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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN
PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential For Use of the
[X] Definitive Proxy Statement Commission Only (as permitted
[ ] Definitive Additional Materials by Rule 14a-6(e)(2)
[ ] Soliciting Material Pursuant
to Section 240.14a-11(c) or
Section 240.14a-12
CITIZENS BANKING CORPORATION
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 2(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on
which the filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
1) Amount Previously Paid:
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4) Date Filed:
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[CITIZENS BANKING CORPORATION LETTERHEAD]
March 14, 1996
To The Shareholders:
The annual meeting of shareholders of Citizens Banking Corporation will be
held in the Carriage Hall Room of the Radisson Riverfront Hotel Flint, One
Riverfront Center West, Flint, Michigan 48502, on Tuesday, April 16, 1996, at
10:00 a.m., local time, in accordance with the provisions of our bylaws.
You are cordially invited to attend this meeting. It is important that
your shares be represented, regardless of the number you own. Therefore, we
request that you please date, sign and return your proxy promptly in the
enclosed envelope whether or not you plan to attend the meeting. Voting by
proxy will not affect your ability to attend the meeting or to change your
vote.
Sincerely yours,
Charles R. Weeks
Charles R. Weeks
Chairman and Chief
Executive Officer
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[CITIZENS BANKING CORPORATION LETTERHEAD]
THOMAS W. GALLAGHER
Senior Vice President, General
Counsel and Secretary
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS, APRIL 16, 1996
To the Shareholders of Citizens Banking Corporation:
Notice is hereby given that the annual meeting of shareholders of Citizens
Banking Corporation (the "Corporation") will be held in the Carriage Hall Room
of the Radisson Riverfront Hotel Flint, One Riverfront Center West, Flint,
Michigan 48502, on Tuesday, April 16, 1996, at 10:00 a.m., local time, for the
following purposes:
(1) To elect six (6) Class I directors to serve a three (3) year term and
until their successors are duly elected and qualify.
(2) To transact such other business as may properly come before the
meeting or any adjournment or adjournments thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE DIRECTORS
NOMINATED.
Shareholders of record of the Corporation's common stock outstanding at
the close of business on February 29, 1996 are entitled to notice of and to
vote at the meeting.
You are invited to attend this meeting. Please date, sign and return your
proxy promptly in the enclosed, stamped envelope whether or not you plan to be
present at the meeting. You may still vote in person if you attend the
meeting.
By Order of the Board of Directors
Thomas W. Gallagher
Thomas W. Gallagher
Secretary
Flint, Michigan
March 14, 1996
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[CITIZENS BANKING CORPORATION LETTERHEAD]
Citizens Banking Corporation
One Citizens Banking Center
328 S. Saginaw St.
Flint, Michigan 48502
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PROXY STATEMENT
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This proxy statement is furnished in connection with the solicitation of
proxies by the board of directors of Citizens Banking Corporation (the
"Corporation") to be used at the annual meeting of shareholders of the
Corporation and any adjournments thereof. The annual meeting will be held on
April 16, 1996 at the time and place and for the purposes set forth in the
accompanying notice of annual meeting of shareholders.
This proxy statement, the proxy and notice of annual meeting of
shareholders are first being provided to shareholders on or about March 14,
1996.
The shareholders of the common stock of the Corporation ("Common Stock")
as of the close of business on February 29, 1996 will be entitled to be present
and to vote at the meeting. Each share is entitled to one (1) vote on each
matter to be voted upon at the meeting. On February 29, 1996, there were
14,356,835 shares of Common Stock outstanding and entitled to vote. The
Corporation has no other class of stock issued and outstanding at this time
that is entitled to vote at the meeting. The board of directors requests that
you execute and return the proxy promptly, whether or not you plan to attend
the meeting. The shares represented by properly executed proxies will be voted
in accordance with the instructions provided therein and where no instructions
are given, will be voted in favor of the election of the Class I directors
identified herein. Any proxy may be revoked by the person giving it at any
time prior to its being exercised by giving written notice of such revocation
to the secretary of the Corporation, by executing a later dated proxy or by
voting in person at the annual meeting.
The costs of soliciting proxies will be borne by the Corporation. The
solicitation of proxies will be made primarily by mail. The Corporation has,
however, retained the firm of Kissel-Blake Inc., specialists in proxy
solicitation, to solicit proxies on its behalf from brokers, bank nominees, and
other institutional holders of its stock at an anticipated cost of $6,500 plus
certain out-of-pocket expenses. Proxies may also be solicited by directors,
officers, and other employees of the Corporation and its subsidiaries
personally, and by telephone, facsimile, or other means. No additional
compensation will be paid to directors, officers, or employees for any such
solicitation nor will any such solicitation result in more than a minimal cost
to the Corporation. Arrangements may also be made directly by the Corporation
with banks, brokerage houses, custodians, nominees, and fiduciaries to forward
solicitation material to the beneficial owners of stock held of record by them
and to obtain authorization for the execution of proxies. The Corporation may
reimburse such institutional holders for reasonable expenses incurred by them
in connection therewith.
The persons named in the proxy to represent shareholders who are present
by proxy at the meeting are Patricia L. Learman and George H. Kossaras.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below includes all of the shareholders of the Corporation known
by the Corporation to beneficially own more than five percent of its Common
Stock as of December 31, 1995.
COMMON STOCK
INVESTMENT POWER VOTING POWER BENEFICIALLY OWNED
----------------------------- ----------------------------- AS A PERCENTAGE OF
NAME AND ADDRESS OF COMMON STOCK SOLE SHARED NONE SOLE SHARED NONE OUTSTANDING COMMON
BENEFICIAL OWNER BENEFICIALLY OWNED STOCK
Citizens
Commercial &
Savings Bank
328 S. Saginaw St.
Flint, Michigan
48502(1) 1,969,745 715,078 1,253,717 950 844,065 1,072,328 53,352 13.742%
CenTra, Inc.
12225 Stephens
Warren, Michigan
48089(2) 1,736,061 1,722,381 13,680 -0- 1,722,381 13,680 -0- 12.112%
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(1)As sole or co-fiduciary, Citizens Commercial & Savings Bank will generally
vote the shares held by it in trusts or estates in which the indenture creating
the same grants such power. Shares held in all other trusts or estates in
which the bank acts as co-fiduciary will generally be voted by the other
co-fiduciary or by the bank at the direction of such co-fiduciary.
(2)The information furnished for CenTra, Inc. is based upon data which have been
supplied to the Corporation by CenTra, Inc. As set forth in the table, CenTra,
Inc. shares investment and voting power with respect to 13,680 shares. The
persons with whom such powers are shared and the amounts attributable to each
such person are as follows: Matthew T. Moroun, 102; Nora M. Moroun, 100 and
the Manuel J. Moroun Trust under agreement dated March 4, 1977, for the benefit
of Manuel J. Moroun, 13,478.
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SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the number of shares of the Corporation's
Common Stock beneficially owned as of December 31, 1995, together with the
percentage of the outstanding shares which such ownership represents, by (i)
each director and nominee for election to the board of directors, (ii) each
executive officer named in the Summary Compensation Table set forth on page 14
of this proxy statement and (iii) all directors and executive officers of the
Corporation as a group. The information with respect to directors and
executive officers has been obtained from the respective individuals and is
reported in accordance with the beneficial ownership rules of the Securities
and Exchange Commission (the "Commission") under which a person may be deemed
to be the beneficial owner of a security if such person has or shares voting
power or investment power with respect to such security or has the right to
acquire such ownership within the next 60 days. Accordingly, the amounts shown
in the following table do not purport to represent beneficial ownership for any
purpose other than compliance with the Commission's reporting requirements.
Common Stock
BENEFICIALLY OWNED
COMMON STOCK AS A PERCENTAGE OF
BENEFICIALLY OWNED OUTSTANDING COMMON
AS OF DECEMBER 31, SOLE VOTING AND SHARED VOTING AND STOCK AS OF
NAME 1995 DISPOSITIVE POWER DISPOSITIVE POWER DECEMBER 31, 1995
Edward P. Abbott 11,802 11,712 90 .082%
Hugo E. Braun Jr. 14,136 14,136 -0- .099%
Jonathan E. Burroughs II(1) 202,094 158,437 43,657 1.410%
Gary O. Clark(2) 116,680 94,964 21,716 .784%
Joseph P. Day 1,510 1,510 -0- .011%
John W. Ennest(3) 156,173 156,173 -0- 1.081%
Lawrence O. Erickson 281,565 1,000 280,565 1.964%
Victor E. George 4,016 4,016 -0- .028%
William J. Hank(4) 279,530 118,512 161,018 1.947%
George H. Kossaras 49,441 14,684 34,757 .345%
Patricia L. Learman 4,118 1,300 2,818 .029%
William F. Nelson Jr. 5,652 4,852 800 .039%
Paul A. Rowley 3,294 2,112 1,182 .023%
William C. Shedd 5,314 1,792 3,522 .037%
David A. Thomas Jr.(5) 55,548 55,548 -0- .387%
James E. Truesdell Jr. 26,842 1,000 25,842 .187%
Robert J. Vitito(6) 148,416 113,335 35,081 1.029%
Charles R. Weeks(7) 183,905 179,600 4,305 1.276%
Kendall B. Williams 1,812 1,212 600 .013%
All Directors and
Executive Officers as a
Group (23)(8) 1,762,450 11.829%
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(1) The shares shown for Mr. Burroughs II, include: 28,794 shares
held in the Burroughs' Memorial Trust, to which Mr. Burroughs II serves as
one of 5 trustees. Mr. Burroughs II disclaims beneficial ownership of
such shares.
(2) Includes 49,461 exercisable options to purchase Common Stock.
(3) Includes 118,319 exercisable options to purchase Common Stock.
(4) Includes 23,842 exercisable options to purchase Common Stock.
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(5)Includes 31,632 exercisable options to purchase Common Stock.
(6)Includes 85,715 exercisable options to purchase Common Stock.
(7)Includes 82,560 exercisable options to purchase Common Stock.
(8)The directors and executive officers disclaim beneficial ownership of 206,354
of these shares. Also, of the 1,762,450 shares shown as being beneficially
owned by such group, 565,972 represent exercisable options to purchase Common
Stock.
ELECTION OF DIRECTORS
In accordance with the Corporation's restated articles of incorporation,
the board of directors is divided into three classes. Each year, on a rotating
basis, the terms of office of the directors in one of the three classes will
expire. Successors to the class of directors whose terms have expired will be
elected for a three-year term. The directors whose terms expire at the 1996
annual meeting of shareholders ("Class I directors") are Edward P. Abbott, Hugo
E. Braun Jr., Jonathan E. Burroughs II, Lawrence O. Erickson, William J. Hank,
and Robert J. Vitito. Upon the recommendation of the directors nominating
committee, the board of directors has nominated each of these individuals for
re-election as Class I directors at the 1996 annual meeting of shareholders for
a term expiring at the 1999 annual meeting of shareholders or upon the election
and qualification of their successors. If any of the nominees should be unable
to serve, the proxies may be voted for the election of such other person or
persons as the board of directors may recommend or the number of directors will
be automatically reduced by the number of nominees unable to serve if no
substitute is recommended by the board of directors.
Six nominees will be elected as Class I directors at the 1996 annual
meeting of shareholders. On the basis of information presently available to
the board of directors, only the six persons named above as nominees will be
nominated for election as directors. Shares represented by proxies in the
accompanying form will be voted for the election of such nominees unless a
contrary direction is indicated. The affirmative vote of a plurality of the
votes cast at the meeting is required for election. THE BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS A VOTE FOR EACH OF THE NOMINEES.
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The name and age of each nominee and incumbent director, positions and
offices with the Corporation and its subsidiaries, his or her five-year
business experience, and the year each became a director of the Corporation,
according to information furnished by such nominees and incumbent directors,
are set forth below.
CLASS I
NOMINEES TO SERVE THREE (3) YEARS
BUSINESS EXPERIENCE DURING THE PAST
FIVE YEARS, DIRECTORSHIPS IN CERTAIN
POSITIONS AND OFFICES SERVED CONTINUOUSLY CORPORATIONS, AND PRINCIPAL
WITH CORPORATION AND AS A DIRECTOR OF OCCUPATIONS IF OTHER THAN WITH
NAME AGE ITS SUBSIDIARIES CORPORATION CORPORATION AND ITS SUBSIDIARIES
Edward P. Abbott 56 Director of 1982 President and Chief Executive
Corporation; Director, Officer, Abbott's Meat, Inc., a
Citizens Commercial & wholesale and retail meat
Savings Bank. distributor.
Hugo E. Braun Jr. 63 Director of 1986 Attorney & Partner, Braun
Corporation; Director, Kendrick Finkbeiner; Director
Second National Bank of Wolohan Lumber Co.
Saginaw.
Jonathan E. 53 Director of Corporation. 1986 President, JEB Enterprises, an
Burroughs II investment consulting firm.
Lawrence O. Erickson 60 Director of 1993 Chief Executive Officer, Four-
Corporation; Director, Way Tool & Die, Inc., an
National Bank of Royal engineering consulting firm for
Oak. metal stamping fabrication and
tool manufacturing.
William J. Hank 63 Director of 1987 Chairman and Chief Executive,
Corporation; Director, Farnham Investments Group;
Commercial National Retired Executive Vice
Bank of Berwyn. President, Citizens Banking
Corporation; Retired Chairman of
the Board, Commercial National
Bank of Berwyn.
Robert J. Vitito 52 President, Chief 1991
Administrative Officer
and Director of
Corporation; Chairman
of the Board, Second
National Bank of
Saginaw; Director,
Citizens Commercial &
Savings Bank; Director,
Second National Bank of
Bay City; Director,
State Bank of Standish;
Director, Grayling
State Bank.
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CLASS II
CONTINUING DIRECTORS - TERM EXPIRING IN 1997
BUSINESS EXPERIENCE DURING THE PAST
FIVE YEARS, DIRECTORSHIPS IN CERTAIN
POSITIONS AND OFFICES SERVED CONTINUOUSLY CORPORATIONS, AND PRINCIPAL
WITH CORPORATION AND AS A DIRECTOR OF OCCUPATIONS IF OTHER THAN WITH
NAME AGE ITS SUBSIDIARIES CORPORATION CORPORATION AND ITS SUBSIDIARIES
Joseph P. Day 56 Director of 1992 President, Banner Engineering &
Corporation, Director, Sales, Inc., a combustion
Second National Bank engineering and manufacturing firm.
of Saginaw.
John W. Ennest 53 Vice Chairman of the 1991
Board, Chief Financial
Officer, and Treasurer
of Corporation;
Director, Citizens
Commercial & Savings
Bank; Director Second
National Bank of
Saginaw; Chairman of
the Board, Commercial
National Bank of
Berwyn.
Victor E. George 64 Director of 1982 Chairman of the Board, Victor
Corporation; Chairman George Oldsmobile, Inc., an
of the Board, Citizens automobile dealership.
Commercial & Savings
Bank.
George H. Kossaras 68 Director of 1982 President, Spring's Drugs Store,
Corporation; Director, Inc., a retail drug store.
Citizens Commercial & Savings
Bank.
Patricia L. Learman 68 Director of 1986 Attorney
Corporation; Director,
Second National
Bank of Saginaw.
Paul A. Rowley 68 Director of 1994 President and Part Owner,
Corporation; Director, Rowley Brothers, Inc., a
Second National Bank wholesale distributor of
of Bay City. automotive aftermarket
products.
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CLASS III
CONTINUING DIRECTORS - TERM EXPIRING IN 1998
BUSINESS EXPERIENCE DURING THE PAST
FIVE YEARS, DIRECTORSHIPS IN CERTAIN
POSITIONS AND OFFICES SERVED CONTINUOUSLY CORPORATIONS, AND PRINCIPAL
WITH CORPORATION AND AS A DIRECTOR OF OCCUPATIONS IF OTHER THAN WITH
NAME AGE ITS SUBSIDIARIES CORPORATION CORPORATION AND ITS SUBSIDIARIES
William F. Nelson Jr. 62 Director of 1986 President, Director, and Owner,
Corporation; William F. Nelson Electric, Inc.,
Director, Second an electrical contractor for
National Bank of commercial and industrial
Saginaw. businesses.
William C. Shedd 56 Director of 1982 Attorney and Partner,
Corporation; Winegarden, Shedd, Haley,
Director, Citizens Lindholm & Robertson.
Commercial &
Savings Bank.
David A. Thomas Jr. 59 Vice Chairman of 1991
the Board of
Corporation;
President, Chief
Executive Officer
and Director,
Citizens Commercial
& Savings Bank;
Director, National
Bank of Royal Oak.
James E. Truesdell Jr. 65 Director of 1982 President-Secretary, J. Austin
Corporation; Oil Company of Flint, Inc., an
Director, Citizens investment and real estate
Commercial & development firm.
Savings Bank.
Charles R. Weeks 61 Chairman of the 1982 Director, Wolohan Lumber Co.
Board and Chief
Executive Officer
of Corporation;
Vice Chairman of
the Board, Citizens
Commercial &
Savings Bank;
Director, Second
National Bank of
Saginaw.
Kendall B. Williams 43 Director of 1992 Attorney and Vice President,
Corporation; Gault Davison, P.C.
Director, Citizens
Commercial &
Savings Bank.
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MEETINGS OF DIRECTORS
During calendar year 1995, four (4) regular meetings and two (2) special
meetings of the board of directors were held. During such period, all
incumbent directors attended at least 75% of the aggregate of the number of
meetings of the board of directors and the number of meetings held by the
committees on which they serve.
COMMITTEES OF THE BOARD OF DIRECTORS
The Corporation has several committees on which members of the board of
directors serve, including an audit committee, a compensation and benefits
committee, and a directors nominating committee. The audit committee meets
quarterly and on call when needed, and the compensation and benefits committee
and directors nominating committee meet on call.
The AUDIT COMMITTEE met 4 times during 1995 and is currently comprised of
the following outside directors: George H. Kossaras, Chairman; Edward P.
Abbott; Joseph P. Day; Patricia L. Learman; William F. Nelson Jr.; and James E.
Truesdell Jr. The responsibilities of the committee are: to oversee the
internal accounting controls for the Corporation and its subsidiaries; to
oversee the internal audit function of the Corporation and its subsidiaries; to
recommend to the board of directors the independent auditors to be retained to
conduct the annual audit of the Corporation; to review the annual audit plan
with the independent auditors and the internal auditors; to review the results
of internal audit examinations and management's responses thereto; to review
the financial results and the results of the independent audit, including
"Management Letter" comments; to prepare summary reports to the board of
directors together with any recommendations for action; to review the non-audit
services performed by the independent auditors to ensure that performance of
such services does not impair the independence of the auditors; to oversee
special investigations; to review with management the programs and procedures
to avoid conflicts of interest, as well as those covering other aspects of
business ethics; to review annually the performance of the general auditor; and
to handle such other matters as may be properly delegated to the committee by
the board of directors.
The COMPENSATION AND BENEFITS COMMITTEE met 6 times during 1995 and is
currently comprised of the following directors: Hugo E. Braun Jr., Chairman;
Lawrence O. Erickson; Victor E. George; James E. Truesdell Jr.; and Kendall B.
Williams. The responsibilities of the committee are: to approve all aspects
of corporate executive compensation such as merit increases, salary ranges, and
special employment or post employment arrangements; to determine and grant
awards under the Corporation's Second Amended Stock Option Plan and to amend or
change the Plan within the parameters of the Plan and as permitted by law; to
review and approve adjustments to the Corporation's annual Management Incentive
Plan target as well as awards under such Plan; to approve amendments or changes
to the pension plan and to review the actions of the pension plan
administrative committee; to approve amendments or changes to the Corporation's
Directors Deferred Compensation Plan; to approve amendments and changes to
other employee benefit plans of the Corporation including welfare, defined
benefit, defined contribution and deferred income plans; to review other
corporate-wide benefit plans and to determine their appropriateness and
dimensions; to approve any salary reduction plan or any other employee stock
purchase, savings, pension, profit sharing, or similar benefit plan or
amendments to such plans which authority and powers shall extend to the
issuance of stock in connection with such plans; and to handle such other
matters as may be properly delegated to the committee by the board of
directors.
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The DIRECTORS NOMINATING COMMITTEE met 1 time during 1995 and is currently
comprised of the following directors: Charles R. Weeks, Chairman; Hugo E.
Braun Jr.; Jonathan E. Burroughs II; Victor E. George; and Paul A. Rowley. The
responsibilities of the committee are: to determine a desirable balance of
expertise among board members; to identify qualified candidates to fill board
positions; to provide aid in attracting qualified candidates to the board of
directors; to recommend the slate of director nominees to the board of
directors for inclusion in the Corporation's proxy statement for election by
the shareholders at the annual meetings; to consider director nominees proposed
by shareholders; and to handle such other matters as may be properly delegated
to the committee by the board of directors. Shareholders proposing director
nominees shall provide written notice of such intention to the president or
secretary of the Corporation at least thirty days prior to the shareholders
meeting for which such nominations are proposed and shall, in accordance with
the bylaws of the Corporation, provide for each such nominee all of the
information that would be required under the rules of the Commission in a proxy
statement soliciting proxies for the election of such nominees as directors of
the Corporation.
COMPENSATION OF DIRECTORS
During 1995, directors of the Corporation were paid an annual retainer of
$6,000 plus the sum of $900 for attendance at each meeting of the board of
directors. Non-officer directors were paid $600 for each committee meeting
attended with the exception of the committee chairpersons who were paid $900.
Committee member directors who are also employees of the Corporation do not
receive fees for committee meeting attendance.
The Corporation also maintains the Stock Option Plan for Directors.
Annually during the ten year term of the Plan, each nonemployee director
serving on the board of directors immediately following an annual meeting of
shareholders will receive an automatic grant of a non-qualified stock option to
purchase 1,000 shares of Common Stock at an exercise price equal to the fair
market value per share of Common Stock on the date of the annual meeting of
shareholders. Each such option will become exercisable in full six months
following the grant date and expire five years after grant. On April 18, 1995,
pursuant to the Plan nonemployee directors received a stock option grant to
purchase 1,000 shares of Common Stock of the Corporation at an exercise price
of $26.50 per share.
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EXECUTIVE OFFICERS
Below is a current listing of executive officers of the Corporation
setting forth the name, age, five year business experience and year each became
an executive officer of the Corporation. Executive officer appointments are
made or reaffirmed annually at the meeting of the board of directors
immediately following the annual meeting of shareholders. The board of
directors may also make executive officer appointments at other times
throughout the year.
YEAR BECAME
EXECUTIVE OFFICER
NAME AGE FIVE-YEAR BUSINESS EXPERIENCE OF THE CORPORATION
Charles R. Weeks 61 Chairman of the Board of 1982
Corporation (June 1994 -
Present); Chief Executive
Officer of Corporation
(September 1982 - Present);
President of Corporation
(September 1982 - June
1994); Vice Chairman of the
Board, Citizens Commercial &
Savings Bank (June 1987 -
Present); Director, Citizens
Commercial & Savings Bank
(September 1982 - Present);
Director, Second National
Bank of Saginaw (December
1985 - Present); Director,
Commercial National Bank of
Berwyn (May 1987 - November
1991).
Robert J. Vitito 52 President and Chief 1986
Administrative Officer of
Corporation (July 1994 -
Present); Executive Vice
President of Corporation
(July 1986 - July 1994);
Director of Corporation and
Citizens Commercial &
Savings Bank (October 1991 -
Present); Chairman of the
Board, Second National Bank
of Saginaw (January 1987 -
Present); Chairman of the
Board, President and Chief
Executive Officer, Second
National Bank of Saginaw
(January 1987 - February
1995); Director, Second
National Bank of Bay City
(January 1987 - Present);
Director, State Bank of
Standish (December 1988 -
Present); Director, Grayling
State Bank (December 1988 -
Present).
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YEAR BECAME
EXECUTIVE OFFICER
NAME AGE FIVE-YEAR BUSINESS EXPERIENCE OF THE CORPORATION
John W. Ennest 53 Vice Chairman of the Board 1983
of Corporation (October 1991
- Present); Chief Financial
Officer and Treasurer of
Corporation (July 1994 -
Present); Chairman of the
Board, Commercial National
Bank of Berwyn (August 1992
- Present); Chief Operating
Officer of Corporation
(October 1991 - July 1994);
Chief Executive Officer,
Commercial National Bank of
Berwyn (August 1992 -
February 1994); Executive
Vice President of
Corporation (March 1983 -
October 1991); Director,
Citizens Commercial &
Savings Bank (June 1987 -
Present); Director, Second
National Bank of Saginaw
(October 1991 - Present);
Director, Commercial
National Bank of Berwyn
(August 1991 - Present);
President and Chief
Executive Officer, Citizens
Commercial & Savings Bank
(June 1987 - October 1991).
David A. Thomas Jr. 59 Vice Chairman of the Board 1985
of Corporation (January 1995
- Present); Executive Vice
President of Corporation
(December 1985 - January
1995); Director of
Corporation (October 1991 -
Present): President and
Chief Executive Officer,
Citizens Commercial &
Savings Bank (October 1991 -
Present); Director, Citizens
Commercial & Savings Bank
(June 1987 - Present);
Director, National Bank of
Royal Oak (October 1993 -
Present); Director,
Commercial National Bank of
Berwyn (November 1991 -
October 1993); Senior Credit
Officer, Citizens Commercial
& Savings Bank (January 1985
- October 1991); Senior
Executive Vice President and
Chief Operating Officer,
Citizens Commercial &
Savings Bank (April 1988 -
October 1991).
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YEAR BECAME
EXECUTIVE OFFICER
NAME AGE FIVE-YEAR BUSINESS EXPERIENCE OF THE CORPORATION
Gary O. Clark 54 Executive Vice President of 1986
Corporation (July 1986 -
Present); President, Chief
Executive Officer, and
Director, Commercial
National Bank of Berwyn
(February 1994 - Present);
Director, Citizens
Commercial & Savings Bank
(October 1991 - February
1994); Senior Executive Vice
President, Chief Operating
Officer, and Senior Credit
Officer, Citizens
Commercial & Savings Bank
(October 1991 - February
1994); President, Second
National Bank of Saginaw
(January 1987 - October
1991); Director, Second
National Bank of Saginaw
(July 1986 - October 1991).
Gary P. Drainville 45 Executive Vice President of 1985
Corporation and Citizens
Commercial & Savings Bank
(December 1993 - Present);
Director of Human Resources
of Corporation and Citizens
Commercial & Savings Bank
(December 1985 - Present);
Senior Vice President of
Corporation and Citizens
Commercial & Savings Bank
(December 1985 - December
1993).
Wayne G. Schaeffer 49 Executive Vice President of 1987
Corporation (December 1993 -
Present); Chief Financial
Officer and Treasurer of
Corporation (August 1988 -
July 1994); Senior Vice
President of Corporation
(August 1988 - December
1993); Director, Citizens
Commercial & Savings Bank
(November 1994 - Present);
Senior Executive Vice
President and Chief
Operating Officer, Citizens
Commercial & Savings Bank
(July 1994 - Present); Chief
Financial Officer, Citizens
Commercial & Savings Bank
(December 1985 - July 1994);
Executive Vice President,
Citizens Commercial &
Savings Bank (December 1993
- July 1994); Director,
Commercial National Bank of
Berwyn (November 1993 -
Present).
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YEAR BECAME
EXECUTIVE OFFICER
NAME AGE FIVE-YEAR BUSINESS EXPERIENCE OF THE CORPORATION
Nicholas J. Cilfone 45 Senior Vice President of 1985
Corporation (August 1988 -
Present); Executive Vice
President and Director,
Second National Bank of
Saginaw (October 1991 -
Present); Senior Vice
President, Citizens
Commercial & Savings Bank
(August 1985 - October
1991).
Thomas W. Gallagher 43 Senior Vice President of 1988
Corporation (July 1993 -
Present); General Counsel of
Corporation (August 1988 -
Present); Secretary of
Corporation (January 1989 -
Present); Vice President of
Corporation (August 1988 -
July 1993); Senior Vice
President and General
Counsel, Citizens Commercial
& Savings Bank (August 1988
- Present).
All of the companies identified above are subsidiaries of the Corporation.
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EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid or accrued by the Corporation and its subsidiaries, to or on
behalf of the Corporation's Chief Executive Officer and each of the four other
most highly compensated executive officers (the "Named Officers") of the
Corporation (determined as of the end of the last fiscal year) for the fiscal
years ended December 31, 1993, 1994 and 1995:
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
ANNUAL
COMPENSATION AWARDS PAYOUTS
---------------------- --------------------------------------------
NAME AND PRINCIPAL RESTRICTED STOCK OPTIONS/ LTIP ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) AWARD(S) ($) SARS(#) PAYOUTS ($) COMPENSATION(1) ($)
- ------------------ ---- ---------- --------- ---------------- -------- ----------- -------------------
Charles R. Weeks 1995 394,711 209,920 --- 36,000 --- 20,473
Chairman and Chief 1994 357,278 134,696 --- --- --- 19,378
Executive Officer 1993 336,390 121,155 273,625(2) --- 1,801,102(3) 17,232
Robert J. Vitito
President and Chief 1995 241,442 112,864 --- 51,750 --- 19,916
Administrative 1994 185,378 86,493 --- 18,679 --- 19,083
Officer 1993 159,983 80,000 --- 12,854 --- 17,232
David A. Thomas Jr. 1995 235,662 97,383 --- 49,786 --- 20,955
Vice Chairman 1994 192,072 86,493 --- 21,702 --- 20,080
1993 181,253 80,000 --- 14,936 --- 18,161
John W. Ennest
Vice Chairman,
Treasurer and 1995 234,414 90,442 --- 50,582 --- 19,982
Chief Financial 1994 225,019 86,493 --- 23,256 --- 19,108
Officer 1993 215,814 80,000 --- 15,522 --- 17,199
Gary O. Clark 1995 160,975 35,874 --- 13,165 --- 17,071
Executive Vice 1994 159,962 47,802 --- 11,463 --- 21,228
President 1993 137,783 46,544 --- 7,855 --- 31,952
- ----------------
(1)The amounts set forth in the "All Other Compensation" column for 1995
represent: (i) contributions of $6,930 to the Corporation's Amended and
Restated Section 401(k) Plan on behalf of each of the named executives to match
1995 pre-tax elective deferral contributions (included under Salary) made by
such individuals to the Plan; (ii) insurance payments with respect to term life
insurance as follows: Mr. Weeks $2,218, Mr. Vitito $1,661, Mr. Ennest $1,727,
Mr. Thomas Jr. $2,700, and Mr. Clark $1,727, and (iii) $11,325 paid to each of
the named executives for services as a director of the Corporation (except Mr.
Clark who does not serve as a director). With respect to the amount shown for
Mr. Clark, $8,414 represents relocation assistance payments.
(2)Represents the grant date market value of 11,000 shares of restricted stock
granted to Mr. Weeks during 1993. The restrictions associated with these
shares of Common Stock have been satisfied and as such, these shares have fully
vested. The shares are valued at $327,250 as of December 31, 1995, based on
the closing price per share of Common Stock on the Nasdaq Stock Market on
December 29, 1995. The other Named Officers do not hold any shares of
restricted stock of the Corporation.
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18
(3)Represents cash payment upon exercise of "phantom shares" granted to Mr.
Weeks from 1988 through 1991. The amount of such payment is equal to the
difference between the fair market value per share of Common Stock on the date
of grant and the fair market value per share of Common Stock on the date of
exercise multiplied by the number of phantom shares awarded. All of the
phantom shares granted to Mr. Weeks have been exercised.
STOCK OPTION GRANTS
The following table contains information concerning the grant of stock
options under the Corporation's Second Amended Stock Option Plan to the Named
Officers during 1995:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- ---------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS
- -------------------------------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED ANNUAL
SECURITIES OPTIONS/ RATE OF STOCK PRICE
UNDERLYING SARS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OR OPTION TERM(3)
/SARS EMPLOYEES IN BASE PRICE EXPIRATION -------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---------------------------------------------------------------------------------------------
C.R. Weeks 36,000(1) 9.27% 26.00 03/21/2005 588,646 1,491,742
R.J. Vitito 14,335(2) 3.69% 26.4375 06/09/2002 154,284 359,546
18,415(2) 4.74% 30.3750 06/09/2002 227,714 530,670
19,000(1) 4.89% 26.00 03/21/2005 310,674 787,308
D.A. Thomas Jr. 14,860(2) 3.83% 26.50 06/09/2002 160,312 373,595
18,926(2) 4.87% 30.625 06/09/2002 235,959 549,885
16,000(1) 4.12% 26.00 03/21/2005 261,620 662,996
J.W. Ennest 16,014(2) 4.12% 26.00 06/09/2002 169,501 395,010
20,068(2) 5.17% 30.625 06/09/2002 250,197 583,065
14,500(1) 3.73% 26.00 03/21/2005 237,093 600,840
G.O. Clark 8,165(2) 2.10% 29.875 06/09/2002 99,303 231,419
5,000(1) 1.29% 26.00 03/21/2005 81,756 207,186
(1)These stock options are non-qualified stock options granted pursuant to the
Second Amended Stock Option Plan of the Corporation. The options are
exercisable in whole or in part during the term thereof once vested, beginning
September 21, 1995. Generally such options become vested on a graduated basis
in accordance with a pre-determined option vesting schedule which is based upon
a rolling average 4 quarter return on average assets ratio ("ROA") for the
Corporation with a minimum vesting of 10% upon the Corporation's achieving a
1.11% ROA and a 100% vesting upon the Corporation's achieving an ROA of 1.20%.
The options granted to Mr. Weeks vest in accordance with the above described
schedule except that such options will vest fully on the last business day
preceding his retirement from the Corporation.
(2)These stock options are non-qualified stock options which were automatically
granted as reload options pursuant to the provisions of the Performance
Partnership Program ("PPP") of the Corporation which has been established under
the Corporation's Second Amended Stock Option Plan. Under the PPP, initial
grants of non-qualified stock options ("Initial Grants") were made to such
participants in 1992 in connection with their agreement to participate in the
PPP. The provisions of the PPP require a participant to contribute currently
owned shares of Common
15
19
Stock to the PPP and to subject such shares together with shares subsequently
acquired under the PPP to certain transfer restrictions. Under the PPP, the
vested portion of the Initial Grant is automatically exercised by the
administrator pursuant to an automatic stock-for-stock exchange procedure
utilizing the shares then credited to the participant's account provided that
the spread between the exercise price and the fair market value of the Common
Stock at such time will result in a gain of at least a specified number of
shares and at least six months and one day have lapsed since the last such
exercise. Each time a portion of the Initial Grant or a subsequently granted
reload option is exercised, a participant will automatically receive an
additional reload option to purchase a number of shares equal to the number of
shares received upon exercise less the number of shares realized as a gain from
the transaction. Reload options become fully exercisable six (6) months after
grant, expire June 9, 2002 and have an exercise price equal to the fair market
value per share of Common Stock on the date the reload option is granted.
(3)Such "potential realizable values" represent the value of such options at the
end of their term, assuming a 5% and 10% appreciation in the price of the
Common Stock compounded annually over the term without discounting for
inflation. The actual value of such options is dependent upon actual
appreciation in the market price of the Common Stock during the term of the
options.
OPTION/SAR EXERCISES AND HOLDINGS
The following table provides information, with respect to the Named
Officers, about the exercise of options and/or SARs during the last fiscal
year, and the unexercised options and SARs held as of the end of the fiscal
year:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT FISCAL IN-THE-MONEY OPTIONS/SARS AT
SHARES YEAR END (#) FISCAL YEAR END ($)
ACQUIRED ON VALUE -------------------------- --------------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------------
C.R. Weeks -0- -0- 82,560 28,440 935,475 106,650
R.J. Vitito 59,505 655,795 85,715 33,425 1,075,247 56,287
D.A. Thomas Jr. 48,245 412,736 31,632 31,566 108,103 47,400
J.W. Ennest 73,464 742,133 118,319 31,523 1,724,616 42,956
G.O. Clark 38,526 645,345 49,461 3,950 507,520 14,812
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PENSION PLANS
The following table shows the estimated annual pension benefits payable to
the Named Officers at normal retirement age(1) under the Corporation's qualified
defined benefit pension plan, based on remuneration that is covered under the
plan and years of service with the Corporation and its subsidiaries:
PENSION PLAN TABLE
Years of Credited Service
-----------------------------------------------
Remuneration(2) 15 20 25 30 35
- ----------------------------------------------------------------
$ 75,000 $16,000 $ 22,000 $ 27,000 $ 33,000 $ 38,000
115,000 27,000 36,000 45,000 54,000 64,000
155,000 38,000 51,000 63,000 76,000 89,000
195,000 49,000 65,000 81,000 98,000 114,000
235,000 60,000 80,000 99,000 119,000 139,000
275,000 70,000 94,000 117,000 141,000 164,000
315,000 80,000 123,000 135,000 162,000 189,000
- ------------------
(1)Normal retirement age is the later of age 65 or the fifth anniversary of the
participant's entry into the plan.
(2)The law in effect throughout calendar year 1995 limits remuneration
considered for benefit purposes to $150,000. Mr. Weeks and Mr. Thomas Jr. have
supplemental plans that pay benefits based upon earnings in excess of the
pension plan limitations, which plans are described below.
A participant's remuneration covered by the Corporation's pension plan is
his or her "average monthly compensation," which is computed over the 60
consecutive months of the participant's last 120 months in which he or she
received the greatest compensation, multiplied by 12 months. For this purpose,
compensation is defined as the participant's base salary, exclusive of bonuses,
overtime and fringe benefits, but includes the participant's 401(k) salary
reduction contributions. Covered remuneration for the named executives as of
the end of the last calendar year is $150,000 for all such named executives.
The estimated credited years of service for each named executive is as follows:
Mr. Weeks, 13; Mr. Ennest, 13; Mr. Thomas Jr., 11; Mr. Vitito, 28; and Mr.
Clark, 21. Benefits are computed as a straight single life annuity beginning
at normal retirement age and are not subject to offset for social security or
other benefits.
The Corporation has an agreement with Mr. Weeks which in part is designed
to replace certain accrued retirement benefits which he forfeited upon
termination of employment with his former employer. The agreement provides
that Mr. Weeks shall be entitled to receive a retirement benefit at age 65
equal to 48% of his highest annual base salary during his final ten years of
employment with appropriate percentage reductions in the event of early
retirement before age 65. That portion of this retirement benefit not covered
by the Corporation's pension plan is covered by a supplemental retirement
benefits plan for Mr. Weeks. Under the combined plans, the estimated annual
benefits payable to Mr. Weeks upon retirement at normal retirement age (65 in
the case of Mr. Weeks) would be approximately $210,272.
Citizens Commercial & Savings Bank, a wholly owned subsidiary of the
Corporation has an agreement with Mr. Thomas Jr. which provides that Mr. Thomas
Jr. shall be entitled to receive a retirement benefit at age 65 equal to 48% of
his average annual base salary over the consecutive 60-month period in which he
received the highest compensation during his final 120 months of employment
with appropriate percentage reductions in the event of early retirement before
age 65. That portion of the retirement benefit not covered by the
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21
Corporation's pension plan and social security are covered by a supplemental
retirement benefits plan for Mr. Thomas Jr.. Under the combined plans the
estimated annual benefits payable to Mr. Thomas Jr. upon retirement at normal
retirement age (65 in the case of Mr. Thomas Jr.) would be approximately
$113,518.
COMPENSATION AND BENEFITS COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Compensation and Benefits Committee of the board of directors of the
Corporation (the "Committee") consists of five directors who are not employed
by the Corporation and are not eligible to participate in any of the
Corporation's benefit plans other than the Stock Option Plan for Directors.
The following report is submitted by the Committee.
OVERVIEW AND PHILOSOPHY
The Committee, pursuant to authority delegated by the board of directors
of the Corporation, is responsible for determining and implementing
compensation and benefit systems for executive officers and other employees of
the Corporation. The Committee determines the annual salaries and other
compensation for executive officers based upon recommendations from the
Chairman and Chief Executive Officer, the President and Chief Administrative
Officer, as well as information from the Corporation's Human Resources
Department and independent outside consultants. The Committee's determinations
relating to executive compensation are intended to:
* align the financial interests of the executive officers with the
long term interests of the Corporation's shareholders;
* attract and retain high performing executive officers to lead the
Corporation to greater levels of profitability; and
* motivate executive officers to attain the Corporation's
performance goals by placing a significant portion of such
officers' financial reward at risk relative to achievement of
Corporate goals.
In furtherance of these objectives, the compensation package structured
for the Corporation's executive officers has three primary components: base
compensation (including salary, pension and welfare benefits and perquisites),
annual cash awards under the Management Incentive Plan ("MIP") for performance
during the previous year, and long term, stock-based compensation generally
awarded under the Corporation's Second Amended Stock Option Plan (the "Option
Plan").
BASE COMPENSATION
Given the Committee's continuing emphasis on performance-based long term
and short term compensation, base compensation for executive officers has been
established by the Committee at competitive levels based upon information
available to the Committee relating to compensation for corresponding executive
positions at similarly situated financial institutions. Executive officer
salaries are evaluated by the Committee on an annual basis utilizing
information from independent outside compensation consultants, the
Corporation's
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22
Human Resources Department and input from the Chairman and Chief Executive
Officer and the President and Chief Administrative Officer. To determine the
actual base salary for each executive officer, the Committee also takes into
account individual performance, experience and unique contributions or needs
for certain expertise required by the Corporation.
Base Compensation of Chief Executive Officer. In December 1994, the
Committee reviewed Mr. Weeks' performance for 1994 and awarded him a 10.51%
merit increase effective January 1, 1995. The Committee noted that, in its
opinion, Mr. Weeks' leadership has directly resulted in significant growth for
the Corporation together with substantial enhancement of shareholder value.
The Committee also noted that the Corporation had again achieved record
earnings in 1994 while continuing to maintain a high quality balance sheet.
MANAGEMENT INCENTIVE PLAN
All of the Corporation's executive officers participate in the MIP. The
MIP is designed to motivate participating officers of the Corporation and its
subsidiaries to attain goals based upon net earnings of the Corporation and its
subsidiaries and the achievement of individual objectives. The amount of an
individual's MIP award is a function of (i) the midpoint of the salary range
for the individual's position, (ii) the "participation rate" established by the
Committee for the individual, (iii) the performance of the Corporation or the
subsidiary for which the individual has responsibility, and (iv) the extent to
which the individual achieved agreed-upon objectives for the year. Each of
these factors is described below.
Midpoint of Salary Range and Participation Rate. As described under "Base
Compensation," the Committee determines a salary range for each executive
officer's position based upon competitive factors. Similarly, the Committee
assigns a "participation rate" to each position based on the same factors
ranging from 6% for lower level executive officers to 45% for the Chief
Executive Officer. The participation rate multiplied by the midpoint of the
individual's salary range is that individual's "Award Base" under the MIP,
which is subject to adjustment based on Corporate and individual performance as
described below.
Corporate Performance. As a general practice under the MIP, no amounts
will be awarded unless the Corporation's net earnings for the year equal or
exceed (i) 90% of the profit plan target approved by the Corporation's board of
directors for that year and (ii) 100% of the previous year's earnings (the
greater of these amounts is referred to as the "Threshold"). Nonrecurring
expenses or income items affecting earnings are evaluated and may be excluded
in the discretion of the Committee from the profit plan earnings calculation to
the extent of management's inability to control such items. A similar formula
based upon subsidiary earnings applies to participants who participate wholly
or partially on a subsidiary level basis. With the exception of Mr. Clark,
during 1995, the Named Officers participated in the MIP based only on the
earnings of the consolidated Corporation. Mr. Clark's participation was based
25% on Corporate performance and 75% on the performance of Commercial National
Bank of Berwyn, a wholly owned subsidiary of the Corporation for which Mr.
Clark is principally responsible. Earnings below the profit plan target but
higher than the Threshold automatically reduce the Award Base while earnings
above the profit plan target automatically increase the Award Base. For 1995,
the Corporation's net operating earnings exceeded both 1994 earnings (by over
14%) and the profit plan target.
Individual Objectives. Individual executive performance also
significantly affects the amount of a participant's individual award.
Annually, each executive officer establishes objectives, subject to approval by
the officer's supervisor. Depending upon the extent to which these objectives
are achieved during the year, a participant will be eligible to receive from 0
to 150 percent of the Award Base, adjusted for Corporate performance as
described above.
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23
Chief Executive Officer Award. Mr. Weeks received an award of $209,920
under the MIP for his 1995 performance on the same basis as the other executive
officers. As noted above, the Corporation exceeded the profit plan target for
1995, thereby increasing his Award Base. Mr. Weeks' primary individual MIP
objective was to have the Corporation's earnings reach the 1995 profit plan
target. The Committee noted that the Corporation's operating earnings during
1995 exceeded any year in its history and that the Corporation's Common Stock
had a total return of approximately 10.5% for the year. Another significant
individual objective of Mr. Weeks was to complete effective March 1, 1995 the
acquisition of the Banc One Corporation banks headquartered in Fenton,
Ypsilanti, East Lansing and Sturgis, Michigan. The Committee noted that the
acquisition had been completed in a timely manner, that the acquired banks had
been successfully and efficiently integrated into the Corporation's operations
and that the acquired banks had a positive impact on fourth quarter earnings in
1995 which exceeded management's expectations. Further, the Committee noted
that, on a combined basis, the four banks acquired have added approximately
$670 million in additional assets to the Corporation's balance sheet, bringing
the total asset base of the Corporation to approximately $3.5 billion at year
end. The Committee concluded that Mr. Weeks had exceeded the profit plan
target for 1995 and had successfully acquired and integrated the Banc One
Corporation banks into the operations of the Corporation, thereby entitling him
to 100% of his adjusted Award Base.
LONG TERM STOCK-BASED COMPENSATION
The Option Plan provides for a variety of different types of compensation
arrangements, such as stock options, restricted stock and stock appreciation
rights, which increase in value as the value of the Common Stock increases.
The purpose of these and similar long term compensation arrangements is to more
closely align the financial interests of executive officers and other key
employees with the long term interests of the Corporation's shareholders by
linking a significant portion of their compensation directly to stock price
growth or decline.
In furtherance of such purpose, the Committee generally makes annual
grants to executive officers of stock options with an exercise price equal to
the fair market value of the Common Stock on the date of grant. Such options
vest and generally become exercisable as the Corporation's return on average
assets increases in accordance with a vesting schedule pertaining to such
option grants. This year the Committee adopted new option grant guidelines to
reflect competitive practices of other similarly situated financial
institutions. These guidelines, implemented by the Committee with the
assistance of the Corporation's outside compensation consultants, employ a
modified Black-Scholes option valuation model to estimate the present value of
long term incentive compensation for corresponding executive positions at
similarly situated and performing financial institutions. A similar analysis
is performed to determine the comparative value of an option to be awarded
under the Option Plan. Based upon this information and other information
concerning compensation practices within the financial services industry, an
appropriate participation rate for each of the executive officers in the Plan
is assigned. The option grant size for each executive officer is then
determined by dividing the product of the position's salary mid-point and
participation rate by the current market price of Common Stock, subject to
being increased or decreased by the Committee based upon its evaluation of the
officer's individual performance.
Other options received by the executive officers during 1995 were reload
grants made automatically under the provisions of the PPP.
Chief Executive Officer Long Term Compensation - During 1995 an option
grant in the amount of 36,000 shares was made to Mr. Weeks in accordance with
the formula described above. Mr. Weeks did not participate in the PPP during
1995 and therefore did not receive reload options thereunder.
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24
$1,000,000 Cap - The Omnibus Budget Reconciliation Act of 1993 prohibits a
publicly owned company from deducting more than $1,000,000 in annual
compensation (including gain from the exercise of certain stock and option
grants) paid to the chief executive officer or any of the next four most highly
compensated executive officers. Certain exceptions apply involving performance
based compensation and the maximum amount of compensation that can be paid
pursuant to a plan. In addition, a transition rule exempts exercises of
options granted under the Option Plan prior to the 1997 annual meeting of
shareholders. The Corporation does not anticipate that any of its executive
officers will receive more than $1,000,000 in compensation during 1996.
The Committee intends to recommend changes to the Option Plan in order to
minimize the effect of the $1,000,000 limitation on the tax deductibility of
gain from the exercise of stock options. The Committee may also recommend
changes in other compensation plans and changes with respect to other facets of
the Option Plan to maximize the tax deductibility of compensation paid pursuant
to such plans if practicable and in the best interests of the Corporation and
its shareholders. However, the Committee believes it is important to maintain
the flexibility to take actions regarding executive compensation which it
considers to be in the best interests of the Corporation and its shareholders,
which may be based on considerations in addition to whether the compensation
will be tax deductible. As a result, it is possible that in the future,
circumstances may cause the Committee to authorize compensation that is not
entirely deductible.
HUGO E. BRAUN JR. VICTOR E. GEORGE
LAWRENCE O. ERICKSON JAMES E. TRUESDELL JR.
KENDALL B. WILLIAMS
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SHAREHOLDER RETURN
Set forth below is a graph which summarizes the cumulative return
experienced by the Corporation's shareholders over the last five years compared
to the S&P 500 Index and the Keefe, Bruyette & Woods, Inc. 50 Bank Index. Such
presentation assumes that the value of the investment in the Corporation's
Common Stock and each index was $100 on December 31, 1990 and that all
dividends were reinvested.
CUMULATIVE TOTAL RETURNS
FIVE YEARS ENDED DECEMBER 31, 1995
Citizens KBW 50 S&P 500
1990 $100 $100 $100
1991 $150 $158 $130
1992 $216 $202 $140
1993 $291 $213 $155
1994 $333 $202 $157
1995 $369 $324 $215
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26
COMPENSATION COMMITTEE INTERLOCKS AND
CERTAIN TRANSACTIONS AND RELATIONSHIPS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Hugo E. Braun Jr., Lawrence O. Erickson, Victor E. George, James
E. Truesdell Jr., and Kendall B. Williams served on the Compensation and
Benefits Committee of the board of directors of the Corporation throughout the
last completed fiscal year. None of these individuals are employees of the
Corporation.
Committee member Braun is a partner in the law firm of Braun Kendrick
Finkbeiner which rendered legal services to certain of the Corporation's
banking subsidiaries during 1995. Such subsidiaries plan to employ this firm
for additional services in 1996.
OTHER TRANSACTIONS WITH OFFICERS AND DIRECTORS
During 1995 the banking subsidiaries of the Corporation had, and expect to
have in the future, banking transactions, in the ordinary course of business,
with directors, officers and their associates. These transactions were made on
substantially the same terms, including interest rate charges and collateral
requirements, as comparable transactions made with unrelated parties prevailing
at the time of such transactions and did not involve more than the normal risk
of collectability or present other unfavorable features.
During 1995, the firm of Winegarden, Shedd, Haley, Lindholm & Robertson,
of which director William C. Shedd is a partner, rendered legal services to the
Corporation and its banking subsidiaries. The Corporation and its banking
subsidiaries paid that firm $178,062 in legal fees and reimbursements. The
Corporation and its subsidiaries expect to employ this firm for services in
1996.
SECURITIES TRANSACTIONS REPORTING
Under the securities laws of the United States, the Corporation's
directors, executive officers and any persons holding more than 10% of the
Common Stock (collectively, the "Reporting Persons") are required to report
their ownership of the Common Stock and any changes in that ownership to the
Commission and to the Nasdaq Stock Market ("Nasdaq"). Specific due dates for
these reports have been established and pursuant to applicable rules, the
Corporation is required to report in its proxy statement any failure to file by
these due dates. Based on corporate records and certifications received from
the Reporting Persons, all required reports of Reporting Persons have been
timely filed with the Commission and the Nasdaq. In making these statements,
the Corporation has relied on the written representations of its directors,
executive officers and its principal shareholder and on copies of the reports
that such persons have filed with the Commission.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
In 1995, Ernst & Young LLP, performed audit and audit related services for
the Corporation and its subsidiaries which included examination of the
consolidated financial statements of the Corporation, and consultation with the
Corporation and its subsidiaries on accounting and reporting matters. Upon
recommendation of the audit committee, the board of directors has again
selected Ernst & Young LLP, as independent auditors. Representatives of Ernst
& Young LLP, will attend the annual meeting, will have an opportunity to make a
statement, and will be available to answer questions that may be asked by
shareholders.
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SHAREHOLDER PROPOSALS
Any proposal by a shareholder of the Corporation to be considered for
inclusion in the Proxy Statement for the 1997 annual meeting must be received
by Thomas W. Gallagher, the secretary of the Corporation, by the close of
business on November 15, 1996.
ANNUAL REPORTS
Appendix A to this Proxy Statement contains the information required to be
included in an annual report pursuant to the rules of the Commission, including
audited financial statements, management's discussion and analysis of financial
condition and results of operations and five year selected financial data.
Upon request, the Corporation will provide without charge a copy of its annual
report on FORM 10-K.
OTHER MATTERS
The board of directors is not aware of any other matters which may come
before the meeting. However, should any such matters properly come before the
meeting, it is the intention of the persons named in the accompanying proxy to
vote in accordance with their judgment on such matters.
CITIZENS BANKING CORPORATION
Thomas W. Gallagher
Thomas W. Gallagher
Senior Vice President, General
Counsel and Secretary
Flint, Michigan
March 14, 1996
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APPENDIX A
CITIZENS BANKING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND
CONSOLIDATED FINANCIAL STATEMENTS
29
TABLE OF CONTENTS
I. Financial Review including
Management's Discussion and Analysis ............ 1
Selected Financial Data ....................... 1
Performance Summary ........................... 2
Net Interest Income ........................... 2
Provision and Allowance for Loan Losses ....... 5
Noninterest Income and Expense ................ 6
Balance Sheet Review .......................... 9
Liquidity and Debt Capacity, Interest Rate Risk
and Impact of Inflation ...................... 15
Year Ended December 31, 1994
Compared with 1993 ........................... 18
II. Consolidated Financial Statements ................. 19
Consolidated Balance Sheets ................... 19
Consolidated Statements of Income ............. 20
Consolidated Statements of Changes
in Shareholders' Equity ...................... 21
Consolidated Statements of Cash Flow .......... 22
III. Notes to Consolidated Financial Statements ........ 23
IV. Report of Independent Auditors .................... 36
V. Report of Management .............................. 37
30
TABLE 1. SELECTED FINANCIAL DATA
(in thousands except per share data) 1995(4) 1994 1993(2) 1992(1) 1991
- -----------------------------------------------------------------------------------------------------------------
FOR THE YEAR
Net interest income $137,495 $118,400 $104,334 $99,975 $99,231
Provision for loan losses 6,441 5,303 5,597 6,251 6,086
Investment securities gains (losses) 198 157 763 (17) 19
Noninterest income 36,236 33,697 30,452 27,082 26,509
Noninterest expense 121,087 107,245 97,268 92,555 93,509
Income taxes 12,805 10,292 6,914 4,765 5,089
Income before cumulative effect
of change in accounting principle 33,596 29,414 25,770 23,469 21,075
Net income 33,596 29,414 25,770 10,564 21,075
Cash dividends 12,770 11,557 9,937 9,027 8,427
PER COMMON SHARE DATA
Primary:
Income before cumulative effect
of change in accounting principle $2.31 $2.03 $1.88 $1.77 $1.60
Net income 2.31 2.03 1.88 0.79 1.60
Fully diluted:
Income before cumulative effect
of change in accounting principle 2.30 2.03 1.87 1.75 1.60
Net income 2.30 2.03 1.87 0.79 1.60
Cash dividends 0.900 0.820 0.745 0.690 0.645
Book value, end of year 20.73 18.31 18.08 16.73 16.68
Market value, end of year 29.75 27.75 25.00 19.25 13.88
AT YEAR END
Assets $3,463,922 $2,703,823 $2,714,112 $2,498,934 $2,492,584
Loans 2,428,513 1,816,221 1,780,180 1,557,423 1,536,461
Deposits 2,864,701 2,252,318 2,246,750 2,086,144 2,064,024
Long-term debt 105,411 5,249 10,865 15,093 20,405
Shareholders' equity 297,186 258,730 255,163 219,276 218,183
AVERAGE FOR THE YEAR
Assets $3,279,646 $2,710,747 $2,535,068 $2,472,245 $2,449,897
Earning assets 3,002,753 2,500,215 2,348,691 2,290,884 2,276,390
Loans 2,302,414 1,797,153 1,643,327 1,539,332 1,545,108
Deposits 2,702,346 2,262,182 2,109,269 2,061,613 2,035,156
Interest-bearing deposits 2,250,711 1,882,451 1,783,718 1,769,078 1,759,965
Repurchase agreements and
other short-term borrowings 146,000 141,230 138,375 135,624 143,012
Long-term debt 102,813 8,667 13,112 16,965 29,726
Shareholders' equity 277,597 256,607 231,160 210,193 210,931
FINANCIAL RATIOS
Return on average:(3)
Shareholders' equity 12.10% 11.46% 11.15% 11.17% 9.99%
Earning assets 1.12 1.18 1.10 1.02 0.93
Assets 1.02 1.09 1.02 0.95 0.86
Average shareholders' equity/ave. assets 8.46 9.47 9.12 8.50 8.61
Dividend payout ratio(3) 38.01 39.29 38.56 38.46 39.99
Net interest margin (FTE) 4.77 4.99 4.74 4.71 4.67
Tier I leverage 6.65 9.52 8.90 8.57 8.48
Risk-based capital (fully phased-in guidelines):
Tier I capital 8.79 13.44 13.12 12.73 13.11
Total capital 10.04 14.69 14.36 13.90 14.35
- --------------------------------------------------------------------------------
(1) 1992 income and income per common share were affected by nonrecurring
items. Nonrecurring items included restructuring expenses related to
the leasing subsidiary, employee benefit costs related to adopting the
accrual method of accounting for retiree benefits and a curtailment gain
resulting from modification of retiree benefit plans. If the nonrecurring
items had been excluded from the results of operations for 1992, income
before cumulative effect of change in accounting principle would have been
reduced by $1.152 million or $0.08 per fully diluted share.
(2) The year 1993 reflects the acquisition of National Bank of Royal Oak
("NBRO"), accounted for as a purchase, and includes NBRO'S results of
operations and financial results subsequent to its October 1, 1993
acquisition date.
(3) Based on income before cumulative effect of change in accounting principle.
(4) The year 1995 reflects the acquisition of the Michigan affiliates of Banc
One Corporation accounted for as a purchase, and includes the related
results of operations and financial results subsequent to the
February 28, 1995 acquisition date.
Page 1
31
PERFORMANCE SUMMARY
The following discussion provides a more comprehensive review of the
Corporation's operating results and financial condition than could be obtained
from reading the Consolidated Financial Statements alone. Citizens Banking
Corporation earned $33,596,000 or $2.30 per fully diluted share during 1995
compared with $29,414,000 or $2.03 per share in 1994. Net income was up
$4,182,000 or $0.27 per fully diluted share over the prior year and reflected a
14.2% increase in net income. This marked the Corporation's thirteenth
consecutive year of increased net operating income and eighth consecutive year
of record earnings.
The Corporation's 1995 results reflect ten months 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 &
Savings Bank headquartered in Flint, Michigan effective immediately after the
acquisition. Total assets acquired of $670 million included net loans of $532
million and investment securities and money market investments of $57 million.
Cost-in-excess of the fair value of identifiable net assets acquired
("intangible assets") of $59.2 million and is being amortized over 15 years.
Return on average assets was 1.02% in 1995, a decrease from 1.09% in 1994.
The decline in the Corporation's return on assets is primarily attributable to
additional interest expense, intangible asset amortization costs and
nonrecurring systems conversions costs associated with the acquired banks.
Systems integration and conversion of the acquired banks to Citizens' corporate
systems was completed in the second and third quarters of 1995, and as a result
the acquisition was accretive to earnings in the fourth quarter.
Return on average equity improved to 12.10% in 1995 compared with 11.46%
last year. Average shareholders' equity was $277.6 million or 8.46% of total
average assets for 1995 compared with $256.6 million or 9.46% for 1994. The
Corporation's risk-based capital levels exceeded all regulatory requirements.
An analysis of changes in major income statement components in 1995 from
1994 is presented below. Overall, the increase in net income reflects
improvement in net interest income and noninterest income, offset, in part, by
increases in noninterest expense and income taxes. Higher levels of earning
assets, primarily loans and leases, resulted in higher net interest income.
Additional data on the Corporation's performance during the past five years
appears in Table 1.
- -----------------------------------------------------------------------------
Year Ended December 31, Changes in 1995
------------------------ -------------------
(in thousands) 1995 1994 Amount Percent
- -----------------------------------------------------------------------------
Interest income $240,600 $179,989 $60,611 33.7%
Interest expense 103,105 61,589 41,516 67.4
-------- -------- -------
Net interest income 137,495 118,400 19,095 16.1
Provision for loan losses 6,441 5,303 1,138 21.5
Noninterest income 36,434 33,854 2,580 7.6
Noninterest expense 121,087 107,245 13,842 12.9
Income taxes 12,805 10,292 2,513 24.4
-------- -------- -------
Net income $ 33,596 $ 29,414 $ 4,182 14.2
======== ======== =======
NET INTEREST INCOME
The largest segment of the Corporation's operating income is net interest
income, which is the sum of interest and certain fees derived from earning
assets minus interest paid on deposits and other funding sources. Net interest
income is impacted by changes in the volume and mix of earning assets and
funding sources, market rates of interest, demand for loans and the
availability of deposits. Other factors, such as Federal Reserve Board
monetary policy and changes in tax laws, may also have an impact on changes in
net interest income from one period to another.
Average balances and rates on major categories of interest-earning assets
and interest-bearing liabilities during the past three years appear in
Table 2. Total average earning assets were 19.9% higher during 1995 compared
with 1994 primarily due to the purchase of the acquired banks. The composition
of average earning assets changed in 1995 as total average loans increased $505
million to 76.7% of average earning assets from 71.9% in 1994. Average
investment securities including money market investments represented 23.3% of
average earning assets in 1995 compared with 28.1% in 1994. Total average
interest-bearing liability balances increased
Page 2
32
TABLE 2. AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
1995 1994 1993
------------------------------ ------------------------------ ------------------------------
Year Ended December 31 AVERAGE AVERAGE Average Average Average Average
(in millions) BALANCE INTEREST(1) RATE(2) Balance Interest(1) Rate(2) Balance Interest(1) Rate(2)
- ---------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Money market investments:
Time deposits with banks $ 4.9 $ 0.3 5.87% $ 5.4 $ 0.2 4.65% $ 12.8 $ 0.4 3.30%
Federal funds sold 74.1 4.4 6.01 43.0 1.9 4.46 46.5 1.4 3.04
Term federal funds sold and other 47.2 2.7 5.69 5.1 0.3 5.21 8.3 0.3 3.64
Investment securities(3):
Taxable 402.1 22.5 5.60 447.9 22.7 5.07 393.9 19.6 4.96
Nontaxable 175.4 9.4 8.30 208.1 10.6 7.86 243.9 11.7 7.31
Loans(4):
Commercial 902.4 81.9 9.17 756.2 59.7 8.01 657.8 48.4 7.51
Real estate 436.1 36.2 8.29 389.7 31.8 8.16 388.8 32.7 8.40
Consumer installment 900.1 79.0 8.78 569.4 47.3 8.30 503.1 45.2 8.99
Lease financing 63.8 4.2 6.55 81.9 5.5 6.71 93.6 6.7 7.16
-------- ------ -------- ------ -------- ------
Total earning assets(3) 3,006.1 240.6 8.20 2,506.7 180.0 7.45 2,348.7 166.4 7.39
NONEARNING ASSETS
Cash and due from banks 141.6 124.3 109.7
Premises and equipment 61.9 53.6 49.4
Other assets 102.4 49.8 47.9
Allowance for loan losses (32.4) (23.7) (20.6)
-------- -------- --------
Total assets $3,279.6 $2,710.7 $2,535.1
======== ======== ========
INTEREST-BEARING LIABILITIES
Deposits:
Interest-bearing demand $ 309.4 5.8 1.87 $ 256.1 4.4 1.71 $ 238.5 5.0 2.08
Savings 909.7 25.6 2.82 909.4 21.7 2.39 832.4 21.3 2.56
Time 1,031.6 56.8 5.50 717.0 29.9 4.17 712.8 31.0 4.35
Short-term borrowings 146.0 7.2 4.95 141.2 5.1 3.62 138.4 4.2 3.04
Long-term debt 102.8 7.7 7.52 8.7 0.5 5.24 13.1 0.6 4.74
-------- ------ -------- ------ -------- ------
Total interest-bearing
liabilities 2,499.5 103.1 4.12 2,032.4 61.6 3.03 1,935.2 62.1 3.21
NONINTEREST-BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 451.6 379.7 325.6
Other liabilities 50.9 42.0 43.1
Shareholders' equity 277.6 256.6 231.2
-------- -------- --------
Total liabilities and
shareholders' equity $3,279.6 $2,710.7 $2,535.1
======== ======== ========
NET INTEREST INCOME $137.5 $118.4 $104.3
====== ====== ======
NET INTEREST INCOME AS A PERCENT
OF EARNING ASSETS 4.77% 4.99% 4.74%
(1) Interest income is shown on an unadjusted basis and therefore does not
include taxable equivalent adjustments.
(2) Average rates include taxable equivalent adjustments to interest income
of $5,983,000, $6,684,000 and $7,003,000 for the years ended December 31,
1995, 1994, and 1993, respectively, based on a 35% tax rate.
(3) For presentation in this table, average balances and the corresponding
average rates for investment securities are based upon historical cost,
adjusted for amortization of premiums and accretion of discounts.
(4) Nonaccrual loans are included in average balances.
Page 3
33
23.0% in 1995 compared to 1994, while average noninterest-bearing deposit
balances increased 18.9%.
The average yield on earning assets improved 75 basis points to 8.20% in
1995. Yields increased in all categories of earning assets except lease
financing, in response to the higher interest rate environment. The cost of
interest-bearing liabilities increased 109 basis points to 4.12% in 1995 from
3.03% in 1994. This increase was attributable to $115 million of long term
debt incurred to fund the first quarter 1995 acquisition and higher deposit
costs, primarily from savings and time accounts. Long-term debt comprised 3.4%
of total funding sources during 1995, compared with 0.4% in 1994.
Additionally, the weighted average rate on all long-term debt increased to
7.52% in 1995 from 5.24% in 1994. The increased costs on interest bearing
liabilities more than offset increased yields on earning assets causing the
interest spread on earning assets (the difference between the average yield on
earning assets and the average rate on interest-bearing liabilities) to
decrease from 4.42% in 1994 to 4.08% in 1995. As a result, net interest margin
decreased from 4.99% in 1994, to 4.77% in 1995, a 22 basis point decline.
The effect on net interest income of changes in average balances
("volume") and yields and rates ("rate") are quantified in Table 3. As shown,
net interest income improved in 1995 due to volume-related increases primarily
attributable to the February 28, 1995 acquisition which provided $16.6 million
of the volume related increase. Higher costs of interest-bearing liabilities
offset the effects of increased asset yields resulting in unfavorable rate
related variances of $2.0 million.
In the latter part of 1995 and again in early 1996, the Federal Reserve
Board lowered the federal funds rate. As a result money market interest rates
declined and the Corporation lowered it's prime lending rate. Management
continually monitors the Corporation's balance sheet to insulate net interest
income from significant swings caused by interest rate volatility. If market
rates continue to decrease in 1996, 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".
TABLE 3. ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
1995 COMPARED TO 1994 1994 Compared to 1993
--------------------------------- ---------------------------------
INCREASE (DECREASE) Increase (Decrease)
DUE TO CHANGE IN Due to Change in
Year Ended December 31 NET -------------------- Net --------------------
(in millions) CHANGE(1) RATE (2) VOLUME Change(1) Rate (2) Volume
- -----------------------------------------------------------------------------------------------------
INTEREST INCOME:
Money market investments:
Time deposits with banks $0.1 $0.1 $(0.0) $(0.2) $--- $(0.2)
Federal funds sold 2.5 1.1 1.4 0.5 0.6 (0.1)
Term federal funds sold 2.4 0.2 2.2 0.0 0.1 (0.1)
Investment securities:
Taxable (0.2) 1.8 (2.0) 3.1 0.9 2.2
Tax-exempt (1.2) 0.5 (1.7) (1.1) 0.8 (1.9)
Loans 57.0 16.2 40.8 11.3 (1.9) 13.2
---- ---- ---- ---- ----- ----
Total 60.6 19.9 40.7 13.6 0.5 13.1
---- ---- ---- ---- ----- ----
INTEREST EXPENSE:
Deposits:
Demand 1.4 0.4 1.0 (0.6) (0.9) 0.3
Savings 3.9 4.1 (0.2) 0.4 (1.9) 2.3
Time 26.9 13.2 13.7 (1.1) (1.6) 0.5
Short-term borrowings 2.1 1.9 0.2 0.9 0.8 0.1
Long-term debt 7.2 2.3 4.9 (0.1) 0.1 (0.2)
---- ---- ---- ---- ----- ----
Total 41.5 21.9 19.6 (0.5) (3.5) 3.0
---- ---- ---- ---- ----- ----
NET INTEREST INCOME $19.1 $(2.0) $21.1 $14.1 $4.0 $10.1
===== ===== ===== ===== ==== =====
(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.
Page 4
34
PROVISION AND ALLOWANCE
FOR LOAN LOSSES
Management provides for possible loan losses at a level determined
adequate based upon judgements regarding historical loss experience, the
financial condition of borrowers, the size and composition of the loan
portfolio, the level and composition of nonperforming loans, estimated future
net charge-offs, present and anticipated economic conditions and other factors.
A summary of the Corporation's loan loss experience from 1991 through 1995
appears in Table 4.
Management increased the provision for loan losses in 1995 by $1.1 million
from 1994, primarily due to the acquisition of the four banks. Net loan
charge-offs were 0.16% of average loans in 1995, down from 0.17% in 1994 and
below peer group levels. The ability to cover loan charge-offs improved during
the year as the ratio of the allowance for loan losses to net loans charged off
increased to 9.6 times at December 31, 1995 compared with 7.9 times as of
December 31, 1994. At year end, the allowance for loan losses was $34.8
million or 1.43% of total loans, up $10.1 million from 1.36% at December 31,
1994. The increase is attributable to a higher loan loss provision in 1995 as
compared to 1994 and the addition of the $7.2 million allowance of the acquired
banks.
Gross charge-offs increased $1.8 million, or 29.6% from 1994, partially
due to charge-offs related to the acquired banks. Recoveries on loans
previously charged off increased 44.5% compared to the prior year, resulting in
a slight decline in the ratio of net charge-offs to average loans outstanding.
The ratio of net charge-offs to average loans for each of the loan portfolios
except commercial decreased compared with the prior year as follows:
commercial (0.16% versus 0.06%), mortgage (0.01% versus 0.02%), consumer (0.14%
versus 0.27%) and leasing (0.70% versus 1.22%).
The Corporation maintains formal policies and procedures to control and
monitor credit risk. Management believes the allowance for loan losses is
adequate to meet presently known credit risks in the loan portfolio. The
Corporation's loan portfolio has no significant concentrations in any one
industry nor any exposure in foreign loans.
TABLE 4. SUMMARY OF LOAN LOSS EXPERIENCE
Year Ended December 31 (in thousands) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------
Allowance for loan losses - January 1 $24,714 $22,547 $19,404 $19,759 $19,448
Allowance of acquired banks 7,235 --- 1,642 --- ---
Provision for loan losses 6,441 5,303 5,597 6,251 6,086
CHARGE-OFFS:
Commercial 2,971 1,869 2,629 2,781 2,125
Real estate(1) 69 72 403 946 668
Consumer installment 4,362 3,020 3,182 4,169 4,667
Lease financing 519 1,153 182 803 251
---------- ---------- ---------- ---------- ----------
Total charge-offs 7,921 6,114 6,396 8,699 7,711
---------- ---------- ---------- ---------- ----------
RECOVERIES:
Commercial 1,534 1,390 673 601 431
Real estate(1) 22 4 177 10 41
Consumer installment 2,675 1,510 1,362 1,474 1,464
Lease financing 71 74 88 8 ---
---------- ---------- ---------- ---------- ----------
Total recoveries 4,302 2,978 2,300 2,093 1,936
---------- ---------- ---------- ---------- ----------
Net charge-offs 3,619 3,136 4,096 6,606 5,775
---------- ---------- ---------- ---------- ----------
Allowance for loan losses -
December 31 $34,771 $24,714 $22,547 $19,404 $19,759
========== ========== ========== ========== ==========
Loans outstanding at year-end $2,428,513 $1,816,221 $1,780,180 $1,557,423 $1,536,461
Average loans outstanding 2,302,414 1,797,153 1,643,327 1,539,332 1,545,108
Ratio of allowance for loan losses
to loans outstanding at year-end 1.43% 1.36% 1.27% 1.25% 1.29%
Ratio of net loans charged off as a
percentage of average loans
outstanding 0.16% 0.17% 0.25% 0.43% 0.37%
(1) 1995 and 1994 commercial real estate loan balances and related
charge-offs and recoveries are reflected in the commercial loan category.
Previous years' balances have not been reclassified.
Page 5
35
The Corporation has generally not extended credit to finance highly
leveraged transactions nor does it intend to do so in the future. Employment
levels and other economic conditions in the Corporation's local markets may
have a significant impact on the level of credit losses. Management continues
to identify and devote attention to credits that may not be performing as well
as expected. Nonperforming loans are further discussed in the section titled
"Nonperforming Assets".
NONINTEREST INCOME
Noninterest income accounted for 20.9% of total operating income or 1.1%
of average assets in 1995, decreasing from 22.2% or 1.3%, respectively, in
1994. The decline was primarily the result of discontinuing the Travel Banking
product line in early 1995, which provided bankcard merchant fee income. This
decrease was more than offset by reductions in associated operating expenses,
including interchange and other bankcard expenses. Excluding the effects of
the Travel Banking product line and the newly acquired banks, 1995 noninterest
income increased by 2.7% over 1994 levels. An analysis of the components of
noninterest income is on the following page.
Excluding the results of the acquired banks, trust income increased
$246,000 or 2.5%. The largest increases occurred in employee benefit trust
services. The Corporation offers comprehensive trust services to its customers
including investment management services in the personal trust, institutional
and employee benefit plan market segments.
Deposit service charges increased 12.7% including the results of the newly
acquired banks. Brokerage and investment fees decreased $196,000, or 13.8%,
excluding the impact of the acquired banks. The decrease in brokerage and
investment fees is due to lower market penetration and a temporary reduction in
staff during the first half of 1995.
Other loan income increased $615,000 from 1994, primarily attributable to
premiums on the sale of student loans and loan servicing income from the
operations of the acquired banks. Net gains on sale of mortgages were $327,000
in 1995 compared with $255,000 in 1994. The direction and magnitude of changes
in market interest rates, as well as the volume of originated mortgages
retained, may affect future levels of income for this category. Excluding
the acquired banks, other loan income increased $25,900 or 2.0% in 1995 as
compared to 1994.
ATM fees increased $222,000, or 16.9%, excluding the impact of the
acquired banks, due to increased volumes. Increases in cash management
services, safe deposit and the other fees resulted primarily from the acquired
banks.
The Corporation realized net gains on sales of investment securities of
$198,000 during 1995 compared with net gains of $157,000 during 1994. As
presented in Note 3 to the Consolidated Financial Statements, gross realized
gains on sales of investment securities amounted to $202,000 in 1995 while
gross realized losses amounted to $4,000. The comparable amounts in 1994 were
$326,000 and $169,000, respectively. Proceeds from sales of investment
securities during 1995 totaled $7.0 million or 1.2% of total average security
holdings compared with $190.3 million or 29.3% in 1994. The 1994 and 1995 net
gains resulted from the sale of certain securities to reposition the investment
portfolio based on the current rate environment.
Effective January 1, 1994, the Corporation adopted Financial Accounting
Standards Board Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS 115"). This Statement requires the Corporation
to classify securities into one of three categories based on its intent and
ability to hold the investment to maturity. These categories include:
held-to-maturity (securities that the Corporation has the positive intent and
ability to hold to maturity), trading (securities bought and held principally
for the purpose of selling in the near future) and available-for-sale
(securities not classified in either of the two other categories). At
adoption, the Corporation classified all of its investment portfolio into the
available-for-sale category. Securities classified as available-for-sale are
recorded at fair value with unrealized gains or losses reported as a separate
component of shareholders' equity. Adoption increased shareholders' equity on
January 1, 1994 by $6.6 million. The Corporation's policies with respect to
the classification of investments in debt and equity securities are further
discussed in the section titled "Investment Securities and Money Market
Investments" and in Note 1 to the Consolidated Financial Statements.
Page 6
36
- ---------------------------------------------------------------------------------------------------
NONINTEREST INCOME Year Ended
December 31, Changes in 1995
---------------------- -------------------
(in thousands) 1995 1994 Amount Percent
- ---------------------------------------------------------------------------------------------------
Trust fees $11,314 $9,697 $1,617 16.7%
Service charges on deposit accounts 9,717 8,618 1,099 12.7
Bankcard fees 5,635 7,694 (2,059) (26.8)
Brokerage and investment fees 1,277 1,392 (115) (8.3)
Other loan income 1,925 1,310 615 46.9
ATM network user fees 1,665 1,311 354 27.0
Cash management services 1,038 916 122 13.3
Safe deposit rentals 1,012 797 215 27.0
Investment securities gains 198 157 41 26.1
Other 2,653 1,962 691 35.2
------- ------- ------
Total noninterest income $36,434 $33,854 $2,580 7.6
======= ======= ======
- ---------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE Year Ended
December 31, Changes in 1995
---------------------- -------------------
(in thousands) 1995 1994 Amount Percent
- ---------------------------------------------------------------------------------------------------
Salaries and employee benefits $ 64,357 $ 55,722 $ 8,635 15.5%
Equipment 9,709 8,505 1,204 14.2
Occupancy 9,000 8,050 950 11.8
Intangible asset amortization 4,687 1,602 3,085 192.6
FDIC insurance premiums 3,250 5,050 (1,800) (35.6)
Bankcard fees 3,418 6,095 (2,677) (43.9)
Stationery and supplies 3,570 2,762 808 29.3
Postage and delivery 3,189 2,359 830 35.2
Advertising and public relations 2,386 1,717 669 39.0
Taxes, other than income taxes 2,448 2,519 (71) (2.8)
Consulting and other professional fees 1,782 1,632 150 9.2
Legal, audit and examination fees 1,762 1,729 33 1.9
Loan and credit charges 1,860 1,290 570 44.2
Other 9,669 8,213 1,456 17.7
-------- -------- -------
Total noninterest expense $121,087 $107,245 $13,842 12.9
======== ======== =======
Page 7
37
NONINTEREST EXPENSE
The major components of noninterest expense are summarized on the previous
page. Excluding the effects of the acquired banks, noninterest expense
decreased $4,143,100, or 3.9% in 1995, from 1994 primarily due to a reduction
in the FDIC insurance assessments paid by the Corporation's banks for the last
seven months of 1995 and the discontinuance of the Travel Banking product line.
SALARIES AND BENEFITS
Compensation is the Corporation's largest noninterest expense. Excluding the
impact of the acquired banks, total compensation expense increased 0.2% to
$55,815,000 from $55,722,000 in 1994. This modest increase was primarily due
to continued health care benefit cost containment and declines in the number of
full-time equivalent employees, offset in part by higher incentive compensation
and merit increases. The reduction in staff occurred through normal attrition.
The consolidation of various business units and supporting functions
throughout the Corporation continues to enhance productivity and mitigate the
need to replace staff lost through attrition. In June 1996, the Michigan
subsidiaries of the Corporation will collapse their respective charters and
subsequently operate as one bank called Citizens Bank. This change will
consolidate remaining operational areas and systems and allow for
standardization of products and services offered throughout the Corporation's
market area. Management anticipates further productivity gains through these
operational consolidations and standardization of products and services.
OTHER NONINTEREST EXPENSES
FDIC insurance assessments decreased by $1,800,000, or 35.6% in 1995 as
compared to 1994. The decline resulted from a new rate schedule implemented
by the FDIC partially offset by an increase in the Corporation's deposit base
due to the purchase of the acquired banks. As a result of the new rate
schedule, deposit insurance assessments decreased from 23 cents to 4 cents per
$100 of insured deposits for all banks within the Corporation beginning in June
1995.
Excluding the impact of the acquired banks, occupancy expense declined
$326,000, or 4.0% and equipment expense increased $119,000 or 1.4% compared to
the previous year. Intangible asset amortization increased $3,085,000 in 1995
compared with 1994 as a result of the February 28, 1995 acquisition which added
$59.2 million to the Corporation's cost-in-excess of the fair value of
identifiable net assets acquired.
Stationery and supplies, postage and delivery, advertising and public
relations and consulting and other professional fee expenses reflect increases
related to the ongoing costs associated with the acquired banks as well as one
time acquisition and conversion costs. During the second and third quarters of
1995, the Corporation completed all system integration and conversions for the
acquired banks to operate within Citizens' corporate systems. This conversion
allowed the Corporation to realize cost savings from the consolidated operating
systems beginning in the fourth quarter of 1995.
Excluding the impact of the acquired banks, bankcard processing expense
declined $2,882,000 or 50.3% as compared to 1994, primarily 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 loan fees and the "other" component of noninterest expense
increased due to expense associated with the acquired banks.
FEDERAL INCOME TAXES
Income tax expense was $12,805,000 in 1995, an increase of 24.4% over the
1994 total of $10,292,000. The increase was due to higher pre-tax earnings and
lower tax-exempt interest income in 1995 as compared to 1994.
Page 8
38
BALANCE SHEET
Proper management of the volume and composition of the Corporation's
earning assets and funding sources is essential for ensuring strong and
consistent earnings performance, maintaining adequate liquidity and limiting
exposure to risks caused by changing market conditions. The Corporation's
investment security portfolio is structured to provide a source of liquidity
through maturities and generate an income stream with relatively low levels of
principal risk. The Corporation does not engage in active securities trading.
Loans comprise the largest component of earning assets and presently are the
Corporation's highest yielding assets. Customer deposits are the primary
source of funding for earning assets while short-term debt and other managed
sources of funds are utilized as market conditions and liquidity needs change.
The Corporation's total assets averaged $3.280 billion for 1995, up $569
million from 1994, primarily due to the purchase of the acquired banks at the
close of business on February 28, 1995. The ratio of average earning assets to
total average assets during 1995 was 91.6%, compared to 92.2% for 1994. The
slight decline reflects an increase in intangible asset balances resulting from
the acquisition. Average loans and leases comprised 70.2% of total assets
during 1995, up from 66.3% in 1994. The ratio of average noninterest-bearing
deposits to total deposits remained unchanged from 1994. Interest-bearing
deposits comprised 90.0% of total average interest-bearing liabilities during
1995, down from 92.6% in 1994. Average long-term debt increased $94 million to
4.1% of average interest-bearing liabilities as a result of the acquisition.
INVESTMENT SECURITIES AND
MONEY MARKET INVESTMENTS
Total investment securities, including money market investments, comprised
23.3% of total average earning assets in 1995, down from 28.1% in 1994. The
decrease in investment securities occurred as proceeds from maturities were
used to fund loan growth and maintain liquidity. A summary of average
investment security balances during 1995 and 1994 follows:
- ----------------------------------------------------------------------------------
INVESTMENT SECURITIES Average Balances(1) Changes in 1995
--------------------- -------------------
Year Ended December 31 (in thousands) 1995 1994 Amount Percent
- ----------------------------------------------------------------------------------
U.S. Treasury $206,253 $233,681 $ (27,428) (11.7)%
Federal agencies:
Mortgage-backed 76,324 94,836 (18,512) (19.5)
Other 59,945 49,096 10,849 22.1
State and municipal:
Taxable 42,033 53,977 (11,944) (22.1)
Tax-exempt 177,392 210,472 (33,080) (15.7)
Other 12,201 7,525 4,676 62.1
-------- -------- ---------
Total $574,148 $649,587 $ (75,439) (11.6)
======== ======== =========
(1) Average balances reflect the estimated fair value of investment
securities
Average total investment in U.S. Treasury securities comprised 35.9 % of
average total investment securities during 1995, decreasing slightly from 36.0%
in 1994. Average Federal agency mortgage-backed securities, primarily
collateralized mortgage obligations ("CMO's"), decreased 19.5% in 1995 as
proceeds from principal repayments were reinvested in other securities and
money market investments and utilized to fund loan growth. The Corporation
continues to invest in U.S. Treasury and Federal agency securities which offer
increased creditworthiness and liquidity compared with privately issued CMO's.
Total state and municipal securities comprised 38.2% of total average
investment securities during 1995 compared with 40.7% in 1994. Average
tax-exempt state and municipal securities decreased 15.7% from 1994. Purchases
of these securities remain dependent on the Corporation's capacity for
tax-exempt income.
Other securities consisting of Federal Reserve stock, privately issued
CMO's and asset backed securities increased 62.1% primarily due to securities
acquired as part of the February 28, 1995 acquisition.
Page 9
39
Money market investments, primarily federal funds sold and term federal
funds sold, averaged $126.2 million in 1995, up 136.0% from $53.5 million in
1994. The amount of funds invested in these assets is based on the present
and anticipated interest rate environment, liquidity needs and other economic
factors.
The Corporation's present policies with respect to the classification of
investments in debt and equity securities are discussed in Note 1 to the
Consolidated Financial Statements. An analysis of investment securities at
year-end for each of the last three years is presented in Table 5.
TABLE 5. ANALYSIS OF INVESTMENT SECURITIES
U.S. Treasury and
Federal Agency(1) State and Municipal(2) Other(1) Total
-------------------------- -------------------------- ------------------------- -------------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair
(in millions) Cost Value Yield Cost Value Yield Cost Value Yield Cost Value Yield
- ----------------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE:
MATURITIES AT
DECEMBER 31, 1995
DUE WITHIN ONE YEAR $169.4 $186.1 5.47% $44.0 $43.6 6.97% $2.8 $2.9 6.37% $216.2 $232.6 5.78%
ONE TO FIVE YEARS 174.8 159.0 5.78 87.2 90.0 8.50 1.0 1.0 7.74 263.0 250.0 6.69
FIVE TO TEN YEARS 1.2 1.2 7.91 45.7 47.0 8.25 0.4 0.4 7.81 47.3 48.6 8.23
AFTER TEN YEARS 0.2 0.2 8.36 32.2 32.9 8.38 6.6 6.6 6.21 39.0 39.7 8.02
------ ------ ----- ----- ---- ---- ------ ------
TOTAL $345.6 $346.5 5.63 $209.1 $213.5 8.11 $10.8 $10.9 6.45 $565.5 $570.9 6.56
====== ====== ====== ====== ===== ===== ====== ======
AVERAGE MATURITY 1.39 yrs. 4.31 yrs. 1.76 yrs. 2.94 yrs.
At December 31, 1994
Total $346.8 $331.0 5.27% $229.0 $226.4 7.89% $6.5 $6.6 6.67% $582.3 $564.0 6.32%
====== ====== ====== ====== ==== ==== ====== ======
Average maturity 2.00 yrs. 4.34 yrs. 3.53 yrs. 2.94 yrs.
Held-to-maturity:
At December 31, 1993
Total $361.7 $363.0 4.79% $279.4 $287.8 7.35% $9.2 $9.6 5.52% $650.3 $660.4 5.90%
====== ====== ====== ====== ==== ==== ====== ======
Average maturity 2.32 yrs. 3.48 yrs. 1.60 yrs. 2.81 yrs.
(1) Maturities for FNMA & GNMA mortgage participation
securities, collateralized mortgage obligations and asset-backed
securities are based upon projections of independent cash flow
models.
(2) Yields for state and municipal securities are calculated on a tax
equivalent basis using a 35% tax rate.
As of December 31, 1995, the estimated aggregate fair value of the
Corporation's investment securities portfolio was $5.4 million above amortized
cost. At December 31, 1995 gross unrealized gains were $6.9 million and gross
unrealized losses were $1.5 million. A summary of estimated fair values and
unrealized gains and losses for the major components of the investment
securities portfolio is provided in Note 3 to the Consolidated Financial
Statements.
In December 1994, the Corporation adopted Financial Accounting Standards
Board Statement No. 119, "Disclosures about Derivative Financial Instruments
and Fair Value of Financial Instruments" ("SFAS 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 collateralized mortgage obligations and, therefore, the adoption
of this Statement did not have a material effect. The Corporation's policy
only allows the purchase of collateralized mortgage obligations that are
composed of mortgage backed securities issued by a Federal Agency. Any CMO's
purchased are in early tranches with short average lives. These tranches are
classified in the Planned Amortization Class and have well-defined prepayment
assumptions (Super PAC's). The Corporation's CMO's are periodically tested to
ensure compliance with guidelines established by the Federal Financial
Institutions Examination Council.
LOANS AND LEASES
The Corporation extends credit primarily within the local markets of its seven
bank subsidiaries. These natural geographic concentrations extend along the
Interstate 75 corridor within the State of Michigan from northern suburban
Detroit to the greater Grayling/Gaylord area, as well as the western suburban
market of Chicago, Illinois. During 1995, the Corporation expanded its market
presence
Page 10
40
with the purchase of the acquired banks. These new locations in East Lansing,
Fenton, Sturgis and Ypsilanti give the Corporation opportunities within the
western suburban Detroit, central and southwestern Michigan market areas. The
Corporation's loan portfolio is widely diversified by borrowers with no
concentration within a single industry that exceeds 10% of total loans. The
Corporation's loan portfolio balances are summarized in Table 6.
Total average loans and leases comprised 76.7% of total average earning
assets during 1995 compared with 71.9% during 1994. As the economy continued
to expand in 1995, the Corporation experienced greater loan demand with total
average loans increasing 28.1% (3.0% excluding the acquired banks). This
growth occurred in all major loan categories except the lease financing
portfolio.
The majority of loan growth occurred as a result of the February 28, 1995
acquisition. Consumer installment loans represent the most significant
component of the acquired banks' loan portfolio. Increased demand for
business loans in the Corporation's local markets and improved economic
conditions modestly expanded the commercial and commercial real estate loan
portfolio 19.3% (3.4% excluding the acquired banks) in 1995 from 1994 levels.
Average consumer loan balances increased to $900.1 million in 1995 from $569.4
million, or 58.1% (7.0% excluding the acquired banks). Average mortgage loan
balances increased $46.4 million or 11.9% in 1995, from $389.7 million in 1994
(1.9% excluding the acquired banks).
In May 1995, Financial Accounting Standards Board issued Statement No. 122
"Accounting for Mortgage Servicing Rights". The Statement amends FASB
Statement No. 65 to require mortgage banking related companies to recognize as
a separate asset the rights to service mortgage loans for others regardless of
how those servicing rights are acquired. This may be through purchase or
origination of the mortgage loans. The Statement is effective for years
beginning after December 15, 1995. The Corporation will adopt the Statement
January 1, 1996. The impact of adoption on the Corporation is not expected to
be material.
TABLE 6. LOAN PORTFOLIO
1995 1994 1993 1992 1991
---------------- ---------------- ---------------- ---------------- ----------------
December 31 (in millions) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
- --------------------------------------------------------------------------------------------------------------------------
Commercial $566.9 23.3% $461.9 25.4% $426.9 24.0% $398.7 25.6% $404.4 26.4%
Commercial real estate 339.0 14.0 286.4 15.8 286.6 16.1 247.3 15.9 260.4 16.9
Real estate-construction 34.0 1.4 24.9 1.4 38.3 2.2 23.4 1.5 13.7 0.9
Real estate-mortgage 457.8 18.9 384.4 21.2 398.1 22.3 336.8 21.6 353.3 23.0
Consumer installment 970.7 40.0 581.3 32.0 534.7 30.0 471.4 30.3 457.2 29.7
Lease financing 60.1 2.4 77.3 4.3 95.6 5.4 79.8 5.1 47.5 3.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total $2,428.5 100.0% $1,816.2 100.0% $1,780.2 100.0% $1,557.4 100.0% $1,536.5 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
NONPERFORMING ASSETS
A five year history of nonperforming assets is presented in Table 7. Total
nonperforming assets, comprised of nonaccrual loans, loans 90 days past due and
still accruing, restructured loans and other real estate, amounted to $21.1
million as of December 31, 1995, a decrease of 3.7% from the year-end 1994
total of $21.9 million. Nonperforming loans as a percentage of total loans
declined significantly to 0.81% at December 31, 1995 from 1.09% on December 31,
1995, a decrease of 25.7%. The decline resulted from the Corporation's
continued management of loan portfolio quality and favorable economic
conditions. In addition, during 1995 consumer installment loan balances (which
historically contain lower levels of nonperforming loans) grew at a faster rate
than other segments of the portfolio, reflecting the retail orientation of the
acquired banks.
The consumer installment portfolio is composed of automobile, personal,
marine, home equity and bankcard loans of which automobile and home equity
comprise 66.7% of the 1995 average balances. One to four family residential
home loans comprise the majority of the real estate mortgage balances. The
Corporation's commercial real estate portfolio represents 14.0% of total loans
at December 31, 1995 compared to 15.8% at year end 1994. Within this portfolio,
nonperforming loans represented 16.4% of total nonperforming loans at December
31, 1995 compared with 18.7% at December 31, 1994. Management believes the
risk of loss on such nonaccrual loans is significantly less than the total
principal balance, due to the nature of the underlying collateral. These loans
are generally for owner-occupied properties and do not rely on the performance
of the real estate market to generate funds for repayment. The Corporation
maintains formal policies and procedures to control and monitor credit risk
within these portfolios. Based upon present information, management believes
the allowance for loan losses is adequate to meet presently known credit risks.
Page 11
41
TABLE 7. NONPERFORMING ASSETS AND PAST DUE LOANS
December 31 (in thousands) 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING LOANS(1),(2)
Nonaccrual(3)
Less than 30 days past due $ 4,783 $ 5,185 $ 2,518 $ 3,247 $ 1,696
From 30 to 89 days past due 784 1,405 938 1,781 2,168
90 or more days past due 13,057 11,566 17,815 15,731 20,846
------- -------- -------- -------- --------
Total 18,624 18,156 21,271 20,759 24,710
90 days past due and still accruing(5) 432 1,253 155 1,206 1,196
Restructured(1) 494 299 238 382 547
------- -------- -------- -------- --------
Total nonperforming loans 19,550 19,708 21,664 22,347 26,453
OTHER REAL ESTATE(3) 1,568 2,230 2,185 4,333 4,214
------- -------- -------- -------- --------
Total nonperforming assets $21,118 $21,938 $23,849 $26,680 $30,667
======= ======== ======== ======== ========
Nonperforming loans as a percent of total loans 0.81% 1.09% 1.22% 1.44% 1.72%
Nonperforming assets as a percent of total loans plus other
real estate 0.87 1.21 1.34 1.71 1.99
NONPERFORMING LOANS BY TYPE
Commercial $13,059 $15,741 $13,034 $10,874 $11,831
Real estate(3)(4) 2,543 1,224 5,232 8,940 12,149
Consumer installment 2,600 1,174 1,574 1,503 1,981
Lease financing 1,348 1,569 1,824 1,030 492
------- -------- -------- -------- --------
Total $19,550 $19,708 $21,664 $22,347 $26,453
======= ======== ======== ======== ========
(1) Nonperforming loans include loans on which interest is being recognized
only upon receipt (nonaccrual), those on which interest has been
renegotiated to lower than market rates because of the financial condition
of the borrowers (restructured), and loans 90 days past due and still
accruing.
(2) Gross interest income that would have been recorded in 1995 for
nonaccrual and restructured loans, as of December 31, 1995, assuming
interest had been accrued throughout the year in accordance with original
terms was $2.509 million. The comparable 1994 and 1993 totals were $1.879
million, and $1.589 million, respectively. Interest collected on these
loans and included in income was $1.427 million in 1995, $1.128 million in
1994 and $0.697 million in 1993. Therefore, on a net basis, total income
foregone due to these loans was $1.082 million in 1995, $0.751 million in
1994 and $0.892 million in 1993.
(3) Assets in-substance foreclosed previously reported as other real estate
were reclassified as nonaccrual loans in the fourth quarter of 1993.
Assets in-substance foreclosed totaled $0 at December 31, 1995; $0.021
million at December 31, 1994; $1.720 million at December 31, 1993; $2.983
million at December 31, 1992 and $4.302 million at December 31, 1991.
(4) 1995 and 1994 nonperforming commercial real estate loan balances have
been reclassified into the nonperforming commercial loan category.
Previous years' balances have not been reclassified.
(5) In 1995, loans 90 days past due and still accruing were reclassified as
nonperforming loans. All prior year information was restated.
The Corporation changed its nonperforming asset policy in the third
quarter of 1995 to include loans 90 days past due and still accruing in the
nonperforming asset category. Previously these loans were considered
underperforming assets. All nonperforming asset disclosures have been adjusted
to reflect this change. The change did not materially impact the percentage of
nonperforming loans to total loans.
The level and composition of nonperforming assets are affected by economic
conditions in the Corporation's local markets. Nonperforming assets,
charge-offs and provisions for loan losses tend to decline in a strong economy
and increase in a weak economy, potentially impacting the Corporation's
results. In addition to nonperforming loans, management carefully monitors
other credits that are current in terms of principal and interest payments but,
in management's opinion, may deteriorate in quality if economic conditions
change. As of December 31, 1995, such loans amounted to $10.8 million or 0.5%
of total loans compared with $15.3 million or 0.8% of total loans as of
December 31, 1994. These loans are primarily commercial and commercial real
estate loans made in the normal course of business and do not represent a
concentration in any one industry. Collectively, these loans and the
nonperforming assets in Table 7 represent 1.32% of total loans as of December
31, 1995 compared with 2.0% as of December 31, 1994.
Page 12
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TABLE 8. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Amount Allocated by Loan Category
--------------------------------------------------
December 31 (in millions) 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
Commercial $11.2 $10.6 $6.0 $6.9 $7.9
Real estate-construction 0.1 0.1 0.2 0.1 0.2
Real estate-mortgage(1) 1.1 1.0 3.2 3.2 3.0
Consumer installment 13.2 7.0 6.6 5.7 5.2
Lease financing 1.2 1.2 1.1 1.0 0.4
----- ----- ----- ----- -----
Total allocated 26.8 19.9 17.1 16.9 16.7
Unallocated 8.0 4.8 5.4 2.5 3.1
----- ----- ----- ----- -----
Total $34.8 $24.7 $22.5 $19.4 $19.8
===== ===== ===== ===== =====
The allocations of the allowance for loan losses in the above table are based
upon ranges of estimates and are not intended to imply either limitations on
the usage of the allowance or precision of the specific amounts. The
Corporation and its subsidiaries do not view the allowance for loan losses as
being divisible among the various categories of loans. The entire allowance is
available to absorb any future losses without regard to the category or
categories in which the charged-off loans are classified.
(1) 1995 and 1994 commercial real estate loan allowance allocations are
reflected in the commercial loan category. Prior years' allowance
allocations have not been reclassified.
The Corporation adopted Financial Accounting Standards Board Statement
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS
118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition
and Disclosures" effective January 1, 1995. SFAS 114 requires creditors to
establish a valuation allowance for impaired loans. A loan is considered
impaired when management determines it is probable that all the principal and
interest due under the contractual terms of the loan will not be collected.
The impairment is measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's observable
market price, or the fair value of the collateral if the loan is collateral
dependent. The adoption of the Statements did not have a material effect on
the Corporation's financial position or results of operations, nor did it
result in additional provisions for loan losses as the Corporation has
historically established valuation allowances based on the fair value of
collateral securing an impaired loan. In addition, as permitted by SFAS 118,
interest income on impaired loans continues to be recognized in a manner
consistent with prior income recognition policies. For all impaired loans,
other than nonaccrual loans, interest income is recorded on an accrual basis.
Interest income on impaired nonaccrual loans is recognized on a cash basis.
Certain of the Corporation's nonperforming loans included in Table 7 are
considered to be impaired under the Statements. The Corporation measures
impairment on all large balance nonaccrual commercial and commercial real
estate loans. Certain large balance accruing loans rated substandard or worse
are also measured for impairment. In most instances, impairment is measured
based on the fair value of the underlying collateral. Impairment losses are
included in the provision for loan losses. SFAS 114 does not apply to large
groups of smaller balance homogeneous loans that are collectively evaluated for
impairment, except for those loans restructured under a troubled debt
restructuring. Loans collectively evaluated for impairment include certain
smaller balance commercial loans, consumer loans, residential real estate
loans, and credit card loans, and are not included in the impaired loan data in
the following paragraph.
At December 31, 1995, loans considered to be impaired under the Statements
totaled $16.6 million (of which $10.1 million were on a nonaccrual basis).
Included within this amount is $4.7 million of impaired loans for which the
related allowance for loan losses is $0.8 million and $11.9 million of impaired
loans for which the fair value exceeded the recorded investment in the loan.
The average recorded investment in impaired loans during the year ended
December 31, 1995 was approximately $19.9 million. For the year ended
December 31, 1995, the Corporation recognized interest income of $1.5 million
which included $0.8 million of interest income recognized using the cash basis
method of income recognition.
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 is doubt regarding collection of
principal or interest, or when principal or interest is past due 90 days or
more and the loan is not well secured and in the process of collection.
Interest accrued but not collected is reversed and charged against income when
the loan is placed on nonaccrual status.
Other real estate owned is comprised of property acquired through a
foreclosure proceeding or acceptance of
Page 13
43
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. Therefore,
these Statements had no effect in 1995 since the Corporation's policy on
in-substance foreclosed assets had been previously amended in 1993 to comply
with new regulatory guidelines.
During 1995, each of the Corporation's banking subsidiaries received a
normally scheduled examination by its governing regulatory agency. There was
no material reclassification of assets as nonperforming resulting from these
examinations.
TABLE 9. AVERAGE DEPOSITS
1995 1994 1993
------------------ ----------------- -----------------
AVERAGE AVERAGE Average Average Average Average
Year Ended December 31 (in millions) BALANCE RATE Balance Rate Balance Rate
- ----------------------------------------------------------------------------------------------------
Noninterest-bearing demand $451.6 --- $379.7 --- $325.6 ---
Interest-bearing demand 309.4 1.87% 256.1 1.71% 238.5 2.08%
Savings 909.7 2.82 909.4 2.39 832.4 2.56
Time 1,031.6 5.50 717.0 4.17 712.8 4.35
-------- -------- --------
Total $2,702.3 3.26 $2,262.2 2.48 $2,109.3 2.72
======== ======== ========
DEPOSITS
The Corporation's average deposit balances and rates for the past three years
are summarized in Table 9. Total average deposits were 19.5% higher in 1995
compared with 1994, due to the acquired banks. The Corporation experienced
increases in all deposit categories. As a result of customer preferences,
deposits continued shifting from savings to time deposits during 1995, with
savings balances remaining virtually unchanged despite the effect of the
acquired banks. Noninterest-bearing demand accounts accounted for 16.7% of
total average deposits during 1995, unchanged from 1994. As of December 31,
1995, certificates of deposits of $100,000 or more comprised approximately 7.6%
of total deposits compared with 5.0% as of December 31, 1994. The maturities
of these deposits are summarized in Table 10.
TABLE 10. MATURITY OF TIME CERTIFICATES OF
DEPOSIT OF $100,000 OR MORE
December 31,
(in millions) 1995
- ------------------------------------------------------------
Three months or less $102.4
After three but within six months 49.5
After six but within twelve months 42.2
After twelve months 25.1
------
Total $219.2
======
The Corporation gathers deposits primarily from the local markets of its
banking subsidiaries and does not rely on brokered deposits. Management
continues to promote core deposit growth and stability through focused
marketing efforts and competitive pricing strategies.
BORROWED FUNDS
Total short-term borrowings, primarily federal funds purchased, securities sold
under agreements to repurchase and Treasury Tax and Loan notes, averaged $146.0
million or 5.8% of total average interest-bearing liabilities during 1995
compared with $141.2 million or 6.9% during 1994. Long-term debt accounted for
$102.8 million or 4.1% of average interest-bearing funds during 1995,
increasing from $8.7 million or 0.4% in 1994. To finance the acquisition of
the acquired banks, the Corporation's Parent company obtained a $115 million
seven year amortizing revolving credit facility. $75 million of the revolving
credit facility is currently priced at a fixed rate of 7.65%. Of this amount,
$16.5 million reprices in March 1996, $51.5 million in March 1997 and $7
million in March 1998. The remaining $23.5 million outstanding has an interest
rate based on a LIBOR index. The debt agreement allows the Corporation to
prepay the debt without penalty subject to certain restrictions. The Parent
company services the debt's principal and interest payments with dividends from
the subsidiary banks. The agreement also requires the Corporation to maintain
certain financial covenants. The Corporation is in full compliance with all
debt covenants as of December 31, 1995. In addition, $4.6 million of long-term
debt of the acquired banks was assumed by the Corporation as part of the
acquisition. A summary of long-term debt balances as of December 31, 1995 and
1994 appears in Note 9 to the Consolidated Financial Statements.
Page 14
44
CAPITAL RESOURCES
Management closely monitors capital levels to provide for current and future
business needs and to comply with regulatory requirements. All bank
subsidiaries within the Corporation have sufficient capital to maintain a "well
capitalized" designation, (the FDIC's highest rating). As summarized below, the
Corporation's capital ratios were in excess of regulatory requirements.
- --------------------------------------------------------------
Regulatory
Minimum
----------------------
December 31,
"Well -------------------
Required Capitalized" 1995 1994 1993
- --------------------------------------------------------------
Risk based:
Tier I capital 4.00% 6.00% 8.79% 13.44% 13.12%
Total capital 8.00 10.00 10.04 14.69 14.36
Tier I leverage 3.00 5.00 6.65 9.52 8.90
The Corporation declared cash dividends of $0.90 per share in 1995, an
increase of 9.8% over 1994 dividends of $0.82 per share. Citizens Banking
Corporation or its predecessor, Citizens Commercial & Savings Bank, have paid
dividends every year since 1892 except for several years during the depression
of the 1930's.
The Corporation maintains a stock repurchase program initiated in November
1987. During 1995, no shares were purchased under this program. A total of
1,132,470 shares have been purchased under this program at an average price of
$14.31 per share.
LIQUIDITY AND DEBT CAPACITY
The liquidity position of the Corporation is monitored for each subsidiary
and the Parent company to ensure that funds are available at a reasonable cost
to meet financial commitments and to finance business expansion. The
Corporation's subsidiary banks derive liquidity primarily through core deposit
growth and maturity of money market investments, investment securities and
loans. Additionally, the Corporation's subsidiary banks have access to market
borrowing sources on an unsecured, as well as a collateralized basis, for
short-term purposes. Management has not had to rely on borrowings from the
Federal Reserve or the sale of investment securities to meet liquidity
requirements. Another source of liquidity is the ability of the Corporation's
Parent company to borrow funds on both a short-term and long-term basis.
Various techniques are used by the Corporation to measure liquidity,
including ratio analysis. Some ratios monitored by the Corporation include:
loans to deposits; short-term investments to volatile liabilities (including
short-term debt and large denomination certificates of deposit); and liquid
assets (cash, U.S. Treasury securities and short-term investments) to total
deposits. The ratios are summarized below for the last three years.
- --------------------------------------------------------------
December 31 1995 1994 1993
- --------------------------------------------------------------
Average loans to deposits 85.2% 80.0% 78.0%
Short-term investments to
volatile liabilities 41.0 40.7 33.7
Liquid assets to total deposits 18.2 19.7 18.6
The subsidiary banks manage liquidity to meet customer cash flow needs
while maintaining funds available for investment opportunities. As discussed
in Note 16 to the Consolidated Financial Statements, the Federal Reserve Bank
requires the Corporation's banking subsidiaries to maintain certain
noninterest-bearing deposits. The balances averaged $41.2 million and $36.2
million during 1995 and 1994, respectively.
The liquidity of the Parent company is managed to provide funds to pay
dividends to shareholders, service debt, invest in subsidiaries and to satisfy
other operating requirements. The Parent company's primary source of liquidity
is dividends from its subsidiaries. During 1995, the Parent company received
$24.4 million in dividends from subsidiaries and paid $12.8 million in
dividends to its shareholders. As discussed in Note 16 to the Consolidated
Financial Statements, $23.2 million was available as of January 1, 1996 for
payment to the Parent company as dividends by the Corporation's banking
subsidiaries without further regulatory approval. Amounts earned by
subsidiaries in 1996 may also become available for such dividend payments.
Additional amounts may be available for payment subject to regulatory approval.
On October 20, 1995, the Corporation announced the consolidation of its
six Michigan chartered banks into one bank called Citizens Bank. The
consolidation will further streamline operations and reduce certain costs but
will retain local management and respective boards of directors. The
consolidation is subject to regulatory approval and is expected to be
completed in June 1996. This consolidation will likely result in maintaining
additional non-interest bearing deposits with the Federal Reserve Bank and may
favorably impact the ability of the surviving entity to pay dividends to the
Parent company without further regulatory approval.
The Corporation's long-term debt to equity ratio was 35.5% as of December
31, 1995 compared with 2.0% as of December 31, 1994. Increases in long-term
debt during 1995 are discussed in the section titled "Borrowed Funds".
Management believes that the Corporation has sufficient liquidity to meet
presently known cash flow requirements arising from ongoing business
transactions.
Page 15
45
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 sufficient liquidity and minimize
exposure to significant changes in interest rates. This process includes
monitoring contractual and expected repricing of assets and liabilities as well
as forecasting earnings under different interest rate scenarios and balance
sheet structures. Generally, management seeks a structure that insulates net
interest income from large swings attributable to changes in market interest
rates. Table 11 depicts the Corporation's asset/liability static sensitivity
("GAP") as of December 31, 1995.
TABLE 11. INTEREST RATE SENSITIVITY
TOTAL
December 31, 1995 1-30 31-90 91-180 181-365 WITHIN 1-5 Over
(in millions) Days Days Days Days 1 YEAR Years 5 Years Total
- -----------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVE ASSETS
Loans and leases $755.8 $95.0 $153.2 $236.0 $1,240.0 $848.8 $339.7 $2,428.5
Investment securities 13.9 60.7 77.2 80.8 232.6 250.0 88.3 570.9
Short-term investments 104.8 45.0 --- --- 149.8 --- --- 149.8
------ ------ ------ ------ -------- -------- ------ --------
Total $874.5 $200.7 $230.4 $316.8 $1,622.4 $1,098.8 $428.0 $3,149.2
====== ====== ====== ====== ======== ======== ====== ========
RATE SENSITIVE LIABILITIES
Deposits (2) $170.6 $236.5 $301.8 $521.3 $1,230.2 $982.5 $145.8 $2,358.6
Short-term borrowings 146.0 --- --- --- 146.0 --- --- 146.0
Long-term debt 2.5 20.0 20.1 --- 42.6 58.5 4.4 105.4
------ ------ ------ ------ -------- -------- ------ --------
Total $319.1 $256.5 $321.9 $521.3 $1,418.8 $1,041.0 $150.2 $2,610.0
====== ====== ====== ====== ======== ======== ====== ========
Period GAP (1) $555.4 $(55.8) $(91.5) $(204.5) $203.6 $57.8 $277.8 $539.2
Cumulative GAP 555.4 499.6 408.1 203.6 261.4 539.2
Cumulative GAP to
Total Assets 16.03% 14.42% 11.78% 5.88% 5.88% 7.55% 15.57% 15.57%
Multiple of Rate Senitive
Assets to Liabilities 2.74 0.78 0.72 0.61 1.14 1.06 2.85 1.21
(1) GAP is the excess of rate sensitive assets (liabilities).
(2) Includes interest bearing savings and demand deposits of $394 million in
the less than one year category and $832 million in the over one year
category. This runoff is based on historical trends, which reflects
industry standards.
As shown, the Corporation had an asset sensitive position (more rate
sensitive assets than rate sensitive liabilities) of $203.6 million within the
one-year time frame. This position suggests that the Corporation has the
potential to earn higher net interest income during the next twelve months if
market interest rates were to rise. Conversely, if interest rates continue to
decline, the Corporation may experience a decrease in net interest income.
However, management is continually reviewing its interest rate risk position
and modifying its strategies based on projections to minimize the impact of
future interest rate declines. Traditional GAP analysis does not, however,
incorporate adjustments for the magnitude or timing of noncontractual
repricing. Because of these and other inherent limitations of GAP analysis,
management also utilizes simulation modeling to evaluate the impact of changes
in interest rates and balance sheet strategies. Management uses these
simulations to develop strategies that can limit interest rate risk and provide
liquidity to meet customer loan demand and deposit preferences.
Page 16
46
TABLE 12. LOAN MATURITIES AND INTEREST RATE SENSITIVITY
Due Within One to After
December 31 (in millions) One Year Five Years Five Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial $453.8 $395.0 $57.1 $905.9
Real estate-construction 24.4 9.3 0.3 34.0
------ ------ ----- ------
Total $478.2 $404.3 $57.4 $939.9
====== ====== ===== ======
Loans above:
With floating interest rates $330.8 $181.8 $38.4 $551.0
With predetermined interest rates 147.4 222.5 19.0 388.9
------ ------ ----- ------
Total $478.2 $404.3 $57.4 $939.9
====== ====== ===== ======
TABLE 13. SELECTED QUARTERLY INFORMATION
1995 1994
------------------------------------------- -------------------------------------------
(in thousands except per share data) FOURTH THIRD SECOND FIRST Fourth Third Second First
------- ----- ------ ----- -------- ------ ------- ----------
Interest income $63,752 $62,779 $62,248 $51,821 $46,836 $45,849 $44,529 $42,775
Net interest income 35,536 35,045 35,361 31,553 30,531 30,315 29,559 27,995
Provision for loan losses 1,937 1,504 1,580 1,420 1,532 1,355 1,358 1,058
Investment securities
gains (losses) 79 15 13 91 4 (35) 9 179
Noninterest income 9,790 9,586 8,889 7,971 8,564 8,450 8,369 8,314
Noninterest expense 29,952 30,587 32,468 28,080 26,328 26,759 26,701 27,457
Net income 9,759 8,984 7,469 7,384 8,234 7,745 7,226 6,209
PER SHARE OF COMMON STOCK
Net income:
Primary 0.67 0.62 0.51 0.51 0.56 0.54 0.50 0.43
Fully diluted 0.67 0.61 0.51 0.51 0.56 0.54 0.50 0.43
Cash dividends declared 0.23 0.23 0.23 0.21 0.21 0.21 0.21 0.19
Market value:(1)
High 32.50 33.25 31.00 27.00 29.00 26.75 26.00 26.00
Low 29.00 29.25 25.25 24.94 25.25 22.00 22.75 22.75
Close 29.75 30.38 29.75 26.50 27.75 25.50 24.50 22.75
(1) Citizens Banking Corporation common stock is traded in the over-the-counter
market (NASDAQ trading symbol: CBCF). At December 31, 1995, there were
approximately 6,700 shareholders of the Corporation's common stock.
IMPACT OF INFLATION
Substantially all of the assets and liabilities of a financial institution
are monetary. Therefore, inflation generally has a less significant impact on
financial institutions than fluctuations in market interest rates. Inflation
can lead to accelerated growth in noninterest expenses, which can adversely
impact results of operations. Additionally, inflation may impact the rate of
deposit growth and necessitate increased growth in equity to maintain a strong
capital position. Management believes the most significant impact on financial
results is the Corporation's ability to respond to changes in interest rates.
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47
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH 1993
Citizens Banking Corporation earned $29,414,000 or $2.03 per fully diluted
share during 1994 compared with $25,770,000 or $1.88 per share in 1993. 1994
reflected a 14.1% increase in net income as compared with 1993. Return on
assets improved 6.9% from 1.02% in 1993 to 1.09% in 1994.
Overall, the increase in net income in 1994 reflects improvement in net
interest income, noninterest income and a reduction in the provision for loan
losses offset, in part, by increases in noninterest expense and income taxes.
The October 1, 1993 acquisition of National Bank of Royal Oak ("NBRO") by the
Corporation affects the comparison between 1994 and 1993. The acquisition was
accounted for as a purchase and, accordingly, the Corporation's net income
reflects three months of financial results for 1993 and a full year for 1994.
Net interest income for 1994 was $118,400,000, an increase of 13.5% over
1993 net interest income of $104,334,000. This increase resulted from a higher
level of earning assets, primarily due to the acquisition of NBRO. Yields on
assets increased slightly between 1994 and 1993. However, rates paid on
funding sources continued to decline in 1994. As a result, the net interest
margin increased to 4.99% in 1994, a 25 basis point improvement over 1993.
The provision for loan losses decreased to $5,303,000 in 1994 compared
with $5,597,000 in 1993 as a result of lower net loan charge-offs and improved
economic conditions. Net loan charge-offs were 0.17% of average total loans in
1994, down from 0.25% in 1993. As of December 31, 1994, the ratio of the
allowance for loan losses to net charge-offs improved to 7.9 times compared
with 5.5 times as of December 31, 1993.
Noninterest income in 1994 increased $2,639,000 or 8.5% over the 1993
levels. This increase resulted from the NBRO acquisition and higher trust fee
income and bankcard fee income. 1994 results for NBRO reflect $3,623,000 of
noninterest income for merchant discount and other bankcard fee income
primarily from the Travel Banking product line. Other loan income declined
$345,000 in 1994 compared with 1993, the result of lower gains on the sale of
mortgage loans into the secondary market and lower mortgage servicing fees.
The Corporation also realized net gains on the sale of securities of $157,000
during 1994 compared with $763,000 in 1993.
Noninterest expense was up $9,977,000 or 10.3% in 1994 of which $9,205,000
resulted from the acquisition of NBRO. Compensation expense, excluding NBRO
decreased 0.4% in 1994 compared with 1993. This decline was primarily due to
continued health care cost containment and a reduction in the number of
full-time equivalent employees through normal attrition. Excluding NBRO,
consulting fees increased 12.3% in 1994 compared with 1993 due to Corporate
automation and reengineering project costs. Excluding the results of NBRO,
bankcard interchange fees increased because of higher merchant transaction
levels. Interchange and other bankcard fees for NBRO totaled $3,797,000 in
1994 versus $911,000 in 1993. These fees primarily reflect the Travel Banking
product line transactions. In 1994 NBRO also incurred a one-time charge of
$1,500,000 related to the Travel Banking product line. Subsequent to 1994,
this product line was discontinued.
Income tax expense for 1994 increased 48.9% compared with 1993. This
increase resulted from higher pretax earnings combined with lower tax-exempt
interest income. The adoption of Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes" by the Corporation effective
January 1, 1993 had no material effect on the results of operations or
financial position of the Corporation.
The Corporation had total average assets of $2.711 billion in 1994, up
from 1993 average assets of $2.535 billion, primarily due to the acquisition
of NBRO. Average loans and leases comprised 71.9% of total earning assets in
1994, up from 70.0% in 1993. Much of this growth occurred in the consumer and
commercial loan portfolios due to improved economic conditions and the
acquisition of NBRO. Average money market investment balances, primarily
federal funds sold and Eurodollar time deposits were virtually unchanged from
1993 levels. As discussed in Note 1 to the Consolidated Financial Statements,
the Corporation adopted SFAS 115 and classified all of its investment portfolio
in the available-for-sale category as of January 1, 1994.
Total average deposits were 7.2% higher in 1994 compared with 1993,
primarily due to the acquisition of NBRO. The Corporation experienced
increases in all deposit categories. As a result of customer preferences,
deposit balances continued to shift from time to savings and demand accounts in
1994 as noted by average time deposits remaining nearly unchanged despite the
NBRO acquisition. Average short-term borrowings, comprised primarily of
securities sold under agreements to repurchase, decreased slightly to 6.9% of
average interest-bearing liabilities in 1994 compared with 7.1% in 1993.
Average long-term debt balances declined to $8.7 million in 1994 from $13.1
million in 1993 due to scheduled principal payments. Average shareholders'
equity was $256.6 million at December 31, 1994, an 11.0% increase over the 1993
average of $231.2 million.
Page 18
48
CONSOLIDATED BALANCE SHEETS
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
December 31,
(in thousands except share amounts) 1995 1994
- ------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 172,754 $ 132,092
Money market investments:
Interest-bearing deposits with banks 10,090 20,135
Federal funds sold 50,000 60,000
Term federal funds sold and other 89,744 25,000
----------- ---------
Total money market investments 149,834 105,135
Investment securities available-for-sale (amortized cost
$565,547 in 1995; $582,316 in 1994) 570,912 563,999
Loans:
Commercial loans 905,947 748,318
Real estate - construction 33,984 24,947
Real estate - mortgage 457,758 384,401
Consumer installment 970,755 581,252
Lease financing 60,069 77,303
----------- ----------
Total loans 2,428,513 1,816,221
Less: Allowance for loan losses (34,771) (24,714)
----------- ----------
Net loans 2,393,742 1,791,507
Premises and equipment 63,147 52,533
Intangible assets 70,385 15,830
Other assets 43,148 42,727
----------- ----------
TOTAL ASSETS $3,463,922 $2,703,823
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing deposits $ 506,116 $ 416,395
Interest-bearing deposits 2,358,585 1,835,923
---------- ----------
Total deposits 2,864,701 2,252,318
Federal funds purchased and securities sold
under agreements to repurchase 130,556 125,581
Other short-term borrowings 15,468 20,850
Other liabilities 50,600 41,095
Long-term debt 105,411 5,249
---------- ----------
Total liabilities 3,166,736 2,445,093
SHAREHOLDERS' EQUITY
Preferred stock - no par value:
Authorized - 5,000,000 shares
Issued - none --- ---
Common stock - no par value:
Authorized - 40,000,000 shares
Issued and outstanding - 14,333,920 in 1995; 14,128,368 in 1994 91,480 89,243
Retained earnings 202,219 181,393
Net unrealized gain (loss) on securities available-for-sale, 3,487 (11,906)
netof tax ---------- ----------
Total shareholders' equity 297,186 258,730
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,463,922 $2,703,823
========== ==========
See Notes to Consolidated Financial Statements.
Page 19
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CONSOLIDATED STATEMENTS OF INCOME
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31,
(in thousands except share amounts) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $201,242 $144,263 $133,029
Interest and dividends on investment securities:
Taxable 22,531 22,725 19,555
Nontaxable 9,403 10,568 11,731
Money market investments 7,424 2,433 2,137
---------- ---------- ----------
Total interest income 240,600 179,989 166,452
---------- ---------- ----------
INTEREST EXPENSE
Deposits 88,157 56,020 57,294
Short-term borrowings 7,221 5,115 4,203
Long-term debt 7,727 454 621
---------- ---------- ----------
Total interest expense 103,105 61,589 62,118
---------- ---------- ----------
NET INTEREST INCOME 137,495 118,400 104,334
Provision for loan losses 6,441 5,303 5,597
---------- ---------- ----------
Net interest income after provision for loan losses 131,054 113,097 98,737
---------- ---------- ----------
NONINTEREST INCOME
Trust fees 11,314 9,697 9,162
Service charges on deposit accounts 9,717 8,619 7,934
Bankcard fees 5,635 7,694 4,631
Investment securities gains 198 157 763
Other 9,570 7,687 8,725
---------- ---------- ----------
Total noninterest income 36,434 33,854 31,215
---------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 64,357 55,722 53,177
Equipment 9,709 8,505 7,616
Occupancy 9,000 8,050 7,073
FDIC insurance premiums 3,250 5,050 4,714
Bankcard fees 3,418 6,095 2,847
Stationery and supplies 3,570 2,762 2,527
Postage and delivery 3,189 2,359 2,279
Other 24,594 18,702 17,035
---------- ---------- ----------
Total noninterest expense 121,087 107,245 97,268
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 46,401 39,706 32,684
Income taxes 12,805 10,292 6,914
---------- ---------- ----------
NET INCOME $33,596 $29,414 $25,770
========== ========== ==========
Net Income Per Share:
Primary $2.31 $2.03 $1.88
Fully diluted $2.30 $2.03 $1.87
Average shares outstanding:
Primary 14,574,871 14,463,068 13,724,319
Fully diluted 14,611,736 14,511,706 13,789,302
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Retained Unrealized
(in thousands except share amounts) Common Stock Earnings Gain(Loss) Total
- ----------------------------------------------------------------------------------------------------------
BALANCE - JANUARY 1, 1993 $71,573 $147,703 $ --- $219,276
Net income 25,770 25,770
Exercise of stock options, net of
shares purchased 828 828
Cash dividends-$0.745 per share (9,937) (9,937)
Shares acquired for retirement (3,254) (3,254)
Acquisition of subsidiary bank
(1,073,053 shares issued) 22,480 22,480
------- -------- ------- --------
BALANCE - DECEMBER 31, 1993 91,627 163,536 --- 255,163
Net income 29,414 29,414
Exercise of stock options, net of
shares purchased 1,602 1,602
Cash dividends-$0.820 per share (11,557) (11,557)
Shares acquired for retirement (3,986) (3,986)
Effect on January 1, 1994 of change in
accounting for investment securities,
net of deferred tax of $3,544 6,582 6,582
Net unrealized loss on securities
available-for-sale,net of tax effect
of $9,955 (18,488) (18,488)
------- -------- ------- --------
BALANCE - DECEMBER 31, 1994 89,243 181,393 (11,906) 258,730
Net income 33,596 33,596
Exercise of stock options, net of
shares purchased 2,237 2,237
Cash dividends-$0.900 per share (12,770) (12,770)
Net unrealized gain on securities
available-for-sale,
net of tax effect of $8,289 15,393 5,393
------- -------- ------- --------
BALANCE - DECEMBER 31, 1995 $91,480 $202,219 $ 3,487 $297,186
======= ======== ======= ========
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31,
(in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $33,596 $29,414 $25,770
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 6,441 5,303 5,597
Depreciation 7,272 6,228 5,480
Amortization of goodwill and other intangibles 4,687 1,602 1,017
Deferred income taxes (credit) 184 (171) 487
Net amortization on investment securities 3,019 3,232 9,459
Investment securities gains (198) (157) (763)
Other 21 (2,260) 5,458
--------- ------- -------
Net cash provided by operating activities 55,022 43,191 52,505
--------- ------- -------
INVESTING ACTIVITIES:
Net (increase) decrease in money market investments (21,599) (19,035) 6,831
Securities available-for-sale:
Proceeds from sale 6,980 190,275 ---
Proceeds from maturity 172,975 187,561 ---
Purchase (130,782) (312,969) ---
Securities held to maturity:
Proceeds from sale --- --- 78,095
Proceeds from maturity --- --- 348,209
Purchase --- --- (379,245)
Net increase in loans and leases (87,272) (39,177) (99,591)
Purchases of premises and equipment (6,583) (4,772) (4,785)
Net cash provided by (used for) acquisition of subsidiary (59,434) --- 8,412
-------- ------- --------
Net cash provided (used) by investing activities (125,715) 1,883 (42,074)
-------- ------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings deposits (81,726) (29,513) 557,114
Net increase (decrease) in time deposits 153,423 35,081 (577,045)
Net increase (decrease) in short-term borrowings (45,415) (12,296) 18,164
Proceeds from issuance of long-term debt 115,000 --- ---
Principal reductions in long-term debt (19,394) (5,616) (4,428)
Cash dividends paid (12,770) (11,557) (9,937)
Proceeds from stock options exercised 2,237 1,602 828
Shares acquired for retirement --- (3,986) (3,254)
---------- --------- ---------
Net cash provided (used) by financing activities 111,355 (26,285) (18,558)
---------- --------- ---------
Net increase (decrease) in cash and due from banks 40,662 18,789 (8,127)
Cash and due from banks at beginning of year 132,092 113,303 121,430
---------- --------- ---------
Cash and due from banks at end of year $172,754 $132,092 $113,303
========== ========= =========
Supplemental Cash Flow Information:
Interest paid $95,267 $61,257 $63,104
Income taxes paid 12,580 10,235 6,661
See Notes to Consolidated Financial Statements.
Page 22
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NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Citizens Banking Corporation
("Corporation") and its subsidiaries conform to generally accepted accounting
principles. Management makes estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from these estimates. The following describes the Corporation's
policies:
CONSOLIDATION
The Consolidated Financial Statements include the accounts of the Corporation
and its subsidiaries after elimination of all material intercompany
transactions and accounts.
INVESTMENT SECURITIES
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" requires securities to be classified
as held-to-maturity, available-for-sale or trading. Only those securities
classified as held-to-maturity are reported at amortized cost, with those
available-for-sale and trading reported at fair value with unrealized gains and
losses included in shareholders' equity or income, respectively. The
Corporation adopted this Statement effective January 1, 1994 and classified all
of its investment portfolio in the available-for-sale category. Prior to
adoption, all securities were classified in a single portfolio accounted for at
amortized cost. In the event that an investment security is sold, the adjusted
cost of the specific security sold is used to compute the applicable gain or
loss. See also Note 3.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered by management
to be adequate to absorb losses inherent in the loan portfolio. Management's
evaluation is based on a continuing review of the loan portfolio and includes
consideration of actual loss experience, the financial condition of borrowers,
the size and composition of the loan portfolio, current and anticipated
economic conditions and other pertinent factors. The allowance is increased by
the provision charged to income and recoveries of loans previously charged off
and reduced by loans charged off.
The Corporation adopted Financial Accounting Standards Board Statement
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS
118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition
and Disclosures" effective January 1, 1995. The statements require creditors
to establish a valuation allowance for impaired loans. A loan is considered
impaired when management determines it is probable that all the principal and
interest due under the contractual terms of the loan will not be collected.
The impairment is measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's observable
market price, or the fair value of the collateral if the loan is collateral
dependent. Prior to 1995, the allowance for loan losses related to these loans
was based on the undiscounted cash flows or the fair value of the collateral
for collateral dependent loans.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are carried at cost
less accumulated depreciation and amortization. Depreciation and amortization
are computed principally on a straight-line basis and are charged to expense
over the lesser of the estimated useful life of the assets or lease term.
Maintenance and repairs as well as gains and losses on dispositions are charged
to expense as incurred.
OTHER REAL ESTATE
Other real estate includes properties acquired in satisfaction of a debt.
These properties are carried at the lower of cost or fair value, net of
estimated costs to sell, based upon current appraised value. Losses arising
from the acquisition of such properties are charged against the allowance for
loan losses. Subsequent valuation adjustments and gains or losses on disposal
of these properties are charged to other expenses as incurred.
INTANGIBLE ASSETS
Goodwill, the unamortized cost of acquiring subsidiaries in excess of the fair
value of identifiable net assets at the date acquired, is amortized on a
straight line basis over 15 years. The carrying amount of goodwill is reviewed
if the facts and information supporting the initially recorded amount changes.
If the review indicates that impairment may exist, the current carrying amount
is reduced by the estimated shortfall.
INCOME TAXES
The Corporation and its subsidiaries file a consolidated federal income tax
return. Income tax expense is based on income as reported in the Consolidated
Statements of income. When income and expenses are recognized
Page 23
53
in different periods for tax purposes, applicable deferred taxes are provided
in the Consolidated Financial Statements.
LOAN INTEREST AND FEE INCOME
Interest on loans is generally accrued and credited to income based upon the
principal amount outstanding. Loans are placed on nonaccrual status when
collectibility of principal or interest is considered doubtful, or payment of
principal or interest is past due 90 days or more and the loan is not well
secured and in the process of collection. When these loans (including a loan
impaired under SFAS 114) are placed on nonaccrual status, all interest
previously accrued but unpaid is reversed against current year interest income.
Interest payments received on nonaccrual loans are credited to income if
future collection of principal is probable. Loans are normally restored to
accrual status when interest and principal payments are current and it is
believed that the financial condition of the borrower has improved to the
extent that future principal and interest payments will be met on a timely
basis.
Loan origination fee income, net of direct origination costs and certain
incremental direct costs, is deferred and amortized as a yield adjustment over
the estimated term of the related loans by methods that approximate the level
yield method. Loan fees on unused commitments and fees related to loans sold
are recognized currently as other income.
NET INCOME PER SHARE
Primary and fully diluted net income per share are computed based on the
weighted average number of shares outstanding in each period and dilutive
common stock equivalents outstanding in each period. Common stock equivalents
consist of common stock issuable under the assumed exercise of stock options
granted under the Corporation's stock option plans, using the treasury stock
method. The weighted average number of shares has been adjusted for a
two-for-one stock split effected in the form of a dividend paid May 12, 1993 to
shareholders of record on April 30, 1993.
CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and amounts due from banks.
NOTE 2. ACQUISITIONS
At the close of business on February 28, 1995, the Corporation purchased
the four Michigan affiliates of Banc One Corporation, located in East Lansing,
Fenton, Sturgis and Ypsilanti, for $115 million in cash. The transaction was
accounted for as a purchase and the four banks ("acquired banks") were merged
into Citizens Commercial & Savings Bank headquartered in Flint, Michigan
effective immediately after the acquisition. Total assets acquired of $670
million included net loans of $532 million, investment securities and money
market investments of $57 million and deposits of $541 million.
Cost-in-excess of the fair value of identifiable net assets acquired was $59.2
million and is being amortized over 15 years. The 1995 results reflect ten
months of operations for the four acquired banks. The unaudited pro-forma
combined operating results of the Corporation and the four banks, assuming the
acquisition was consummated on January 1, 1994, are as follows:
- -----------------------------------------
(in thousands except
per share amounts) 1995 1994
- -----------------------------------------
Net interest income $142,091 $137,532
Net income 35,679 27,692
Net income per share:
Primary $2.45 $1.91
Fully diluted 2.44 1.91
- -----------------------------------------
On October 1, 1993, the Corporation purchased Royal Bank Group, Inc. and
its subsidiary, National Bank of Royal Oak ("NBRO"), which is located in
Oakland County, Michigan. All of the outstanding common shares of Royal Bank
Group, Inc. were exchanged for 1,073,053 shares of common stock of the
Corporation and $207,000 in cash. Concurrent with the acquisition, Royal Bank
Group, Inc. was dissolved and its subsidiary, NBRO, transferred to the
Corporation. Total assets acquired of $208 million included net loans of $126
million, investment securities and money market investments of $53 million, and
deposits of $181 million. The acquisition was accounted for as a purchase and,
accordingly, the Consolidated Financial Statements include NBRO's results of
operations from the date of acquisition. Cost in excess of the fair value of
identifiable net assets acquired was $9.7 million and is being amortized over
15 years.
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54
NOTE 3. INVESTMENT SECURITIES
The amortized cost, estimated fair value and gross unrealized gains and
losses of investment securities follow:
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1995 December 31, 1994
--------------------------------------------- -------------------------------------------
Estimated Gross Gross Estimated Gross Gross
Amortized Fair Unrealized Unrealized Amortized Fair Unrealized Unrealized
(in thousands) Cost Value Gains Losses Cost Value Gains Losses
- ---------------------------------------------------------------------------------------------------------------------
U.S. Treasury $197,872 $198,462 $958 $367 $222,910 $211,965 $1 $10,946
Federal agencies:
Mortgage-backed 77,349 77,477 471 343 82,980 79,476 14 3,518
Other 70,436 70,546 135 25 40,867 39,542 --- 1,325
State and municipal 209,068 213,491 5,183 760 229,055 226,423 2,998 5,630
Mortgage and asset-backed 4,090 4,149 58 --- 2,021 2,040 19 ---
Other 6,732 6,787 55 --- 4,483 4,553 71 1
-------- -------- ------ ------ -------- -------- ------ -------
Total $565,547 $570,912 $6,860 $1,495 $582,316 $563,999 $3,103 $21,420
======== ======== ====== ====== ======== ======== ====== =======
The amortized cost and approximate fair value of debt securities at
December 31, 1995, by contractual maturity, are shown below. Actual maturities
may differ from contractual maturities due to prepayment or early call
privileges of the borrower.
- -----------------------------------------------------------
Estimated
Amortized Fair
(in thousands) Cost Value
- -----------------------------------------------------------
Due within one year $162,630 $178,796
One to five years 237,092 224,026
Five to ten years 45,729 47,065
After ten years 32,185 32,872
-------- --------
477,636 482,759
Equity securities 6,472 6,527
Mortgage and asset-backed securities 81,439 81,626
-------- --------
Total $565,547 $570,912
======== ========
Sales of investment securities resulted in realized gains and losses as
follows:
- -----------------------------------------------
Year Ended December 31,
(in thousands) 1995 1994 1993
- -----------------------------------------------
Securities gains $202 $326 $773
Securities losses (4) (169) (10)
---- ---- ----
Net gain $198 $157 $763
==== ==== ====
Effective January 1, 1994, the Corporation adopted Financial Accounting
Standards Board Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities". The Statement requires the Corporation to classify
securities into one of three categories based on its intent and ability to hold
the investments. These categories include: held-to-maturity (securities that
the Corporation has the positive intent and ability to hold to maturity),
trading (securities bought and held principally for the purpose of selling in
the near future) and available-for-sale (securities not classified in either of
the two other categories). At adoption the Corporation classified all of its
investment portfolio in the available-for-sale category. Securities classified
as available-for-sale are recorded at fair value with the unrealized gain or
loss reported as a separate component of shareholders' equity. Adoption
increased shareholders' equity on January 1, 1994 by $6.6 million after
deferred taxes of $3.5 million.
In December 1994, the Corporation adopted Financial Accounting Standards
Board Statement No. 119, "Disclosures about Derivative Financial Instruments
and Fair Value of Financial Instruments" ("SFAS 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 collateralized mortgage obligations and, therefore, the adoption
of the Statement did not have a material effect. The Corporation's policy only
allows the purchase of collateralized mortgage obligations that are composed of
mortgage backed securities issued by a Federal Agency. Any CMO's purchased are
in early tranches with short average lives. These tranches are classified in
the Planned Amortization Class and have well-defined prepayment assumptions
(Super PAC's). The Corporation's CMO's are periodically tested to ensure
compliance with guidelines established by the Federal Financial Institutions
Examination Council.
Securities with amortized cost of $278.2 million at December 31, 1995, and
$260.5 million at December 31, 1994, were pledged to secure public deposits,
repurchase agreements, and other liabilities. Except for obligations of the
U.S. Government and its agencies, no holdings of securities of any single
issuer exceeded 10% of consolidated shareholders' equity at December 31, 1995
or 1994.
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55
NOTE 4. LOANS AND NONPERFORMING ASSETS
The Corporation extends credit primarily within the local markets of its
seven bank subsidiaries. These natural geographic concentrations extend along
the Interstate 75 corridor within the State of Michigan from northern suburban
Detroit to the greater Grayling/Gaylord area, as well as the western suburban
market of Chicago, Illinois. During 1995, the Corporation expanded its market
presence into East Lansing, Fenton, Sturgis and Ypsilanti. This expands the
Corporation's opportunities within the western Detroit, central and
southwestern Michigan market areas. The Corporation has limited its credit risk
by establishing guidelines to review its aggregate outstanding commitments and
loans to particular borrowers, industries and geographic areas. Collateral is
secured based on the nature of the credit and management's credit assessment of
the customer.
The loan portfolio is widely diversified by borrowers and industry groups
with no single concentration exceeding 10% of total loans. The Corporation has
no loans to foreign countries and generally does not participate in large
national loan syndications or highly leveraged transactions. Most of the
Corporation's commercial real estate loans consist of mortgages on
owner-occupied properties. Those borrowers are involved in business activities
other than real estate, and the sources of repayment are not dependent on the
performance of the real estate market.
The Corporation changed its nonperforming asset policy in the third
quarter of 1995 to include loans 90 days past due and still accruing in the
nonperforming asset category. Previously these loans were considered
underperforming assets. All nonperforming asset disclosures have been adjusted
to reflect this change. A summary of nonperforming assets follows:
- ---------------------------------------------------------------
December 31,
(in thousands) 1995 1994
- ---------------------------------------------------------------
Nonperforming loans:
Nonaccrual $18,624 $18,156
Loans 90 days past due (still accruing) 432 1,253
Restructured 494 299
------ ------
Total nonperforming loans 19,550 19,708
Other real estate 1,568 2,230
------ ------
Total nonperforming assets $21,118 $21,938
====== ======
The effect of nonperforming loans on interest income follows:
- ----------------------------------------------------------------
Year Ended December 31,
(in thousands) 1995 1994 1993
- ----------------------------------------------------------------
Interest income:
At original contract rates $2,509 $1,879 $1,589
As actually recognized 1,427 1,128 697
------ ------ ------
Interest foregone $1,082 $ 751 $ 892
====== ====== ======
There are no significant commitments outstanding to lend additional funds
to customers whose loans were classified as nonaccrual or restructured at
December 31, 1995.
At December 31, 1995, loans considered to be impaired totaled $16.6
million (of which $10.1 million were on a nonaccrual basis). Included within
this amount is $4.7 million of impaired loans for which the related allowance
for loan losses is $0.8 million and $11.9 million of impaired loans for which
the fair value exceeded the recorded investment in the loan. The average
recorded investment in impaired loans during the year ended December 31, 1995
was approximately $19.9 million. For the year ended December 31, 1995, the
Corporation recognized interest income of $1.5 million which included $0.8
million of interest income recognized using the cash basis method of income
recognition.
Certain directors and executive officers of the Corporation and its
significant subsidiaries, including their families and entities in which they
have 10% or more ownership, were customers of the banking subsidiaries. Total
loans to these customers aggregated $11.2 million and $12.4 million at December
31, 1995 and 1994, respectively. During 1995, new loans of $13.0 million were
made and repayments totaled $14.2 million. All such loans were made in the
ordinary course of business on substantially the same terms, including interest
rates and collateral, as those for comparable transactions with unrelated
parties and did not involve more than normal risk of collectibility.
NOTE 5. ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses follows:
- ----------------------------------------------------------------
Year Ended December 31,
(in thousands) 1995 1994 1993
- ----------------------------------------------------------------
Balance - January 1 $24,714 $22,547 $19,404
Allowance of acquired banks 7,235 --- 1,642
Provision for loan losses 6,441 5,303 5,597
Charge-offs (7,921) (6,114) (6,396)
Recoveries 4,302 2,978 2,300
------- ------- -------
Net charge-offs (3,619) (3,136) (4,096)
------- ------- -------
Balance - December 31 $34,771 $24,714 $22,547
======= ======= =======
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56
NOTE 6. PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
- ------------------------------------------------------------------
December 31,
(in thousands) 1995 1994
- ------------------------------------------------------------------
Land $ 10,792 $ 8,229
Buildings 71,363 59,608
Leasehold improvements 3,391 2,664
Furniture and equipment 63,843 53,430
-------- --------
149,389 123,931
Accumulated depreciation
and amortization (86,242) (71,398)
-------- --------
Total $ 63,147 $ 52,533
======== ========
Certain branch facilities and computer equipment are leased under various
operating leases. Total rental expense, including expenses related to these
operating leases, was $2.1 million in 1995; $1.8 million in 1994; and $1.6
million in 1993. Future minimum rental commitments under noncancelable
operating leases, net of sublease payments, are as follows at December 31,
1995: $1.0 million in 1996; $0.8 million in 1997; $0.7 million in 1998; $0.7
million in 1999; and $0.6 million in 2000, and $1.5 million after 2000.
NOTE 7. DEPOSITS
A summary of deposits follows:
- --------------------------------------------------------------------
(in thousands) 1995 1994
- --------------------------------------------------------------------
Noninterest-bearing demand $ 506,116 $ 416,395
Interest-bearing demand 318,390 252,816
Savings 907,691 843,975
Time deposits over $100,000 219,158 111,930
Other time deposits 913,346 627,202
---------- ----------
Total $2,864,701 $2,252,318
========== ==========
NOTE 8. SHORT-TERM BORROWINGS
Short-term borrowings consist primarily of federal funds purchased and
securities sold under agreements to repurchase. Federal funds purchased are
overnight borrowings from other financial institutions. Securities sold under
agreements to repurchase are secured transactions done principally with
customers and generally mature within thirty days. Other short-term borrowed
funds consist of demand notes to the U.S. Treasury.
Information relating to federal funds purchased and securities sold under
agreements to repurchase follows:
- ------------------------------------------------------------
(in thousands) 1995 1994 1993
- ------------------------------------------------------------
At December 31:
Balance $130,556 $125,581 $116,777
Weighted average
interest rate paid 4.74% 4.39% 2.91%
During the year:
Maximum outstanding
at any month-end $146,429 $129,846 $137,067
Daily average 128,141 120,356 116,624
Weighted average
interest rate paid 4.83% 3.63% 3.08%
NOTE 9. LONG-TERM DEBT
A summary of long-term debt follows:
- ------------------------------------------------------------------
December 31,
(in thousands) 1995 1994
- ------------------------------------------------------------------
Citizens Banking Corporation
(Parent only):
Floating rate term notes:
Maturing March 1995 --- $ 1,200
Maturing October 1997 $ 2,500 3,750
Revolving credit facility:
Maturing December 2001 98,378 ---
-------- --------
Total 100,878 4,950
Subsidiaries:
Subordinated debt 4,057 ---
Nonrecourse lease financing 36 99
Other 440 200
-------- --------
Total 4,533 299
-------- --------
Total long-term debt $105,411 $ 5,249
======== ========
The floating rate term note maturing in October 1997 is payable in equal
annual principal payments through October 1997. Interest is payable quarterly
at a rate selected by the Corporation from certain indices available under the
agreement. At December 31, 1995, the rate was 5.28%.
To finance the acquisition of the acquired banks, the Corporation's Parent
company obtained a $115 million seven year amortizing revolving credit
facility. The revolving credit facility, maturing December 2001, is payable in
annual payments of $16.5 million with a final payment of $16 million. The
revolving credit facility is currently comprised of $75 million at a fixed rate
of 7.65%. Of this amount, $16.5 million reprices in March 1996, $51.5 million
in March 1997 and $7 million in March 1998. The remaining $23.5 million
outstanding has an interest rate based on a LIBOR index. Currently $20 million
is priced at a rate of 6.24% and $3.5 million is priced at a rate of 6.36%.
Interest is payable quarterly. The
Page 27
57
Parent company services the debt's principal and interest payments with
dividends from the subsidiary banks. The agreement also requires the
Corporation to maintain certain financial covenants. The Corporation is in
full compliance with all debt covenents as of December 31, 1995.
The subordinated debt was assumed by the Corporation as part of the
acquisition. The total subordinated debt is payable on April 15, 2003.
Interest is payable semiannually at a fixed rate of 6.72%. Other subsidiary
debt also assumed as part of the acquisition consists of an EDC mortgage due
April 1, 2002. Interest is payable monthly at an interest rate of 75% of the
prime rate.
Nonrecourse lease financing represents borrowings from unaffiliated
lenders against future lease payments. In the event of default by a lessee,
the lender has security in the underlying leased equipment and has no further
recourse against the Corporation. On December 31, 1995, nonrecourse lease
financing notes were at fixed rates of interest of 9.75% and were amortized
with equal monthly payments. Maturities of long-term debt during the next five
years follow:
- ----------------------------------------------------
(in thousands) Parent Subsidiaries Consolidated
- ----------------------------------------------------
1996 $17,694 $146 $17,840
1997 17,694 0 17,694
1998 16,490 0 16,490
1999 16,500 0 16,500
2000 16,500 0 16,500
Over 5 Years 16,000 4,387 20,387
-------- ------ --------
Total $100,878 $4,533 $105,411
NOTE 10. EMPLOYEE BENEFIT PLANS
The Corporation and its subsidiaries have various employee benefit plans.
Costs of various benefit arrangements charged to operations each year follow:
- --------------------------------------------------------------------
Year Ended December 31,
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------
Defined benefit pension plans:
Qualified plan - funded:
Service Cost $1,541 $1,534 $1,367
Interest cost 2,339 2,188 2,214
Actual return on plan assets (6,825) 281 (3,311)
Net amortization and deferral 2,783 (4,014) (438)
------ ------ -------
Net income (162) (11) (168)
------ ------ -------
Supplemental plans - unfunded:
Service cost 103 105 89
Interest cost 119 106 97
Net amortization and deferral 38 58 38
------ ------ -------
Net cost 260 269 224
Net pension cost 98 258 56
Defined contribution 401(k)
plan 1,738 1,431 1,340
------ ------ -------
Total benefit cost $1,836 $1,689 $1,396
====== ====== =======
PENSION PLANS
The Corporation maintains a qualified defined benefit plan covering
substantially all full-time employees. Under the plan, benefits are based on
the employee's length of service and average compensation during the highest
consecutive 60 month period out of the final 120 months preceding retirement.
The Corporation's funding policy is to contribute annually an amount sufficient
to meet the minimum funding requirements set forth in the Employee Retirement
Income Security Act of 1974, plus such additional amounts as the Corporation
may determine to be appropriate. Contributions are intended to provide for
benefits attributed to past service and for benefits expected to be earned in
the future.
The funded status and amounts recognized in the Corporation's Consolidated
Balance Sheets for the qualified defined benefit plan follow:
- -----------------------------------------------------------------------------
December 31,
(in thousands) 1995 1994
- -----------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Vested benefits $21,281 $21,517
Nonvested benefits 623 628
------- -------
Accumulated benefit obligation 21,904 22,145
Effect of projected future
compensation levels 12,257 5,997
------- -------
Projected benefit obligation 34,161 28,142
Plan assets at fair value, primarily listed
stocks and bonds, corporate obligations
and money market and mutual funds 41,483 35,638
------- -------
Plan assets in excess of projected
benefit obligation 7,322 7,496
Unrecognized net gain (6,001) (6,611)
Unrecognized prior service cost 115 133
Unrecognized net asset at transition
being recognized over 16 years (1,125) (1,326)
------- -------
Prepaid (accrued) pension cost recognized
in the Consolidated Balance Sheets $ 311 $ (308)
======= =======
Actuarial assumptions used in determining the benefit obligation at
December 31 were:
- ---------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------
Weighted average discount rate 7.75% 8.50% 7.75%
Rate of increase in future
compensation levels (1) (1) (1)
Long-term rate of return 9.00 9.00 9.00
(1) Scaled by age of plan participant - 9.00% at age 24 or under
declining to 4.00% at age 50 or older
The Corporation also maintains unfunded supplemental benefit plans, which
are nonqualified plans providing certain officers with defined pension benefits
in excess of limits imposed by Federal tax law. At December 31, 1995, the
projected benefit obligation for these plans totaled $1.7 million, of which
$113,000 was subject to later amortization. The remaining $1.6 million is
included in other liabilities in the accompanying Consolidated Balance Sheets.
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58
At December 31, 1994, the projected benefit obligation for these plans totaled
$1.4 million of which $74,000 was subject to later amortization. The remaining
$1.3 million is included in other liabilities in the accompanying Consolidated
Balance Sheets.
DEFINED CONTRIBUTION PLAN
The Corporation maintains a defined contribution 401(k) savings plan covering
substantially all full-time employees. Under the plan, employee contributions
are partially matched by the Corporation. Effective January 1, 1993, the
employer matching contribution was increased to 75 percent of the first 6% (100
percent of the first 3% plus 50 percent of the next 3%) of each eligible
employee's base salary contributed to the plan. In addition, one third of
these matching contributions are used to fund a postretirement medical savings
account established within the plan for each contributing employee.
POSTEMPLOYMENT BENEFITS
Effective January 1, 1994, the Corporation adopted Financial Accounting
Standards Board Statement No. 112, "Employers' Accounting for Postemployment
Benefits." It requires, under certain circumstances, accrual of the estimated
cost of benefits provided to former or inactive employees after employment but
before retirement. Such benefits (referred to as postemployment benefits)
include, but are not limited to, salary continuation, supplemental unemployment
benefits, severance benefits, disability-related benefits, job training and
counseling, and continuation of benefits such as health care and life insurance
coverage. The unrecorded liability for these accrued benefits at adoption and
at year-end 1994 and 1995 was not material.
NOTE 11. POSTRETIREMENT BENEFIT PLAN
The Corporation maintains an unfunded postretirement defined benefit plan
offering medical and life insurance benefits. This plan, as amended effective
January 1, 1993, provides postretirement medical benefits at certain
subsidiaries to full-time employees who retire at normal retirement age, have
attained age 50 prior to January 1, 1993 and have at least 15 years of credited
service under the Corporation's defined benefit pension plan. This plan is
subject to a vesting schedule, is contributory and contains other cost-sharing
features such as deductibles and coinsurance. Retirees not meeting the above
eligibility requirements may participate in the medical benefit provided by the
plan, as amended, at their own cost. Those retired prior to January 1, 1993
receive benefits provided by the plan prior to its amendment. That plan
includes dental care, has some contribution requirements, and has less
restrictive eligibility requirements. Under either plan, life insurance is
provided to all retirees on a reducing basis for 5 years.
The following table presents the plan's unfunded status reconciled with
amounts recognized in the Corporation's Consolidated Balance Sheets at December
31:
- -------------------------------------------------------------
(in thousands) 1995 1994
- -------------------------------------------------------------
Accumulated postretirement
benefit obligation:
Retirees $(10,073) $ (9,116)
Fully eligible plan participants --- (14)
Other active plan participants (218) (827)
-------- --------
Total unfunded obligation (10,291) (9,957)
Unrecognized net gain (2,878) (3,313)
Unrecognized prior service cost (2,200) (2,655)
-------- --------
Accrued postretirement benefit cost $(15,369) $(15,925)
======== ========
- -------------------------------------------------------------
Net periodic postretirement benefit cost includes the following
components:
- --------------------------------------------------------------------
Year Ended December 31,
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------
Service cost $10 $48 $44
Interest cost 761 896 914
Net amortization and deferral (643) (455) (516)
---- ---- ----
Net periodic postretirement
benefit cost $128 $489 $442
==== ==== ====
- --------------------------------------------------------------------
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% and 8.50% at December 31, 1995 and
1994, respectively. The weighted-average annual assumed rate of increase in
the per capita cost of covered benefits (i.e., health care cost trend rate) is
9% for 1996 (10% for 1995) and is assumed to decrease 1% annually to 5% by the
year 2000 and remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. For example,
increasing the assumed health care cost trend rates by one percent in each year
would increase the accumulated postretirement benefit obligation as of December
31, 1995 and 1994 by $1.0 million, and $1.1 million, respectively, and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1995 by $84,000.
Page 29
59
NOTE 12. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Corporation's deferred tax assets and liabilities as of December 31,
1995 and 1994 follow:
- -----------------------------------------------------
(in thousands) 1995 1994
- -----------------------------------------------------
Deferred tax assets:
Allowance for loan losses $12,091 $8,511
Net unrealized losses on
securities --- 6,411
Accrued postemployment
benefits other than pensions 5,379 5,574
Other deferred tax assets 3,472 3,523
------- ------
Total deferred tax assets 20,942 24,019
------- ------
Deferred tax liabilities:
Acquisition premium on loans 2,076 1,119
Tax over book depreciation 1,965 1,972
Net unrealized gains on
securities 1,878 ---
Other deferred tax liabilities 3,661 1,774
------- ------
Total deferred tax liabilities 9,580 4,865
------- ------
Net deferred tax assets $11,362 $19,154
======= =======
- -----------------------------------------------------
Income tax expense (benefit) consists of the following:
- --------------------------------------------------------------
Year Ended December 31,
(in thousands) 1995 1994 1993
- --------------------------------------------------------------
Currently payable $12,732 $10,463 $6,426
Deferred taxes (credit) 73 (171) 768
Effect of tax rate change
on deferred taxes --- --- (280)
------- ------- ------
Total income tax
expense $12,805 $10,292 $6,914
======= ======= ======
- --------------------------------------------------------------
A reconciliation of income tax expense to the amount computed by applying
the Federal statutory rate of 35% to income before income taxes follows:
- --------------------------------------------------------------------
Year Ended December 31,
(in thousands) 1995 1994 1993
- --------------------------------------------------------------------
Tax at Federal statutory rate
applied to income before
income taxes $16,240 $13,897 $11,439
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (3,539) (4,045) (4,371)
Other 104 440 (154)
------- ------- ------
Total income tax
expense $12,805 $10,292 $6,914
======= ======= ======
- --------------------------------------------------------------------
NOTE 13. SHAREHOLDERS' EQUITY
In April, 1993, the Corporation declared a two-for-one stock split
effected in the form of a dividend paid May 12, 1993 to shareholders of record
April 30, 1993. All share and per share amounts have been restated to give
effect to the split.
SHAREHOLDERS' RIGHTS PLAN
The Corporation's Shareholders' Rights Plan is designed to provide certain
assurances that all shareholders are treated fairly in connection with certain
types of business transactions involving an attempt to acquire controlling
interest in the Corporation. Under the plan, one right attaches to each
outstanding share of common stock and represents the right to purchase from the
Corporation 1/100 of a share of a new series of preferred stock at the initial
exercise price of $37.50. The rights become exercisable only if a person or
group without Board approval announces an intention to acquire 15% or more of
the Corporation's outstanding common stock or makes a tender offer for that
amount of stock. Upon the occurrence of such an event, the right "flips in"
and becomes the right to purchase one share of common stock of the Corporation
or the surviving company at 50% of the market price. These rights are
redeemable by the Board for $0.01 per right and expire July 20, 2000. The
rights will cause substantial dilution to a person or entity attempting to
acquire the Corporation without conditioning the offer on the rights being
redeemed by the Board.
STOCK REPURCHASE PLAN
The Corporation maintains a stock repurchase program initiated in November
1987. At year end 1995, this program, which has been expanded several times,
allowed for the repurchase of 1,600,000 shares. As of December 31, 1995, a
total of 1,132,470 shares have been repurchased under the program at an average
price of $14.31 per share. These shares were reissued in connection with a
purchase acquisition in October 1993 and the Corporation's stock option plan.
In 1994, shares of common stock in treasury were accorded the treatment as
if retired; however, such shares remain available for reissue. Such treatment
was made retroactively to January 1, 1993 in the Consolidated Financial
Statements.
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60
STOCK OPTION PLAN
The Corporation's stock option plan, as amended and restated in April 1992,
authorizes the granting of incentive and nonqualified stock options, tandem
stock appreciation rights, restricted stock and performance share grants to key
employees. Aggregate grants under the plan may not exceed 2,000,000 shares
within any five year period and are limited annually to 3% of the Corporation's
outstanding common stock as of the first day of the year, plus any unused
shares that first become available for grants in the prior year. Stock options
outstanding under the plan were granted at a price not less than the fair
market value of the shares on the date of grant.
Replacement options may be granted upon exercise of a nonqualified stock
option by payment of the exercise price with shares of the Corporation's common
stock. A replacement option provides the employee with a new option to
purchase the number of shares surrendered at an option price equal to the fair
market value of the Corporation's common stock on the date the underlying
nonqualified stock option is exercised. During 1995, 1994 and 1993, 168,927,
114,398 and 76,417 shares, respectively, were surrendered by employees for
payment to the Corporation for stock option exercises for which an equal number
of replacement options were granted.
Options may be granted until January 16, 2002. The options terminate ten
years from the date of grant and are exercisable beginning six months from the
date of grant or for certain options, granted since April 1992, are exercisable
subject to a pre-determined option vesting schedule based on achievement of
certain return on average asset targets. Canceled or expired options become
available for future grants.
The Financial Accounting Standards Board issued Statement No. 123,
"Accounting for Stock Based Compensation" in October 1995 and is effective for
1996 financial statements. The Corporation does not intend to adopt the
recognition provisions of the Statement but will continue accounting for stock
options in accordance with Accounting Principles Board Opinion No. 25
"Accounting for Stock issued to Employees" as permitted by the new Statement.
Therefore, adoption will not materially impact the Corporation.
A summary of stock option transactions under the plan for 1993, 1994 and
1995 follows:
- --------------------------------------------------------------------------------
Options Option Price
---------------------- ----------------------
Available Per Share
for Grant Outstanding Range Average
- --------------------------------------------------------------------------------
January 1, 1993 233,662 1,253,326 $9.875-18.315 $14.41
Authorized 393,093 --- --- ---
Granted (141,214) 141,214 19.125-26.000 22.39
Exercised --- (145,456) 9.875-21.630 15.94
-------- --------- ------------- ------
December 31, 1993 485,541 1,249,084 9.875-26.000 15.13
Authorized 331,000 --- --- ---
Granted (172,098) 172,098 23.250-27.250 25.40
Exercised --- (291,502) 9.875-21.630 15.35
Canceled 3,025 (3,025) 17.655-21.630 19.26
-------- --------- ------------- ------
December 31, 1994 647,468 1,126,655 9.875-27.250 16.63
Authorized 137,463 --- --- ---
Granted (388,227) 388,227 26.000-30.813 27.22
Exercised --- (374,479) 9.875-26.375 17.68
Canceled 5,530 (5,530) 21.630-26.000 25.60
-------- --------- ------------- ------
December 31, 1995 402,234 1,134,873 9.875-30.813 19.86
======== ===========
Exercisable - December 31, 1995 867,357 9.875-29.938 17.51
===========
NOTE 14. COMMITMENTS AND CONTINGENT LIABILITIES
The Consolidated Financial Statements do not reflect various loan
commitments (unfunded loans and unused lines of credit) and letters of credit
originated in the normal course of business. Loan commitments are made to
accommodate the financial needs of customers. Generally, new loan commitments
do not extend beyond 90 days and unused lines of credit are reviewed at least
annually. Letters of credit guarantee future payment of customer financial
obligations to third parties. They are issued primarily for services provided
or to facilitate the shipment of goods, and generally expire within one year.
Page 31
61
Both arrangements have essentially the same level of credit risk as that
associated with extending loans to customers and are subject to the
Corporation's normal credit policies. Inasmuch as these arrangements generally
have fixed expiration dates or other termination clauses, most expire unfunded
and do not necessarily represent future liquidity requirements. Collateral is
obtained based on management's assessment of the customer and may include
receivables, inventories, real property and equipment. Amounts available to
customers under loan commitments and letters of credit follow:
- --------------------------------------------------
December 31,
(in thousands) 1995 1994
- --------------------------------------------------
Loan commitments:
Commercial $ 735,513 $466,391
Real estate-construction 19,675 20,882
Real estate-mortgage 17,850 3,993
Credit card and home equity
credit lines 281,233 189,483
Other consumer installment 11,323 12,171
---------- --------
Total $1,065,594 $692,920
========== ========
Standby letters of credit $ 42,981 $ 16,858
Commercial letters of credit 3,257 5,786
- --------------------------------------------------
The Corporation and its subsidiaries are parties to litigation arising in
the ordinary course of business. Management believes that the aggregate
liability, if any, resulting from these proceedings would not have a material
effect on the Corporation's consolidated financial position.
NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Financial Accounting
Standards Board Statement No. 107, "Disclosure About Fair Value of Financial
Instruments" ("SFAS 107"). Where quoted market prices are not available, as is
the case for a significant portion of the Corporation's financial instruments,
the fair values are based on estimates using present value or other valuation
techniques. These techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows.
Accordingly, the derived fair value estimates presented herein cannot be
substantiated by comparison to independent markets and are not necessarily
indicative of the amounts the Corporation could realize in a current market
exchange.
In addition, the fair value estimates are based on existing on- and
off-balance sheet financial instruments without attempting to estimate the
value of anticipated future business and the value of assets and liabilities
that are not considered financial instruments. For example, the Corporation
has a substantial trust department that contributes net fee income annually.
The trust department is not considered a financial instrument and its value has
not been incorporated into the fair value estimates. Other significant assets
and liabilities that are not considered financial assets or liabilities include
the Corporation's mortgage servicing operation, brokerage network, net deferred
tax asset, premises and equipment, goodwill and deposit based intangibles. In
addition, tax ramifications related to the realization of unrealized gains and
losses such as those within the investment securities portfolio can also have a
significant effect on estimated fair values and have not been considered in the
estimates. Accordingly, the aggregate fair value amounts do not represent the
underlying value of the Corporation. The estimated fair values of the
Corporation's financial instruments follow:
- ---------------------------------------------------------------------------------------------------
December 31, 1995 December 31, 1994
--------------------- -----------------------
Carrying Estimated Carrying Estimated
(in thousands) Amount Fair Value Amount Fair Value
- ---------------------------------------------------------------------------------------------------
Financial assets:
Cash and money market investments $ 322,588 $ 322,600 $ 237,227 $ 237,700
Investment securities 570,912 570,900 563,999 564,000
Net loans(1) 2,333,799 2,360,400 1,714,244 1,705,000
Financial liabilities:
Deposits 2,864,701 2,874,000 2,252,318 2,253,000
Short-term borrowings 146,024 146,000 146,431 146,400
Long-term debt 105,411 106,600 5,249 5,300
Off-balance sheet financial instrument liabilities:
Loan commitments --- 1,224 --- 814
Standby and commercial letters of credit --- 231 --- 113
- ---------------------------------------------------------------------------------------------------
(1) Excludes lease financing which for purposes of SFAS 107 disclosure is not
considered a financial instrument.
Page 32
62
The various methods and assumptions used by the Corporation in estimating
fair value for its financial instruments are set forth below:
CASH AND MONEY MARKET INVESTMENTS
The carrying amounts reported in the balance sheet for cash and money market
investments approximate those assets' fair values because they mature within
six months and do not present unanticipated credit concerns.
INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED AND ASSET-BACKED SECURITIES)
The carrying amounts reported in the balance sheet for investment securities
approximate those assets' fair values as all investment securities are being
classified in the available-for-sale category. SFAS 115 requires securities
carried in the available-for-sale category to be carried at fair value. See
Note 3. The fair values are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
LOANS RECEIVABLE
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
real estate, residential mortgage, credit card, and other consumer. Each loan
category is further segmented into fixed and variable-rate interest types and
for certain categories by performing and nonperforming.
For performing variable-rate loans that reprice frequently (within six
months) and with no significant change in credit risk, fair values are based on
carrying values. Similarly, for credit card loans with no significant credit
concerns and average interest rates approximating current market origination
rates, the carrying amount is a reasonable estimate of fair value.
Fair values of other loans (e.g., fixed-rate commercial, commercial real
estate, residential mortgage and other consumer loans) are estimated by
discounting the future cash flows using interest rates currently being offered
by the Corporation for loans with similar terms and remaining maturities ("new
loan rates"). Management believes the risk factor embedded in the new loan
rates adequately represents the credit risk within the portfolios.
Fair values for nonperforming loans are estimated after giving
consideration to credit risk and estimated cash flows and discount rates based
on available market and specific borrower information. The carrying amount of
accrued interest for all loan types approximates its fair value.
DEPOSIT LIABILITIES
Under SFAS 107, the fair value of demand deposits (e.g., interest and
noninterest checking, passbook savings and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). Fair values for certificates of
deposit are based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for certificates
of similar remaining maturities.
SHORT-TERM BORROWINGS
The carrying amounts of federal funds purchased, securities sold under
agreement to repurchase and other short-term borrowings approximate their fair
values.
LONG-TERM DEBT
The carrying value of the Corporation's variable-rate long-term debt
approximates its fair value. The fair value of its fixed-rate long-term debt
(other than deposits) is estimated using discounted cash flow analyses, based
on the Corporation's current incremental borrowing rates for similar types of
borrowings arrangements.
LOAN COMMITMENTS AND LETTERS OF CREDIT
The fair value of loan commitments and letter of credit guarantees is based on
fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the counterparties' credit standing.
Page 33
63
NOTE 16. REGULATORY MATTERS
The Federal Reserve Bank requires the Corporation's banking subsidiaries
to maintain certain noninterest-bearing deposits. These reserve balances vary
depending upon the level of customer deposits in the subsidiary banks. During
1995 and 1994, the average reserve balances were $41.2 million and $36.2
million, respectively.
The bank subsidiaries are also subject to limitations under banking laws
on extensions of credit to members of the affiliate group and on dividends that
can be paid to the Corporation. Generally extensions of credit are limited to
10% to any one affiliate and 20% in aggregate to all affiliates of a subsidiary
bank's capital and surplus (net assets) as defined. Unless prior regulatory
approval is obtained, dividends declared in any calendar year may not exceed
the retained net profit, as defined, of that year plus the retained net profit
of the preceding two years. At January 1, 1996, the bank subsidiaries could
distribute to the Corporation approximately $23.2 million in dividends without
regulatory approval. Their 1996 net income will also become available for such
dividends.
NOTE 17. CITIZENS BANKING
CORPORATION (PARENT ONLY)
STATEMENTS
Condensed financial statements of Citizens Banking Corporation (Parent
Only) follow:
BALANCE SHEETS
CITIZENS BANKING CORPORATION (PARENT ONLY)
December 31,
(in thousands) 1995 1994
- -----------------------------------------------------------------
ASSETS:
Cash $ 5 $ 4
Interest-bearing deposit with
subsidiary bank 30,000 ---
Money market investments 14,544 14,511
Loans - commercial paper --- 5,000
Investment securities 218 5,331
Investment in bank
subsidiaries 348,676 234,324
Goodwill - net 5,041 5,837
Other assets 4,890 2,900
-------- --------
TOTAL ASSETS $403,374 $267,907
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Long-term debt $100,878 $ 4,950
Other liabilities 5,310 4,227
-------- --------
Total liabilities 106,188 9,177
Shareholders' equity 297,186 258,730
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $403,374 $267,907
======== ========
Page 34
64
STATEMENTS OF INCOME
CITIZENS BANKING CORPORATION (PARENT ONLY)
Year Ended December 31,
(in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
INCOME
Dividends from subsidiaries - principally banks $24,388 $24,211 $20,841
Interest from subsidiaries 1,413 150 183
Other 1,605 646 392
------- ------- -------
Total 27,406 25,007 21,416
------- ------- -------
EXPENSES
Interest 7,374 371 425
Amortization of goodwill 796 856 908
Salaries and employee benefits 764 780 2,028
Service fees paid to subsidiaries 1,054 879 1,401
Other noninterest expense 949 1,564 855
------- ------- ------
Total 10,937 4,450 5,617
------- ------- ------
Income before income taxes and equity in undistributed earnings of
subsidiaries 16,469 20,557 15,799
Income tax benefit 3,195 809 1,501
Equity in undistributed earnings of subsidiaries - principally banks 13,932 8,048 8,470
------- ------- ------
NET INCOME $33,596 $29,414 $25,770
======= ======= =======
STATEMENTS OF CASH FLOWS
CITIZENS BANKING CORPORATION (PARENT ONLY)
Year Ended December 31,
(in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $33,596 $29,414 $25,770
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill 796 856 908
Equity in undistributed earnings of subsidiaries (13,932) (8,048) (8,470)
Other (967) 1,658 (326)
--------- ----- ------
Net cash provided by operating activities 19,493 23,880 17,882
INVESTING ACTIVITIES
Net increase in interest-bearing deposit at subsidiary bank (30,000) --- ---
Net (increase) decrease in money market investments (33) 1,410 2,790
Purchases of investment securities --- (18,646) (3,043)
Proceeds from maturities of investment securities 5,146 16,748 328
Net (increase) decrease in loans 5,000 (5,000) ---
Purchase of and capital contributions to subsidiaries (85,000) --- (2,996)
--------- -------- ------
Net cash used by investing activities (104,887) (5,488) (2,921)
--------- -------- --------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 115,000 --- ---
Principal reductions in long-term debt (19,072) (4,450) (2,600)
Cash dividends paid (12,770) (11,557) (9,937)
Proceeds from stock options exercised 2,237 1,602 828
Shares acquired for retirement --- (3,986) (3,254)
-------- ------- -------
Net cash provided (used) by financing activities 85,395 (18,391) (14,963)
-------- ------- -------
Net increase (decrease) in cash 1 1 (2)
Cash at beginning of year 4 3 5
-------- ------- -------
Cash at end of year $ 5 $ 4 $ 3
======== ======== =======
Page 35
65
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS CITIZENS BANKING CORPORATION
We have audited the accompanying consolidated balance sheets of Citizens
Banking Corporation and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Citizens
Banking Corporation and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Detroit, Michigan
January 18, 1996
Page 36
66
REPORT OF MANAGEMENT
MANAGEMENT'S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
Management is responsible for the preparation of the consolidated
financial statements and all other financial information appearing in this
Annual Report. The Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles.
SYSTEM OF INTERNAL CONTROLS
The Corporation maintains a system of internal controls designed to
provide reasonable assurance that assets are safe-guarded and that the
financial records are reliable for preparing Consolidated Financial Statements.
The selection and training of qualified personnel and the establishment and
communication of accounting and administrative policies and procedures are
elements of this control system. The effectiveness of the internal control
system is monitored by a program of internal audit and by independent certified
public accountants ("independent auditors").
Management recognizes that the cost of a system of internal controls
should not exceed the benefits derived and that there are inherent limitations
to be considered in the potential effectiveness of any system. Management
believes the Corporation's system provides the appropriate balance between
costs of controls and the related benefits.
AUDIT COMMITTEE OF THE BOARD
The Audit Committee of the Board of Directors, comprised entirely of
outside directors, recommends the independent auditors who are engaged upon
approval by the Board of Directors. The committee meets regularly with the
internal auditor and the independent auditors to review timing and scope of
audits and review audit reports. The internal auditor and the independent
auditors have free access to the Audit Committee.
INDEPENDENT AUDITORS
The Consolidated Financial Statements in this Annual Report have been
audited by the Corporation's independent auditors, Ernst & Young LLP, for the
purpose of determining that the Consolidated Financial Statements are free of
material misstatement. Their audit considered the Corporation's internal
control structure to the extent necessary to determine the scope of their
auditing procedures.
John W. Ennest Charles R. Weeks
John W. Ennest Charles R. Weeks
Vice Chairman, Chairman
Chief Financial Officer and Treasurer and Chief Executive Officer
Page 37
67
- -----------------------------------------------------------------------------------------------------------------------------------
Please mark
your votes as
indicated in /x/
this example
1. ELECTION OF DIRECTORS THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE NOMINEES LISTED.
For all nominees Withhold Class I (three year term): Edward P. Abbott, Hugo E. Braun Jr.,
listed (except as Authority Jonathan E. Burroughs II, Lawrence O. Erickson, William J. Hank, and
marked to the as to all nominees Robert J. Vitito.
contrary) listed
TO WITHHOLD AUTHORITY TO VOTE FOR ANY NOMINEE, DRAW A LINE THROUGH THE
/ / / / NOMINEE'S NAME.
Please sign exactly as name appears hereon.
When shares are held by joint tenants, both
should sign. When signing as Attorney,
Executor, Personal Representative,
Administrator, Trustee or Guardian, please
give full title as such. If signing on
behalf of a corporation please sign in full
corporate name by President or other
authorized officer. If signing on behalf of
a partnership, please sign in partnership
name by authorized person.
Dated: , 1996
-----------------------------
-----------------------------------------
Signature
-----------------------------------------
Signature if held jointly
- -------------------------------------------------------------------------------
FOLD AND DETACH HERE
REMINDER
Dear Shareholders(s):
Our records indicate that you have not delivered for exchange your Royal
Bank Group, Inc. ("Royal") shares for Citizens Banking Corporation ("Citizens")
shares following the merger of Royal into Citizens. Since you have not
delivered your Royal shares for exchange, under our tabulator's system, the
enclosed proxy card will reflect the number of shares of Royal owned by you
prior to the merger. Be assured however that when tallied, the shares will be
converted to reflect the full number of Citizens shares you were entitled to
upon the effective date the merger of Royal into Citizens.
We urge you to submit your certificate(s) as soon as possible so that
the exchange may be made and your accrued dividends may be distributed.
If you should have any questions, please feel free to contact us.
Sincerely,
James M. Polehna
Assistant Vice President
Shareholder Relations Manager
- -------------------------------------------------------------------------------
PROXY
CITIZENS BANKING CORPORATION
FLINT, MICHIGAN
PROXY BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS - APRIL 16, 1996
The undersigned shareholder of Citizens Banking Corporation (the
"Corporation") hereby appoints George H. Kossaras and Patricia L. Learman, or
either of them, my proxies or proxy, with full power of substitution to vote all
shares of stock of the Corporation that the undersigned would be entitled to
vote at the annual meeting of shareholders of the Corporation to be held in the
Carriage Hall Room of the Radisson Riverfront Hotel Flint, One Riverfront Center
West, Flint, Michigan, on Tuesday April 16, 1996, at 10:00 a.m. local time, and
at any adjournments thereof, and thereat vote all shares of stock of the
Corporation that the undersigned would be entitled to vote upon the matter of
the election of directors, and in their discretion, upon such other matters as
may properly come before the meeting. THIS PROXY WHEN PROPERLY EXECUTED WILL BE
VOTED IN THE MANNER DIRECTED; IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR EACH NOMINEE NAMED ON THE REVERSE SIDE OF THIS PROXY.
For participants in the Corporation's Amended and Restated Section
401(k) Plan ("Plan"), this card also provides voting instructions to the Trustee
under the Plan for the undersigned's allowable portion, if any, of the total
number of shares of Common Stock of the Corporation held by such Plan as
indicated on the reverse side hereof. These voting instructions are solicited
and will be carried out in accordance with the applicable provisions of the
Plan.
The undersigned acknowledges receipt of the Notice of Annual Meeting of
Shareholders and the Proxy Statement dated March 14, 1996 and ratifies all that
the proxies or either of them or their substitutes may lawfully do or cause to
be done by virtue hereon and revokes all former proxies.
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
68
- -----------------------------------------------------------------------------------------------------------------------------------
Please mark
your votes as
indicated in /x/
this example
1. ELECTION OF DIRECTORS THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE NOMINEES LISTED.
For all nominees Withhold Class I (three year term): Edward P. Abbott, Hugo E. Braun Jr.,
listed (except as Authority Jonathan E. Burroughs II, Lawrence O. Erickson, William J. Hank, and
marked to the as to all nominees Robert J. Vitito.
contrary) listed
TO WITHHOLD AUTHORITY TO VOTE FOR ANY NOMINEE, DRAW A LINE THROUGH THE
/ / / / NOMINEE'S NAME.
Please sign exactly as name appears hereon.
When shares are held by joint tenants, both
should sign. When signing as Attorney,
Executor, Personal Representative,
Administrator, Trustee or Guardian, please
give full title as such. If signing on
behalf of a corporation please sign in full
corporate name by President or other
authorized officer. If signing on behalf of
a partnership, please sign in partnership
name by authorized person.
Dated: , 1996
---------------------------
-----------------------------------------
Signature
-----------------------------------------
Signature if held jointly
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
Dear Shareholder(s):
Enclosed you will find material relative to the Corporation's 1996
Annual Meeting of Shareholders. The Notice of the Annual Meeting and proxy
statement describe the formal business to be transacted at the meeting, as
summarized on the attached proxy card.
Whether or not you expect to attend the Annual Meeting, please complete
and return promptly the attached proxy card in the accompanying envelope, which
requires no postage if mailed in the United States. Please remember that your
vote is very important to us. We look forward to hearing from you.
James M. Polehna
Assistant Vice President
Shareholder Relations Manager
- -------------------------------------------------------------------------------
PROXY
CITIZENS BANKING CORPORATION
FLINT, MICHIGAN
PROXY BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS - APRIL 16, 1996
The undersigned shareholder of Citizens Banking Corporation (the
"Corporation") hereby appoints George H. Kossaras and Patricia L. Learman, or
either of them, my proxies or proxy, with full power of substitution to vote all
shares of stock of the Corporation that the undersigned would be entitled to
vote at the annual meeting of shareholders of the Corporation to be held in the
Carriage Hall Room of the Radisson Riverfront Hotel Flint, One Riverfront Center
West, Flint, Michigan, on Tuesday April 16, 1996, at 10:00 a.m. local time, and
at any adjournments thereof, and thereat vote all shares of stock of the
Corporation that the undersigned would be entitled to vote upon the matter of
the election of directors, and in their discretion, upon such other matters as
may properly come before the meeting. THIS PROXY WHEN PROPERLY EXECUTED WILL BE
VOTED IN THE MANNER DIRECTED; IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR EACH NOMINEE NAMED ON THE REVERSE SIDE OF THIS PROXY.
For participants in the Corporation's Amended and Restated Section
401(k) Plan ("Plan"), this card also provides voting instructions to the Trustee
under the Plan for the undersigned's allowable portion, if any, of the total
number of shares of Common Stock of the Corporation held by such Plan as
indicated on the reverse side hereof. These voting instructions are solicited
and will be carried out in accordance with the applicable provisions of the
Plan.
The undersigned acknowledges receipt of the Notice of Annual Meeting of
Shareholders and the Proxy Statement dated March 14, 1996 and ratifies all that
the proxies or either of them or their substitutes may lawfully do or cause to
be done by virtue hereon and revokes all former proxies.
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE