,191 2,136 55 2.6
Bankcard fees 1,178 1,636 (458) (28.0)
Brokerage and investment fees 255 349 (94) (26.9)
Other loan income 373 471 (98) (20.8)
ATM network user fees 363 302 61 20.2
Cash management services 213 219 (6) (2.7)
Safe deposit rentals 220 192 28 14.6
Investment securities gains 91 179 (88) (49.2)
Other, net 519 561 (42) 7.5
------ ------ -----
Total noninterest income $8,062 $8,493 $(431) (5.1)
====== ====== =====
Including the effects of the four acquired banks, noninterest income in the
first quarter of 1995 decreased 5.1% over the first quarter of 1994. Bankcard
fees declined 28.0% primarily due to the discontinuance of the Travel Banking
product line in early 1995 which provided merchant discount fee income.
Brokerage fees declined 26.9% from the first quarter of 1994, due to lower
market penetration and a temporary reduction in staff. Increased volume and
improved pricing strategies resulted in higher ATM network user fees. Other
loan income decreased due to lower levels of gains on sales of mortgages to the
secondary market as compared to the same period a year ago. Safe deposit
income increased 14.6% over a year ago due in part to revenue from the four
acquired banks.
Excluding the effect of the acquisition of the four acquired banks, noninterest
income in the first quarter of 1995 decreased 11.2% from the first quarter of
1994.
NONINTEREST EXPENSE
Significant changes in noninterest expense during the first quarter of 1995
compared with the same period of 1994 are summarized in the table below.
NONINTEREST EXPENSE Three Months Ended Changes in 1995
March 31, ------------------
(in thousands) 1995 1994 Amount Percent
- - - - - - -------------------------------------------------------------------------------------------------------------
Salaries and employee benefits $14,801 $13,907 $894 6.4%
Equipment 2,245 2,064 181 8.8
Occupancy 2,045 1,992 53 2.7
FDIC insurance premiums 1,356 1,236 120 9.7
Bankcard processing 664 1,186 (522) (44.0)
Stationery and supplies 737 657 80 12.2
Postage and delivery 660 627 33 5.3
Taxes other than income taxes 675 584 91 15.6
Advertising and public relations 595 560 35 6.3
Consulting and other professional fees 378 309 69 22.3
Legal, audit and examination fees 511 497 14 2.8
Other loan fees 345 329 16 4.9
Other, net 3,068 3,509 (441) (12.6)
------- ------- ----
Total noninterest expense $28,080 $27,457 $623 2.3
======= ======= ====
Excluding the one month effect of the four acquired banks, noninterest expense
decreased 5.5% in the first quarter of 1995, compared with the first quarter of
1994.
SALARIES AND EMPLOYEE BENEFITS
The 6.4% increase in salaries and employee benefits in the first quarter of
1995 compared with the same period a year
12
13
ago primarily reflects the effects of the acquired banks. Excluding the one
month results of the acquired banks, salaries and employee benefits increased
0.5% or $63,000 during the first quarter. Cost savings attributable to staff
reductions through attrition partially offset the effects of normal merit
increases and higher health insurance and other benefit costs. Management
anticipates that the ongoing consolidation of operational functions throughout
the Corporation including the newly acquired banks will continue to mitigate
the need to replace staff lost through normal attrition.
OTHER NONINTEREST EXPENSE
The first quarter of 1995 including the results of the acquired banks,
reflected a 44.0% decrease in bankcard processing expense due to the
discontinuance of the Travel Banking product line in early 1995 which had
previously generated significant amounts of interchange and other bankcard
expense. Other expense categories, including supplies, taxes, and
miscellaneous expenses, when adjusted for the one month effect of the acquired
banks, increased only slightly when compared with the same period one year ago.
Consulting and other professional services have increased 22.3%, or $69,000 as
compared to the same period last year primarily due to system conversion costs
associated with the newly acquired banks.
INCOME TAXES
Federal income tax expense increased to $2,731,000 for the first quarter of
1995 from $1,764,000 during the same period of 1994, an increase of $1,533,000.
This increase resulted from higher pre-tax earnings and a slightly lower level
of tax-exempt interest income.
BALANCE SHEET
The Corporation had total assets of $3,384,595,000 as of March 31, 1995, an
increase of $680,772,000 or 25.2% from $2,703,823,000 as of December 31, 1994.
The newly acquired banks accounted for $730,000,000 of the increase including
a preliminary cost-in-excess of the fair value of identifiable net assets
acquired of $57,025,000. Total average earning assets amounted to
$2,668,957,000 for the quarter ending March 31, 1995, compared with
$2,500,541,000 for the quarter ending March 31, 1994, an increase of
$168,416,000 or 6.7%. Average earning assets comprised 91.6% of average total
assets during the first quarter of 1995 compared with 92.5% in the first
quarter of 1994.
INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
Total average investments, including money market investments, comprised 25.1%
of average earning assets during the first quarter of 1995, compared with 29.0%
for the same period of 1994. Average money market investment balances
increased to 4.4% of total average earning assets during the first quarter of
1995 from 1.9% during the corresponding period of 1994. Overall, decreases in
investment securities and money market investments as a percent of earning
assets resulted from the purchase of the new acquired banks and the use of
funds to support loan growth.
In December 1994, the Corporation adopted Financial Accounting Standards Board
Statement No. 119 "Disclosures about Derivative Financial Instruments and Fair
Value of Financial Instruments" ("FAS 119"). This Statement defines a
derivative as a future, forward, swap, option contract or other financial
instrument with similar characteristics. The Statement requires expanded
disclosures about these types of financial instruments. The Corporation does
not invest in derivatives or related types of financial instruments except for
Federal agency collaterized mortgage obligations and, therefore, the adoption
of this Statement did not have a material effect.
LOANS AND LEASES
The Corporation extends credit primarily within the market areas of its seven
banking subsidiaries; six located in Michigan and one in Illinois. The loan
portfolio is widely diversified by borrowers and industry groups with no
significant concentrations in any industry. Total average loans increased
12.6% in the first quarter of 1995 compared with the same period of 1994 (1.3%
excluding the purchase of the newly acquired banks). The real estate loan
portfolio decreased due to lower new loan volume and sale of mortgages in 1994
while the commercial and consumer loan portfolios increased.
UNDERPERFORMING ASSETS
Effective January 1, 1995 the Corporation adopted Financial Accounting
Standards Board Statements No. 114 and 118, "Accounting by Creditors for
Impairment of a Loan". The Statements require impaired loans be carried at
their market value which is determined by market quotes, if available; the fair
value of the underlying collateral, if collateral dependent; or the present
value of expected future cash flows discounted at the loan's contractual
effective interest rate. An allowance for loan losses is maintained by the
Corporation for all deficiencies on the loans for the amount of the difference
between the market and book value of the loan. The Corporation's income
recognition policy on loan interest and fee income remains unchanged with the
adoption of the Statements.
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At March 31, 1995, loans considered to be impaired under the Statements
totalled $22,235,000 (of which $11,651,000 were on a nonaccrual basis).
Included within this amount is $8,022,000 of impaired loans for which the
related allowance for loan losses is $1,356,000 and $14,213,000 of impaired
loans that as a result of previous write-downs, do not have an allowance for
loan losses. The average recorded investment in impaired loans during the
quarter ended March 31, 1995 was approximately $17,142,000. For the quarter
ended March 31, 1995, the Corporation recognized interest income of $360,000,
which included $198,000 of interest income recognized using the cash basis
method of income recognition.
Underperforming assets consist of nonaccrual loans, restructured loans, loans
90 days past due and still accruing interest, and other real estate owned.
Certain of these loans are considered to be impaired under the Statements. The
Corporation maintains policies and procedures to identify and monitor
nonaccrual loans. A loan (including a loan impaired under the Statements) is
placed on nonaccrual status when there are doubts regarding collection of
principal or interest, or when principal or interest is past due 90 days or
more and the loan is not well secured and in the process of collection.
Interest accrued but not collected is reversed and charged against income when
the loan is placed on nonaccrual status.
Other real estate owned is comprised of property acquired through a foreclosure
proceeding or acceptance of a deed-in-lieu of foreclosure and loans classified
as in-substance foreclosure. In accordance with the Statements, a loan is
classified as in-substance foreclosure when the Corporation has taken
possession of the collateral regardless of whether formal foreclosure
proceedings take place. Loans previously classified as in-substance foreclosure
but for which the Corporation has not taken possession of the collateral are
classified in loans. In 1993, the Corporation amended its disclosure policy for
assets in-substance foreclosed to comply with new regulatory guidelines. As a
result, loans previously classified as in-substance foreclosure but for which
the Corporation had not taken possession of the collateral were reclassified as
nonaccrual real estate mortgage loans. This reclassification did not impact the
Corporation's financial condition or results of operations.
The table below provides a summary of underperforming assets as of March 31,
1995, December 31, 1994 and March 31, 1994. Total underperforming assets
amounted to $23,599,000 as of March 31, 1995, compared with $21,938,000 as of
December 31, 1994 and $23,868,000 as of March 31, 1994. Overall,
underperforming assets increased from December 31, 1994 due to increases in
the nonaccrual and other real estate owned categories primarily the result of
nonperforming assets of the acquired banks but declined as a percentage of
total loans and assets.
UNDERPERFORMING ASSETS
MARCH 31, December 31, March 31,
(in thousands) 1995 1994 1994
- - - - - - -----------------------------------------------------------------------------------------------------------
NONPERFORMING LOANS(1)
Nonaccrual
Less than 30 days past due $ 5,657 $ 5,185 $ 3,715
From 30 to 89 days past due 610 1,405 2,740
90 or more days past due 12,409 11,566 15,335
------- ------- -------
Total 18,676 18,156 21,789
Restructured 394 299 158
------- ------- -------
Total nonperforming loans 19,070 18,455 21,947
OTHER REAL ESTATE OWNED ("OREO") 3,175 2,230 1,768
------- ------- -------
Total nonperforming assets 22,245 20,685 23,716
LOANS 90 DAYS PAST DUE (STILL ACCRUING) 1,354 1,253 152
------- ------- -------
Total underperforming assets $23,599 $21,938 $23,868
Nonperforming loans as a percent of total loans 0.81% 1.02% 1.22%
Nonperforming assets as a percent of total loans plus OREO 0.95 1.14 1.32
Nonperforming assets as a percent of total assets 0.66 0.77 0.86
(1) Nonperforming loans include loans on which interest is recognized only
upon receipt (nonaccrual) and those on which interest has been
renegotiated to lower than market rates because of the financial
condition of the borrowers (restructured).
Employment levels and other economic conditions in the Corporation's local
markets can impact the level and composition of underperforming assets. In a
deteriorating or weak economy, higher levels of nonperforming assets,
charge-offs and provisions for loan losses could result which may adversely
impact the Corporation's results.
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In addition to nonperforming loans, management identifies and closely monitors
other credits that are current in terms of principal and interest payments but,
in management's opinion, may deteriorate in quality if economic conditions
change. As of March 31, 1995 such credits amounted to $20,968,000 or 0.9% of
total loans, compared with $15,257,000 or 0.8 % at December 31, 1994 and
$18,935,000 or 1.1% as of March 31, 1994.
DEPOSITS
The Corporation gathers deposits primarily in its local markets and
historically has not relied on brokered funds to sustain liquidity. Average
deposits increased 7.9% in the first quarter of 1995 over the same period in
1994 (decline of 0.5% excluding the newly acquired banks). The shift in
customer preferences from savings deposits to other deposit alternatives
reflects changing customer liquidity preferences and the desire for higher
interest rates. Management seeks to maintain core deposit stability by
offering customers a wide range of deposit products at competitive rates.
SHORT-TERM BORROWINGS AND LONG-TERM DEBT
On average, total short-term borrowings declined to $131,220,000 during the
first quarter of 1995 compared with $143,296,000 during the same period of
1994. To finance the acquisition of the acquired banks, the Corporation's
Parent company obtained $115,000,000 in long-term debt financing. The Parent
services the debt's scheduled principal and interest payments with dividends
from the subsidiary banks. In addition, long-term debt of $4,561,000 existing
on the acquisition date at the acquired banks was assumed by the Corporation as
part of the acquisition. The transaction resulted in average long-term debt
balances increasing to $45,940,000 during the first quarter of 1995 from
$10,573,000 for the same period of 1994.
CAPITAL RESOURCES
REGULATORY CAPITAL REQUIREMENTS
Bank holding companies, such as the Corporation, and their bank subsidiaries
are required by banking regulators to meet certain minimum levels of capital
adequacy. These are expressed in the form of certain ratios. Capital is
separated into Tier I capital (essentially common stockholders' equity less
goodwill) and Tier II capital (essentially the allowance for loan losses
limited to 1.25% of risk-weighted assets). The first two ratios, which are
based on the degree of credit risk in the company's assets, provide for
weighting assets based on assigned risk factors and include off-balance sheet
items such as loan commitments and stand-by letters of credit. The ratio of
Tier I capital to risk-weighted assets must be at least 4.0% and the ratio of
Total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must
be at least 8.0%. The capital leverage ratio supplements the risk-based
capital guidelines. Banks and bank holding companies are required to maintain
a minimum ratio of Tier 1 capital to adjusted quarterly average total assets of
3.0%
The FDIC, the insurer of deposits in financial institutions, has adopted a
risk-based insurance premium system based in part on an institution's capital
adequacy. Under this system, a depository institution is classified into one
of three capital categories (well-capitalized, adequately capitalized or
undercapitalized) according to its risk-based capital and leverage ratios and
is required to pay successively higher premiums depending on its capital levels
and its supervisory rating by its primary regulator. It is the Corporation's
intention to maintain sufficient capital in each of its bank subsidiaries to
permit them to maintain a "well capitalized" designation (the FDIC's highest
rating).
As summarized below, the Corporation's risk based capital levels were well in
excess of all regulatory standards.
CAPITAL RATIOS Regulatory
Minimum
For "Well MARCH 31, December 31, March 31,
Capitalized" 1995 1994 1994
- - - - - - ---------------------------------------------------------------------------------------------------------
Risk based capital:
Tier I 6.0% 8.3 13.4 12.6
Total capital 10.0 9.6 14.7 13.8
Tier I leverage 5.0 7.0 9.5 8.7
COMMON AND PREFERRED STOCK
The Corporation maintains a stock repurchase program initiated in November
1987. During the first quarter of 1995, no shares were repurchased under this
program. As of March 31, 1995, a total of 1,132,470 shares have been
repurchased under this program at an average price per share of $14.31.
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OTHER
Total shareholders' equity was $269,571,000 or $19.06 per share as of March 31,
1995, compared with $258,730,000 or $18.31 per share as of December 31, 1994
and $254,016,000 or $18.06 per share as of March 31, 1994. The Corporation
declared cash dividends of $0.21 per share during the first quarter of 1995, an
increase of 10.5% over the $0.19 per share declared during the same period in
1994.
LIQUIDITY AND DEBT CAPACITY
The level of liquid assets available to meet ongoing funding needs and to
capitalize on opportunities for business expansion is closely monitored by
management. It is management's intent to maintain adequate liquidity so that
sufficient funds are readily available at a reasonable cost. Various
techniques are used by the Corporation to measure liquidity, including ratio
analysis. Some ratios monitored by the Corporation include: average loans to
deposits; total liquid assets (including cash, U.S. Treasury securities and
short-term investments) to total deposits; and, total long-term debt to
equity. These ratios are summarized in the table below.
KEY LIQUITY RATIOS MARCH 31, December 31, March 31,
1995 1994 1994
- - - - - - ------------------------------------------------------------------------------------------------------
Quarterly average:
Loans to deposits 82.4% 80.0% 78.9%
Liquid assets to deposits 18.8 19.1 17.9
Total long-term debt to equity 45.8 2.0 3.9
With the acquired banks, the Corporation's quarterly average loan to deposit
ratio increased to 82.4% at March 31, 1995 from 80.0% at December 31, 1994.
The acquisition was funded from the proceeds of long-term debt financing of
$115 million through the Corporation's parent company. The funding increased
the long-term debt to equity ratio to 45.8% at March 31, 1995 from 2.0% at
December 31, 1994. The parent will service the scheduled principal and
interest payments with dividends from the Corporation's subsidiary banks.
Management believes that the Corporation has sufficient liquidity to meet
presently known cash flow requirements arising from ongoing business
transactions.
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INTEREST RATE RISK
Interest rate risk generally arises when the maturity or repricing structure of
the Corporation's assets and liabilities differs significantly.
Asset/liability management, which among other things addresses such risk, is
the process of developing, testing and implementing strategies that seek to
maximize net interest income, maintain liquidity and minimize exposure to
significant changes in interest rates. This process includes monitoring the
contractual and anticipated repricing of assets and liabilities as well as
simulating net interest income under a variety of economic assumptions and
balance sheet configurations. Generally, management seeks a structure that
insulates net interest income and capital from large swings caused by changes
in interest rates. The Corporation's static interest rate sensitivity ("GAP")
as of March 31, 1995 is illustrated in the table on the following page. As
shown, the Corporation was in an "asset sensitive" position (had more rate
sensitive assets than rate sensitive liabilities) of $252 million within the
one year time frame. Traditional GAP analysis does not incorporate
adjustments for the magnitude or timing of noncontractual repricing. Because
of these and the other inherent limitations of GAP analysis, management also
uses simulation modeling to evaluate the impact of changes in interest rates
and balance sheet configurations. Such simulations can be used to develop
strategies which can limit interest rate risk and provide adequate liquidity.
INTEREST RATE SENSITIVITY
Multiple of Rate
Rate Sensitive Rate Sensitive Sensitive Assets
(in millions) Assets Liabilities Period Gap to Liabilities
- - - - - - ------------------------------------------------------------------------------------------------------------
March 31, 1995
Repricing or maturing:
Within 30 days $ 972 $ 720 $252 1.35
31-90 Days 125 193 (68) 0.65
91-180 Days 151 184 (33) 0.82
181-365 Days 318 217 101 1.47
------ ------ ----
TOTAL WITHIN 1 YEAR 1,566 1,314 252 1.19
1-5 Year 1,173 453 720 2.59
Over 5 years 359 832(1) (473) 0.43
------ ------ ----
Total $3,098 $2,599 $499 1.19
====== ====== ====
December 31, 1994
Total within 1 year 2,501 1,988 513 1.26
March 31, 1994
Total within 1 year 2,524 2,084 440 1.21
(1) Includes savings deposits of $511 million with no contractual repricing
schedule. These deposit totals have generally not fluctuated in response
to changes in market rates of other deposit alternatives.
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PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On February 28, 1995 the Corporation completed the acquisition of the four
affiliate banks of Banc One Corporation in East Lansing, Fenton, Sturgis and
Ypsilanti, Michigan in a cash transaction for $115 million. The four branches
have a combined asset base of $730 million and operate 21 branches. The banks
were merged into Citizens Commercial and Savings Bank headquartered in Flint,
Michigan the Corporation's lead bank in the holding company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 3. Exhibits:
(11) Statement re: computation of per share earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K
During the three month period ending March 31, 1995, a report was filed
on Form 8-K under Item 5, Other Events. The report dated February 28,
1995 and filed on March 13, 1995 announced the acquisition of the four
Michigan subsidiaries of Banc One Corporation.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIZENS BANKING CORPORATION
Date May 12, 1995 By /s/ John W. Ennest
-------------------------------------------
John W. Ennest
Vice Chairman of the Board, Treasurer
and Chief Financial Officer
(Principal Financial and Accounting Officer)
(Duly Authorized Signatory)
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
- - - - - - ----------- ----------- ----
11 Statement re: computation
of per share earnings
27 Financial Data Schedule