1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended June 30, 1996
-------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
---------------- ---------------
Commission file Number 0-10535
-------
CITIZENS BANKING CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2378932
------------------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Citizens Banking Center Flint, Michigan 48502
-------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(810) 766-7500
----------------------------------------------------
(Registrant's telephone number, including area code)
None
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at July 26, 1996
- --------------------------- -----------------------------
Common Stock, No Par Value 14,447,254 Shares
(This report contains 24 pages)
2
Citizens Banking Corporation
Index to Form 10-Q
PART I - FINANCIAL INFORMATION
Page
----
Item 1 - Consolidated Financial Statements .................................. 3
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................... 8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings .................................................. 23
Item 2 - Changes in Securities .............................................. 23
Item 3 - Defaults Upon Senior Securities .................................... 23
Item 4 - Submission of Matters to a Vote of Security Holders ................ 23
Item 5 - Other Information .................................................. 23
2
3
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
- ----------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
JUNE 30, December 31,
(in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 158,689 $ 172,754
Money market investments:
Interest-bearing deposits with banks 210 10,090
Federal funds sold 18,000 50,000
Term federal funds and other 5,383 89,744
---------- ----------
Total money market investments 23,593 149,834
Securities available-for-sale:
U.S. Treasury and federal agency securities 375,782 346,485
State and municipal securities 210,154 213,491
Other securities 14,365 10,936
---------- ----------
Total investment securities 600,301 570,912
Loans:
Commercial 965,269 905,947
Real estate construction 31,372 33,984
Real estate mortgage 511,911 457,758
Consumer 985,925 970,755
Lease financing 56,952 60,069
---------- ----------
Total loans 2,551,429 2,428,513
Less: Allowance for loan losses (35,256) (34,771)
---------- ----------
Net loans 2,516,173 2,393,742
Premises and equipment 62,598 63,147
Intangible assets 67,657 70,385
Other assets 46,928 43,148
---------- ----------
TOTAL ASSETS $3,475,939 $3,463,922
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 491,415 $506,116
Interest-bearing 2,375,293 2,358,585
---------- ----------
Total deposits 2,866,708 2,864,701
Federal funds purchased and securities sold
under agreements to repurchase 151,360 130,556
Other short-term borrowings 32,033 15,468
Other liabilities 46,964 50,600
Long-term debt 75,342 105,411
---------- ----------
Total liabilities 3,172,407 3,166,736
SHAREHOLDERS' EQUITY
Preferred stock - No par value --- ---
Common stock - No par value 92,677 91,480
Retained earnings 213,182 202,219
Net unrealized gain (loss) on securities available-for-sale, net of tax (2,327) 3,487
---------- ----------
Total shareholders' equity 303,532 297,186
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,475,939 $3,463,922
========== ==========
- ----------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
3
4
- -------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 54,646 $ 51,945 $ 107,782 $ 94,436
Interest and dividends on investment securities:
Taxable 6,387 5,667 12,175 10,858
Nontaxable 2,301 2,367 4,561 4,805
Money market investments 578 2,269 2,363 3,970
-------- -------- --------- --------
Total interest income 63,912 62,248 126,881 114,069
-------- -------- --------- --------
INTEREST EXPENSE
Deposits 23,709 22,840 47,854 40,668
Short-term borrowings 1,790 1,727 3,512 3,285
Long-term debt 1,546 2,320 3,403 3,202
-------- -------- --------- --------
Total interest expense 27,045 26,887 54,769 47,155
-------- -------- --------- --------
NET INTEREST INCOME 36,867 35,361 72,112 66,914
Provision for loan losses 1,771 1,580 3,542 3,000
-------- -------- --------- --------
Net interest income after provision for loan losses 35,096 33,781 68,570 63,914
-------- -------- --------- --------
NONINTEREST INCOME
Trust fees 3,076 2,840 6,230 5,499
Service charges on deposit accounts 2,483 2,559 4,918 4,750
Bankcard fees 1,448 1,342 2,792 2,520
Investment securities gains 7 13 59 104
Other 2,734 2,148 5,289 4,091
-------- -------- --------- --------
Total noninterest income 9,748 8,902 19,288 16,964
-------- -------- --------- --------
NONINTEREST EXPENSE
Salaries and employee benefits 17,201 16,515 33,959 31,316
Equipment 2,434 2,513 4,858 4,758
Occupancy 2,382 2,263 4,734 4,308
Intangible asset amortization 1,370 1,331 2,727 2,028
FDIC insurance premiums 3 1,557 7 2,913
Bankcard fees 891 673 1,663 1,337
Stationery and supplies 897 967 1,675 1,704
Postage and delivery 895 766 1,719 1,426
Other 5,780 5,883 11,335 10,758
-------- -------- --------- --------
Total noninterest expense 31,853 32,468 62,677 60,548
-------- -------- --------- --------
INCOME BEFORE INCOME TAXES 12,991 10,215 25,181 20,330
Income taxes 3,731 2,746 7,180 5,477
-------- -------- --------- --------
NET INCOME $ 9,260 $ 7,469 $ 18,001 $ 14,853
======== ======== ========= ========
PRIMARY AND FULLY DILUTED INCOME PER SHARE $ 0.63 $ 0.51 $ 1.23 $ 1.02
======== ======== ========= ========
AVERAGE SHARES OUTSTANDING:
Primary 14,694 14,529 14,684 14,505
Fully Diluted 14,694 14,579 14,684 14,561
- -------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
4
5
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
1996 1995
------------------------------ -----------------------
SECOND First Fourth Third
(in thousands) QUARTER Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance, beginning of quarter $ 92,202 $ 91,480 $ 90,445 $ 89,491
Exercise of stock options, net of shares purchased 475 722 1,035 954
-------- -------- -------- --------
Balance, end of quarter 92,677 92,202 91,480 90,445
-------- -------- -------- --------
RETAINED EARNINGS
Balance, beginning of quarter 207,667 202,219 195,743 190,027
Net income 9,260 8,741 9,759 8,984
Cash dividends (3,745) (3,293) (3,283) (3,268)
-------- -------- -------- --------
Balance, end of quarter 213,182 207,667 202,219 195,743
-------- -------- -------- --------
UNREALIZED GAIN (LOSS) ON SECURITIES
AVAILABLE-FOR-SALE
Balance, beginning of quarter 278 3,487 424 (162)
Net unrealized gain (loss), net of tax benefit (2,605) (3,209) 3,063 586
-------- -------- -------- --------
Balance, end of quarter (2,327) 278 3,487 424
-------- -------- -------- --------
TOTAL SHAREHOLDERS' EQUITY $303,532 $300,147 $297,186 $286,612
======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
5
6
- ------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Six Months Ended
June 30,
(in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 18,001 $ 14,853
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 3,542 3,000
Depreciation and amortization 3,586 3,554
Amortization of intangibles 2,727 2,028
Net amortization on investment securities 911 1,526
Investment securities gains (59) (104)
Other (4,285) 246
--------- ---------
Net cash provided by operating activities 24,423 25,103
--------- ---------
INVESTING ACTIVITIES:
Net decrease (increase) in money market investments 126,241 (23,247)
Securities available-for-sale:
Proceeds from sales --- 6,883
Proceeds from maturities 283,001 79,979
Purchases (322,186) (60,904)
Net increase in loans and leases (125,973) (41,761)
Purchases of premises and equipment (3,037) (3,500)
Net cash used for acquisition of banks --- (59,434)
--------- ---------
Net cash used by investing activities (41,954) (101,984)
--------- ---------
FINANCING ACTIVITIES:
Net decrease in demand and savings deposits 0 (65,749)
Net increase in time deposits 23,233 88,476
Net increase (decrease) in short-term borrowings 37,369 (24,525)
Proceeds from issuance of long-term debt --- 115,000
Principal reductions in long-term debt (30,069) (1,487)
Cash dividends paid (7,038) (6,219)
Proceeds from stock options exercised 1,197 248
--------- ---------
Net cash provided by financing activities 3,466 105,744
--------- ---------
Net increase (decrease) in cash and due from banks (14,065) 28,863
Cash and due from banks at beginning of period 172,754 132,092
Cash and due from banks at end of period $ 158,689 $ 160,955
========= =========
- ------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
6
7
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions for Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six month
periods ended June 30, 1996 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1996. The 1996 six month
results reflect six months of operations for the four Michigan affiliates of
Banc One Corporation purchased at the close of business on February 28, 1995,
as compared to four months of operations for the same period in 1995. The
transaction was accounted for as a purchase and the four banks ("acquired
banks") were merged into Citizens Commercial and Savings Bank headquartered in
Flint, Michigan effective immediately after the acquisition. For further
information, refer to the consolidated financial statements and notes thereto
included in the Corporation's annual report on Form 10-K for the year ended
December 31, 1995.
NOTE 2. IMPAIRED LOANS
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. See additional
discussion under the section entitled "Nonperforming Assets" in this filing.
NOTE 3 - LOAN SERVICING
The Corporation originates mortgage loans for sale to the secondary
market and sells the loans with servicing retained or released. Effective
January 1, 1996, the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 122, "Accounting for Mortgage Servicing Rights, an
amendment of FASB Statement No. 65." This statement requires servicers to
capitalize the rights to service originated mortgage loans. Prior to adoption
of SFAS 122, only purchased mortgage servicing rights were capitalized.
Beginning in 1996, the total cost of mortgage loans originated with the intent
to sell is allocated between the loan servicing right and the mortgage loan
without servicing, based on their relative fair values. The capitalized cost
of loan servicing rights is amortized in proportion to, and over the period of,
estimated net future servicing revenue. See additional discussion under
"Loans" within the Balance Sheet section in this filing.
NOTE 4. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year financial statement presentation.
7
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a review of the Corporation's performance during the three and
six month periods ended June 30, 1996. This discussion should be read in
conjunction with the accompanying unaudited financial statements and notes
thereto appearing on pages 3 through 7 of this report and the Corporation's
1995 Annual Report on Form 10-K.
- -------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except per share data) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------
FOR THE PERIOD
Interest income $63,912 $62,248 $126,881 $114,069
Net interest income 36,867 35,361 72,112 66,914
Provision for loan losses 1,771 1,580 3,542 3,000
Investment securities gains 7 13 59 104
Other noninterest income 9,741 8,889 19,229 16,860
Noninterest expense 31,853 32,468 62,677 60,548
Income taxes 3,731 2,746 7,180 5,477
Net income 9,260 7,469 18,001 14,853
Cash dividends 3,745 3,256 7,039 6,219
PER SHARE DATA
Net income:
Primary $ 0.63 $ 0.51 $ 1.23 $ 1.02
Fully diluted 0.63 0.51 1.23 1.02
Cash dividends 0.26 0.23 0.49 0.44
Book value (end of period) -- -- 21.02 19.69
Market value (end of period close) -- -- 29.00 29.75
FINANCIAL RATIOS (ANNUALIZED)
Return on average:
Shareholders' equity 12.40% 10.89% 12.09% 11.13%
Assets 1.08 0.89 1.05 0.95
Net interest margin (FTE) 4.83 4.77 4.74 4.85
Net loan charge-offs to average loans 0.22 0.10 0.25 0.10
Average equity to average total assets 8.68 8.14 8.67 8.55
Nonperforming assets to loans plus other
real estate (end of period) -- -- 0.74 1.00
Nonperforming assets to total assets
(end of period) -- -- 0.55 0.70
BALANCE SHEET TOTALS Percent
At Period End (June 30): Change
-------
Assets 1.2 $ 3,475,939 $ 3,436,099
Loans 7.0 2,551,429 2,385,565
Deposits 1.8 2,866,708 2,815,731
Shareholders' equity 8.7 303,532 279,356
Average balances:
Assets 9.7 3,453,124 3,147,457
Loans 13.7 2,481,829 2,182,585
Deposits 9.7 2,860,879 2,607,065
Shareholders' equity 11.3 299,420 269,006
- -------------------------------------------------------------------------------------------
8
9
PERFORMANCE SUMMARY
Selected financial data as of June 30, 1996 and 1995 and for the three and six
month periods then ended are presented in the table on page 8. As shown,
earnings increased in 1996 resulting from higher net interest and noninterest
income. This improvement was offset in part by higher noninterest expense,
provision for loan losses and income taxes. The 1996 results reflect six
months of operations for the four Michigan affiliates of Banc One Corporation
purchased at the close of business on February 28, 1995, as compared to four
months of operations for the same period in 1995. The 1995 transaction was
accounted for as a purchase and the four banks ("acquired banks") were merged
into Citizens Commercial and Savings Bank headquartered in Flint, Michigan
effective immediately after the acquisition.
NET INTEREST INCOME
Net interest income and average balances and yields on major categories of
interest-earning assets and interest-bearing liabilities for the three and six
months ended June 30, 1996 and 1995 are summarized on pages 11 and 12,
respectively. The effects of changes in average market rates of interest
("rate") and average balances ("volume") are quantified in the table below.
- -------------------------------------------------------------------------------------------------------------------------
ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
Three Months Ended June 30 Six Months Ended June 30
1996 Compared With 1995 1996 Compared With 1995
--------------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Net Due to Change in Net Due to Change in
------------------------- -------------------------
(in thousands) Change(1) Volume Rate(2) Change(1) Volume Rate(2)
- -------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Money market investments:
Time deposits with banks $ 0 $ 0 $ 0 $ (126) $ (124) $ (2)
Federal funds sold (775) (735) (40) (1,182) (1,062) (120)
Term federal funds sold
and other (916) (880) (36) (299) (189) (110)
Investment securities:
Taxable 720 618 102 1,317 1,122 195
Tax-exempt (66) 19 (85) (244) (69) (175)
Loans 2,701 3,087 (386) 13,346 13,526 (180)
------- ------- ------ ------- ------- ------
Total 1,664 2,109 (445) 12,812 13,204 (392)
------- ------- ------ ------- ------- ------
INTEREST EXPENSE:
Deposits:
Demand (242) (70) (172) (131) 129 (260)
Savings (621) 74 (695) (444) 437 (881)
Time 1,732 1,566 166 7,761 5,696 2,065
Short-term borrowings 63 126 (63) 227 317 (90)
Long-term debt (774) (782) 8 201 236 (35)
------- ------- ------ ------- ------- ------
Total 158 914 (756) 7,614 6,815 799
------- ------- ------ ------- ------- ------
NET INTEREST INCOME $ 1,506 $ 1,195 $ 311 $5,198 $ 6,389 $(1,191)
======= ======= ====== ======= ======= ======
- -------------------------------------------------------------------------------------------------------------------------
(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.
9
10
Favorable three and six month volume related variances in net interest income
partially offset by a negative rate variance for the six month period resulted
in an increase in net interest income of $1,506,000 and $5,198,000 for the
three and six months ended June 30, 1996 as compared with the same period in
1995. The February 28, 1995 acquisition accounted for $4,573,000 of the volume
related increase when comparing the six months ended June 30, 1996 with the
same period of 1995. Loan growth partially offset by time deposit growth
accounted for the remaining six month as well as the three month volume
increases.
The net interest margin increased from 4.77% to 4.83% for the three months
ended June 30, 1996 as compared to the same period in the prior year due
primarily to a decrease in the cost of interest bearing liabilities from 4.16%
to 4.12% during these periods. This decline resulted from higher costs for
time deposits more than offset by lower costs for other funding sources.
Yields on earning assets remained unchanged for the three months ended June 30,
1996 compared to the same period in the prior year.
Yields on earning assets increased slightly to 8.21% from 8.14% for the six
months ended June 30, 1996 as compared with the same period of 1995. The cost
of interest bearing liabilities increased to 4.17% from 3.97% for the six
months ended June 30, 1996 as compared with the same period in 1995. This
increase was attributable to higher costs for time deposits partially offset by
slightly lower demand and savings deposit and short and long term debt costs.
These changes resulted in a decrease in the net interest margin to 4.74% from
4.85% in 1995 for the six months ended June 30, 1996 compared with the same
period of 1995.
If market rates were to shift significantly in 1996, corresponding changes in
funding costs would need to 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".
10
11
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
1996 1995
Three Months Ended June 30 Average Average Average Average
(in thousands) Balance Interest(1) Rate(2) Balance Interest(1) Rate(2)
- -----------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Money market investments:
Interest earning deposits with banks $ 54 $ 1 2.75% $ 62 $ 1 7.49%
Federal funds sold 32,806 462 5.67 81,407 1,237 6.09
Term federal funds sold and other 9,654 115 4.86 69,437 1,031 5.96
Investment securities(3):
Taxable 447,682 6,387 5.72 403,643 5,667 5.62
Nontaxable 175,752 2,301 8.10 175,424 2,367 8.36
Loans and leases:
Commercial 970,933 21,133 8.83 923,742 21,219 9.29
Real estate 507,283 10,693 8.43 436,977 9,048 8.28
Consumer 980,219 21,853 8.97 938,765 20,574 8.79
Lease financing 57,461 967 6.73 65,342 1,104 6.76
----------- -------- ------ ---------- -------- ------
Total earning assets(3) 3,181,844 63,912 8.25 3,094,799 62,248 8.25
-------- --------
NONEARNING ASSETS
Cash and due from banks 141,635 138,983
Bank premises and equipment 62,661 63,723
Other nonearning assets 109,024 114,154
Allowance for loan losses (35,190) (33,480)
----------- ---------
Total assets $3,459,974 $3,378,179
=========== ==========
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits $ 315,831 1,314 1.67 $ 326,203 1,556 1.91
Savings deposits 910,971 6,069 2.68 938,022 6,690 2.86
Time deposits 1,175,397 16,326 5.59 1,063,386 14,594 5.50
Repurchase agreements and other short-term borrowings 153,550 1,790 4.69 141,123 1,727 4.91
Long-term debt 82,475 1,546 7.54 123,310 2,320 7.55
----------- -------- ------ ---------- -------- ------
Total interest-bearing liabilities 2,638,224 27,045 4.12 2,592,044 26,887 4.16
-------- --------
NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits 471,786 460,132
Other liabilities 49,600 51,811
Shareholders' equity 300,364 274,192
Total liabilities and shareholders' equity $3,459,974 $3,378,179
========== ==========
NET INTEREST INCOME $ 36,867 $35,361
======== =======
NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 4.83% 4.77%
(1) Interest income shown on actual basis and does not include taxable
equivalent adjustments.
(2) Average rates are presented on an annual basis and include taxable
equivalent adjustments to interest income of $1,521 and $1,492 for the
three months ended June 30, 1996 and 1995, respectively, based on a
tax rate of 35%.
(3) For presentation in this table, average balances and the corresponding
average rates for investment securities are based upon historical cost,
adjusted for amortization of premiums and accretion of discounts.
11
12
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
1996 1995
------------------------------------ ------------------------------------
Six Months Ended June 30 Average Average Average Average
(in thousands) Balance Interest(1) Rate(2) Balance Interest(1) Rate(2)
- ----------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Money market investments:
Interest earning deposits with banks $ 2,819 81 5.76% $ 7,064 $ 207 5.92%
Federal funds sold 46,101 1,261 5.50 81,768 2,443 6.02
Term federal funds sold and other 38,055 1,021 5.41 44,903 1,320 5.93
Investment securities(3):
Taxable 428,619 12,175 5.69 394,375 10,858 5.53
Nontaxable 175,099 4,561 8.05 178,686 4,805 8.33
Loans and leases
Commercial 957,468 41,776 8.86 871,140 39,534 9.21
Real estate 491,175 20,674 8.42 420,985 17,357 8.25
Consumer 975,525 43,376 8.94 821,984 35,337 8.67
Lease financing 57,661 1,956 6.78 68,476 2,208 6.45
---------- --------- ----- --------- -------- -----
Total earning assets(3) 3,172,522 126,881 8.21 2,889,381 114,069 8.14
--------- --------
NONEARNING ASSETS
Cash and due from banks 141,484 138,796
Bank premises and equipment 62,711 60,092
Other nonearning assets 111,469 89,777
Allowance for loan losses (35,062) (30,589)
---------- ---------
Total assets $ 3,453,124 $3,147,457
========== ==========
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits $ 315,488 2,685 1.71 $ 302,588 2,816 1.88
Savings deposits 908,780 12,194 2.70 906,704 12,638 2.81
Time deposits 1,176,166 32,975 5.64 964,575 25,214 5.27
Repurchase agreements and other 150,379 3,512 4.70 136,199 3,285 4.86
short-term borrowings
Long-term debt 90,890 3,403 7.53 84,838 3,202 7.61
----------- --------- ----- --------- -------- -----
Total interest-bearing liabilities 2,641,703 54,769 4.17 2,394,904 47,155 3.97
--------- --------
NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS'
EQUITY
Demand deposits 460,445 433,198
Other liabilities 51,556 50,349
Shareholders' equity 299,420 269,006
---------- ---------
Total liabilities and shareholders' equity $ 3,453,124 $3,147,457
=========== ==========
NET INTEREST INCOME $ 72,112 $ 66,914
======== ========
NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 4.74% 4.85%
(1) Interest income shown on actual basis and does not
include taxable equivalent adjustments.
(2) Average rates are presented on an annual basis and include taxable
equivalent adjustments to interest income of $3,009 and $3,003 for the six
months ended June 30, 1996 and 1995, respectively, based on a tax rate of 35%.
(3) For presentation in this table, average balances and the corresponding
average rates for investment securities are based upon historical cost,
adjusted for of premiums and accretion of discounts.
12
13
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Management provides for possible loan losses at a rate considered
appropriate based on judgments regarding economic conditions, historical loss
experience, the size and composition of the loan portfolio, the amount and
character of nonperforming assets, estimated future net charge-offs and other
factors. A summary of loan loss experience during the three and six months
ended June 30, 1996 and 1995 is provided below. The provision for loan losses
increased $191,000 and $542,000 during the three and six months ended June 30,
1996, respectively, as compared with the same periods in 1995. The allowance
for loan losses increased $1.4 million to $35.3 million at June 30, 1996
compared to June 30, 1995. The ratio of net loans charged off to average loans
outstanding increased 12 and 15 basis points for the three and six months ended
June 30, 1996, respectively, as compared to the same periods in 1995. The
increase resulted, in part, from higher charge-offs in the commercial and
consumer loan portfolios but was not the result of concentrations in any one
segment of either portfolio. Unusually high recoveries in the first half of
1995 also contributed to the year to year variance.
- --------------------------------------------------------------------------------------------------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------
Allowance for loan losses - beginning of period $ 34,840 $ 32,916 $ 34,771 $ 24,714
Allowance of Acquired Banks --- --- --- 7,235
Charge-offs 2,243 1,758 4,695 3,265
Recoveries 888 1,155 1,638 2,209
---------- --------- ---------- ----------
Net charge-offs 1,355 603 3,057 1,056
Provision for loan losses 1,771 1,580 3,542 3,000
---------- --------- ---------- ----------
Allowance for loan losses - end of period $ $35,256 $ 33,893 $ 35,256 $ 33,893
========== ========= ========== ==========
Loans outstanding at period end
Average loans outstanding during period $2,551,429 $2,385,565 $2,551,429 $2,385,565
2,515,896 2,364,826 2,481,829 2,182,585
Allowance for loan losses as a percentage of
loans outstanding at period end 1.38% 1.42% 1.38% 1.42%
Ratio of net charge-offs during period to
average loans outstanding (annualized) 0.22 0.10 0.25 0.10
Loan loss coverage (allowance as a multiple of
net charge-offs, annualized) 6.5 x 14.1 x 5.8 x 16.0 x
- --------------------------------------------------------------------------------------------------------
The Corporation maintains formal policies and procedures to monitor and
control credit risk. The Corporation's loan portfolio has no significant
concentrations in any one industry nor any exposure to foreign loans. The
Corporation has generally not extended credit to finance highly leveraged
transactions nor does it intend to do so in the future. Based on present
information, management believes the allowance for loan losses is adequate to
meet known risks in the loan portfolio.
Employment levels and other economic conditions in the Corporation's
local markets may have a significant impact on the level of credit losses.
Management has identified and devotes appropriate attention to credits which may
not be performing as well as expected. Nonperforming loans are further
discussed in the section entitled "Nonperforming Assets."
13
14
NONINTEREST INCOME
A summary of significant sources of noninterest income during the three
and six months ended June 30, 1996 and 1995 follows:
- ------------------------------------------------------------------------------------------------
NONINTEREST INCOME Three Months Ended Six Months Ended Percent
June 30, June 30, Change in 1996
------------------ ---------------- --------------
Three Six
(in thousands) 1996 1995 1996 1995 months months
- ------------------------------------------------------------------------------------------------
Trust fees $3,076 $2,840 $6,230 $5,499 8.3% 13.3%
Service charges on deposit accounts 2,483 2,559 4,918 4,750 (3.0) 3.5
Bankcard fees 1,448 1,342 2,792 2,520 7.9 10.8
Brokerage and investment fees 579 302 977 557 91.7 75.4
Other loan income 374 422 892 812 (11.4) 9.9
ATM network user fees 492 371 954 734 32.6 30.0
Cash management services 373 231 652 444 61.5 46.8
Safe deposit rentals 283 242 556 461 16.9 20.6
Investment securities gains 7 13 59 104 (46.2) (43.3)
Other, net 633 580 1,258 1,083 9.1 16.2
------ ------ ------- -------
Total noninterest income $9,748 $8,902 $19,288 $16,964 9.5% 13.7%
====== ====== ======= =======
- ------------------------------------------------------------------------------------------------
The six months ended June 30, 1996 include the operations of the
acquired banks, as compared with four months of operations for the same period
in 1995. Noninterest income for the three and six months ended June 30, 1996
increased 9.5% and 13.7%, respectively, as compared to the same periods in
1995. Excluding the effects of the 1995 acquisition, noninterest income
increased 10.7% for the six months ended June 30, 1996 as compared to the same
period in 1995. The three month period ended June 30 comparison was not
impacted by the first quarter 1995 acquisition.
Excluding the impact of the 1995 acquisition for the six month period
ending June 30, 1996, the following categories had significant increases when
compared to the same period in the prior year. Brokerage and investment fees
increased 91.7% and 64.5% for the three and six months ended June 30, 1996,
respectively, as compared to the same period in 1995, the result of increased
market penetration. For the quarter ended June 30, 1996, other loan income
declined slightly due primarily to fewer sales of mortgage loans into the
secondary market. Increased volume and improved pricing strategies resulted in
higher ATM network user fees for both the three and six months ended June 30,
1996. Cash management service fees increased 61.5% and 38.1% for the three
and six months ended June 30, 1996 as compared to the previous year. This
increase is volume related as customers have responded to enhanced investment
options which include various money market funds from which the Corporation
receives a management fee. Safe deposit rental fees increased for both the
three and six month periods ended June 30, 1996 as compared to the same periods
in the prior year, as a result of increased service fee charges for rentals.
When excluding the impact of the 1995 acquisition, variances for the following
income categories were not significant: trust income, service charges on
deposits, bankcard fees and other miscellaneous income.
In July 1996, the Corporation announced the sale of its residential mortgage
loan servicing operations to LaSalle Home Mortgage Corporation. The transaction
will result in a gain and is expected to be completed by October 1996. The
Corporation currently services approximately 17,000 residential mortgage loans
for various investors and its own portfolio.
14
15
NONINTEREST EXPENSE
Significant changes in noninterest expense during the three and six months
ended June 30, 1996 compared with the same period of 1995 are summarized in
the table below.
- -----------------------------------------------------------------------------------------------
NONINTEREST EXPENSE Three Months Ended Six Months Ended Percent
June 30, June 30, Changes in 1995
------------------ ---------------- ---------------
Three Six
(in thousands) 1996 1995 1996 1995 Months Months
- -----------------------------------------------------------------------------------------------
Salaries and employee benefits $17,201 $16,515 $33,959 $31,316 4.2% 8.4%
Equipment 2,434 2,513 4,858 4,758 (3.1) 2.1
Occupancy 2,382 2,263 4,734 4,308 5.3 9.9
Intangible asset amortization 1,370 1,331 2,727 2,028 2.9 34.5
FDIC insurance premiums 3 1,557 7 2,913 (99.8) (99.8)
Bankcard fees 891 673 1,663 1,337 32.4 24.4
Stationery and supplies 897 967 1,675 1,704 (7.2) (1.7)
Postage and delivery 895 766 1,719 1,426 16.8 20.5
Advertising and public relations 948 790 1,892 1,385 20.0 36.6
Taxes, other than income taxes 647 564 1,301 1,239 14.7 5.0
Other loan fees 857 480 1,576 825 78.5 91.0
Consulting and other
professional fees 584 795 1,038 1,174 (26.5) (11.6)
Legal, audit and examination fees 339 409 729 920 (17.1) (20.8)
Other, net 2,405 2,845 4,799 5,215 (15.5) (8.0)
------- ------- ------- -------
Total noninterest expense $31,853 $32,468 $62,677 $60,548 (1.9)% 3.5%
======= ======= ======= =======
- -----------------------------------------------------------------------------------------------
Noninterest expense reflects a decrease of 1.9% and an increase of 3.5%
for the three and six months ended June 30, 1996, respectively, when compared
with the same periods in 1995. Excluding the effect of the acquisition,
noninterest expense in the first half of 1996 increased a modest 1.2%.
SALARIES AND EMPLOYEE BENEFITS
Excluding the effects of the 1995 acquisition, salaries and employee
benefits expense was $29,430,000 in the first six months of 1996 as compared to
$28,208,000 in 1995, an increase of 4.3%. For the three months ended June 30,
1996 salary and employee benefits increased 4.2% as compared to the same period
in 1995. Cost savings attributable to staff reductions through attrition
partially offset the effects of normal merit increases. Management anticipates
that the ongoing consolidation of operational functions throughout the
Corporation will continue to mitigate the need to replace staff lost through
normal attrition.
The Financial Accounting Standards Board issued Statement No. 123,
"Accounting for Stock Based Compensation" in October 1995, effective for the
Corporation's year end 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.
OTHER NONINTEREST EXPENSE
Excluding the effect of the first quarter 1995 acquisition, other
noninterest expenses decreased 2.5%. The most significant decline was the
reduction of FDIC (Federal Deposit Insurance Corporation) premiums. Effective
June 1, 1995 FDIC assessments were reduced from 23 cents to 4 cents per $100 of
deposits for banks meeting the requirements of supervisory risk subgroup 1.A.
"well capitalized". Both of the Corporation's subsidiaries have sufficient
capital to maintain a "well capitalized" designation, (the FDIC's highest
rating). On December 11, 1995, the FDIC amended the assessment rate schedule to
reduce assessments on deposits for "well capitalized" banks to zero effective
for the first semiannual assessment period in 1996. Further regulatory changes
could impact the amount and type of assessments paid by the Corporation's
subsidiary banks.
15
16
In October 1995, the Corporation announced the consolidation of its six
Michigan chartered banks into one bank called Citizens Bank. The consolidation,
which occurred in June 1996, will further streamline operations and reduce
certain costs but will retain local management and respective boards of
directors. Also in 1995, the Corporation announced its Process Improvement
Project, a series of productivity initiatives designed to increase revenues and
reduce operating expenses throughout the Corporation. The Corporation expects
to achieve financial benefits as a result of these initiatives.
Both loan fees and advertising and public relations expense increased
significantly for the three and six months ended June 30, 1996 as compared to
the same periods in 1995. Excluding the impact of the 1995 acquisition for the
six month period, loan fees increased $721,000 as compared to the prior year.
The three month period also increased $377,000 as compared to the prior year.
This increase is directly related to increased loan volumes resulting in
additional mortgage appraisal and processing fees expense. The additional
mortgage costs are more than offset by increases in mortgage application,
origination and processing income collected as a result of the large volume
increases. This related income is reflected in the Corporation's net interest
income. Advertising and public relations expenses increased during the three
and six months ended June 30, 1996 as compared to the same period last year, due
in part to a promotional campaign related to the June 1, 1996 consolidation of
the Corporation's six Michigan banks.
Legal, audit and examination fees decreased for the three and six months
ended June 30, 1996 as compared to the same periods in 1995 primarily due to a
reduction in loan collection related expenses. Consulting and other
professional fees and stationery and supplies expense declines for the same
periods were the result of significant 1995 integration and conversion costs
associated with the acquisition. Increased postage and delivery expense for the
three and six months ended June 30, 1996 as compared to the same period in 1995
are the result of higher delivery costs incurred after the June 1995 conversion
of the acquired banks to Citizens' processing systems. Other processing
efficiencies gained with the consolidation more than offset these additional
costs. In addition, one time postage costs associated with the promotional
campaign for the June consolidation of the Corporation's Michigan banks also
attributed to the increase.
When excluding the impact of the 1995 acquisition for the six month
period all other expense categories which include equipment, occupancy,
intangible asset amortization, bankcard, and other expense had insignificant
changes for the three and six months ended June 30, 1996 when compared to the
same period in the prior year.
INCOME TAXES
Federal income tax expense increased $985,000 and $1,703,000 for the
three and six months ended June 30, 1996, respectively, as compared to the same
periods of 1995 resulting from higher pre-tax earnings and a lower level of
tax-exempt interest income.
BALANCE SHEET
The Corporation had total assets of $3.476 billion as of June 30, 1996, an
increase of $12.0 million or 0.3% from $3.464 billion as of December 31, 1995.
Average earning assets comprised 91.9% of average total assets during the
first six months of 1996 compared with 91.5% in the first six months of 1995.
INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
Total average investments, including money market investments, comprised
21.8% of average earning assets during the first six months of 1996, compared
with 22.2% for the same period of 1995. Average money market investment
balances decreased slightly to 2.7% of total average earning assets during the
first six months of 1996 from 4.2% during the corresponding period of 1995
primarily due to higher loan and decreased long-term debt balances.
LOANS
The Corporation extends credit primarily within the market areas of its
Michigan and Illinois banking subsidiaries. The loan portfolio is widely
diversified by borrowers and industry groups with no significant concentrations
in any industry. Total average loans increased 13.7% (6.6% excluding the effect
of the acquired banks) in the first six months of 1996 compared with the same
period of 1995. The increases occurred in all loan categories.
16
17
NEW ACCOUNTING STATEMENTS
The Corporation originates mortgage loans for sale to the secondary
market, and may sell the loans with servicing retained or released. Effective
January 1, 1996, the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 122, "Accounting for Mortgage Servicing Rights, an
amendment of FASB Statement No. 65." This statement requires servicers to
capitalize the rights to service originated mortgage loans. Prior to adoption
of SFAS 122, only purchased mortgage servicing rights were capitalized.
Beginning in 1996, the total cost of mortgage loans originated with the intent
to sell is allocated between the loan servicing right and the mortgage loan
without servicing, based on their relative fair values. The capitalized cost of
loan servicing rights is amortized in proportion to, and over the period of,
estimated net future servicing revenue.
Mortgage servicing rights are stratified based on predominant risk
characteristics of the underlying serviced loans, such as loan type, term, and
note rate, and periodically evaluated for impairment. Impairment represents the
excess of cost of an individual mortgage servicing rights stratum over its fair
value, and is recognized through a valuation allowance.
Fair values for individual stratum are based on the present value of
estimated future cash flows using a discount rate commensurate with the risks
involved (9.1% at June 30, 1996). Estimates of fair value include assumptions
about prepayment, default and interest rates, and other factors which are
subject to change over time. Changes in these underlying assumptions could
cause the fair value of loan servicing rights, and the related valuation
allowance, to change significantly in the future.
The unpaid principal balance of mortgage loans serviced for others, which
are not included on the balance sheets, was $223.7 million and $221.2 million at
June 30, 1996 and December 31, 1995, respectively. The balance of loans serviced
for others related to servicing rights that have been capitalized (provided
below) was $8.3 million at June 30, 1996. The remaining balance of loans
serviced for others also have servicing rights associated with them; however,
these servicing rights arose prior to adoption of SFAS 122, and accordingly,
have not been capitalized on the balance sheet. The carrying value and fair
value of capitalized servicing rights consisted of the following as of June 30:
1996
----
Unamortized cost $86,000
Valuation Allowance ---
-------
Carrying Value $86,000
=======
Fair Value $95,000
=======
An analysis of the activity for loan servicing rights in the first half of 1996
follows. There was no activity in the related valuation allowance during the
first half.
Unamortized Cost
Balance at January 1 $ ---
Additions 92,000
Amortization (6,000)
--------
Balance at June 30 $ 86,000
========
17
18
In March 1995 Financial Accounting Standards Board issued Statement No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". The Statement establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets. It also requires entities to review assets
being carried for potential impairment and to recognize the impairment loss if
one exists. The Corporation adopted the Statement effective January 1, 1996 and
the impact was not material.
NONPERFORMING ASSETS
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.
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 that follows.
At June 30, 1996, loans considered to be impaired under the Statements
totalled $21.9 million (of which $10.4 million were on a nonaccrual basis).
Included within this amount is $6.6 million of impaired loans for which the
related allowance for loan losses is $0.8 million and $15.3 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 quarter ended June
30, 1996 was approximately $17.0 million. For the quarter ended June 30, 1996,
the Corporation recognized interest income of $0.4 million which included $0.3
million of interest income recognized using the cash basis method of income
recognition.
At June 30, 1995, loans considered to be impaired under the Statements
totalled $19.7 million (of which $10.8 million were on a nonaccrual basis).
Included within this amount is $8.2 million of impaired loans for which the
related allowance for loan losses is $1.2 million and $11.5 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
quarter ended June 30, 1995 was approximately $19.7 million. For the quarter
ended June 30, 1995, the Corporation recognized interest income of $ 0.4
million which included $0.2 million of interest income recognized using the cash
basis method of income recognition.
Nonperforming assets consist of nonaccrual loans, restructured loans,
loans 90 days past due and still accruing interest, and other real estate
owned. 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 contained in this
filing have been adjusted to reflect this change. Certain of these loans, as
defined above, are considered to be impaired under the Statements. The
Corporation maintains policies and procedures to identify and monitor nonaccrual
loans. A loan (including a loan impaired under the Statements) is placed on
nonaccrual status when there 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.
18
19
The table below provides a summary of nonperforming assets as of June 30,
1996, December 31, 1995 and June 30, 1995. Total nonperforming assets
amounted to $19.0 million as of June 30, 1996, compared with $21.1 million as of
December 31, 1995 and $24.0 million as of June 30, 1995. Overall, nonperforming
assets decreased from December 31, 1995 due to improvements in the nonaccrual
category, resulting in a decrease in nonperforming assets as a percentage of
total loans plus OREO and total assets.
- ----------------------------------------------------------------------------------------------------------------
Nonperforming Assets
June 30, December 31, June 30,
(in thousands) 1996 1995 1995
- ----------------------------------------------------------------------------------------------------------------
NONPERFORMING LOANS
Nonaccrual:
Less than 30 days past due $ 4,705 $ 4,783 $ 6,452
From 30 to 89 days past due 1,344 784 1,261
90 or more days past due 10,163 13,057 13,344
------- ------- -------
Total 16,212 18,624 21,057
90 days past due and still accruing 834 432 479
Restructured 568 494 560
------- ------- -------
Total nonperforming loans 17,614 19,550 22,096
OTHER REAL ESTATE OWNED ("OREO") 1,350 1,568 1,890
------- ------- -------
Total nonperforming assets $ 18,964 $ 21,118 $ 23,986
======= ======= =======
Nonperforming assets as a percent of total loans plus OREO 0.74% 0.87% 1.00%
Nonperforming assets as a percent of total assets 0.55 0.61 0.70
- ----------------------------------------------------------------------------------------------------------------
Employment levels and other economic conditions in the Corporation's
local markets can impact the level and composition of nonperforming assets. In a
deteriorating or weak economy, higher levels of nonperforming assets,
charge-offs and provisions for loan losses could result which may adversely
impact the Corporation's results.
In addition to nonperforming loans, management identifies and closely
monitors other credits that are current in terms of principal and interest
payments but, in management's opinion, may deteriorate in quality if economic
conditions change. As of June 30, 1996 such credits amounted to $11.8 million
or 0.5 % of total loans, compared with $10.8 million or 0.5% at December 31,
1995 and $17.9 million or 0.8% as of June 30, 1995. 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.
DEPOSITS
The Corporation gathers deposits primarily in its local markets and
historically has not relied on brokered funds to sustain liquidity. Average
deposits increased 9.7% (4.3% excluding the 1995 acquisition effect) in the
first six months of 1996 compared to the same period in 1995. The shift in
customer preferences from savings deposits to time deposit alternatives reflects
changing customer liquidity preferences and the desire for higher interest
rates. Management seeks to maintain core deposit stability by offering
customers a wide range of deposit products at competitive rates.
SHORT-TERM BORROWINGS AND LONG-TERM DEBT
On average, total short-term borrowings increased to $150.4 million during
the first six months of 1996 compared with $136.2 million during the same
period of 1995. Long-term debt accounted for $90.9 million or 2.9% of average
interest-bearing funds for the six months ended June 30, 1996, compared with
$84.8 million or 3.0% for the same period in 1995. To finance the February 28,
1995 acquisition of the four banks, the Corporation's Parent company obtained a
$115 million seven year amortizing revolving credit facility. The Corporation
has made payments reducing the outstanding balance to $68.4 million at June 30,
1996. The revolving credit facility includes $58.5 million at a fixed rate
19
20
of 7.65%. Of this amount, $51.4 million reprices in March 1997 and $7.0
million in March 1998. The remaining $10.0 million outstanding has a variable
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 June 30, 1996.
CAPITAL RESOURCES
REGULATORY CAPITAL REQUIREMENTS
Bank holding companies, such as the Corporation, and their bank subsidiaries
are required by banking regulators to meet certain minimum levels of
capital adequacy. These are expressed in the form of certain ratios.
Capital is separated into Tier I capital (essentially common stockholders'
equity less goodwill) and Tier II capital (essentially the allowance for loan
losses limited to 1.25% of risk-weighted assets). The first two ratios, which
are based on the degree of credit risk in the company's assets, provide for
weighting assets based on assigned risk factors and include off-balance sheet
items such as loan commitments and stand-by letters of credit. The ratio of
Tier I capital to risk-weighted assets must be at least 4.0% and the ratio of
Total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must
be at least 8.0%. The capital leverage ratio supplements the risk-based capital
guidelines. Banks and bank holding companies are required to maintain a minimum
ratio of Tier 1 capital to adjusted quarterly average total assets of 3.0%
The FDIC, the insurer of deposits in financial institutions, has adopted
a risk-based insurance premium system based in part on an institution's capital
adequacy. Under this system, a depository institution is classified into one of
three capital categories (well-capitalized, adequately capitalized or
undercapitalized) according to its risk-based capital and leverage ratios and is
required to pay successively higher premiums depending on its capital levels and
its supervisory rating by its primary regulator. It is the Corporation's
intention to maintain sufficient capital in each of its bank subsidiaries to
permit them to maintain a "well capitalized" designation (the FDIC's highest
rating).
As summarized below, the Corporation's risk based capital levels were well in
excess of all regulatory standards.
- --------------------------------------------------------------------------------
CAPITAL RATIOS Regulatory
Minimum For
"Well JUNE 30, December 31, June 30,
Capitalized" 1996 1995 1995
- --------------------------------------------------------------------------------
Risk based capital:
Tier I 6.0% 9.1% 8.8% 8.4%
Total capital 10.0 10.3 10.0 9.7
Tier I leverage 5.0 7.0 6.7 6.3
- --------------------------------------------------------------------------------
COMMON AND PREFERRED STOCK
The Corporation maintains a stock repurchase program initiated in November
1987. During 1995 and the first six months of 1996, 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. These shares were
reissued in connection with a purchase acquisition in October 1993 and the
Corporation's stock option plan.
OTHER
Total shareholders' equity was $303.5 million or $21.02 per share as of June
30, 1996, compared with $297.2 million or $20.73 per share as of December 31,
1995 and $279.4 million or $19.69 per share as of June 30, 1995. The
Corporation declared cash dividends of $0.49 per share during the first six
months of 1996, an increase of 11.4% over the $0.44 per share declared during
the same period in 1995.
20
21
LIQUIDITY AND DEBT CAPACITY
The level of liquid assets available to meet ongoing funding needs and
to capitalize on opportunities for business expansion is closely monitored by
management. It is management's intent to maintain adequate liquidity so that
sufficient funds are readily available at a reasonable cost. Various techniques
are used by the Corporation to measure liquidity, including ratio analysis.
Some ratios monitored by the Corporation include: average loans to deposits;
total liquid assets (including cash, U.S. Treasury securities and short-term
investments) to total deposits; and, total long-term debt to equity. These
ratios are summarized in the table below.
- -----------------------------------------------------------------------------
KEY LIQUIDITY RATIOS
JUNE 30, December 31, June 30,
1996 1995 1995
- -----------------------------------------------------------------------------
Quarterly average:
Loans to deposits 87.5% 86.5% 84.8%
Liquid assets to deposits 13.1 17.0 18.0
Total long-term debt to equity 24.8 35.5 44.1
- -----------------------------------------------------------------------------
The Corporation's quarterly average loan to deposit ratio increased to
87.5% at June 30, 1996 from 86.5% at December 31, 1995. The 1995 acquisition
was funded from the proceeds of long-term debt financing of $115 million through
the Corporation's parent company. The long-term debt to equity ratio has
declined to 24.8% at June 30, 1996 from 35.5% at December 31, 1995. The parent
will continue to service the scheduled principal and interest payments with
dividends from the Corporation's subsidiary banks. Management believes that the
Corporation has sufficient liquidity to meet presently known cash flow
requirements arising from ongoing business transactions.
21
22
INTEREST RATE RISK
Interest rate risk generally arises when the maturity or repricing
structure of the Corporation's assets and liabilities differs significantly.
Asset/liability management, which among other things addresses such risk, is the
process of developing, testing and implementing strategies that seek to maximize
net interest income, maintain liquidity and minimize exposure to significant
changes in interest rates. This process includes monitoring the contractual and
anticipated repricing of assets and liabilities as well as simulating net
interest income under a variety of economic assumptions and balance sheet
configurations. Generally, management seeks a structure that insulates net
interest income and capital from large swings caused by changes in interest
rates. The Corporation's static interest rate sensitivity ("GAP") as of June
30, 1996 is illustrated in the following table. As shown, the Corporation had
an asset sensitive position (more rate sensitive assets than rate sensitive
liabilities) of $9.0 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 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 changes. 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.
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY
TOTAL
June 30, 1996 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 $ 807.4 $ 90.9 $ 114.5 $ 249.0 $1,261.8 $ 890.4 $399.2 $2,551.4
Investment securities 41.2 33.0 40.4 65.0 179.6 304.7 116.0 600.3
Short-term investments 23.6 --- --- --- 23.6 --- --- 23.6
------- ------- ------- ------- -------- -------- ------ --------
Total $ 872.2 $ 123.9 $ 154.9 $ 314.0 $1,465.0 $1,195.1 $515.2 $3,175.3
======= ======= ======= ======= ======== ======== ====== ========
RATE SENSITIVE LIABILITIES
Deposits (2) $ 176.5 $ 268.7 $ 318.0 $ 445.3 $1,208.5 $ 985.4 $181.4 $2,375.3
Short-term borrowings 183.4 --- --- --- 183.4 --- --- 183.4
Long-term debt 12.5 --- --- 51.6 64.1 7.1 4.1 75.3
------- ------- ------- ------- -------- -------- ------ --------
Total $ 372.4 $ 268.7 $ 318.0 $ 496.9 $1,456.0 $ 992.5 $185.5 $2,634.0
======= ======= ======= ======= ======== ======== ====== ========
Period GAP(1) $ 499.8 $(144.8) $(163.1) $(182.9) $ 9.0 $ 202.6 $329.7 $ 541.3
Cumulative GAP 499.8 355.0 191.9 9.0 --- 211.6 541.3 ---
Cumulative GAP to
Total Assets 14.38% 10.21% 5.52% 0.26% 0.42% 6.09% 15.57% 15.57%
Multiple of Rate Sensitive
Assets to Liabilities 2.34 0.46 0.49 0.63 1.01 1.20 2.78 1.21
- ------------------------------------------------------------------------------------------------------------------------------------
(1) GAP is the excess of rate sensitive assets (liabilities).
(2) Includes interest bearing savings and demand deposits of $353 million in
the less than one year category, and $867 million in the over one year
category, based on historical trends for these noncontractual maturity
deposit types, which reflects industry standards.
22
23
II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS--None
ITEM 2. CHANGES IN SECURITIES--None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES--None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--None
ITEM 5. OTHER INFORMATION--None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 3. Exhibits:
(11) Statement re: computation of per share earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K:
none
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIZENS BANKING CORPORATION
Date August 9, 1996 By /s/ John W. Ennest
-------------------- --------------------------------------------
John W. Ennest
Vice Chairman of the Board,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
(Duly Authorized Signatory)
23
24
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
11 Statement re: Computation of per
share earnings
27 Financial Data Schedule