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 September 30, 1997
------------------
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 October 28, 1997
- --------------------------- -------------------------------
Common Stock, No Par Value 18,676,049 Shares
2
Citizens Banking Corporation
Index to Form 10-Q
Page
PART I - FINANCIAL INFORMATION ----
Item 1 - Consolidated Financial Statements........................... 3
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 8
PART II - OTHER INFORMATION
Item 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
Item 6 - Exhibits and Reports on Form 8-K............................ 23
2
3
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, December 31,
(in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 150,163 $ 182,039
Money market investments:
Interest-bearing deposits with banks 75 83
Federal funds sold 34,500 4,500
Term federal funds and other 2,514 14,288
---------- ----------
Total money market investments 37,089 18,871
Securities available-for-sale:
U.S. Treasury and federal agency securities 393,336 502,042
State and municipal securities 176,263 200,835
Other securities 18,507 14,181
---------- ----------
Total investment securities 588,106 717,058
Loans:
Commercial 1,257,001 1,177,098
Real estate construction 66,865 71,125
Real estate mortgage 777,086 744,606
Consumer 1,355,227 1,189,807
Lease financing 40,349 47,173
---------- ----------
Total loans 3,496,528 3,229,809
Less: Allowance for loan losses (46,041) (42,166)
---------- ----------
Net loans 3,450,487 3,187,643
Premises and equipment 71,628 74,859
Intangible assets 61,402 73,684
Other assets 54,559 51,819
---------- ----------
TOTAL ASSETS $4,413,434 $4,305,973
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 598,615 $ 580,742
Interest-bearing 3,096,685 3,018,009
---------- ----------
Total deposits 3,695,300 3,598,751
Federal funds purchased and securities sold
under agreements to repurchase 116,303 146,903
Other short-term borrowings 53,766 29,902
Other liabilities 54,094 51,570
Long-term debt 94,866 86,826
---------- ----------
Total liabilities 4,014,329 3,913,952
SHAREHOLDERS' EQUITY
Preferred stock - No par value --- ---
Common stock - No par value 119,031 118,312
Retained earnings 276,778 273,484
Net unrealized gain on securities available-for-sale, net of tax 3,296 225
---------- ----------
Total shareholders' equity 399,105 392,021
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,413,434 $4,305,973
========== ==========
See notes to consolidated financial statements
3
4
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $75,292 $67,740 $217,646 $196,500
Interest and dividends on investment securities:
Taxable 8,035 8,176 25,033 25,687
Nontaxable 2,140 2,455 6,710 7,333
Money market investments 181 393 482 2,863
------- ------- -------- --------
Total interest income 85,648 78,764 249,871 232,383
------- ------- -------- --------
INTEREST EXPENSE
Deposits 33,133 29,861 95,733 88,481
Short-term borrowings 2,297 2,068 7,025 5,722
Long-term debt 1,473 1,380 4,349 4,920
------- ------- -------- --------
Total interest expense 36,903 33,309 107,107 99,123
------- ------- -------- --------
NET INTEREST INCOME 48,745 45,455 142,764 133,260
Provision for loan losses 5,245 3,593 12,197 7,980
------- ------- -------- --------
Net interest income after provision for loan
losses 43,500 41,862 130,567 125,280
------- ------- -------- --------
NONINTEREST INCOME
Trust fees 3,858 3,561 11,672 10,820
Service charges on deposit accounts 3,129 3,240 9,163 9,323
Bankcard fees 1,917 1,835 5,271 4,971
Other loan income 521 1,965 1,152 3,061
Investment securities gains (losses) (755) 134 (812) 570
Other 2,997 2,551 8,108 7,638
------- ------- -------- --------
Total noninterest income 11,667 13,286 34,554 36,383
------- ------- -------- --------
NONINTEREST EXPENSE
Salaries and employee benefits 19,986 20,567 60,778 60,872
Equipment 3,069 3,119 9,428 9,241
Occupancy 2,820 3,013 8,700 9,042
Intangible asset amortization 1,386 1,663 4,712 4,975
Bankcard fees 1,579 1,299 3,757 3,375
Stationery and supplies 968 1,074 3,076 3,090
Postage and delivery 1,116 1,107 3,305 3,252
Advertising and public relations 911 893 3,351 3,259
Special charge 23,734 --- 23,734 ---
Other 5,771 6,245 18,845 19,342
------- ------- -------- --------
Total noninterest expense 61,340 38,980 139,686 116,448
------- ------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (6,173) 16,168 25,435 45,215
Income taxes (1,222) 4,670 8,182 13,032
------- ------- -------- --------
NET INCOME (LOSS) $(4,951) $11,498 $ 17,253 $ 32,183
======= ======= ======== ========
PRIMARY AND FULLY DILUTED INCOME (LOSS) PER SHARE $ (0.27) $ 0.61 $ 0.91 $ 1.71
======= ======= ======== ========
AVERAGE SHARES OUTSTANDING:
Primary 18,996 18,850 18,893 18,856
Fully Diluted 19,056 18,852 19,016 18,856
See notes to consolidated financial statements.
4
5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
1997 1996
------------------------------------------------------- -------------
THIRD Second First Fourth
(in thousands) QUARTER Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance, beginning of quarter $118,781 $118,461 $118,312 $120,475
Exercise of stock options, net of shares
purchased 300 320 149 188
Shares acquired for retirement --- --- --- (2,351)
Cash in lieu of fractional shares (50) --- --- ---
-------- -------- -------- --------
Balance, end of quarter 119,031 118,781 118,461 118,312
-------- -------- -------- --------
RETAINED EARNINGS
Balance, beginning of quarter 287,027 279,806 273,484 267,814
Net income (loss) (4,951) 11,315 10,889 10,242
Cash dividends (5,298) (4,094) (4,567) (4,572)
-------- -------- -------- --------
Balance, end of quarter 276,778 287,027 279,806 273,484
-------- -------- -------- --------
UNREALIZED GAIN (LOSS) ON SECURITIES
AVAILABLE-FOR-SALE
Balance, beginning of quarter 543 (3,519) 225 (1,653)
Net unrealized gain (loss), net of tax benefit 2,753 4,062 (3,744) 1,878
-------- -------- -------- --------
Balance, end of quarter 3,296 543 (3,519) 225
-------- -------- -------- --------
TOTAL SHAREHOLDERS' EQUITY $399,105 $406,351 $394,748 $392,021
======== ======== ======== ========
See notes to consolidated financial statements
5
6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Nine Months Ended
September 30,
(in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 17,253 $ 32,183
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 12,197 7,980
Depreciation and amortization 6,829 6,807
Amortization of intangibles 4,712 4,975
Write down of intangibles 7,570 ---
Net amortization on investment securities 794 1,710
Investment securities losses (gains) 812 (570)
Other (1,854) (8,575)
--------- ---------
Net cash provided by operating activities 48,313 44,510
INVESTING ACTIVITIES:
Net decrease (increase) in money market investments (18,218) 111,415
Securities available-for-sale:
Proceeds from sales 170,600 105,357
Proceeds from maturities 90,978 354,113
Purchases (129,523) (398,895)
Net increase in loans (275,041) (305,824)
Purchases of premises and equipment (3,598) (3,940)
--------- ---------
Net cash used by investing activities (164,802) (137,774)
FINANCING ACTIVITIES:
Net decrease in demand and savings deposits (33,456) (64,198)
Net increase in time deposits 130,005 107,786
Net increase (decrease) in short-term borrowings (6,736) 38,785
Proceeds from issuance of long-term debt 55,000 20,000
Principal reductions in long-term debt (46,960) (41,493)
Cash dividends paid (13,959) (13,318)
Proceeds from stock options exercised 769 1,335
Shares acquired for retirement --- (1,421)
Cash in lieu of fractional shares (50) ---
--------- ---------
Net cash provided by financing activities 84,613 47,476
--------- ---------
Net decrease in cash and due from banks (31,876) (45,788)
Cash and due from banks at beginning of period 182,039 211,396
--------- ---------
Cash and due from banks at end of period $ 150,163 $ 165,608
========= =========
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 nine month periods ended September
30, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997.
NOTE 2. ACQUISITION
On July 1, 1997, the Corporation merged with CB Financial Corporation. As
part of the merger, Citizens issued 4,170,903 shares of its common stock in a
tax free exchange for all of the outstanding shares of CB Financial
Corporation. The merger was accounted for as a pooling of interests resulting
in the restatement of the financial statements for the periods presented to
reflect the consolidated financial information of both entities. The
consolidation resulted in no change in either entities year end or in the
consolidated shareholder equity position. No material intercompany
transactions existed between the companies prior to the merger. For the six
month period ending June 30, 1997( the latest period immediately preceding the
merger), CB Financial Corporation and Citizens Banking Corporation had
separate interest income of $30,471,000 and $133,752,000 and net income of
$2,889,000 and $19,315,000, respectively.
NOTE 3. SPECIAL CHARGE
The results of operations for the three and nine month periods presented
reflect a special charge of $17.3 million, after tax, related to the July 1,
1997 merger with CB Financial Corporation and the reorganization of Citizens'
information technology operations. See page 15 under the caption "Noninterest
Expense" for further information on this special charge.
NOTE 4. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year financial statement presentation. All financial information presented
reflects the consolidated results of Citizens Banking Corporation and CB
Financial Corporation.
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
nine month periods ended September 30, 1997. 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 Citizens Banking
Corporation's and CB Financial Corporation's 1996 Annual Reports on Form 10-K.
SELECTED FINANCIAL DATA
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share data) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------
FOR THE PERIOD
Interest income $ 85,648 $ 78,764 $ 249,871 $ 232,383
Net interest income 48,745 45,455 142,764 133,260
Provision for loan losses 5,245 3,593 12,197 7,980
Investment securities gains (losses) (755) 134 (812) 570
Other noninterest income 12,422 13,152 35,366 35,813
Noninterest expense before special charge 37,606 38,980 115,952 116,448
Special charge, net of tax 17,263 --- 17,263 ---
Income taxes 5,249 4,670 14,653 13,032
Net income (loss) (4,951) 11,498 17,253 32,183
Net income before special charge (1) 12,312 11,498 34,516 32,183
Cash dividends 5,298 3,757 13,959 13,318
PER SHARE DATA
Net income (loss):
Primary and fully diluted $ (0.27) $ 0.61 $ 0.91 $ 1.71
Fully diluted before special charge (1) 0.65 0.61 1.82 1.71
Cash dividends 0.285 0.26 0.83 0.75
Book value (end of period) --- --- 21.45 20.82
Market value (end of period close) --- --- 44.00 28.63
FINANCIAL RATIOS (ANNUALIZED)
Return on average:
Shareholders' equity (1) 11.99% 11.98% 11.53% 11.35%
Assets (1) 1.10 1.09 1.06 1.03
Net interest margin (FTE) 4.86 4.83 4.84 4.78
Net loan charge-offs to average loans 0.51 0.42 0.33 0.31
Average equity to average total assets
Nonperforming assets to loans plus other
repossessed assets (end of period) --- --- 0.72 0.71
Nonperforming assets to total assets
(end of period) --- --- 0.57 0.53
BALANCE SHEET TOTALS Percent
At Period End (September 30): Change
-------
Assets 3.8 $4,413,434 $4,252,419
Loans 10.4 3,496,528 3,166,142
Deposits 4.7 3,695,300 3,530,649
Shareholders' equity 3.2 399,105 386,636
Average balances:
Assets 4.1 4,361,659 4,190,974
Loans 10.7 3,341,447 3,019,288
Deposits 3.6 3,630,251 3,502,658
Shareholders' equity 5.7 400,141 378,607
(1) 1997 Operating income before special charge associated with CB Financial
Corporation merger and information technology operations reorganization.
8
9
PERFORMANCE SUMMARY
Selected financial data as of September 30, 1997 and 1996 and for the three and
nine month periods then ended are presented in the table on page 8. As shown,
earnings excluding the special charge increased in 1997 resulting from higher
net interest income and lower noninterest expense. This improvement was offset
in part by lower noninterest income and a higher provision for loan losses.
All amounts presented have been restated to include the results of CB Financial
Corporation which merged with the Corporation on July 1, 1997. The transaction
was accounted for as a pooling of interests.
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 nine
months ended September 30, 1997 and 1996 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 September 30 Nine Months Ended September 30
------------------------------------------- ----------------------------------------------------------
1997 Compared With 1996 1997 Compared With 1996
------------------------------------------- ----------------------------------------------------------
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 $ (1) $ (1) $ 0 $ (78) $ (77) $ (1)
Federal funds sold (224) (244) 20 (1,416) (1,420) 4
Term federal funds sold
and other 13 (4) 17 (887) (879) (8)
Investment securities:
Taxable (141) (326) 185 (654) (1,506) 852
Tax-exempt (315) (310) (5) (623) (682) 59
Loans 7,552 6,801 751 21,146 21,142 4
------ ------ ----- ------- ------- -----
Total 6,884 5,916 968 17,488 16,578 910
------ ------ ----- ------- ------- -----
INTEREST EXPENSE:
Deposits:
Demand (265) (87) (178) (705) (188) (517)
Savings 146 (141) 287 212 (576) 788
Time 3,391 2,887 504 7,745 7,501 244
Short-term borrowings 229 14 215 1,303 944 359
Long-term debt 93 351 (258) (571) (52) (519)
------ ------ ----- ------- ------- -----
Total 3,594 3,024 570 7,984 7,629 355
------ ------ ----- ------- ------- -----
NET INTEREST INCOME $3,290 $2,892 $ 398 $ 9,504 $ 8,949 $ 555
====== ====== ===== ======= ======= =====
(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 volume and rate related variances in net interest income resulted in
an increase in net interest income of $3,290,000 and $9,504,000 for the three
and nine months ended September 30, 1997 as compared to the same periods in
1996. Overall, loan growth partially offset by time deposit growth and
increased short-term borrowings accounted for the three and nine month volume
increases.
Yields on earning assets increased from 8.24% and 8.21% to 8.42% and 8.37% for
the three and nine months ended September 30, 1997, respectively, as compared
with the same periods of 1996. The increase resulted from higher yields on
investment securities, commercial and consumer loans and a higher concentration
of loans to earning assets. Real estate mortgage yields were lower for the
three and nine month periods ended September 30, 1997 as compared to the same
periods in 1996 due to the sale of the Corporation's mortgage servicing rights
in the third quarter of 1996. The resulting impact of the third party mortgage
servicing costs are now reflected in portfolio yields. Costs savings as a
result of this servicing transfer are reflected in non-interest expense.
Higher interest income due to loan growth was partially offset by reduced money
market and investment securities income as the Corporation continued to
partially fund loan growth with these investment assets. This resulted in
$5,916,000 and $16,578,000 in volume related increases for interest income when
comparing the three and nine months ended September 30, 1997 to the same
periods in 1996.
The cost of interest bearing liabilities increased from 4.14% and 4.15% to
4.34% and 4.28% for the three and nine months ended September 30, 1997,
respectively, as compared with the same periods in 1996. The three and nine
month cost increase was the result of higher rates on time and savings deposits
and short-term borrowings as well as a continued shift in deposits from lower
rate savings and demand accounts to higher cost time deposit accounts. These
changes were partially offset by decreased costs for demand deposits and
long-term debt. Rates on time deposits have increased twelve and two basis
points for the three and nine months ended September 30, 1997, respectively, as
compared to the same periods in the prior year. Increased volumes for time
deposits and short-term borrowings resulted in higher interest expense for the
three and nine month periods ended September 30, 1997 as compared to the same
periods in 1996.
Overall, favorable rate variances on earning assets and improved volumes of
higher yielding loans partially offset by increased costs on interest bearing
liabilities resulted in higher net interest margins for the three and nine
month periods ended September 30, 1997 as compared to the same periods in 1996.
Management continually monitors the Corporation's balance sheet to insulate net
interest income from significant swings caused by interest rate volatility. If
market rates change in 1997, corresponding changes in funding costs would be
considered to avoid any potential 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
1997 1996
------------------------------- -------------------------------
Three Months Ended September 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 $ 49 $ 1 6.08% $ 186 $ 2 4.85%
Federal funds sold 8,548 119 5.53 29,723 343 4.59
Term federal funds sold and other 5,137 61 4.72 5,626 48 3.37
Investment securities(3):
Taxable 514,708 8,035 6.23 543,832 8,176 6.00
Nontaxable 160,279 2,140 8.24 184,195 2,455 8.24
Loans:
Commercial 1,273,404 28,192 8.90 1,201,928 26,078 8.76
Real estate 782,523 15,905 8.13 703,969 14,457 8.21
Consumer 1,334,473 30,554 9.09 1,170,779 26,284 8.93
Lease financing 40,901 641 6.27 53,346 921 6.91
--------- ------ ---- --------- ------ ----
Total earning assets(3) 4,120,022 85,648 8.42 3,893,584 78,764 8.24
------ ------
NONEARNING ASSETS
Cash and due from banks 149,302 159,093
Bank premises and equipment 72,208 76,803
Other nonearning assets 126,477 122,087
Allowance for loan losses (45,539) (39,666)
---------- ----------
Total assets $4,422,470 $4,211,901
========== ==========
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits $ 375,544 1,533 1.62 $ 395,727 1,798 1.81
Savings deposits 1,046,604 7,496 2.84 1,071,985 7,350 2.73
Time deposits 1,683,525 24,104 5.68 1,481,506 20,713 5.56
Repurchase agreements and other short-term borrowings 183,505 2,297 4.97 182,654 2,068 4.50
Long-term debt 88,457 1,473 6.64 70,318 1,380 7.81
--------- ------ ---- --------- ------ ----
Total interest-bearing liabilities 3,377,635 36,903 4.34 3,202,190 33,309 4.14
------ ------
NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits 581,554 572,541
Other liabilities 55,844 55,425
Shareholders' equity 407,437 381,745
---------- ----------
Total liabilities and shareholders' equity $4,422,470 $4,211,901
========== ==========
NET INTEREST INCOME $48,745 $45,455
======= =======
NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 4.86% 4.83%
(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 $1,439 and $1,669 for
the three months ended September 30, 1997 and 1996, 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
1997 1996
------------------------------- --------------------------------
Nine Months Ended September 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 $ 145 $ 5 4.88% $ 1,935 $ 83 5.73%
Federal funds sold 6,687 277 5.55 42,116 1,693 5.37
Term federal funds sold and other 5,491 200 4.86 28,790 1,087 5.06
Investment securities(3):
Taxable 541,131 25,033 6.17 580,030 25,687 5.91
Nontaxable 167,611 6,710 8.24 185,181 7,333 8.16
Loans:
Commercial 1,254,324 82,286 8.87 1,174,508 76,729 8.83
Real estate 774,244 46,797 8.06 656,449 41,083 8.34
Consumer 1,270,150 86,414 9.09 1,132,119 75,811 8.94
Lease financing 42,729 2,149 6.71 56,212 2,877 6.82
---------- -------- ----- ---------- -------- ------
Total earning assets(3) 4,062,514 249,871 8.37 3,857,340 232,383 8.21
-------- --------
NONEARNING ASSETS
Cash and due from banks 146,163 168,661
Bank premises and equipment 73,310 77,592
Other nonearning assets 123,702 126,531
Allowance for loan losses (44,030) (39,150)
---------- ----------
Total assets $4,361,659 $4,190,974
INTEREST-BEARING LIABILITIES ========== ==========
Deposits:
Demand deposits $ 383,827 4,629 1.61 $ 398,695 5,334 1.79
Savings deposits 1,053,848 22,173 2.81 1,083,340 21,961 2.71
Time deposits 1,634,278 68,931 5.64 1,455,293 61,186 5.62
Repurchase agreements and other
short-term borrowings 191,952 7,025 4.89 164,794 5,722 4.64
Long-term debt 85,703 4,349 6.78 86,617 4,920 7.59
---------- -------- ----- ---------- -------- ------
Total interest-bearing liabilities 3,349,608 107,107 4.28 3,188,739 99,123 4.15
NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' -------- --------
EQUITY
Demand deposits 558,298 565,330
Other liabilities 53,612 58,298
Shareholders' equity 400,141 378,607
---------- ----------
Total liabilities and shareholders' equity $4,361,659 $4,190,974
NET INTEREST INCOME $142,764 $133,260
======== ========
NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 4.84% 4.78%
(1) Interest income shown on actual basis and does not include taxable
equivalent adjustments.
(2) Average rates are presented on an annual basis and include taxable
equivalent adjustments to interest income of $4,662 and $5,008 for the nine
months ended September 30, 1997 and 1996, 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.
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 nine months ended September 30, 1997 and 1996 is provided
below. The provision for loan losses increased $1,652,000 and
$4,217,000 during the three and nine months ended September 30, 1997,
respectively, as compared with the same periods in 1996. The increased
loan loss provision expense was due to higher net charge-offs and a
desire to maintain loan loss reserves at Citizens' historical loan loss
coverage levels amid high loan growth. The higher provision amounts
increased the loan allowance by $6.5 million from 1.25% at September 30,
1996 to 1.32% at September 30, 1997.
The ratio of net loans charged off to average loans outstanding
increased nine and two basis points, respectively, for the three and
nine months ended September 30, 1997, respectively, as compared to the
same periods in 1996. The increase resulted from higher consumer loan
charge-off's.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------
Allowance for loan losses - beginning of period $ 45,198 $ 39,231 $ 42,166 $ 38,705
Charge-offs 5,085 4,428 10,862 10,143
Recoveries 683 1,181 2,540 3,035
---------- ---------- ---------- ----------
Net charge-offs 4,402 3,247 8,322 7,108
Provision for loan losses 5,245 3,593 12,197 7,980
---------- ---------- ---------- ----------
Allowance for loan losses - end of period $ 46,041 $ 39,577 $ 46,041 $ 39,577
========== ========== ========== ==========
Loans outstanding at period end $3,496,528 $3,166,142 $3,496,528 $3,166,142
Average loans outstanding during period 3,431,301 3,130,022 3,341,447 3,019,288
Allowance for loan losses as a percentage of
loans outstanding at period end 1.32% 1.25% 1.32% 1.25%
Ratio of net charge-offs during period to
average loans outstanding (annualized) 0.51 0.42 0.33 0.31
Loan loss coverage (allowance as a multiple of
net charge-offs, annualized) 2.6x 3.0x 4.1x 4.2x
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 nine months ended September 30, 1997 and 1996 follows:
NONINTEREST INCOME Three Months Ended Nine Months Ended Percent
September 30, September 30, Change in 1997
-------------------- -------------------- ----------------
Three Nine
(in thousands) 1997 1996 1997 1996 months months
- --------------------------------------------------------------------------------------------------
Trust fees $ 3,858 $ 3,561 $11,672 $10,820 8.3% 7.9%
Service charges on deposit accounts 3,129 3,240 9,163 9,323 (3.4) (1.7)
Bankcard fees 1,917 1,835 5,271 4,971 4.5 6.0
Brokerage and investment fees 422 444 1,261 1,362 (5.0) (7.4)
Other loan income 521 1,965 1,152 3,061 (73.5) (62.4)
ATM network user fees 910 599 2,150 1,660 51.9 29.5
Cash management services 440 437 1,349 1,225 0.7 10.1
Safe deposit rentals 288 320 964 958 (10.0) 0.6
Investment securities gains (losses) (755) 134 (812) 570 (1) (1)
Other, net 937 751 2,384 2,433 24.8 (2.0)
------- ------- ------- -------
Total noninterest income $11,667 $13,286 $34,554 $36,383 (12.2)% (5.0)%
======= ======= ======= =======
(1) Not meaningful.
Noninterest income decreased in the three and nine month periods ended
September 30, 1997 as compared to the same periods in 1996 primarily due
to a $1.55 million gain on the sale of the Corporation's residential
mortgage servicing operations in the third quarter of 1996 and the
subsequent curtailment of the loan servicing fee income. This decline
was partially offset by enhanced trust fees, ATM network user fees and
cash management services fees.
Increased trust fee income for personal and employee benefit trust
services resulted in a 8.3% and 7.9% increase for the three and nine
months ended September 30, 1997 as compared to the same periods in the
prior year. Brokerage and investment fees declined for the three and
nine months ended September 30, 1997 as compared to the same periods in
1996 due to lower market penetration. This temporary decline was
attributable to the change in the brokerage provider utilized by the
Corporation to sell brokerage and insurance products and the subsequent
transfer of accounts for clients. The new brokerage provider is
expected to enhance future revenue for the Corporation through higher
profit margins, enhanced marketing and improved management reporting.
Increased volume and improved pricing strategies resulted in higher ATM
network user fees for both the three and nine months ended September 30,
1997 as compared to the same periods in the prior year. A significant
portion of the increase resulted from the June 1997 implementation of a
convenience fee assessed only to non-client users of the Corporation's
ATM network. Cash management services fees increased $124,000 for the
nine months ended as compared to the same period in the year. This
increase is volume related as clients have responded to enhanced
investment options which include various money market mutual funds from
which the Corporation receives a management fee. Other miscellaneous
income increased for the three months ended September 30, 1997 as
compared to the same period in the prior year due to a gain on the July
1997 sale of a bank branch office and the corresponding deposits.
The 1996 and 1997 third quarter and year to date gains and losses on the
sale of investment securities resulted from the sale of certain
securities to reposition the investment portfolio based on the current
rate environment.
14
15
NONINTEREST EXPENSE
Significant changes in noninterest expense during the three and nine
months ended September 30, 1997 as compared with the same periods in
1996 are summarized in the table below.
NONINTEREST EXPENSE Three Months Ended Nine Months Ended Percent
September 30, September 30, Changes in 1997
-------------------- -------------------- ------------------
Three Nine
(in thousands) 1997 1996 1997 1996 Months Months
- ------------------------------------------------------------------------------------------------------
Salaries and employee benefits $19,986 $20,567 $ 60,778 $ 60,872 (2.8)% (0.2)%
Equipment 3,069 3,119 9,428 9,241 (1.6) 2.0
Occupancy 2,820 3,013 8,700 9,042 (6.4) (3.8)
Intangible asset amortization 1,386 1,663 4,712 4,975 (16.7) (5.3)
Bankcard fees 1,579 1,299 3,757 3,375 21.6 11.3
Stationery and supplies 968 1,074 3,076 3,090 (9.9) (0.5)
Postage and delivery 1,116 1,107 3,305 3,252 0.8 1.6
Advertising and public relations 911 893 3,351 3,259 2.0 2.8
Taxes, other than income taxes 795 860 2,414 2,437 (7.6) (0.9)
Other loan fees 796 923 2,406 2,632 (13.8) (8.6)
Consulting and other professional fees 972 951 2,534 2,186 2.2 15.9
Legal, audit and examination fees 370 574 1,722 1,758 (35.5) (2.0)
Special charge (1) 23,734 --- 23,734 --- (2) (2)
Other, net 2,838 2,937 9,769 10,329 (3.4) (5.4)
------- ------- -------- --------
Total noninterest expense $61,340 $38,980 $139,686 $116,448 57.4% 20.0%
======= ======= ======== ========
(1) Special charge associated with CB Financial Corporation merger and
information technology operations reorganization. (2) Not
meaningful.
In the third quarter of 1997, the Corporation announced a special charge of
$23.7 million related to its July 1, 1997, merger with CB Financial Corporation
and the reorganization of Citizens' information technology operations. The
special charge includes $16.1 million of merger related expenses comprised of
$8.5 million of direct merger and restructuring-related charges and a $7.6
million write-down of goodwill and core deposit intangibles. This write-down
reflects the impairment of assets related to previous acquisitions of CB
Financial Corporation. The merger related expenses reflect the cost of
integrating and consolidating branch network and administrative facilities,
severance arrangements, professional services and other expenses directly
related to the merger.
Also in the third quarter, the Corporation entered into a strategic arrangement
with M & I Data Services of Milwaukee, Wisconsin, as part of its efforts to
upgrade its information technology operations. This arrangement will provide
the Corporation with the professional expertise and technological resources
necessary to improve its competitive position in a rapidly changing
technological environment. The Corporation believes it will enhance its
position to quickly respond to the demands of its markets and support future
strategic initiatives. The strategic arrangement will also address Year 2000
information systems-related issues. The third quarter special charge includes
expenses of $7.6 million related to this arrangement, comprised of up-front
conversion and reorganization costs.
The Corporation anticipates that the merger and reorganization will have a
positive effect on its future operating performance. In addition, the special
charge is not expected to adversely affect current and future dividends.
Excluding the special charge, operating expenses were down 3.5% and 0.4% for
the three and nine months ended September 30, 1997 as compared to the same
periods in 1996. The decline in operating expenses is primarily attributable
to the operating efficiencies achieved from the CB Financial Corporation merger
and other initiatives during the past year.
This disclosure contains forward-looking statements about expected savings and
effects of the merger and other which are subject to risks and uncertainties
that could cause actual results to differ. These risks and uncertainties
include unanticipated changes in the competitive environment.
15
16
SALARIES AND EMPLOYEE BENEFITS
Salaries and employee benefits expense decreased 2.8% and 0.2% for the three
and nine months ended September 30, 1997 as compared to the same periods in the
prior year. Salary expense declined 3.3% and 1.0% for the three and nine
month comparison due to operating efficiencies attributable to staff reductions
from the July 1, 1997 CB Financial Corporation merger, the June 1997
consolidation of the Corporation's six Michigan bank charters into one charter
and the September 1996 sale of the Corporation's mortgage servicing operations.
OTHER NONINTEREST EXPENSE
Excluding the special charge, other noninterest expenses decreased 4.3% and
0.7% for the three and nine months ended September 30, 1997 as compared to the
same periods in the prior year. The most significant decreases were
attributable to intangible asset amortization, other loan fees and legal, audit
and examination fees partially offset by increased bankcard fee expenses.
Increases in bankcard expenses resulted from higher costs associated with the
Corporation's outside provider for processing services and enhanced loss
prevention efforts. Consulting and other professional services increased for
the nine months ended September 30, 1997 as compared with the same period in
the prior year due to various ongoing corporate automation projects.
Intangible asset amortization expense declined due to the write-down of
goodwill and core deposit intangibles related to previous acquisitions of CB
Financial Corporation. Other loan fees declined in the three and nine month
comparison due to a change in accounting policy in the fourth quarter of 1996
which deferred external costs incurred by the Corporation to originate home
equity loans. The costs are being amortized over the expected life of the
loans. Lower audit and examination fees are the result of the July 1, 1997 CB
Financial Corporation merger and the 1996 consolidation of the Corporation's
Michigan bank charters.
INCOME TAXES
Excluding the effect of the special charge, higher pre-tax earnings and a
slightly lower level of tax-exempt interest income resulted in increased
federal income tax expense for the three and nine months ended September 30,
1997 as compared to the same periods in the prior year.
BALANCE SHEET
The Corporation had total assets of $4.413 billion as of September 30, 1997, an
increase of $107 million or 2.5% from $4.306 billion as of December 31, 1996.
Average earning assets comprised 93.1% of average total assets during the
first nine months of 1997 compared with 92.0% in the first nine months of 1996.
This increase is the result of enhanced cash management techniques implemented
during 1996 and early 1997 which lowered the Corporation's cash and
correspondent bank balances.
INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
Total average investments, including money market investments, comprised 17.7%
of average earning assets during the first nine months of 1997, compared with
21.7% for the same period of 1996. Average money market investment decreased
to 0.2% of total average earning assets during the first nine months of 1997,
from 1.9% during the corresponding period of 1996. This decline resulted from
funding requirements to support loan growth.
LOANS
The Corporation extends credit primarily within the market areas of its two
banking subsidiaries; one located in Michigan and one in Illinois. The loan
portfolio is widely diversified by borrowers and industry groups with no
significant concentrations in any industry. Total average loans increased
10.7% in the first nine months of 1997 as compared to the same period in 1996.
This growth occurred in all categories except lease financing.
16
17
NONPERFORMING ASSETS
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" 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. 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 September 30, 1997, loans considered to be impaired under the
Statements totalled $18.7 million (of which $11.4 million were on a
nonaccrual basis). Included within this amount was $7.0 million of
impaired loans for which the related allowance for loan losses was $0.6
million and $11.7 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 September 30, 1997
was approximately $17.8 million. For the quarter ended September 30,
1997, the Corporation recognized interest income of $0.3 million which
included $0.2 million of interest income recognized using the cash basis
method of income recognition.
At September 30, 1996, loans considered to be impaired under the
Statements totalled $21.0 million (of which $10.9 million were on a
nonaccrual basis). Included within this amount is $7.0 million of
impaired loans for which the related allowance for loan losses was $0.4
million and $14.0 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 September 30, 1996
was approximately $23.2 million. For the quarter ended September 30,
1996, 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. 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.
The table below provides a summary of nonperforming assets as of
September 30, 1997, December 31, 1996 and September 30, 1996. Total
nonperforming assets amounted to $25.2 million as of September 30, 1997,
compared with $25.3 million as of December 31, 1996 and $22.6 million as
of September 30, 1996. Nonperforming assets as a percent of total
assets are comparable for all three periods presented. Effective in the
third quarter of 1997, the Corporation changed its nonperforming asset
policy to include repossessed assets acquired from consumer loans. All
nonperforming asset disclosures in this filing have been restated to
include all repossessed assets.
17
18
NONPERFORMING ASSETS
September 30, December 31, September 30,
(in thousands) 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------
NONPERFORMING LOANS
Nonaccrual:
Less than 30 days past due $ 5,171 $ 5,555 $ 6,190
From 30 to 89 days past due 1,463 1,370 1,512
90 or more days past due 13,617 12,856 9,868
------- ------- -------
Total 20,251 19,781 17,570
90 days past due and still accruing 662 1,874 1,299
Restructured 487 502 520
------- ------- -------
Total nonperforming loans 21,400 22,157 19,389
OTHER REPOSSESSED ASSETS ACQUIRED 3,766 3,118 3,183
------- ------- -------
Total nonperforming assets $25,166 $25,275 $22,572
======= ======= =======
Nonperforming assets as a percent of total loans plus other
repossessed assets 0.72% 0.78% 0.71%
Nonperforming assets as a percent of total assets 0.57 0.59 0.53
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 September 30, 1997 such
credits amounted to $23.9 million or 0.6% of total loans, compared with
$12.6 million or 0.3% at December 31, 1996 and $9.6 million or 0.3% as
of September 30, 1996. 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. The increase in
potential nonperforming loans for the period ending September 30, 1997
as compared to the two prior periods presented is primarily attributable
to the application of Citizens' loan review and classification criteria
to the CB Financial Corporation loan portfolio subsequent to the July 1,
1997 merger.
DEPOSITS
The Corporation gathers deposits primarily in its local markets and
historically has not relied on brokered funds to sustain liquidity. In
the third quarter of 1997, the Corporation purchased approximately $20.0
million in deposits from a brokerage house as an alternative source of
funding. The deposits mature in intervals over the next three years.
The Corporation will continue to evaluate the use of alternative funding
sources such as brokered deposits as funding needs change. Average
deposits increased 3.6% in the first nine months of 1997 as compared to
the same period in 1996. The shift in deposits from demand and savings
accounts to time accounts reflects changing customer liquidity
preferences and the desire for higher yields. Management seeks to
maintain core deposit stability by offering clients a wide range of
deposit products at competitive rates.
SHORT-TERM BORROWINGS AND LONG-TERM DEBT
On average, total short-term borrowings increased to $192.0 million
during the first nine months of 1997 compared with $164.8 million during
the same period of 1996. This increase is attributable to greater
utilization of short-term borrowings from the Federal Home Loan Bank and
purchases of overnight federal funds. Long-term debt accounted for
$85.7 million or 2.6% of average interest-bearing funds for the first
nine months of 1997, decreasing from $86.6 million or 2.4% for the same
period in 1996. To finance the February 28, 1995 acquisition, the
Corporation's Parent company obtained a $115 million seven year amortizing
revolving credit facility. The Corporation has reduced th balance to $33.0
million at September 30, 1997. Of this amount, $13.0 million reprices in
1997, $7.0 million in March 1998 and $13.0 million in 1999. The debt
agreement allows the Corporation to prepay the debt without penalty subject
18
19
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 September 30, 1997.
NEW ACCOUNTING PRONOUNCEMENTS
In September 1996, the Financial Accounting Standards Board issued
Statement No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities". In December 1996, the
Financial Accounting Standards Board issued Statement No. 127 which
delayed the effective dates of certain provisions of the original
Statement. The Statements establish accounting and reporting standards
to assist in determining when to recognize or derecognize financial
assets and liabilities in the financial statements after a transfer of
financial assets has occurred. The Corporation has adopted the
Statements to the extent permitted and will adopt the remaining
provisions effective January 1, 1998. The adoption is not expected to
be material.
In March 1997, the Financial Accounting Standards Board issued
Statement No. 128 "Earnings per Share". The Statement establishes
standards for computing and presenting earnings per share (EPS),
simplifies the standards for computing and makes the calculation
comparable to international standards. Primary EPS will be replaced by
basic EPS and requires basic and fully diluted EPS to be presented on
the face of the income statement. The Statement is effective for
periods ending after December 15, 1997 and supersedes APB Opinion No. 15
and AICPA Accounting interpretations 1-102 of Opinion 15. Early
adoption is not permitted and full restatement of EPS must occur upon
adoption. The Corporation will adopt the Statement for year end 1997
reporting and does not expect the impact to the current EPS calculation
to be material.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130 "Reporting Comprehensive Income". The Statement establishes
standards for the reporting and disclosure of comprehensive income and
its components in a full set of general purpose financial statements.
Presently, the only component of comprehensive income not included in
net income is unrealized gains or losses on available-for-sale
investment securities. The Statement is effective for fiscal years
beginning after December 15, 1997 with reclassification of the financial
statements for earlier periods required for comparative purposes. The
Corporation plans to adopt the Statement in 1998.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131 "Disclosure about Segments of an Enterprise and Related
Information". The Statement changes the manner in which public
companies report segment information in annual reports and requires
companies to report selected segment information in interim financial
reports. Public companies will be required to report financial and
descriptive information about the company's operating segments. The
Statement is effective for fiscal years beginning after December 15,
1997 with reclassification of the financial statements for earlier
periods required for comparative purposes. In the year of adoption,
companies will not be required to disclose interim period information.
The Corporation plans to adopt the Statement in 1998.
19
20
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 4.0%
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 SEPTEMBER 30, December 31, September 30,
Capitalized" 1997 1996 1996
- ----------------------------------------------------------------------------------------
Risk based capital:
Tier I 6.0% 9.6% 9.8% 9.8%
Total capital 10.0 10.9 11.1 11.0
Tier I leverage 5.0 7.7 7.5 7.6
COMMON AND PREFERRED STOCK
The Corporation initiated a stock repurchase program in November 1987.
A total of 1,260,970 shares have been purchased under this program at an
average price of $15.84 per share. Effective January 27, 1997, the
Corporation's stock repurchase program was formally rescinded by its
Board of Directors in conjunction with the agreement to acquire CB
Financial Corporation.
OTHER
Total shareholders' equity was $399.1 million or $21.45 per share as of
September 30, 1997, compared with $315.2 million or $21.18 per share as
of December 31, 1996 and $386.6 million or $20.82 per share as of
September 30, 1996. The Corporation declared cash dividends of $0.83
per share during the first nine months of 1997, an increase of 10.7%
over the $0.75 per share declared during the same period in 1996.
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: loans to deposits, core funding (deposits plus a
portion of repurchase agreements and long term debt less single maturity
certificates of deposits) to total funding (volatile funding plus core
funding) and liquid assets to volatile funding (interest bearing
liabilities plus noninterest bearing deposits less core funding).
During 1997, the Corporation's strategy to operate at lower levels of
liquid assets to volatile funding and a higher loan to deposit ratio
improved the asset mix, resulting in increased net interest income. The
Corporation experienced no liquidity or operational problems as a result
of the reduced liquidity levels. These ratios are summarized in the
following table:
KEY LIQUIDITY RATIOS
SEPTEMBER 30, December 31, September 30,
1997 1996 1996
---------------------------------------------
Quarterly average:
Loans to deposits 93.1% 89.7% 88.9%
Liquid assets to volatile funding 31.6 44.9 43.9
Core funding to total funding 87.7 87.9 86.6
The Corporation's quarterly average loan to deposit ratio increased to
93.1% at September 30, 1997 from 89.7% at December 31, 1996 as a result
of loan growth surpassing deposit growth. 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 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. The Corporation's static interest rate sensitivity
("GAP") as of September 30, 1997 is illustrated in the following table.
As shown, the Corporation's interest rate risk position is well balanced
in the less than one year time frame with rate sensitive assets slightly
above rate sensitive liabilities by $20.2 million. This position
suggests that the Corporation's net interest income may not be
significantly impacted by changes in interest rates over the next 12
months. 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. While traditional GAP
analysis does not always incorporate adjustments for the magnitude or
timing of noncontractual repricing, this table does incorporate
appropriate adjustments as indicated in footnotes 2 and 3 to the table.
Because of these and other inherent limitations of any GAP analysis,
management utilizes simulation modeling as its primary tool to evaluate
the impact of changes in interest rates and balance sheet strategies.
Management uses these simulations to develop strategies that can limit
interest rate risk and provide liquidity to meet client loan demand and
deposit preferences.
INTEREST RATE SENSITIVITY
TOTAL
September 30, 1997 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 (3)
Loans $1,092.9 $ 131.6 $ 176.6 $ 347.7 $1,748.8 $1,237.8 $509.9 $3,496.5
Investment securities 13.9 32.3 36.7 88.2 $ 171.1 268.4 148.6 588.1
Short-term investments 37.1 --- --- --- 37.1 --- --- 37.1
-------- -------- ------- ------- -------- -------- ------ --------
Total $1,143.9 $ 163.9 $ 213.3 $ 435.9 $1,957.0 $1,506.2 $658.5 $4,121.7
======== ======== ======= ======= ======== ======== ====== ========
RATE SENSITIVE LIABILITIES
Deposits (2) $ 270.8 $ 329.0 $ 451.5 $ 663.2 $1,714.5 $1,195.4 $186.8 $3,096.7
Short-term borrowings 130.8 39.3 --- --- 170.1 --- --- 170.1
Long-term debt 1.2 0.5 7.5 43.1 52.2 40.0 2.6 94.8
-------- -------- ------- ------- -------- -------- ------ --------
Total $ 402.8 $ 368.8 $ 459.0 $ 706.3 $1,936.8 $1,235.4 $189.4 $3,361.6
======== ======== ======= ======= ======== ======== ====== ========
Period GAP (1) $ 741.1 $ (204.9) $(245.7) $(270.4) $ 20.2 $ 270.8 $469.1 $ 760.1
Cumulative GAP 741.1 536.2 290.5 20.2 291.0 760.1
Cumulative GAP to
Total Assets 16.79% 12.15% 6.58% 0.46% 0.46% 6.59% 17.22% 17.22%
Multiple of Rate Sensitive
Assets to Liabilities 2.84 0.44 0.46 0.62 1.01 1.22 3.48 1.23
(1) GAP is the excess of rate sensitive assets (liabilities).
(2) Includes interest bearing savings and demand deposits of $439 million in
the less than one year category, and $959 million in the over one year
category, based on historical trends for these noncontractual maturity
deposit types, which reflects industry standards.
(3) Incorporates prepayment projections for certain assets which may shorten
the time frame for repricing or maturity compared to contractual runoff.
22
23
PART 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:
On October 17, 1997, the Corporation announced that the Board of Directors
approved a 3-for-2 stock split effected in the form of a dividend to
shareholders of record on October 27, 1997 payable to shareholders on November
18, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 3. Exhibits:
(3)(b) Amended and Restated Bylaws.
(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 November 7, 1997 By /s/ John W. Ennest
--------------------- -------------------------------------
John W. Ennest
Vice Chairman of the Board,
Treasurer and Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Signatory)
23
24
INDEX TO EXHIBIT
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(3)(b) Amended and Restated Bylaws.
(11) Statement re: computation of per share earnings.
(27) Financial Data Schedule.
24