1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended March 31, 1999
------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file Number 0-10535
--------------------------
CITIZENS BANKING CORPORATION
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(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.)
328 S. Saginaw St., Flint, Michigan 48502
- ------------------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)
(810) 766-7500
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(Registrant's telephone number, including area code)
None
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
X Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 7, 1999
-------------------------- --------------------------
Common Stock, No Par Value 27,659,992 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.......................................................... 9
Item 3. - Quantitative and Qualitative Disclosure of Market Risk............................ 22
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.................................................................. 22
Item 2 - Changes in Securities.............................................................. 22
Item 3 - Defaults upon Senior Securities.................................................... 22
Item 4 - Submission of Matters to a Vote of Security Holders................................ 22
Item 5 - Other Information.................................................................. 23
Item 6 - Exhibits and Reports on Form 8-K................................................... 23
SIGNATURES....................................................................................... 23
EXHIBIT INDEX.................................................................................... 24
2
3
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
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CONSOLIDATED BALANCE SHEETS
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
MARCH 31, December 31,
(in thousands) 1999 1998
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(UNAUDITED) (Note 1)
ASSETS
Cash and due from banks $ 150,447 $ 140,543
Money market investments:
Interest-bearing deposits with banks 353 304
Term federal funds and other 17,811 25,935
----------- -----------
Total money market investments 18,164 26,239
Securities available-for-sale:
U.S. Treasury and federal agency securities 461,310 430,676
State and municipal securities 161,225 157,551
Other securities 24,524 25,302
----------- -----------
Total investment securities 647,059 613,529
Loans:
Commercial 1,600,555 1,594,113
Real estate construction 79,039 89,623
Real estate mortgage 719,445 741,358
Consumer 1,138,629 1,159,417
----------- -----------
Total loans 3,537,668 3,584,511
Less: Allowance for loan losses (45,325) (46,449)
------------ -----------
Net loans 3,492,343 3,538,062
Premises and equipment 80,060 78,248
Intangible assets 53,084 54,470
Other assets 57,580 50,318
----------- -----------
TOTAL ASSETS $ 4,498,737 $ 4,501,409
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 597,133 $ 636,059
Interest-bearing 3,156,530 3,128,297
----------- -----------
Total deposits 3,753,663 3,764,356
Federal funds purchased and securities sold
under agreements to repurchase 112,171 111,336
Other short-term borrowings 21,197 12,971
Other liabilities 52,041 40,727
Long-term debt 130,821 130,937
----------- -----------
Total liabilities 4,069,893 4,060,327
SHAREHOLDERS' EQUITY
Preferred stock - No par value -- --
Common stock - No par value 97,942 117,525
Retained earnings 328,030 319,500
Accumulated other comprehensive income 2,872 4,057
----------- -----------
Total shareholders' equity 428,844 441,082
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,498,737 $ 4,501,409
=========== ===========
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See notes to consolidated financial statements.
3
4
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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES Three Months Ended
March 31,
(in thousands, except per share amounts) 1999 1998
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INTEREST INCOME
Interest and fees on loans $72,460 $75,675
Interest and dividends on investment securities:
Taxable 7,017 6,855
Nontaxable 1,870 1,923
Money market investments 733 754
------- -------
Total interest income 82,080 85,207
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INTEREST EXPENSE
Deposits 30,182 32,940
Short-term borrowings 1,101 1,481
Long-term debt 1,778 2,010
------- -------
Total interest expense 33,061 36,431
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NET INTEREST INCOME 49,019 48,776
Provision for loan losses 3,600 3,510
------- -------
Net interest income after provision for loan losses 45,419 45,266
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NONINTEREST INCOME
Trust fees 5,213 4,613
Service charges on deposit accounts 3,069 3,009
Bankcard fees 2,172 1,773
Mortgage and other loan income 1,093 529
Brokerage and investment fees 709 484
Cash management services 604 537
Investment securities gains (losses) 75 50
Premium on sale of deposits 1,340 --
Other 1,929 1,996
------- -------
Total noninterest income 16,204 12,991
------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 21,024 20,397
Equipment 2,828 3,107
Occupancy 2,710 2,837
Intangible asset amortization 1,386 1,386
Bankcard fees 1,466 1,183
Stationery and supplies 917 1,010
Postage and delivery 1,114 1,089
Advertising and public relations 1,211 1,202
Data processing fees 1,772 940
Other 6,405 5,541
------- -------
Total noninterest expense 40,833 38,692
------- -------
INCOME BEFORE INCOME TAXES 20,790 19,565
Income taxes 6,367 6,043
------- -------
NET INCOME $14,423 $13,522
======= =======
NET INCOME PER SHARE:
Basic $ 0.52 $ 0.48
Diluted 0.51 0.47
AVERAGE SHARES OUTSTANDING:
Basic 27,848 28,076
Diluted 28,400 28,747
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See notes to consolidated financial statements
4
5
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Accumulated
Other
Common Retained Comprehensive
(in thousands except per share amounts) Stock Earnings Income Total
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BALANCE - MARCH 31, 1998 $ 121,413 $ 293,904 $ 3,510 $ 418,827
Net income 13,683 13,683
Net unrealized loss on securities available-for-sale,
net of tax effect 135 135
---------
Total comprehensive income 13,818
Exercise of stock options, net of
shares purchased 2,142 2,142
Shares acquired for exercise of stock options (2,095) (2,095)
Cash dividends - $0.21 per share (5,909) (5,909)
--------- --------- ------- ---------
BALANCE - JUNE 30, 1998 121,460 301,678 3,645 426,783
Net income 14,589 14,589
Net unrealized gain on securities available-for-sale,
net of tax effect 2,312 2,312
---------
Total comprehensive income 16,901
Exercise of stock options, net of
shares purchased 182 182
Shares acquired for exercise of stock options (3,154) (3,154)
Cash dividends - $0.21 per share (5,914) (5,914)
--------- --------- ------- ---------
BALANCE - SEPTEMBER 30, 1998 118,488 310,353 5,957 434,798
Net income 14,991 14,991
Net unrealized loss on securities available-for-sale,
net of tax effect (1,900) (1,900)
---------
Total comprehensive income 13,091
Exercise of stock options, net of
shares purchased 771 771
Shares acquired for retirement (1,734) (1,734)
Cash dividends - $0.21 per share (5,844) (5,844)
--------- --------- ------- ---------
BALANCE - DECEMBER 31, 1998 117,525 319,500 4,057 441,082
Net income 14,423 14,423
Net unrealized gain on securities available-for-sale,
net of tax effect (1,185) (1,185)
---------
Total comprehensive income 13,238
Exercise of stock options, net of
shares purchased 575 575
Shares acquired for retirement (20,158) (20,158)
Cash dividends - $0.21 per share (5,893) (5,893)
--------- --------- ------- ---------
Balance - March 31, 1999 $ 97,942 $ 328,030 $2,872 $ 428,844
========= ========= ======= =========
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See notes to consolidated financial statements.
5
6
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Three Months Ended
March 31,
(in thousands) 1999 1998
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OPERATING ACTIVITIES:
Net income $ 14,423 $ 13,522
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 3,600 3,510
Depreciation 2,359 2,108
Amortization of intangibles 1,386 1,386
Net amortization on investment securities 771 407
Investment securities gains (75) (50)
Other 4,691 8,983
--------- ---------
Net cash provided by operating activities 27,155 29,866
INVESTING ACTIVITIES:
Net increase (decrease) in money market investments 8,075 (100,386)
Securities available-for-sale:
Proceeds from sales -- 9,625
Proceeds from maturities 84,296 60,387
Purchases (120,346) (88,397)
Net increase in loans 42,119 52,350
Purchases of premises and equipment (4,171) (2,705)
--------- ---------
Net cash used by investing activities 9,973 (69,126)
FINANCING ACTIVITIES:
Net decrease in demand and savings deposits (76,764) (21,564)
Net increase in time deposits 66,071 47,219
Net increase (decrease) in short-term borrowings 9,061 (40,979)
Proceeds from issuance of long-term debt -- 60,000
Principal reductions in long-term debt (116) (2,456)
Cash dividends paid (5,893) (5,324)
Proceeds from stock options exercised 575 1,139
Shares acquired for retirement (20,158) --
--------- ---------
Net cash provided by financing activities (27,224) 38,035
--------- ---------
Net increase (decrease) in cash and due from banks 9,904 (1,225)
Cash and due from banks at beginning of period 140,543 168,351
--------- ---------
Cash and due from banks at end of period $ 150,447 $ 167,126
========= =========
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See notes to consolidated financial statements.
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7
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions for Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 1999 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Corporation's 1998 Annual Report on Form
10-K.
NOTE 2. LINES OF BUSINESS INFORMATION
The Corporation is managed along the following business lines: Commercial
Banking, Retail Banking, Financial Services, and all other. Selected lines of
business segment information for the first quarter of 1999 and 1998 is
provided below. Total assets by business segment did not change materially
from that previously disclosed in the Corporation's 1998 Annual Report on
Form 10-K. There are no significant intersegment revenues.
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Commercial Retail Financial
(in thousands) Banking Banking Services Other Total
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Earnings Summary - Three Months Ended March 31, 1999
Net interest income (taxable equivalent) $17,395 $28,647 $ 355 $ 4,237 $50,634
Provision for loan losses 394 5,088 -- (1,882) 3,600
------- ------- ------- ------- -------
Net interest income after provision 17,001 23,559 355 6,119 47,034
Noninterest income 2,262 7,817 5,753 372 16,204
Noninterest expense 8,495 21,370 4,001 6,967 40,833
------- ------- ------- ------- -------
Income (loss) before income taxes 10,768 10,006 2,107 (476) 22,405
Income tax expense (taxable equivalent) 3,769 3,502 737 (26) 7,982
------- ------- ------- ------- -------
Net income (loss) $ 6,999 $ 6,504 $ 1,370 $ (450) $14,423
======= ======= ======= ======= =======
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Earnings Summary - Three Months Ended March 31, 1998
Net interest income (taxable equivalent) $15,781 $30,938 $ 451 $ 3,052 $50,222
Provision for loan losses 367 3,567 -- (424) 3,510
------- ------- ------- ------- -------
Net interest income after provision 15,414 27,371 451 3,476 46,712
Noninterest income 2,094 5,611 4,978 308 12,991
Noninterest expense 8,926 20,684 4,540 4,542 38,692
------- ------- ------- ------- -------
Income (loss) before income taxes 8,582 12,298 889 (758) 21,011
Income tax expense (taxable equivalent) 3,004 4,304 311 (130) 7,489
------- ------- ------- ------- -------
Net income (loss) $ 5,578 $ 7,994 $ 578 $ (628) $13,522
======= ======= ======= ======= =======
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NOTE 3. PENDING ACQUISITION
On April 19, 1999, Citizens Banking Corporation and F&M Bancorporation, a
bank holding company headquartered in Wisconsin, announced the signing of a
definitive agreement whereby Citizens would acquire F&M in a stock-for-stock
merger transaction. Under the terms of the agreement, shareholders of F&M
will receive 1.303 shares of Citizens common stock for each outstanding
common share of F&M. Based on Citizens current stock price of approximately
$33.00 per share, the transaction has an aggregate value of $694 million. The
transaction will be accounted for as a pooling-of-interests. The transaction
is subject to approval by regulatory authorities, the shareholders of both
Citizens and F&M, and the satisfactory completion of credit due diligence by
Citizens. The merger is expected to close in the fourth quarter of 1999.
NOTE 4. EARNINGS PER SHARE
Net income per share is computed based on the weighted-average number of
shares outstanding, including the dilutive effect of stock options, as
follows:
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Three Months Ended
March 31,
(in thousands, except per share amounts) 1999 1998
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Numerator:
Numerator for basic and dilutive earnings per share -- net income available to
common share $ 14,423 $13,522
======== =======
Denominator:
Denominator for basic earnings per share -- weighted-average shares 27,848 28,076
Effect of dilutive securities -- potential conversion of employee stock options 552 671
-------- -------
Denominator for diluted earnings per share -- adjusted weighted-average
shares and assumed conversions 28,400 28,747
======== =======
Basic earnings per share $ 0.52 $ 0.48
======== =======
Diluted earnings per share $ 0.51 $ 0.47
======== =======
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During the first quarter of 1999, employees exercised stock options to
acquire 57,460 shares at an average exercise price of $11.44 per share.
NOTE 5. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year financial statement presentation.
8
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a review of the Corporation's performance during
the three-month period ended March 31, 1999. This discussion should be read in
conjunction with the accompanying unaudited financial statements and notes
thereto appearing on pages 3 through 8 of this report and the Corporation's 1998
Annual Report on Form 10-K.
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Selected Financial Data
Three Months Ended
March 31,
(in thousands, except per share data) 1999 1998
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FOR THE PERIOD
Interest income $ 82,080 $ 85,207
Net interest income 49,019 48,776
Provision for loan losses 3,600 3,510
Investment securities gains 75 50
Other noninterest income 16,129 12,941
Noninterest expense 40,833 38,692
Income taxes 6,367 6,043
Net income 14,423 13,522
Cash dividends 5,893 5,324
PER SHARE DATA
Basic net income $ 0.52 $ 0.48
Diluted net income 0.51 0.47
Cash dividends 0.21 0.19
Book value (end of period) 15.57 14.89
Market value (end of period close) 36.00 35.69
FINANCIAL RATIOS (ANNUALIZED)
Return on average shareholders' equity 13.50 13.28 %
Return on average assets 1.29 1.24
Net interest margin (taxable equivalent) 4.83 4.89
Net loan charge-offs to average loans 0.54 0.34
Average equity to average total assets 9.57 9.34
Nonperforming assets to loans plus other repossessed
assets acquired (end of period) 0.58 0.79
Nonperforming assets to total assets (end of period) 0.46 0.61
BALANCE SHEET TOTALS Percent
At Period End (March 31) Change
------------
Assets 0.05% $4,498,737 $4,496,698
Loans 1.5% 3,537,668 3,486,328
Deposits 0.9% 3,753,663 3,720,001
Shareholders' equity 2.4% 428,844 418,827
Average balances
Assets 2.4% 4,524,079 4,418,905
Loans 1.5% 3,552,947 3,501,362
Deposits 2.8% 3,799,307 3,694,808
Shareholders' equity 5.0% 433,404 412,780
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10
PERFORMANCE SUMMARY
Selected financial data as of March 31, 1999 and 1998 and for the three month
periods then ended are presented in the table on page 9. As shown, earnings
increased due to higher net interest income and noninterest income. This
improvement was partially offset by a slightly higher provision for loan losses
and small increases in operating expense and income taxes. Net interest income
increased due to higher earning asset levels and lower rates paid on deposit
accounts. Noninterest income reflects a premium of $1.3 million from the sale of
deposits of a branch, as well as significant growth in trust fees, bankcard
fees, brokerage and investment fees, and mortgage and other loan income. Higher
bankcard fees and new data processing services and telecommunication costs
associated with the Corporation's information technology partnership with M&I
Data Services (entered into in the third quarter of 1997) resulted in an
increase in noninterest expense.
LINES OF BUSINESS REPORTING
The Corporation operates along three major business segments: Commercial
Banking, Retail Banking and Financial Services. For more information about each
line of business see Note 17 to the Corporation's 1998 Annual Report on Form
10-K and Note 2 of this Quarterly Report on Form 10Q. A summary of net income by
each business line is presented below.
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Three Months Ended
March 31,
(in thousands) 1999 1998
- -------------------------------------------------------------------------------
Commercial Banking $ 6,999 $ 5,578
Retail Banking 6,504 7,994
Financial Services 1,370 578
Other (450) (628)
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Total $14,423 $13,522
======= =======
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The increase in commercial banking net income is due to growth in overall
commercial account relationships, including increased demand deposits, strong
loan growth and expanded cash management services. Retail banking net income
decreased as a result of lower interest income and a higher loan loss provision
associated with the indirect consumer lending portfolio offset, in part, by
higher mortgage banking and related title insurance revenues and improved
pricing strategies on deposit products. Financial services income improved due
to growth in trust and investment advisory services from enhanced pricing
strategies and greater sales volumes, increased brokerage activity and the
introduction of new products and services during 1998.
NET INTEREST INCOME
Net interest income and average balances and yields on major categories of
interest-earning assets and interest-bearing liabilities during the first three
months of 1999 and 1998 are summarized on page 12. The effects of changes in
average market rates of interest ("rate") and average balances ("volume") are
quantified in the table on page 11.
For the first quarter of 1999, net favorable volume related variances in net
interest income offset, in part, by net unfavorable rate related variances
resulted in an increase of $243,000 in net interest income, as compared to the
same period in 1998. Increased balances in all earning assets with the exception
of consumer and mortgage loans were partially offset by higher interest-bearing
liabilities. Commercial loans accounted for the largest volume increase in
earning assets, while demand and time deposits were the primary increases in the
interest-bearing liabilities category.
Yields on earning assets decreased to 8.00% from 8.46% for the three months
ended March 31, 1999 as compared with the same period in 1998 due to lower
yields on all major categories of earning assets, particularly the commercial
loan portfolio. The change in the composition of assets and the overall higher
level of earning assets resulted in net volume related increases in interest
income of $2,167,000 for the three month period ended March 31, 1999, as
compared to the same period in 1998.
The cost of interest-bearing liabilities decreased to 3.89% from 4.36% for the
three months ended March 31, 1999, as compared with the same period in 1998. The
decrease in the first quarter reflected the overall lower interest rate
environment as the cost of all categories of interest-bearing deposits declined
compared with the same period of 1998. The cost of interest-bearing liabilities
also decreased as a result of decreases in the higher cost, short and long-term
borrowings.
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 1999, corresponding changes in funding costs would be
considered to limit 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
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ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
1999 Compared with 1998
-----------------------------------------
Increase (Decrease)
Three Months Ended March 31 Net Due to Change in
---------------------------
(in thousands) Change (1) Rate Volume (2)
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INTEREST INCOME:
Money market investments:
Time Deposits with banks $ -- $ -- $ --
Federal funds sold (74) (101) 27
Term federal funds sold and other 53 (14) 67
Investment securities:
Taxable 162 (249) 411
Tax-exempt (53) (117) 64
Loans (3,215) (4,813) 1,598
------- ------- -------
Total (3,127) (5,294) 2,167
------- ------- -------
INTEREST EXPENSE
Deposits:
Demand 26 100 (74)
Savings 1,365 1,743 (378)
Time 1,367 1,695 (328)
Short-term borrowings 380 271 109
Long-term debt 232 50 182
------- ------- -------
Total 3,370 3,859 (489)
------- ------- -------
NET INTEREST INCOME $ 243 $(1,435) $ 1,678
======= ======= =======
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(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 volume.
11
12
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AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
1999 1998
------------------------------------- -----------------------------------
Three Months Ended March 31 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 $ 72 $ 1 3.28% $ 44 $ 1 5.53%
Federal funds sold 54,765 644 4.77 52,412 718 5.56
Term federal funds sold and other 7,546 88 4.75 3,142 35 4.56
Investment securities(3):
Taxable 461,759 7,017 6.09 428,346 6,855 6.42
Tax-exempt 147,365 1,870 7.85 144,890 1,923 8.21
Loans:
Commercial 1,648,733 31,926 8.00 1,392,429 29,688 8.77
Real estate 756,626 15,080 7.97 795,497 16,390 8.24
Consumer 1,147,588 25,454 8.99 1,313,436 29,597 9.13
---------- ------- ----------- -------
Total earning assets(3) 4,224,454 82,080 8.00 4,130,196 85,207 8.46
NONEARNING ASSETS
Cash and due from banks 160,892 147,727
Bank premises and equipment 79,224 69,738
Other nonearning assets 104,960 117,576
Allowance for loan losses (45,451) (46,332)
----------- -----------
Total assets $4,524,079 $ 4,418,905
----------- -----------
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits 405,041 1,445 1.45 376,005 1,471 1.59
Savings deposits 1,037,460 5,828 2.28 1,025,592 7,193 2.84
Time deposits 1,753,103 22,909 5.30 1,725,389 24,276 5.71
Short-term borrowings 116,364 1,101 3.84 124,055 1,481 4.84
Long-term debt 130,925 1,778 5.51 132,842 2,010 6.08
---------- ------- ----------- -------
Total interest-bearing liabilities 3,442,893 33,061 3.89 3,383,883 36,431 4.36
------- -------
NONINTEREST-BEARING LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits 603,703 567,822
Other liabilities 44,079 54,420
Shareholders' equity 433,404 412,780
---------- -----------
Total liabilities and shareholders' equity $4,524,079 $ 4,418,905
========== ===========
NET INTEREST INCOME $49,019 $48,776
------- -------
NET INTEREST INCOME AS A PERCENT OF
EARNING ASSETS 4.83% 4.89%
- ---------------------------------------------------------------------------------------------------------------------------
(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 $1,615 and $1,446 for the
three months ended March 31, 1999 and 1998, 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 by dividing the allowance into two
components, allocated and unallocated. The allocated component of the allowance
is based on expected losses from the analysis of specific loans and historical
loss experience for each category of loans. This analysis is performed
throughout the year and is updated based on actual experience and loan reviews.
The unallocated portion of the allowance is determined based on the
Corporation's assessment of general economic and conditions, the economic
conditions in the markets in which the Corporation operates, the level and
composition of nonperforming loans and other factors. This analysis involves a
higher degree of uncertainty and considers factors, which may not be reflected
in historical loss factors used to determine the allocated portion of the
allowance. A summary of loan loss experience during the three months ended March
31, 1999 and 1998 is provided below. The provision for loan losses increased
$90,000 during the first quarter of 1999, as compared with the same period in
1998.
- ----------------------------------------------------------------------------------------------------------------------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended
March 31,
(in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses - beginning of period $ 46,449 $ 45,911
Charge-offs 5,752 3,851
Recoveries 1,028 910
-------- --------
Net charge-offs 4,724 2,941
Provision for loan losses 3,600 3,510
-------- --------
Allowance for loan losses - end of period $ 45,325 $ 46,480
======== ========
Loans outstanding at period end $3,537,668 $3,486,328
Average loans outstanding during period 3,552,947 3,501,362
Allowance for loan losses as a percentage of loans outstanding at period end 1.28 % 1.33 %
Ratio of net charge-offs during period to average loans outstanding (annualized) 0.54 0.34
Loan loss coverage (allowance as a multiple of net charge-offs, annualized) 2.4x 4.0x
- ----------------------------------------------------------------------------------------------------------------------------
The ratio of net loans charged off to average loans outstanding increased twenty
basis points in the first quarter of 1999, as compared to the same period in
1998. The changes reflect increased levels of charge-offs in the Corporation's
indirect consumer loan portfolio during 1999.
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 or 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 that may not be
performing as well as expected. Nonperforming loans are further discussed in the
section entitled "Nonperforming Assets."
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NONINTEREST INCOME
A summary of significant sources of noninterest income during the first three
months of 1999 and 1998 follows:
- -----------------------------------------------------------------------------
NONINTEREST INCOME
Three Months Ended
March 31, Change in 1999
-----------------------
(in thousands) 1999 1998 Amount Percent
- -----------------------------------------------------------------------------
Trust fees $ 5,213 $ 4,613 600 13.0 %
Service charges on deposit accts 3,069 3,009 60 2.0
Bankcard fees 2,172 1,773 399 22.5
Brokerage and investment fees 709 484 225 46.5
Mortgage and other loan income 1,093 529 564 106.6
ATM network user fees 635 722 (87) (12.0)
Cash management services 604 537 67 12.5
Title insurance fees 274 223 51 22.9
Investment securities gains 75 50 25 50.0
Premium on sale of deposits 1,340 -- 1,340 (1)
Other, net 1,020 1,051 (31) (2.9)
------- ------- -------
Total noninterest income $16,204 $12,991 $ 3,213 24.7
======= ======= =======
- -----------------------------------------------------------------------------
(1) Not Meaningful
Noninterest income increased 24.7% for the three-month period ended March 31,
1999, as compared to the same period in 1998. Nearly every category of
noninterest income was higher in 1999 than in 1998. The corporation experienced
significant increases in trust fees, bankcard fees, brokerage and investment
fees, mortgage and other loan income, cash management fees and title insurance
fees. ATM network user fees decreased 12.0% in the third quarter, primarily due
to a volume decrease in non-client surcharge fees and ATM network fees.
Increased trust fee income for personal and employee benefit trust services
increased 13.0% in the first quarter of 1999, as compared to the same period in
1998. The increase reflects improved pricing strategies and higher volumes of
managed assets. Brokerage and investment fees increased 46.5%, as compared to
the previous year. This increase was the result of increased sales efforts,
introduction of new products and continued penetration of the corporation's
client base.
Mortgage and other loan income increased 106.6% for the three months ended March
31, 1999, over the same period in 1998. This increase reflects higher servicing
release premiums on the sale of residential mortgage loans into the secondary
market and an increase in commercial line of credit fees. The 12.5% increase in
cash management services fees is primarily volume related as clients have
responded to enhanced investment options, which include various money market and
treasury obligation mutual funds from which the Corporation receives a
management fee. The 22.9% increase in title insurance fees reflects growth in
residential and commercial mortgage refinancing and origination.
In March 1999, the Corporation recognized a premium of $1.3 million from the
sale of deposits of a bank branch office. The 1999 and 1998 first quarter 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 and, in part, to fund loan growth and meet liquidity needs.
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NONINTEREST EXPENSE
Significant changes in noninterest expense during the three months ended March
31, 1999 and 1998 is summarized in the table below.
- ------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Three Months Ended
March 31, Change in 1999
----------------------
(in thousands) 1999 1998 Amount Percent
- ------------------------------------------------------------------------------------------
Salaries and employee benefits $21,024 $20,397 627 3.1 %
Equipment 2,828 3,107 (279) (9.0)
Occupancy 2,710 2,837 (127) (4.5)
Intangible asset amortization 1,386 1,386 -- --
Bankcard fees 1,466 1,183 283 23.9
Stationery and supplies 917 1,010 (93) (9.2)
Postage and delivery 1,114 1,089 25 2.3
Advertising and public relations 1,211 1,202 9 0.7
Data processing services 1,772 940 832 88.5
Professional services 1,174 1,134 40 3.5
Other loan fees 965 761 204 26.8
Telephone 972 784 188 24.0
Other, net 3,294 2,862 432 15.1
------- ------- -------
Total noninterest expense $40,833 $38,692 $ 2,141 5.5
======= ======= =======
- ------------------------------------------------------------------------------------------
SALARIES AND EMPLOYEE BENEFITS
Salaries and employee benefits expense increased 3.1% for the three month period
ended March 31, 1999, as compared to the same period in the prior year. The
increase reflects normal merit increases, higher incentive based compensation
and increased outside staffing services offset, in part, by lower full-time
staffing levels associated with the Corporation's information technology
partnership with M&I Data Services.
OTHER NONINTEREST EXPENSES
Other noninterest expenses, increased 8.3% for the three months ended March 31,
1999, as compared to the same period in 1998. Increases in data processing
services and telephone were attributable to new services and costs associated
with the Corporation's information technology partnership with M&I Data
Services. These increases were partially offset by related reductions in
personnel, equipment, occupancy, and stationery and supplies costs.
Bankcard fees increased due to higher transaction volume. Other loan fees
increased as higher commercial and mortgage loan volumes resulted in recognition
of additional processing fees. The increase in other expenses is attributable to
higher losses on checks and other negotiable items, and new trust tax service
fees. The new trust tax service fees were offset, in part, by reduced staff,
equipment and stationery and supplies costs resulting from the transfer of trust
tax preparation services to a third party vendor in the fourth quarter of 1998.
INCOME TAXES
Higher pre-tax earnings, partially offset by a higher level of tax-exempt
interest income resulted in increased federal income tax expense for the three
months ended March 31, 1999, as compared to the same period in the prior year.
BALANCE SHEET
The Corporation had total assets of $4.499 billion as of March 31, 1999, a
decrease of $2.7 million or 0.06% from $4.501 billion as of December 31, 1998.
Average earning assets comprised 93.4% of average total assets during the first
three months of 1999 compared with 93.5% in the first three months of 1998.
INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
Total average investments, including money market investments, comprised 15.9%
of average earning assets during the first quarter of 1999, compared with 15.2%
for the same period of 1998. Liquidity provided from the sale and maturity of
investment securities (primarily U.S. Treasury and federal agency securities)
was reinvested in federal agency mortgage-backed securities, tax-exempt
municipal securities and was used to fund loan growth.
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LOANS
The Corporation extends credit primarily within the market areas of its two
banking subsidiaries located in Michigan and Illinois. The loan portfolio is
widely diversified by borrower and industry groups with no significant
concentrations in any industry. Due to strong sales efforts and a relatively low
interest rate environment, the Corporation experienced greater loan demand with
total average loans increasing 1.5% in the first three months of 1999 as
compared to the same period in 1998. This growth occurred primarily within the
commercial and commercial real estate mortgage categories.
NONPERFORMING ASSETS
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 below, are considered to be impaired. The Corporation
maintains policies and procedures to identify and monitor nonaccrual loans. A
loan 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 following describes the Corporation's policy and related disclosures for
impaired loans. The Corporation establishes 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. In most instances, the impairment is measured based on
the fair value of the underlying collateral. Impairment may also be measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate. Cash collected on impaired nonaccrual loans is
applied to principle until collection of principle is no longer in doubt and
then to interest income. Interest income on all other impaired loans is
recognized on an accrual basis.
Certain of the Corporation's nonperforming loans included in the following table
are considered to be impaired. 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. The policy does not apply to large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment, except for
those loans restructured under a troubled debt restructuring. Loans collectively
evaluated for impairment include certain smaller balance commercial loans,
consumer loans, residential real estate loans, and credit card loans, and are
not included in the impaired loan data in the following paragraphs.
At March 31, 1999, loans considered to be impaired under the Statements totaled
$15.2 million (of which $8.4 million were on a nonaccrual basis). Included
within this amount was $8.6 million of impaired loans for which the related
allowance for loan losses was $1.9 million and $6.6 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 March 31,
1999 was approximately $15.2 million. For the quarter ended March 31, 1999, the
Corporation recognized interest income of $0.1 million. Approximately $0.2
million of cash collected on nonaccrual impaired loans was applied to loan
principal.
At March 31, 1998, loans considered to be impaired under the Statements totaled
$18.6 million (of which $12.1 million were on a nonaccrual basis). Included
within this amount was $8.5 million of impaired loans for which the related
allowance for loan losses was $2.0 million and $10.1 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 March 31,
1998 was approximately $16.8 million. For the quarter ended March 31, 1998, the
Corporation recognized interest income of approximately $0.4 million which
included $0.3 million of interest income recognized using the cash basis method
of income recognition.
The table below provides a summary of nonperforming assets as of March 31, 1999,
December 31, 1998 and March 31, 1998. Total nonperforming assets amounted to
$20.7 million as of March 31, 1999, compared with $24.3 million as of December
31, 1998 and $27.6 million as of March 31, 1998. During the first quarter of
1999, several large nonaccrual commercial and commercial mortgage loans
(approximately $2.2 million in aggregate) were paid current or paid off. In
addition, the Corporation charged off approximately $3.5 million in indirect
consumer loans. As a result, nonaccrual loans 90 or more days past due at March
31, 1999 were down $3,947,000 or 21.8% from year-end 1998.
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- -------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
March 31, December 31, March 31,
(IN THOUSANDS) 1999 1998 1998
- -------------------------------------------------------------------------------------------------------
Nonperforming Loans
Nonaccrual
Less than 30 days past due $ 2,049 $ 2,016 $ 5,201
From 30 to 89 days past due 1,455 1,641 2,978
90 or more days past due 14,187 18,134 14,717
------- ------- -------
Total 17,691 21,791 22,896
90 days past due and still accruing 838 801 568
Restructured 114 114 305
------- ------- -------
Total nonperforming loans 18,643 22,706 23,769
Other Repossessed Assets Acquired (ORAA) 2,037 1,547 3,866
------- ------- -------
Total nonperforming assets $20,680 $24,253 $27,635
======= ======= =======
Nonperforming assets as a percent of total loans plus ORAA 0.58 % 0.68 % 0.79 %
Nonperforming assets as a percent of total assets 0.46 0.54 0.61
- -------------------------------------------------------------------------------------------------------
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 March 31, 1999, such credits amounted to $18.1 million or 0.5% of
total loans, compared with $14.5 million or 0.4% at December 31, 1998 and $21.4
million or 0.6% as of March 31, 1998. 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
Average deposits increased 2.8% in the first three months of 1999 as compared to
the same period in 1998. Deposit growth was derived primarily from noninterest
and interest-bearing demand accounts which increased 6.3% and 7.7%,
respectively, from 1998 first quarter average balances. The increase is due to
growth in both commercial and retail accounts. In addition, there was a
continued shift in deposits from statement savings accounts to higher yielding
investment rate savings and money market accounts as customers sought higher
returns. The Corporation gathers deposits primarily in its local markets and
historically has not relied on brokered funds to sustain liquidity. At March 31,
1999 and at year-end 1998, the Corporation had approximately $14 million in
brokered deposits as an alternative source of funding. These deposits mature in
July 2001. The Corporation will continue to evaluate the use of alternative
funding sources such as brokered deposits as funding needs change. Management
continues to promote relationship driven core deposit growth and stability
through focused marketing efforts and competitive pricing strategies.
SHORT-TERM BORROWINGS AND LONG-TERM DEBT
On average, total short-term borrowings decreased to $116.4 million during the
first three months of 1999 compared with $124.1 million during the same period
of 1998. Long-term debt accounted for $130.9 million or 3.8% of average
interest-bearing funds for the first three months of 1999, decreasing from
$132.8 million or 3.9% of average interest-bearing funds for the same period in
1998. At March 31, 1999, $117.5 million of the long-term debt consists of
borrowings from the Federal Home Loan Bank by the Corporation's lead subsidiary
bank. The borrowings mature at different intervals over the next five years
except for $60 million, which matures in 9 years. These borrowings are utilized
to fund the Corporation's loan growth.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for hedging activities and
for derivative instruments, including certain derivative instruments embedded in
other contracts. This statement requires a company to recognize all derivatives
as either assets or liabilities in its balance sheet and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a fair value, cash flow, or foreign currency hedge.
The accounting for changes in the fair value of a derivative (i.e., gains and
losses) depends on the intended use of the derivative and the resulting
designation. If the Corporation elects to apply hedge accounting, it is required
to establish at the
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18
inception of the hedge the method it will use for assessing the effectiveness of
the hedging derivative and the measurement approach for determining the
ineffective aspect of the hedge. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Corporation plans to
adopt this Statement effective January 1, 2000. Presently the Corporation does
not utilize derivative or related types of financial instruments except for
Federal agency collateralized mortgage obligations. Therefore, this Statement is
not anticipated to have a material impact on the Corporation.
IMPACT OF YEAR 2000
As is more fully described in the Corporation's 1998 Annual Report on Form 10-K,
the Corporation believes that it has completed its assessment of all
computer-based systems and applications and non-information technology systems
necessary for continued operations beyond December 31, 1999. The majority of
applications that are not Year 2000 compliant have been, or will be, upgraded or
replaced by new systems. The costs of new systems have been, or will be,
recorded as an asset and amortized. System assessment and conversion costs to
upgrade the remaining noncompliant systems are expensed as incurred. A
significant portion of the costs associated with making the remaining
applications not covered by new systems Year 2000 compliant do not represent
incremental costs to the Corporation, as they are covered under current
maintenance agreements or involve the redeployment of existing information
technology resources. Costs related to the year 2000 issue are funded through
operating cash flows. The Corporation estimates that it will spend less than
$3.0 million for its Year 2000 compliance efforts. Approximately $2.0 million to
$2.5 million of these expenditures is for new hardware and software and has or
will be capitalized. Year 2000 compliance costs expended through March 31, 1999
were approximately $875,000.
These estimates do not include the cost of the Corporation's previously planned
core application systems replacement, which was not accelerated due to the Year
2000 problem. M&I Data Services upgraded its systems to be Year 2000 compliant,
in the third quarter of 1998, and is currently processing the Corporation's core
applications on these compliant systems. Testing of these systems was completed
in the first quarter of 1999. The application systems run by M&I Data Services
represent approximately 70% of the Corporation's mission critical systems.
Currently, the Corporation's remediation, implementation and testing efforts are
at different phases of completion. Remediation, implementation and testing
activities are underway or completed on all of the Corporation's mission
critical information technology and non-information technology systems and
applications. For the Corporation's information technology exposures, to date
the remediation and implementation phase is 90% complete (100% of mission
critical applications and 86% of non-mission critical applications) and the
testing phase is 85% complete. The phases run concurrently for different
systems. Completion of the implementation and testing phases for all significant
information technology systems is expected by June 30, 1999. The Corporation's
exposure to non-information technology systems (i.e. systems with date sensitive
embedded technology requiring Year 2000 upgrades) relates primarily to the
Corporation's operating equipment and facilities (e.g., security access and
alarm systems, elevators, heating and air conditioning units, etc.). Completion
of the implementation and testing of non-information technology systems is
expected by October 31, 1999.
The Corporation is also addressing the readiness of critical suppliers,
customers, governmental agencies and other third parties that provide services
to or receive services from the Corporation. Primarily, the Corporation is
surveying its suppliers and large customers to assess the extent to which the
Corporation is vulnerable to those third parties' failures to resolve their own
Year 2000 issues. The Corporation has received responses from the majority of
its third party vendors and suppliers, confirming that the third parties'
software systems are Year 2000 compliant or, if not compliant, that these third
parties have an action plan in place to have them compliant by mid 1999. The
testing of mission critical third party software systems is also in progress.
The Corporation is on schedule to have all testing of third party software
systems completed by June 30, 1999. The Corporation is continuing to seek
assurances that the systems of other companies on which the Corporation's
systems rely will be timely converted or modified. Failure of such entities, or
one of their suppliers or customers, to become compliant in a timely manner
could have an adverse effect on the Corporation's results of operations or
financial condition.
As a bank holding company, the Corporation is also exposed to the credit risk of
its loan customers ("borrowers"). To the extent that major borrowers fail to
adequately address Year 2000 issues, the credit worthiness of these borrowers
may deteriorate and adversely impact the Corporation's subsidiary banks. As a
result, the Corporation has identified material borrowers and has assessed these
borrowers' Year 2000 preparedness. The Year 2000 readiness of material borrowers
will be monitored periodically, to assess their Year 2000 compliance and
evaluate any further risk to the Corporation.
Management's assessment of the risks associated with the Year 2000 project and
the status of the Corporation's contingency plans are unchanged from that
described in the Corporation's 1998 Annual Report on Form 10-K. The anticipated
costs and projected dates for completion of the Corporation's Year 2000 project,
was based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources and other factors. Other unanticipated Year 2000 issues could arise
and there can be no assurance that these estimates will be achieved and actual
results could differ from those anticipated. These unanticipated issues may
include, but are not limited
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to, the ability to identify and correct all noncompliant systems and
applications, the ability of third parties to become Year 2000 compliant, the
availability and cost of trained personnel, the impact of Year 2000 on our
clients and other uncertainties.
The information above contains forward-looking statements, including, without
limitation, statements relating to the Corporation's plans, strategies,
objectives, expectation, intention, and adequate resources that are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that forward-looking statements about
Year 2000 should be read in conjunction with the Corporation's disclosures under
the heading Forward Looking Information.
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 March 31, December 31, March 31,
Capitalized" 1999 1998 1998
- -----------------------------------------------------------------------------------------------
Risk based capital:
Tier I 6.0 % 10.4 % 10.5 % 10.2 %
Total capital 10.0 11.6 11.8 11.4
Tier I leverage 5.0 8.4 8.7 8.2
- -----------------------------------------------------------------------------------------------
COMMON AND PREFERRED STOCK
The Corporation maintains two stock repurchase plans. In May 1998, the
Corporation initiated a stock repurchase plan ("Plan I") that provides for the
repurchase of up to 600,000 shares of its stock on the open market over the next
24 months. The shares will be utilized to satisfy the Corporation's obligation
to issue shares under its existing employee and director stock option plans. The
Corporation intends to acquire such shares in a systematic pattern. In January
1999, the Corporation initiated a second stock repurchase plan ("Plan II") that
provides for the repurchase of up to 1,400,000 shares of its common stock
(approximately 5% of the outstanding shares) for general bank purposes. As of
March 31, 1999, a total of 272,500 shares had been purchased under Plan I at an
average price of $33.26 per share. All but 117,184 of these shares have been
reissued for the exercise of stock options. A total of 548,500 shares had been
acquired under Plan II at an average price of $32.96 per share. Shares of common
stock in treasury are accorded the treatment as if retired; however, such shares
remain available for reissue.
OTHER
Total shareholders' equity was $428.8 million or $15.57 per share as of March
31, 1999, compared with $441.1 million or $15.70 per share as of December 31,
1998 and $418.8 million or $14.89 per share as of March 31, 1998. The
Corporation declared cash dividends of $0.21 per share during the first quarter
of 1999, an increase of 10.5% over the $0.19 per share declared during the same
period in 1998.
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LIQUIDITY AND DEBT CAPACITY
Management closely monitors the level of liquid assets available to meet ongoing
funding needs and to capitalize on opportunities for business expansion. 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 1999, the Corporation
has continued its strategy to operate at lower levels of liquidity and at a
higher loan to deposit ratio to improve its asset mix and thereby increase net
interest income. The Corporation has experienced no liquidity or operational
problems as a result of the current liquidity levels. These ratios are
summarized in the following table:
- --------------------------------------------------------------------------------
KEY LIQUIDITY RATIOS
March 31, December 31, March 31,
1999 1998 1998
- --------------------------------------------------------------------------------
Quarterly average:
Loans to deposits 93.5 % 94.9 % 94.8 %
Liquid assets to volatile funding 49.5 46.0 46.1
Core funding to total funding 89.2 88.8 88.7
- --------------------------------------------------------------------------------
The corporation manages liquidity to meet client cash flow needs while
maintaining funds available for loan and investment opportunities. Management
believes that the Corporation has sufficient liquidity to meet presently known
cash flow requirements arising from ongoing business transactions.
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 March 31, 1999 and
1998 is illustrated in the table below.
At March 31, 1999, the Corporation's rate sensitive assets were below rate
sensitive liabilities within the one-year time frame by $226.1 million. At March
31, 1998, rate sensitive assets exceeded rate sensitive liabilities in the
one-year time frame by 269.4 million. As of both dates, the Corporation's
interest rate risk position was well balanced in the less than one-year time
frame suggesting that net interest income may not be significantly impacted by
changes in interest rates over the following 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
changes. 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.
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- -------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY
TOTAL
1-30 31-90 91-180 181-365 WITHIN 1-5 Over
(dollars in millions) Days Days Days Days 1 YEAR Years 5 Years Total
- -------------------------------------------------------------------------------------------------------------------------
MARCH 31, 1999
RATE SENSITIVE ASSETS (3)
Loans $1,044.5 $ 145.1 $ 174.5 $ 286.9 $1,651.0 $ 1,413.8 $ 472.9 $3,537.7
Investment securities 49.7 25.5 38.8 78.2 192.2 279.3 175.6 647.1
Short-term investments 18.2 -- -- -- 18.2 -- -- 18.2
-------- ------ ------ ------- ------- --------- ------- -------
Total $1,112.4 $ 170.6 $ 213.3 $ 365.1 $1,861.4 $ 1,693.1 $ 648.5 $4,203.0
======== ====== ====== ======= ======= ========= ======= =======
RATE SENSITIVE LIABILITIES
Deposits (2) $ 326.6 $ 376.9 $ 413.0 $ 717.0 $1,833.5 $ 1,144.0 $ 179.0 $3,156.5
Short-term borrowings 133.4 -- -- -- 133.4 -- -- 133.4
Long-term debt -- -- 42.6 78.0 120.6 10.2 0.1 130.9
-------- ------ ------ ------- ------- --------- ------- -------
Total $ 460.0 $ 376.9 $ 455.6 $ 795.0 $2,087.5 $ 1,154.2 $ 179.1 $3,420.8
======== ====== ====== ======= ======= ========= ======= =======
Period GAP (1) $ 652.4 $(206.3) $(242.3) $ (429.9) $ (226.1) $ 538.9 $ 469.4 $ 782.2
Cumulative GAP 652.4 446.1 203.8 (226.1) 312.8 782.2
Cumulative GAP to Total Assets 14.50% 9.92% 4.53% (5.03)% (5.03)% 6.95% 17.39% 17.39%
Multiple of Rate Sensitive Assets
to Liabilities 2.42 0.45 0.47 0.46 0.89 1.47 3.62 1.23
- -------------------------------------------------------------------------------------------------------------------------
MARCH 31, 1998
RATE SENSITIVE ASSETS (3)
Loans $1,065.1 $ 174.0 $ 248.4 $ 405.4 $1,892.9 $ 1,241.3 $ 352.1 $3,486.3
Investment securities 14.2 34.2 66.4 108.3 223.1 235.4 134.4 592.9
Short-term investments 112.6 -- -- -- 112.6 -- -- 112.6
-------- ------ ------ ------- ------- --------- ------- -------
Total $1,191.9 $ 208.2 $ 314.8 $ 513.7 $2,228.6 $ 1,476.7 $ 486.5 $4,191.8
======== ====== ====== ======= ======= ========= ======= =======
RATE SENSITIVE LIABILITIES
Deposits (2) $ 295.2 $ 348.9 $ 429.0 $ 641.1 $1,714.2 $ 1,237.5 $ 184.4 $3,136.1
Short-term borrowings 133.9 -- -- -- 133.9 -- -- 133.9
Long-term debt 0.1 35.0 13.0 63.0 111.1 50.0 4.6 165.7
-------- ------ ------ ------- ------- --------- ------- -------
Total $ 429.2 $ 383.9 $ 442.0 $ 704.1 $1,959.2 $ 1,287.5 $ 189.0 $3,435.7
======== ====== ====== ======= ======= ========= ======= =======
Period GAP (1) $ 762.7 $(175.7) $(127.2) $ (190.4) $ 269.4 $ 189.2 $ 297.5 $ 756.1
Cumulative GAP 762.7 587.0 459.8 269.4 458.6 756.1
Cumulative GAP to Total Assets 16.96% 13.05% 10.22% 5.99% 5.99% 10.20% 16.81% 16.81%
Multiple of Rate Sensitive Assets
to Liabilities 2.78 0.54 0.71 0.73 1.14 1.15 2.57 1.22
- -------------------------------------------------------------------------------------------------------------------------
(1) GAP is the excess of rate sensitive assets (liabilities).
(2) Includes interest bearing savings and demand deposits of $467 million and
$433 million in 1999 and 1998, respectively, in the less than one year
category, and $963 million and $956 million, respectively 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.
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FORWARD-LOOKING STATEMENTS
The foregoing disclosure contains "forward-looking statements" within the
meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934,
both as amended, with respect to expectations for future periods. These
forward-looking statements involved are subject to risk and uncertainties that
could cause actual results to differ. These risks and uncertainties include
unanticipated changes in the competitive environment and relationships with
third party vendors and clients and certain other factors discussed in this
report. Management believes that the expectations used in the forward-looking
statements are reasonable, however, actual results may vary significantly.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information concerning quantitative and qualitative disclosures about market
risk contained and incorporated by reference in Item 7A of the Corporation's
1998 Annual Report on Form 10-K, is here incorporated by reference.
The Corporation faces market risk to the extent that both earnings and the fair
value of its financial instruments are affected by changes in interest rates.
The Corporation manages this risk with static GAP analysis and simulation
modeling. Throughout the first quarter of 1999, the results of these measurement
techniques were within the Corporation's policy guidelines. The Corporation does
not believe that there has been a material change in the Corporation's primary
market risk exposure (i.e., the categories of market risk to which the
Corporation is exposed and the particular markets that present the primary risk
of loss to the Corporation). As of the date of this Quarterly Report on Form
10-Q, the Corporation does not know of or expect there to be any material change
in the general nature of its primary market risk exposure in the near term.
The methods by which the Corporation manages its primary market risk exposure,
as described in the sections of its 1998 Annual Report on Form 10-K incorporated
by reference in response to this item, have not changed materially during the
current year. As of the date of this Quarterly Report on Form 10-Q, the
Corporation does not expect to change those methods in the near term. However,
the Corporation may change those methods in the future to adapt to changes in
circumstances or to implement new techniques. In this discussion, "near term"
means a period of one year following the date of the most recent balance sheet
contained in this report.
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
Proxies were solicited pursuant to Regulation 14 under the Securities Exchange
Act of 1934 to be voted at the annual meeting of shareholders of the Corporation
held April 20, 1999. There was no solicitation in opposition to management's
nominees for directors as set forth in the Corporation's Proxy Statement dated
March 15, 1999 and all such nominees were elected.
The results were as follows with respect to each director nominee:
Votes Against/ Shares Not Voted
Director Votes For Withheld Or Abstentions
- ------------------------------------ -------------------- --------------------- ---------------------
Edward P. Abbott 22,633,105 96,771 4,993,711
Hugo E. Braun Jr. 22,594,757 135,119 4,993,711
Jonathan E. Burroughs, II 22,550,922 178,954 4,993,711
Lawrence O. Erickson 22,648,232 81,643 4,993,711
William J. Hank 22,610,257 119,619 4,993,711
Robert J. Vitito 22,629,943 99,933 4,993,711
Total shares eligible to vote: 27,723,587
Broker non-votes included in non-voted shares above: none
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ITEM 5. OTHER INFORMATION
On April 19, 1999, the Corporation announced an agreement to acquire F&M
Bancorporation headquartered in Wisconsin. F&M Bancorporation has a combined
asset base of $2.4 billion and operates 87 offices throughout Wisconsin,
Minnesota and Iowa. The Corporation will issue approximately $21 million shares
of its common stock in a tax-free exchange for all of the outstanding stock of
F&M Bancorporation. The acquisition will be accounted for as a pooling of
interests and is expected to be completed during the fourth quarter of 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(3a) Restated Articles of Incorporation, as amended
(27) Financial Data Schedule
(b) Reports on Form 8-K
During the three month period ended March 31, 1999, a report on Form
8-K was filed under Item 5, Other Events. The report, dated and filed
April 27, 1999, announced an agreement to acquire F&M Bancorporation.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIZENS BANKING CORPORATION
Date May 10, 1999 By /s/ John W. Ennest
---------------------- --------------------------------------
John W. Ennest
Vice Chairman of the Board, Treasurer
and Chief Financial Officer
(Principal Financial Officer)
(Duly Authorized Signatory)
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Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
(3a) Restated Articles of Incorporation, as amended
27 Financial Data Schedule
24