<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended June 30, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________________ to ______________________
Commission file Number 0-10535
CITIZENS BANKING CORPORATION
-------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2378932
------------------------------------------ ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Citizens Banking Center, Flint, Michigan 48502
-------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(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.
<TABLE>
<CAPTION>
Class Outstanding at August 4, 1995
------------------------------ -----------------------------
<S> <C>
Common Stock, No Par Value 14,217,880 Shares
</TABLE>
(This report contains 24 pages)
<PAGE> 2
Citizens Banking Corporation
Index to Form 10-Q
<TABLE>
<CAPTION>
Page
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<S> <C>
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 4 - Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . 22
Item 5 - Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
JUNE 30, December 31,
(in thousands) 1995 1994
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 160,955 $ 132,092
Money market investments:
Interest-bearing deposits with banks 62 20,135
Federal funds sold 45,000 60,000
Term federal funds and other 106,420 25,000
---------- ----------
Total money market investments 151,482 105,135
Securities available-for-sale:
U.S. Treasury and federal agency securities 354,778 331,001
State and municipal securities 219,341 226,424
Other securities 15,793 6,574
---------- ----------
Total investment securities 589,912 563,999
Loans:
Commercial loans 919,533 760,087
Real estate mortgage 447,362 391,117
Consumer installment 959,767 587,714
Lease Financing 58,903 77,303
---------- ----------
Total loans 2,385,565 1,816,221
Less: Allowance for loan losses (33,893) (24,714)
---------- ----------
Net loans 2,351,672 1,791,507
Premises and equipment 63,611 52,533
Cost-in-excess of assets acquired 70,919 15,830
Other assets 47,548 42,727
---------- ----------
TOTAL ASSETS $3,436,099 $2,703,823
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 506,000 $ 416,395
Interest-bearing 2,309,731 1,835,923
---------- ----------
Total deposits 2,815,731 2,252,318
Federal funds purchased and securities sold
under agreements to repurchase 128,381 125,581
Other short-term borrowings 38,533 20,850
Other liabilities 50,780 41,095
Long-term debt 123,318 5,249
---------- ----------
Total liabilities 3,156,743 2,445,093
SHAREHOLDERS' EQUITY
Preferred stock - No par value --- ---
Common stock - No par value 89,491 89,243
Retained earnings 190,027 181,393
Net unrealized losses on securities available-for-sale, net of tax (162) (11,906)
---------- ----------
Total shareholders' equity 279,356 258,730
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,436,099 $2,703,823
========== ==========
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</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
<TABLE>
<CAPTION>
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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 1995 1994 1995 1994
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $51,945 $35,612 $94,436 $69,885
Interest and dividends on investment securities:
Taxable 5,667 5,979 10,858 11,322
Nontaxable 2,367 2,642 4,805 5,412
Money market investments 2,269 296 3,970 685
------- ------- ------ -------
Total interest income 62,248 44,529 114,069 87,304
------- ------- ------ -------
INTEREST EXPENSE
Deposits 22,840 13,598 40,668 27,191
Short-term borrowings 1,727 1,254 3,285 2,320
Long-term debt 2,320 118 3,202 239
------- ------- ------ -------
Total interest expense 26,887 14,970 47,155 29,750
------- ------- ------ -------
NET INTEREST INCOME 35,361 29,559 66,914 57,554
Provision for loan losses 1,580 1,358 3,000 2,416
------- ------- ------ -------
Net interest income after provision for loan losses 33,781 28,201 63,914 55,138
------- ------- ------ -------
NONINTEREST INCOME
Trust fees 2,840 2,447 5,499 4,895
Service charges on deposit accounts 2,559 2,143 4,750 4,279
Bankcard fees 1,342 1,685 2,520 3,321
Investment securities gains 13 9 104 188
Other 2,148 2,094 4,091 4,188
------- ------- ------ -------
Total noninterest income 8,902 8,378 16,964 16,871
------- ------- ------ -------
NONINTEREST EXPENSE
Salaries and employee benefits 16,515 14,020 31,316 27,927
Equipment 2,513 2,106 4,758 4,170
Occupancy 2,263 1,952 4,308 3,944
FDIC insurance premiums 1,557 1,236 2,913 2,472
Bankcard fees 673 1,310 1,337 2,496
Stationery and supplies 967 657 1,704 1,314
Postage and delivery 766 618 1,426 1,245
Other 7,214 4,802 12,786 10,590
------- ------- ------ -------
Total noninterest expense 32,468 26,701 60,548 54,158
------- ------- ------ -------
INCOME BEFORE INCOME TAXES 10,215 9,878 20,330 17,851
Income taxes 2,746 2,652 5,477 4,416
------- ------- ------ -------
NET INCOME $ 7,469 $ 7,226 $14,853 $13,435
======= ======= ======= =======
Per Share:
Primary $0.51 $0.50 $1.02 $0.93
Fully Diluted $0.51 $0.50 $1.02 $0.93
===== ===== ===== =====
Average Shares Outstanding:
Primary 14,529 14,450 14,505 14,466
Fully Diluted 14,579 14,461 14,561 14,471
--------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
<TABLE>
<CAPTION>
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
1995 1994
---------------------------- ------------------------------
SECOND First Fourth Third
(in thousands) QUARTER Quarter Quarter Quarter
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<S> <C> <C> <C> <C>
COMMON STOCK
Balance, beginning of quarter $89,303 $89,243 $89,202 $89,050
Exercise of stock options, net of shares purchased 188 60 41 687
Shares acquired for retirement --- --- --- (535)
-------- -------- -------- --------
Balance, end of quarter 89,491 89,303 89,243 89,202
-------- -------- -------- --------
RETAINED EARNINGS
Balance, beginning of quarter 185,814 181,393 176,119 171,331
Net income 7,469 7,384 8,234 7,745
Cash dividends (3,256) (2,963) (2,960) (2,957)
-------- -------- -------- --------
Balance, end of quarter 190,027 185,814 181,393 176,119
-------- -------- -------- --------
UNREALIZED GAIN (LOSS) ON SECURITIES
AVAILABLE-FOR-SALE
Balance, beginning of quarter (5,546) (11,906) (7,516) (6,164)
Net unrealized gain (loss), net of tax benefit 5,384 6,360 (4,390) (1,352)
-------- -------- -------- --------
Balance, end of quarter (162) (5,546) (11,906) (7,516)
-------- -------- -------- --------
TOTAL SHAREHOLDERS' EQUITY $279,356 $269,571 $258,730 $257,805
======== ======== ======== ========
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</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
<TABLE>
<CAPTION>
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
Six Months Ended
June 30,
(in thousands) 1995 1994
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $14,853 $13,435
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 3,000 2,416
Depreciation and amortization 3,554 3,112
Amortization of goodwill and other intangibles 2,028 750
Net amortization on investment securities 1,526 1,524
Investment securities gains (104) (188)
Other 246 (7,367)
-------- --------
Net cash provided by operating activities 25,103 13,682
-------- --------
INVESTING ACTIVITIES:
Net decrease (increase) in money market investments (23,247) 15,993
Securities available-for-sale:
Proceeds from sales 6,883 187,577
Proceeds from maturities 79,979 87,278
Purchases (60,904) (263,322)
Net increase in loans and leases (41,761) (47,015)
Purchases of premises and equipment (3,500) (2,726)
Net cash used for acquisition of banks (59,434) ---
-------- --------
Net cash used by investing activities (101,984) (22,215)
-------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings deposits (65,749) 26,578
Net increase in time deposits 88,476 6,137
Net decrease in short-term borrowings (24,525) (2,150)
Proceeds from issuance of long-term debt 115,000 ---
Principal reductions in long-term debt (1,487) (2,303)
Cash dividends paid (6,219) (5,640)
Proceeds from stock options exercised 248 874
Shares acquired for retirement --- (3,451)
-------- --------
Net cash provided by financing activities 105,744 20,045
-------- --------
Net increase in cash and due from banks 28,863 11,512
Cash and due from banks at beginning of period 132,092 113,303
-------- --------
Cash and due from banks at end of period $160,955 $124,815
======== ========
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions for Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three
and six month periods ended June 30, 1995 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1995. For
further information, refer to the consolidated financial statements and notes
thereto included in the Corporation's annual report on Form 10-K for the year
ended December 31, 1994.
NOTE 2. IMPAIRED LOANS
Effective January 1, 1995 the Corporation adopted Financial Accounting
Standards Board Statements No. 114 and 118, "Accounting by Creditors for
Impairment of a Loan". The Statements require that impaired loans be carried
at market value computed by one of three methods: market quotes, if
available; the fair value of the underlying collateral, if collateral
dependent; or the present value of expected future cash flows discounted at
the loan's contractual effective interest rate. The Corporation maintains an
allowance for loan losses for the difference between the market and book
value of these impaired loans. The Corporation's income recognition policy
on loan interest and fee income remains unchanged with the adoption of the
Statements. See additional discussion under the section entitled
"Underperforming Assets" in this filing.
NOTE 3. ACQUISITION OF BANKS
The 1995 results reflect four months of operations for the four Michigan
affiliates of Banc One Corporation purchased at the close of business on
February 28, 1995. The transaction was accounted for as a purchase and the
four banks ("acquired banks") were merged into Citizens Commercial and
Savings Bank headquartered in Flint, Michigan effective immediately after the
acquisition. The required pro-forma disclosures for a business combination
accounted for as a purchase are incorporated by reference from Form 8K/A
filed on April 27, 1995.
Note 4. Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year financial statement presentation.
7
<PAGE> 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a review of the Corporation's performance during the three and
six month periods ended June 30, 1995. This discussion should be read in
conjunction with the accompanying unaudited financial statements and notes
thereto appearing on pages 3 through 7 of this report and the Corporation's
1994 Annual Report on Form 10-K.
<TABLE>
<CAPTION>
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SELECTED FINANCIAL DATA
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except per share data) 1995 1994 1995 1994
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOR THE PERIOD
Interest income $62,248 $44,529 $114,069 $87,304
Net interest income 35,361 29,559 66,914 57,554
Provision for loan losses 1,580 1,358 3,000 2,416
Investment securities gains 13 9 104 188
Other noninterest income 8,889 8,369 16,860 16,683
Noninterest expense 32,468 26,701 60,548 54,158
Income taxes 2,746 2,652 5,477 4,416
Net income 7,469 7,226 14,853 13,435
Cash dividends 3,256 2,964 6,219 5,640
PER SHARE DATA
Net income:
Primary $ 0.51 $ 0.50 $ 1.02 $ 0.93
Fully diluted 0.51 0.50 1.02 0.93
Cash dividends 0.23 0.21 0.44 0.40
Book value (end of period) -- -- 19.69 18.08
Market value (end of period close) -- -- 29.75 24.50
FINANCIAL RATIOS (ANNUALIZED)
Return on average:
Shareholders' equity 10.89% 11.44% 11.13% 10.57%
Earning assets 0.97 1.15 1.04 1.08
Assets 0.89 1.06 0.95 1.00
Net interest margin (FTE) 4.77 4.97 4.85 4.88
Net loan charge-offs to average loans 0.10 0.23 0.10 0.16
Average equity to average total assets 8.15 9.27 8.55 9.43
Nonperforming assets to loans plus other real estate
(end of period) 0.98 1.11
Nonperforming assets to total assets (end of period) 0.68 0.74
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET TOTALS Percent
At Period End (June 30) Change
------
<S> <C> <C> <C>
Assets 25.4 $3,436,099 $2,739,181
Loans 30.7 2,385,565 1,825,542
Deposits 23.5 2,815,731 2,279,337
Shareholders' equity 9.9 279,356 254,217
Average balances
Assets 15.8 3,147,457 2,717,663
Loans 22.0 2,182,585 1,789,132
Deposits 15.1 2,607,065 2,264,368
Shareholders' equity 4.9 269,006 256,332
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
PERFORMANCE SUMMARY
Selected financial data as of June 30, 1995 and 1994 and for the three and six
month periods then ended are presented in the table on page 8. As shown,
earnings increased in 1995 resulting from higher net interest income. This
improvement was offset in part by higher noninterest expense, provision for
loan losses and income taxes. The first six months results reflect four months
of operations for the four Michigan affiliates of Banc One Corporation
purchased at the close of business on February 28, 1995. The transaction was
accounted for as a purchase and the four banks ("acquired banks") were merged
into Citizens Commercial and Savings Bank headquartered in Flint, Michigan
effective immediately after the acquisition.
SIX MONTHS, 1995 VERSUS SIX MONTHS, 1994
NET INTEREST INCOME
Net interest income and average balances and yields on major categories of
interest-earning assets and interest-bearing liabilities during the first six
months of 1995 and 1994 are summarized on page 10. The effects of changes in
average market rates of interest ("rate") and average balances ("volume") are
quantified in the table below.
<TABLE>
<CAPTION>
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ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
1995 Compared With 1994
--------------------------------------
Increase (Decrease)
Due to Change in
Six Months Ended June 30 Net ------------------------
(in thousands) Change(1) Rate (2) Volume
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Money market investments:
Time deposits with banks $ 136 $ 90 $ 46
Federal funds sold 1,853 979 874
Term federal funds sold and other 1,296 415 881
Investment securities:
Taxable (464) 1,126 (1,590)
Tax-exempt (607) 372 (979)
Loans 24,551 8,727 15,824
------- ------- -------
Total 26,765 11,709 15,056
------- ------- -------
INTEREST EXPENSE:
Deposits:
Demand 599 231 368
Savings 1,866 2,196 (330)
Time 11,012 5,927 5,085
Short-term borrowings 965 1,093 (128)
Long-term debt 2,963 1,111 1,852
------- ------- -------
Total 17,405 10,558 6,847
------- ------- -------
NET INTEREST INCOME $ 9,360 $ 1,151 $ 8,209
======= ======= =======
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</TABLE>
(1) Changes are based on actual interest income and do not reflect taxable
equivalent adjustments.
(2) Rate/Volume variances are allocated to changes due to rate.
Net favorable rate and volume related variances in net interest income resulted
in an increase in net interest income of $9,360,000, while reflecting a
decrease in net interest margin of 3 basis points during the first six months
of 1995 as compared with the same period in 1994. The higher volume resulted
primarily from the acquisition of the four new banks. These banks, acquired
during the first quarter of 1995, contributed $6,388,000 of the increase in the
net interest income for the period. A higher overall interest rate environment
during the first six months of 1995 when compared to the same period in 1994
resulted in increased yields on all categories of earning assets. Average
yields on interest-bearing liabilities increased from 2.93% to 3.97% for the
first six months of 1995 compared to the same period for 1994. If market rates
were to either increase or decrease in 1995, corresponding changes in funding
costs would be considered to avoid a negative impact on net interest income.
The Corporation's policies in this regard are further discussed in the section
titled "Interest Rate Risk."
9
<PAGE> 10
<TABLE>
<CAPTION>
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AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
1995 1994
Six Months Ended June 30 --------------------------------------- ---------------------------------
Average Average Average Average
(in thousands) Balance Interest (1) Rate(2) Balance Interest(1) Rate(2)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Money market investments:
Interest earning deposits with banks $7,064 $207 5.92% $4,278 $71 3.32%
Federal funds sold 81,768 2,443 6.02 32,964 590 3.61
Term federal funds sold and other 44,903 1,320 5.93 1,441 24 3.35
Investment securities(3):
Taxable 394,375 10,858 5.53 462,687 11,322 4.91
Nontaxable 178,686 4,805 8.33 218,034 5,412 7.69
Loans and leases:
Commercial 871,140 39,534 9.21 743,025 27,768 7.65
Real estate 420,985 17,357 8.25 405,578 16,455 8.11
Consumer 821,984 35,337 8.67 554,481 22,858 8.31
Lease financing 68,476 2,208 6.45 86,048 2,804 6.52
---------- -------- ---- ---------- ------- ----
Total earning assets(3) 2,889,381 114,069 8.14 2,508,536 87,304 7.27
-------- -------
NONEARNING ASSETS
Cash and due from banks 138,796 125,013
Bank premises and equipment 60,092 53,962
Other nonearning assets 89,777 53,188
Allowance for loan losses (30,589) (23,036)
----------- -----------
Total assets $3,147,457 $2,717,663
========== ==========
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits $302,588 2,816 1.88 $258,899 2,217 1.73
Savings deposits 906,704 12,638 2.81 926,014 10,772 2.35
Time deposits 964,575 25,214 5.27 709,015 14,202 4.04
Repurchase agreements and other
short-term borrowings 136,199 3,285 4.86 144,279 2,320 3.24
Long-term debt 84,838 3,202 7.61 10,015 239 4.80
---------- -------- ---- ---------- ------- ----
Total interest-bearing liabilities 2,394,904 47,155 3.97 2,048,222 29,750 2.93
------- -------
NONINTEREST-BEARING LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits 433,198 370,440
Other liabilities 50,349 42,669
Shareholders' equity 269,006 256,332
---------- ----------
Total liabilities and shareholders' equity $3,147,457 $2,717,663
========== ==========
NET INTEREST INCOME $66,914 $57,554
======= =======
NET INTEREST INCOME AS A PERCENT OF
EARNING ASSETS 4.85% 4.88%
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</TABLE>
(1) Interest income shown on actual basis and does not include
taxable equivalent adjustments.
(2) Average rates are presented on an annual basis and include
taxable equivalent adjustments to interest income of $3,003
and $3,388 for the six months ended June 30, 1995 and
1994, respectively, based on a tax rate of 35%.
(3) For presentation in this table, average balances and the
corresponding average rates for investment securities are
based upon historical cost, adjusted for amortization of
premiums and accretion of discounts.
10
<PAGE> 11
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 six months ended June 30, 1995 and
1994 is provided below. The provision for loan losses increased $584,000
during the first six months of 1995 compared with the same period of 1994.
The allowance for loan losses increased $10,369,000 at June 30, 1995 compared
to the prior year primarily due to the allowance of the acquired banks and
lower net charge-offs during the past year.
<TABLE>
<CAPTION>
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ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Six Months Ended
June 30,
(in thousands) 1995 1994
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses - beginning of period $24,714 $22,547
Allowance of Acquired Banks 7,235 ---
Charge-offs 3,265 3,038
Recoveries 2,209 1,599
------- -------
Net charge-offs 1,056 1,439
Provision for loan losses 3,000 2,416
------- -------
Allowance for loan losses - end of period $33,893 $23,524
======= =======
Loans outstanding at period end $2,385,565 $1,825,542
Average loans outstanding during period 2,182,585 1,789,132
Allowance for loan losses as a percentage of loans outstanding at period end 1.42% 1.29%
Ratio of net charge-offs during period to average loans outstanding (annualized) 0.10 0.16
Loan loss coverage (allowance as a multiple of net charge-offs, annualized) 16.0 x 8.2 x
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 "Underperforming Assets."
11
<PAGE> 12
NONINTEREST INCOME
A summary of significant sources of noninterest income during the first six
months of 1995 and 1994 follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME Six Months Ended Changes in 1995
June 30, -------------------
(in thousands) 1995 1994 Amount Percent
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust fees $5,499 $4,895 $604 12.3%
Service charges on deposit accounts 4,750 4,279 471 11.0
Bankcard fees 2,520 3,321 (801) (24.1)
Brokerage and investment fees 613 781 (168) (21.5)
Other loan income 540 769 (229) (29.8)
ATM network user fees 734 624 110 17.6
Cash management services 388 437 (49) (11.2)
Safe deposit rentals 461 385 76 19.7
Investment securities gains 104 188 (84) (44.7)
Other, net 1,355 1,192 163 13.7
------- ------- ---
Total noninterest income $16,964 $16,871 $93 0.6%
======= ======= ===
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</TABLE>
Including the effects of the four acquired banks, noninterest income in the
first six months of 1995 increased 0.6% over the same period in 1994. Bankcard
fees declined 24.1% primarily due to the discontinuance of the Travel Banking
product line in early 1995 which provided bankcard merchant fee income.
Brokerage and investment fees declined 21.5% from the same period in 1994, due
to lower market peneration and a temporary reduction in staff. Increased
volume and improved pricing strategies resulted in higher ATM network
user fees. Other loan income decreased due to lower levels of gains on
sales of mortgages to the secondary market as compared to the same period a
year ago. Safe deposit income increased 19.7% over a year ago due in part to
revenue from the four acquired banks.
Excluding the effects of the four acquired banks, noninterest income in the
first six months of 1995 decreased 10.6% as compared to the previous year.
Excluding the four month effect of the acquired banks, trust fees increased
3.1%, deposit service charges decreased 7.6% and other miscellaneous income
decreased 6.7% when compared to the same period last year.
12
<PAGE> 13
NONINTEREST EXPENSE
Significant changes in noninterest expense during the first six months of 1995
compared with the same period of 1994 are summarized in the table below.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE Six Months Ended Changes in 1995
June 30, ------------------
(in thousands) 1995 1994 Amount Percent
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $31,316 $27,927 $3,389 12.1%
Equipment 4,758 4,170 588 14.1
Occupancy 4,308 3,944 364 9.2
FDIC insurance premiums 2,913 2,472 441 17.8
Bankcard processing 1,337 2,496 (1,159) (46.4)
Stationery and supplies 1,704 1,314 390 29.7
Postage and delivery 1,426 1,245 181 14.5
Taxes other than income taxes 1,239 1,193 46 3.9
Advertising and public relations 1,385 1,079 306 28.4
Legal, audit and examination fees 920 980 (60) (6.1)
Other loan fees 825 668 157 23.5
Consulting and other professional fees 1,174 576 598 103.8
Other, net 7,243 6,094 1,149 18.9
------- ------- ------
Total noninterest expense $60,548 $54,158 $6,390 11.8%
======= ======= ======
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SALARIES AND EMPLOYEE BENEFITS
The 12.1% increase in salaries and employee benefits in the first six months of
1995 compared with the same period a year ago primarily reflects the effects of
the acquired banks. Excluding the four month results of the acquired banks,
salaries and employee benefits increased $280,000 or 1.0% during the first six
months. Cost savings attributable to staff reductions partially offset the
effects of normal merit increases and higher health insurance and other benefit
costs. Management anticipates that the ongoing consolidation of operational
functions throughout the Corporation including the newly acquired banks will
continue to mitigate the need to replace staff lost through normal attrition.
OTHER NONINTEREST EXPENSE
The first six months of 1995, including the results of the acquired banks,
reflected a 46.4% decrease in bankcard processing expense due to the
discontinuance of the Travel Banking product line in early 1995 which
previously generated significant amounts of interchange and other bankcard
expense. Other expense categories including advertising, equipment,
occupancy, supplies, taxes, and miscellaneous expenses, when adjusted for the
four month effect of the acquired banks, increased only slightly when compared
with the same period one year ago. Consulting and other professional services
increased 103.8%, or $598,000 as compared to the same period last year
primarily due to integration and conversion costs associated with the newly
acquired banks. Other noninterest expense, excluding salaries and benefits and
the four month effect of the new banks, totalled $26,231,000, an overall
decrease of $2,929,000 or 11.2% compared to one year ago.
INCOME TAXES
Federal income tax expense increased to $5,477,000 for the first six months of
1995 from $4,416,000 during the same period of 1994, an increase of 24.0%.
This increase resulted from higher pre-tax earnings and a slightly lower level
of tax-exempt interest income.
13
<PAGE> 14
THREE MONTHS, 1995 VERSUS THREE MONTHS, 1994
NET INTEREST INCOME
Net interest income and average balances and yields on major categories of
interest-earning assets and interest-bearing liabilities during the second
quarter of 1995 and 1994 are summarized on page 15. The effects of changes in
average market rates of interest ("rate") and average balances ("volume") are
quantified in the table below.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
1995 Compared With 1994
-------------------------------------
Increase (Decrease)
Due to Change in
Three Months Ended June 30 Net --------------------
(in thousands) Change(1) Volume Rate(2)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Money market investments:
Time deposits with banks $ (3) $ (4) $1
Federal funds sold 945 521 424
Term federal funds sold and other 1,031 1,031 ---
Investment securities:
Taxable (312) (860) 548
Tax-exempt (275) (446) 171
Loans 16,333 11,234 5,099
------- ------- ------
Total 17,719 11,476 6,243
------- ------- ------
INTEREST EXPENSE:
Deposits:
Demand 475 284 191
Savings 1,325 (56) 1,381
Time 7,442 3,470 3,972
Short-term borrowings 473 (45) 518
Long-term debt 2,202 1,444 758
------- ------- ------
Total 11,917 5,097 6,820
------- ------- ------
NET INTEREST INCOME $ 5,802 $ 6,379 $ (577)
======= ======= =======
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Changes are based on actual interest income and do not reflect taxable
equivalent adjustments.
(2) Rate/Volume variances are allocated to changes due to rate.
Net favorable volume related variances in net interest income partially offset
by negative rate variances resulted in an increase in net interest income of
$5,802,000 during the second quarter of 1995 compared with the same period of
1994. $4,586,000 of the increase resulted from the acquisition of the four new
banks which occurred on February 28, 1995. Yields on earning assets increased
from 7.34% to 8.25% while the cost of interest bearing liabilities increased
from 2.92% to 4.16%. Increased deposit and debt costs were incurred to fund the
acquisition resulting in higher liability costs. As a result the net interest
margin declined 20 basis points to 4.77%. The Corporation's policies regarding
changes in funding costs are discussed in the section titled "Interest Rate
Risk."
14
<PAGE> 15
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
1995 1994
Three Months Ended June 30 --------------------------------- -------------------------------
AVERAGE AVERAGE Average Average
(in thousands) BALANCE INTEREST(1) RATE(2) Balance Interest(1) Rate(2)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Money market investments:
Interest earning deposits with banks $62 $1 7.49% $492 $4 2.82%
Federal funds sold 81,407 1,237 6.09 29,247 292 4.01
Term federal funds sold and other 69,437 1,031 5.96 9 --- ---
Investment securities(3):
Taxable 403,643 5,667 5.62 478,475 5,979 5.00
Nontaxable 175,424 2,367 8.36 210,937 2,642 7.76
Loans and leases:
Commercial 923,742 21,219 9.29 764,755 14,605 7.78
Real estate 436,977 9,048 8.28 391,638 8,023 8.19
Consumer 938,765 20,574 8.79 566,054 11,638 8.25
Lease financing 65,342 1,104 6.76 81,620 1,346 6.60
---------- ------- ---- ---------- ------- ----
Total earning assets(3) 3,094,799 62,248 8.25 2,523,227 44,529 7.34
------- -------
NONEARNING ASSETS
Cash and due from banks 138,983 128,352
Bank premises and equipment 63,723 53,853
Other nonearning assets 114,154 49,826
Allowance for loan losses (33,480) (23,242)
---------- ----------
Total assets $3,378,179 $2,732,016
========== ==========
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits $326,203 1,556 1.91 $257,331 1,081 1.69
Savings deposits 938,022 6,690 2.86 928,418 5,365 2.32
Time deposits 1,063,386 14,594 5.50 713,879 7,152 4.02
Repurchase agreements and other short-term
borrowings 141,123 1,727 4.91 145,253 1,254 3.47
Long-term debt 123,310 2,320 7.55 9,463 118 5.00
---------- ------- ---- ---------- ------- ----
Total interest-bearing liabilities 2,592,044 26,887 4.16 2,054,344 14,970 2.92
------- -------
NONINTEREST-BEARING LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits 460,132 382,220
Other liabilities 51,811 42,129
Shareholders' equity 274,192 253,323
---------- ----------
Total liabilities and shareholders' equity $3,378,179 $2,732,016
========== ==========
NET INTEREST INCOME $35,361 $29,559
======= =======
NET INTEREST INCOME AS A PERCENT OF EARNING
ASSETS 4.77% 4.97%
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 $1,492
and $1,619 for the three months ended June 30, 1995 and 1994,
respectively, based on a tax rate of 35%.
(3) For presentation in this table, average balances and the
corresponding average rates for investment securities are
based upon historical cost, adjusted for amortization of
premiums and accretion of discounts.
15
<PAGE> 16
PROVISION AND ALLOWANCE FOR LOAN LOSSES
A summary of loan loss experience during the second quarter ended June 30, 1995
and 1994 is provided below. The provision for loan losses and net loan
charge-offs recorded during the second quarter of 1995 compared with the same
period of 1994, has been primarily impacted by the purchase of the four new
banks, acquired February 28, 1995.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended
June 30,
(In thousands) 1995 1994
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses - beginning of period $ 32,916 $ 23,203
Charge-offs 1,758 1,729
Recoveries 1,155 692
------ -------
Net charge-offs 603 1,037
Provision for loan losses 1,580 1,358
------ -------
Allowance for loan losses - end of period $33,893 $23,524
======= =======
Average loans outstanding during period $2,364,826 $1,804,067
Ratio of net charge-offs during period to average loans outstanding (annualized) 0.10 0.23
Loan loss coverage (allowance as a multiple of net charge-offs, annualized) 14.1 x 5.7 x
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NONINTEREST INCOME
A summary of significant sources of noninterest income during the second
quarter of 1995 and 1994 follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME Three Months Ended Changes in 1995
June 30, --------------------
(in thousands) 1995 1994 Amount Percent
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust fees $2,840 $2,447 $393 16.1%
Service charges on deposit accounts 2,559 2,143 416 19.4
Bankcard fees 1,342 1,685 (343) (20.4)
Brokerage and investment fees 335 427 (92) (21.5)
Other loan income 282 297 (15) (5.1)
ATM network user fees 371 322 49 15.2
Cash management services 198 221 (23) (10.4)
Safe deposit rentals 242 193 49 25.4
Investment securities gains 13 9 4 44.4
Other, net 720 634 86 13.6
------ ------ -----
Total noninterest income $8,902 $8,378 $ 524 6.3%
====== ====== =====
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Including the effects of the four acquired banks, noninterest income in the
second quarter of 1995 increased 6.3% over the second quarter of 1994.
Bankcard fees declined 20.4% primarily due to the discontinuance of the Travel
Banking product line in early 1995 which provided bankcard merchant fee income.
Brokerage and investment fees declined 21.5% from the second quarter of 1994,
due to lower market penetration and a temporary reduction in staff. Increased
volume and improved pricing strategies resulted in higher ATM network
user fees. Safe deposit income increased 25.4% over a year ago due in part to
revenue from the four acquired banks.
Excluding the effect of the acquisition of the banks, noninterest income in the
second quarter of 1995 decreased 10.0% from the second quarter of 1994.
Excluding the year to date effect of the new banks, trust fees increased 3.3%,
deposit service charges decreased 7.8% and other miscellaneous income decreased
1.9% compared to the same period last year.
16
<PAGE> 17
NONINTEREST EXPENSE
Significant changes in noninterest expense during the second quarter of 1995
compared with the same period of 1994 are summarized in the table below.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE Three Months Ended Changes in 1995
June 30, --------------------
(in thousands) 1995 1994 Amount Percent
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $16,515 $14,020 $2,495 17.8%
Equipment 2,513 2,106 407 19.3
Occupancy 2,263 1,952 311 15.9
FDIC insurance premiums 1,557 1,236 321 26.0
Bankcard processing 673 1,310 (637) (48.6)
Stationery and supplies 967 657 310 47.2
Postage and delivery 766 618 148 23.9
Taxes other than income taxes 564 609 (45) (7.4)
Advertising and public relations 790 519 271 52.2
Consulting and other professional fees 795 267 528 197.8
Legal, audit and examination fees 409 484 (75) (15.5)
Other loan fees 480 339 141 41.6
Other, net 4,176 2,584 1,592 61.6
------- ------- ------
Total noninterest expense $32,468 $26,701 $5,767 21.6%
======= ======= ======
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SALARIES AND EMPLOYEE BENEFITS
The 17.8% increase in salaries and employee benefits in the second quarter of
1995 compared with the same period a year ago primarily reflects the effects of
the acquired banks. Excluding the three month results of the acquired banks,
salaries and employee benefits increased 1.5% or $215,000 during the second
quarter. Cost savings attributable to staff reductions partially offset the
effects of normal merit increases and higher health insurance and other benefit
costs. Management anticipates that the ongoing consolidation of operational
functions throughout the Corporation including the newly acquired banks will
continue to mitigate the need to replace staff lost through normal attrition.
OTHER NONINTEREST EXPENSE
Including the results of the acquired banks, the second quarter of 1995
reflected a 48.6% decrease in bankcard processing expense due to the
discontinuance of the Travel Banking product line in early 1995 which had
previously generated significant amounts of interchange and other bankcard
expense. Other expense categories, including advertising, equipment,
occupancy, supplies, taxes, and miscellaneous expenses, when adjusted for the
three month effect of the acquired banks, increased only slightly when compared
with the same period one year ago. Consulting and other professional services
have increased 197.8%, or $528,000 compared to the same period last year
primarily due to integration and conversion costs associated with the newly
acquired banks.
Excluding the quarterly expense impact of the four acquired banks, noninterest
expense decreased 4.2% in the second quarter of 1995, compared with the second
quarter of 1994.
BALANCE SHEET
The Corporation had total assets of $3,436,099,000 as of June 30, 1995, an
increase of $732,276,000 or 27.1% from $2,703,823,000 as of December 31, 1994.
The newly acquired banks accounted for $730,000,000 of the increase including
a preliminary cost-in-excess of the fair value of identifiable net assets
acquired of $ 57,025,000. Total earning assets amounted to $3,126,959,000 as
of June 30, 1995, compared with $2,523,555,000 as of June 30, 1994, an increase
of $603,404,000 or 23.9%. Average earning assets comprised 91.5% of average
total assets during the first half of 1995 compared with 92.3% in the first
half of 1994.
INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
Total average investments, including money market investments, comprised 24.2%
of average earning assets during the first half of 1995, compared with 28.7%
for the same period of 1994. Average money market investment balances
increased to 4.6% of total average earning assets during the first half of 1995
from 1.5% during the corresponding period of 1994. Overall, decreases in
investment securities and money market investments as a percent of earning
assets resulted from the newly acquired banks and the use of funds to support
loan growth.
17
<PAGE> 18
In December 1994, the Corporation adopted Financial Accounting Standards Board
Statement No. 119 "Disclosures about Derivative Financial Instruments and Fair
Value of Financial Instruments" ("FAS 119"). This Statement defines a
derivative as a future, forward, swap, option contract or other financial
instrument with similar characteristics. The Statement requires expanded
disclosures about these types of financial instruments. The Corporation does
not invest in derivatives or related types of financial instruments except for
Federal agency collaterized mortgage obligations and, therefore, the adoption
of this Statement did not have a material effect.
LOANS AND LEASES
The Corporation extends credit primarily within the market areas of its seven
banking subsidiaries; six located in Michigan and one in Illinois. The loan
portfolio is widely diversified by borrowers and industry groups with no
significant concentrations in any industry. Total average loans increased
22.0% in the first half of 1995 compared with the same period of 1994 (2.0%
excluding the purchase of the newly acquired banks). The real estate loan
portfolio decreased due to lower new loan volume and sale of mortgages in 1994
while the commercial and consumer loan portfolios increased.
UNDERPERFORMING ASSETS
Effective January 1, 1995 the Corporation adopted Financial Accounting
Standards Board Statements No. 114 and 118, "Accounting by Creditors for
Impairment of a Loan". The Statements require impaired loans be carried at
their market value which is determined by market quotes, if available; the fair
value of the underlying collateral, if collateral dependent; or the present
value of expected future cash flows discounted at the loan's contractual
effective interest rate. An allowance for loan losses is maintained by the
Corporation for all deficiencies on the loans for the amount of the difference
between the market and book value of the loan. The Corporation's income
recognition policy on loan interest and fee income remains unchanged with the
adoption of the Statements.
At June 30, 1995, loans considered to be impaired under the Statements totalled
$19,732,000 (of which $10,818,000 were on a nonaccrual basis). Included within
this amount is $8,243,000 of impaired loans for which the related allowance
for loan losses is $1,243,000 and $11,489,000 of impaired loans that as a
result of previous write-downs, do not have an allowance for loan losses. The
average recorded investment in impaired loans during the quarter ended June 30,
1995 was approximately $19,689,000. For the quarter ended June 30, 1995, the
Corporation recognized interest income of $ 389,000 which included $163,000 of
interest income recognized using the cash basis method of income recognition.
Underperforming assets consist of nonaccrual loans, restructured loans, loans
90 days past due and still accruing interest, and other real estate owned.
Certain of these loans are considered to be impaired under the Statements. The
Corporation maintains policies and procedures to identify and monitor
nonaccrual loans. A loan (including a loan impaired under the Statements) is
placed on nonaccrual status when there is doubts regarding collection of
principal or interest, or when principal or interest is past due 90 days or
more and the loan is not well secured and in the process of collection.
Interest accrued but not collected is reversed and charged against income when
the loan is placed on nonaccrual status.
Other real estate owned is comprised of property acquired through a foreclosure
proceeding or acceptance of a deed-in-lieu of foreclosure and loans classified
as in-substance foreclosure. In accordance with the Statements, a loan is
classified as in-substance foreclosure when the Corporation has taken
possession of the collateral regardless of whether formal foreclosure
proceedings take place. Loans previously classified as in-substance
foreclosure but for which the Corporation has not taken possession of the
collateral are classified in loans. In 1993, the Corporation amended its
disclosure policy for assets in-substance foreclosed to comply with new
regulatory guidelines. As a result, loans previously classified as
in-substance foreclosure but for which the Corporation had not taken possession
of the collateral were reclassified as nonaccrual real estate mortgage loans.
This reclassification did not impact the Corporation's financial condition or
results of operations.
The table on the following page provides a summary of underperforming assets as
of June 30, 1995, December 31, 1994 and June 30, 1994. Total underperforming
assets amounted to $23,986,000 as of June 30, 1995, compared with $21,938,000
as of December 31, 1994 and $20,435,000 as of June 30, 1994. Overall,
underperforming assets increased from December 31, 1994 due to increases in
the nonaccrual categories the result of nonperforming assets of the acquired
banks, but declined as a percentage of total loans and assets.
18
<PAGE> 19
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
UNDERPERFORMING ASSETS
JUNE 30, December 31, June 30,
(in thousands) 1995 1994 1994
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NONPERFORMING LOANS(1)
Nonaccrual
Less than 30 days past due $ 6,452 $ 5,185 $ 4,431
From 30 to 89 days past due 1,261 1,405 557
90 or more days past due 13,344 11,566 12,295
------- ------- -------
Total 21,057 18,156 17,283
Restructured 560 299 151
------- ------- -------
Total nonperforming loans 21,617 18,455 17,434
OTHER REAL ESTATE OWNED ("OREO") 1,890 2,230 2,878
------- ------- -------
Total nonperforming assets 23,507 20,685 20,312
LOANS 90 DAYS PAST DUE (STILL ACCRUING) 479 1,253 123
------- ------- -------
Total underperforming assets $23,986 $21,938 $20,435
======= ======= =======
Nonperforming loans as a percent of total loans 0.91% 1.02% 0.96%
Nonperforming assets as a percent of total loans plus OREO 0.98 1.14 1.11
Nonperforming assets as a percent of total assets 0.68 0.77 0.74
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Nonperforming loans include loans on which interest is recognized only
upon receipt (nonaccrual) and those on which interest has been
renegotiated to lower than market rates because of the financial
condition of the borrowers (restructured).
Employment levels and other economic conditions in the Corporation's local
markets can impact the level and composition of underperforming assets. In a
deteriorating or weak economy, higher levels of nonperforming assets,
charge-offs and provisions for loan losses could result which may adversely
impact the Corporation's results.
In addition to nonperforming loans, management identifies and closely monitors
other credits that are current in terms of principal and interest payments but,
in management's opinion, may deteriorate in quality if economic conditions
change. As of June 30, 1995 such credits amounted to $17,874,000 or 0.8% of
total loans, compared with $15,257,000 or 0.8 % at December 31, 1994 and
$19,425,000 or 1.1% as of June 30, 1994.
DEPOSITS
The Corporation gathers deposits primarily in its local markets and
historically has not relied on brokered funds to sustain liquidity. Average
deposits increased 15.1% in the first half of 1995 over the same period in 1994
(decline of 1.7% excluding the newly acquired banks). The shift in customer
preferences from savings deposits to other deposit alternatives reflects
changing customer liquidity preferences and the desire for higher interest
rates. Management seeks to maintain core deposit stability by offering
customers a wide range of deposit products at competitive rates.
SHORT-TERM BORROWINGS AND LONG-TERM DEBT
On average, total short-term borrowings declined to $136,199,000 during the
first half of 1995 compared with $144,279,000 during the same period of 1994.
To finance the acquisition of the acquired banks, the Corporation's Parent
company obtained $115,000,000 in long-term debt financing. The Parent company
services the debt's scheduled principal and interest payments with dividends
from the subsidiary banks. In addition, long-term debt of $4,561,000 existing
on the acquisition date at the acquired banks was assumed by the Corporation as
part of the acquisition. The transaction resulted in average long-term debt
balances increasing to $84,838,000 during the first half of 1995 from
$10,015,000 for the same period of 1994.
NEW ACCOUNTING STATEMENTS
In March 1995 Financial Accounting Standards Board issued Statement No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of". The Statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets. It also requires entities to review assets being
carried for potential impairment and to recognize the impairment loss if one
19
<PAGE> 20
exists. The Statement is effective for years beginning after December 15,
1995. The Corporation will adopt the Statement effective January 1, 1996 and
the impact of adoption on the Corporation is not expected to be material.
In May 1995 Financial Accounting Standards Board issued Statement No. 122
"Accounting for Mortgage Servicing Rights". The Statement amends FASB
Statement No. 65 to require mortgage banking related companies to recognize as
a separate asset the rights to service mortgage loans for others regardless of
how those servicing rights are acquired. This may be through purchase or
origination of the mortgage loans. The Statement is effective for years
beginning after December 15, 1995. The Corporation will adopt the Statement by
January 1, 1996. The impact of adoption on the Corporation is not expected to
be material.
CAPITAL RESOURCES
REGULATORY CAPITAL REQUIREMENTS
Bank holding companies, such as the Corporation, and their bank subsidiaries
are required by banking regulators to meet certain minimum levels of capital
adequacy. These are expressed in the form of certain ratios. Capital is
separated into Tier I capital (essentially common stockholders' equity less
goodwill) and Tier II capital (essentially the allowance for loan losses
limited to 1.25% of risk-weighted assets). The first two ratios, which are
based on the degree of credit risk in the company's assets, provide for
weighting assets based on assigned risk factors and include off-balance sheet
items such as loan commitments and stand-by letters of credit. The ratio of
Tier I capital to risk-weighted assets must be at least 4.0% and the ratio of
Total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must
be at least 8.0%. The capital leverage ratio supplements the risk-based
capital guidelines. Banks and bank holding companies are required to maintain
a minimum ratio of Tier 1 capital to adjusted quarterly average total assets of
3.0%.
The FDIC, the insurer of deposits in financial institutions, has adopted a
risk-based insurance premium system based in part on an institution's capital
adequacy. Under this system, a depository institution is classified into one
of three capital categories (well-capitalized, adequately capitalized or
undercapitalized) according to its risk-based capital and leverage ratios and
is required to pay successively higher premiums depending on its capital levels
and its supervisory rating by its primary regulator. All bank subsidiaries
within the Corporation maintain sufficient capital to maintain a "well
capitalized" designation (the FDIC's highest rating).
The Federal Deposit Insurance Corporation recently announced that the deposit
insurance premiums paid by banks that are considered "well capitalized" will
drop from 23 to four cents per 100 dollars of deposits. The reduction is
expected to have a significant impact on the Corporation's earnings beginning in
the third quarter of 1995.
As summarized below, the Corporation's risk based capital levels were well in
excess of all regulatory standards.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS
Regulatory JUNE 30, December 31, June 30,
Minimum 1995 1994 1994
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk based capital:
Tier I 4.0% 8.4% 13.4% 12.7%
Total capital 8.0 9.7 14.7 14.0
Tier I leverage 3.0 6.3 9.5 9.0
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
COMMON AND PREFERRED STOCK
The Corporation maintains a stock repurchase program initiated in
November 1987. During the first half of 1995, no shares were repurchased under
this program. As of June 30, 1995, a total of 1,132,470 shares have been
repurchased under this program at an average price per share of $14.31.
OTHER
Total shareholders' equity was $279,356,000 or $19.69 per share as of June 30,
1995, compared with $258,730,000 or $18.31 per share as of December 31, 1994
and $254,217,000 or $18.08 per share as of June 30, 1994. The Corporation
declared cash dividends of $0.44 per share during the first half of 1995, an
increase of 10.0% over the $0.40 per share declared during the same period in
1994.
LIQUIDITY AND DEBT CAPACITY
The level of liquid assets available to meet ongoing funding needs and to
capitalize on opportunities for business expansion is closely monitored by
management. It is management's intent to maintain adequate liquidity so that
20
<PAGE> 21
sufficient funds are readily available at a reasonable cost. Various
techniques are used by the Corporation to measure liquidity, including ratio
analysis. Some ratios monitored by the Corporation include: average loans to
deposits; total liquid assets (including cash, U.S. Treasury securities and
short-term investments) to total deposits; and, total long-term debt to
equity. These ratios are summarized in the table below.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
KEY LIQUIDITY RATIOS
JUNE 30, December 31, June 30,
1995 1994 1994
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Quarterly average:
Loans to deposits 84.8% 80.0% 79.1%
Liquid assets to deposits 18.0 19.1 18.1
Total long-term debt to equity 44.1 2.0 3.4
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
With the acquired banks, the Corporation's quarterly average loan to deposit
ratio increased to 84.8% at June 30, 1995 from 80.0% at December 31, 1994.
The acquisition was funded from the proceeds of long-term debt financing of
$115 million through the Corporation's parent company. The funding increased
the long-term debt to equity ratio to 44.1% at June 30, 1995 from 2.0% at
December 31, 1994. The parent will service the scheduled principal and
interest payments with dividends from the Corporation's subsidiary banks.
Management believes that the Corporation has sufficient liquidity to meet
presently known cash flow requirements arising from ongoing business
transactions.
INTEREST RATE RISK
Interest rate risk generally arises when the maturity or repricing structure of
the Corporation's assets and liabilities differs significantly.
Asset/liability management, which among other things addresses such risk, is
the process of developing, testing and implementing strategies that seek to
maximize net interest income, maintain liquidity and minimize exposure to
significant changes in interest rates. This process includes monitoring the
contractual and anticipated repricing of assets and liabilities as well as
simulating net interest income under a variety of economic assumptions and
balance sheet configurations. Generally, management seeks a structure that
insulates net interest income and capital from large swings caused by changes
in interest rates. The Corporation's static interest rate sensitivity ("GAP")
as of June 30, 1995 is illustrated in the following table. As shown, the
Corporation was in an "asset sensitive" position (had more rate sensitive
assets than rate sensitive liabilities) of $262 million within the one year
time frame. Because of the other inherent limitations of GAP analysis,
management also uses simulation modeling to evaluate the impact of changes in
interest rates and balance sheet configurations. Such simulations can be used
to develop strategies which can limit interest rate risk and provide adequate
liquidity.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY
Multiple of Rate
Rate Sensitive Rate Sensitive Sensitive Assets
(in millions) Assets Liabilities Period Gap to Liabilities
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
June 30, 1995
Repricing or maturing:
Within 30 days $ 904 $ 332 $572 2.72 x
31-90 Days 131 225 (94) 0.58
91-180 Days 176 286 (110) 0.62
181-365 Days 360 466 (106) 0.77
------ ------ -----
TOTAL WITHIN 1 YEAR 1,571 1,309 262 1.20
1-5 Year 1,139 1,136 3 1.00
Over 5 years 408 155 253 2.63
------ ------ -----
Total $3,118 $2,600 $518 1.20
====== ====== =====
December 31, 1994
Total within 1 year 2,501 1,988 513 1.26
June 30, 1994
Total within 1 year 1,198 1,099 99 1.09
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
PART II - OTHER INFORMATION
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 on April 18, 1995. There was no solicitation in opposition to
management's nominees for directors as set forth in the Corporation's Proxy
Statement dated March 14, 1995 and all such nominees were elected.
The results were as follows with respect to each director nominee:
<TABLE>
<CAPTION>
Votes Against/ Shares Not Voted
Director Votes For Withheld or Abstentions
--------------------------------- ------------------- ----------------------- ----------------------
<S> <C> <C> <C>
William F. Nelson 13,029,848 61,547 1,041,546
William C. Shedd 13,023,040 68,355 1,041,546
David A. Thomas, Jr. 13,028,356 63,039 1,041,546
James E. Truesdell, Jr. 13,032,670 58,725 1,041,546
Charles R. Weeks 13,028,332 63,063 1,041,546
Kendall B. Williams 13,027,023 64,372 1,041,546
</TABLE>
Other matters submitted at the April 18, 1995 Shareholder meeting requiring
shareholder approval:
(1) Stock Option Plan for Directors. Votes for: 11,944,085, votes against
/withheld: 940,242, shares not voted or abstentions: 1,248,614.
(2) Amendment to the Restated Articles of Incorporation to increase the
number of authorized common shares. Votes for: 12,489,076, votes
against/withheld: 467,841, shares not voted or abstentions: 1,176,023.
Total shares eligible to vote: 14,132,941
Broker non-votes included in non-voted shares above: none
ITEM 5. OTHER INFORMATION
On February 28, 1995 the Corporation completed the acquisition of the four
affiliate banks of Banc One Corporation in East Lansing, Fenton, Sturgis and
Ypsilanti, Michigan in a cash transaction for $115 million. The four banks
have a combined asset base of $730 million and operate 21 branches. The banks
were merged into Citizens Commercial and Savings Bank headquartered in Flint,
Michigan, the Corporation's lead bank in the holding company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 3. Exhibits:
(11) Statement re: computation of per share earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K:
During the three month period ending June 30, 1995, an amendment to the Form
8-K filed on March 13, 1995 pertaining to the acquisition of the four
Michigan subsidiaries of Banc One Corporation was filed. The amendment
dated April 27, 1995 contained the financial statements and pro forma
financial information and exhibits required to be filed pursuant to Item 7
of Form 8-K.
22
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIZENS BANKING CORPORATION
Date August 11, 1995 By /s/ John W. Ennest
--------------------------------------------
John W. Ennest
Vice Chairman of the Board,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
(Duly Authorized Signatory)
23
<PAGE> 24
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
-------- --------------- ------------
<S> <C> <C>
11 Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
<PAGE> 1
FORM 10-Q
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Net income per share is computed based on the weighted average number of
shares outstanding, including the dilutive effect of stock options, as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except per share amounts) 1995 1994 1995 1994
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INCOME: $ 7,469 $ 7,226 $ 14,853 $ 13,435
======= ======= ======= =======
PRIMARY EARNINGS PER SHARE:
Actual average shares outstanding 14,171 14,094 14,152 14,088
Net effect of the assumed exercise of stock
options -- based on the treasury stock method
using average market price for the period 358 356 353 378
------- ------- ------- -------
Pro forma average shares outstanding 14,529 14,450 14,505 14,466
======= ======= ======= =======
Net Income Per Share $0.51 $0.50 $1.02 $0.93
======= ======= ======= =======
FULLY DILUTED EARNINGS PER SHARE:
Actual average shares outstanding 14,171 14,094 14,152 14,088
Net effect of the assumed exercise of stock
options -- based on the treasury stock method
using higher of average or closing market price 408 361 409 383
------- ------- ------- -------
Pro forma average shares outstanding 14,579 14,461 14,561 14,471
======= ======= ======= =======
Net Income Per Share $ 0.51 $ 0.50 $ 1.02 $ 0.93
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> APR-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 160,955
<INT-BEARING-DEPOSITS> 62
<FED-FUNDS-SOLD> 45,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 589,912
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 2,385,565
<ALLOWANCE> 33,893
<TOTAL-ASSETS> 3,436,099
<DEPOSITS> 2,815,731
<SHORT-TERM> 166,914
<LIABILITIES-OTHER> 50,780
<LONG-TERM> 123,318
<COMMON> 89,491
0
0
<OTHER-SE> 189,865
<TOTAL-LIABILITIES-AND-EQUITY> 3,436,099
<INTEREST-LOAN> 51,945
<INTEREST-INVEST> 10,303
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 62,248
<INTEREST-DEPOSIT> 22,840
<INTEREST-EXPENSE> 26,887
<INTEREST-INCOME-NET> 35,361
<LOAN-LOSSES> 1,580
<SECURITIES-GAINS> 13
<EXPENSE-OTHER> 32,468
<INCOME-PRETAX> 10,215
<INCOME-PRE-EXTRAORDINARY> 7,469
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,469
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
<YIELD-ACTUAL> 8.25
<LOANS-NON> 21,057
<LOANS-PAST> 479
<LOANS-TROUBLED> 560
<LOANS-PROBLEM> 17,874
<ALLOWANCE-OPEN> 32,916
<CHARGE-OFFS> 1,758
<RECOVERIES> 1,155
<ALLOWANCE-CLOSE> 33,893
<ALLOWANCE-DOMESTIC> 27,307
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,586
</TABLE>
