<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 March 31, 1996
--------------
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Citizens Banking Center, Flint, Michigan 48502
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(Address of principal executive offices) (Zip Code)
(810) 766-7500
----------------------------------------------------
(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 April 24, 1996
- -------------------------- -----------------------------
Common Stock, No Par Value 14,419,291 Shares
(This report contains 21 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 1 - Legal Proceedings................................................. 20
Item 2 - Changes in Securities............................................. 20
Item 3 - Defaults Upon Senior Securities................................... 20
Item 4 - Submission of Matters to a Vote of Security Holders............... 20
Item 5 - Other Information................................................. 20
Item 6 - Exhibits and Reports on Form 8-K.................................. 20
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
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CONSOLIDATED BALANCE SHEETS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
MARCH 31, December 31,
(in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 157,103 $ 172,754
Money market investments:
Interest-bearing deposits with banks 11 10,090
Federal funds sold 42,000 50,000
Term federal funds and other 15,683 89,744
---------- ----------
Total money market investments 57,694 149,834
Securities available-for-sale:
U.S. Treasury and federal agency securities 433,042 346,485
State and municipal securities 216,243 213,491
Other securities 14,337 10,936
---------- ----------
Total investment securities 663,622 570,912
Loans:
Commercial 949,151 905,947
Real estate - construction 34,104 33,984
Real estate - mortgage 479,510 457,758
Consumer 965,194 970,755
Lease financing 59,472 60,069
---------- ----------
Total loans 2,487,431 2,428,513
Less: Allowance for loan losses (34,840) (34,771)
---------- ----------
Net loans 2,452,591 2,393,742
Premises and equipment 62,295 63,147
Intangible assets 69,028 70,385
Other assets 45,890 43,148
---------- ----------
TOTAL ASSETS $3,508,223 $3,463,922
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 487,544 $ 506,116
Interest-bearing 2,428,934 2,358,585
---------- ----------
Total deposits 2,916,478 2,864,701
Federal funds purchased and securities sold
under agreements to repurchase 138,600 130,556
Other short-term borrowings 18,931 15,468
Other liabilities 48,635 50,600
Long-term debt 85,432 105,411
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Total liabilities 3,208,076 3,166,736
SHAREHOLDERS' EQUITY
Preferred stock - No par value --- ---
Common stock - No par value 92,202 91,480
Retained earnings 207,667 202,219
Net unrealized gain on securities available-for-sale, net of tax 278 3,487
---------- ----------
Total shareholders' equity 300,147 297,186
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,508,223 $3,463,922
========== ==========
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</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
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Consolidated Statements of Income (Unaudited)
Citizens Banking Corporation and Subsidiaries
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(in thousands) 1996 1995
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<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 53,136 $ 42,491
Interest and dividends on investment securities:
Taxable 5,788 5,191
Nontaxable 2,260 2,438
Money market investments 1,785 1,701
--------- ---------
Total interest income 62,969 51,821
INTEREST EXPENSE
Deposits 24,145 17,828
Short-term borrowings 1,722 1,558
Long-term debt 1,857 882
--------- ---------
Total interest expense 27,724 20,268
NET INTEREST INCOME 35,245 31,553
Provision for loan losses 1,771 1,420
--------- ---------
Net interest income after provision for
loan losses 33,474 30,133
NONINTEREST INCOME
Trust fees 3,154 2,659
Service charges on deposit accounts 2,435 2,191
Bankcard fees 1,344 1,178
Investment securities gains 52 91
Other 2,555 1,943
--------- ---------
Total noninterest income 9,540 8,062
NONINTEREST EXPENSE
Salaries and employee benefits 16,758 14,801
Equipment 2,424 2,245
Occupancy 2,352 2,045
FDIC insurance premiums 4 1,356
Bankcard fees 772 664
Stationery and supplies 778 737
Postage and delivery 824 660
Other 6,912 5,572
--------- ---------
Total noninterest expense 30,824 28,080
INCOME BEFORE INCOME TAXES 12,190 10,115
Income taxes 3,449 2,731
--------- ---------
NET INCOME $ 8,741 $ 7,384
========= =========
PRIMARY AND FULLY DILUTED INCOME PER SHARE: $ 0.60 $ 0.51
========= =========
AVERAGE SHARES OUTSTANDING:
Primary 14,675,356 14,477,417
Fully Diluted 14,677,184 14,485,260
</TABLE>
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See notes to consolidated financial statements.
4
<PAGE> 5
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
1996 1995
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FIRST Fourth Third Second
(in thousands) QUARTER Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCK
Balance, beginning of quarter $ 91,480 $ 90,445 $ 89,491 $ 89,303
Exercise of stock options, net of shares
purchased 722 1,035 954 188
--------- --------- --------- ---------
Balance, end of quarter 92,202 91,480 90,445 89,491
--------- --------- --------- ---------
RETAINED EARNINGS
Balance, beginning of quarter 202,219 195,743 190,027 185,814
Net income 8,741 9,759 8,984 7,469
Cash dividends (3,293) (3,283) (3,268) (3,256)
--------- --------- --------- ---------
Balance, end of quarter 207,667 202,219 195,743 190,027
--------- --------- --------- ---------
UNREALIZED GAIN (LOSS) ON
SECURITIES AVAILABLE-FOR-SALE
Balance, beginning of quarter 3,487 424 (162) (5,546)
Net unrealized gain (loss), net of tax (3,209) 3,063 586 5,384
--------- --------- --------- ---------
Balance, end of quarter 278 3,487 424 (162)
--------- --------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY $ 300,147 $ 297,186 $ 286,612 $ 279,356
========= ========= ========= =========
</TABLE>
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See Notes to consolidated financial statements
5
<PAGE> 6
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(in thousands) 1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 8,741 $ 7,384
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 1,771 1,420
Depreciation 1,805 1,696
Amortization of intangibles 1,357 697
Net amortization on investment securities 599 830
Investment securities gains (52) (91)
Other (2,978) (3,040)
---------- ----------
Net cash provided by operating activities 11,243 8,896
---------- ----------
INVESTING ACTIVITIES:
Net decrease (increase) in money market investments 92,140 (48,832)
Securities available-for-sale:
Proceeds from sales --- 5,983
Proceeds from maturities 85,297 52,347
Purchases (183,492) (17,130)
Net increase in loans and leases (60,620) (3,134)
Purchases of premises and equipment (953) (1,416)
Net cash used for acquisition of subsidiary --- (59,434)
---------- ----------
Net cash used by investing activities (67,628) (71,616)
---------- ----------
FINANCING ACTIVITIES:
Net decrease in demand and savings deposits (17,277) (64,660)
Net increase in time deposits 69,054 78,691
Net increase (decrease) in short-term borrowings 11,507 (54,351)
Proceeds from issuance of long-term debt --- 115,000
Principal reductions in long-term debt (19,979) (1,398)
Cash dividends paid (3,293) (2,963)
Proceeds from stock options exercised 722 60
---------- ----------
Net cash provided by financing activities 40,734 70,379
---------- ----------
Net increase in cash and due from banks (15,651) 7,659
Cash and due from banks at beginning of period 172,754 132,092
---------- ----------
Cash and due from banks at end of period $ 157,103 $ 139,751
========== ==========
</TABLE>
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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 month period
ended March 31, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. The 1996 first quarter results
reflect three months of operations for the four Michigan affiliates of Banc
One Corporation purchased at the close of business on February 28, 1995, as
compared to one month of operations for the same period in 1995. The
transaction was accounted for as a purchase and the four banks ( "acquired
banks") were merged into Citizens Commercial and Savings Bank headquartered in
Flint, Michigan effective immediately after the acquisition. For further
information, refer to the consolidated financial statements and notes thereto
included in the Corporation's annual report on Form 10-K for the year ended
December 31, 1995.
NOTE 2. IMPAIRED LOANS
The Corporation adopted Financial Accounting Standards Board Statement
("SFAS") No. 114, "Accounting by creditors for Impairment of a Loan" and
SFAS 118, "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures" effective January 1, 1995. SFAS 114 requires
creditors to establish a valuation allowance for impaired loans. A loan is
considered impaired when management determines it is probable that all the
principal and interest due under the contractual terms of the loan will not
be collected. The impairment is measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate,
the loan's observable market price, or the fair value of the collateral if
the loan is collateral dependent. The adoption of the Statements did not
have a material effect on the Corporation's financial position or results of
operations nor did it result in additional provisions for loan losses as the
Corporation has historically established valuation allowances based on the
fair value of collateral securing an impaired loan. In addition, as
permitted by SFAS 118, interest income on impaired loans continues to be
recognized in a manner consistent with prior income recognition policies.
For all impaired loans, other than nonaccrual loans, interest income is
recorded on an accrual basis. Interest income on impaired nonaccrual loans
is recognized on a cash basis. See additional discussion under the section
entitled "Nonperforming Assets" in this filing.
NOTE 3 - LOAN SERVICING
The Corporation originates mortgage loans for sale to the secondary market and
sells the loans with servicing retained (or released). Effective January 1,
1996, the Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 122, "Accounting for Mortgage Servicing Rights, an amendment of
FASB Statement No. 65." This statement requires servicers to capitalize the
rights to service originated mortgage loans. Prior to adoption of SFAS 122,
only purchased mortgage servicing rights were capitalized. Beginning in 1996,
the total cost of mortgage loans originated with the intent to sell is
allocated between the loan servicing right and the mortgage loan without
servicing, based on their relative fair values. The capitalized cost of loan
servicing rights is amortized in proportion to, and over the period of,
estimated net future servicing revenue. See additional discussion under
"Loans" within the Balance Sheet section in this filing.
NOTE 4. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year financial statement presentation.
7
<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-month period ended March 31, 1996. This discussion should be read in
conjunction with the accompanying unaudited financial statements and notes
thereto appearing on pages 3 through 7 of this report and the Corporation's
1995 Annual Report on Form 10-K.
<TABLE>
<CAPTION>
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Selected Financial Data
Three Months Ended
March 31,
(in thousands, except per share data) 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
FOR THE PERIOD
Interest income $ 62,969 $ 51,821
Net interest income 35,245 31,553
Provision for loan losses 1,771 1,420
Investment securities gains 52 91
Other noninterest income 9,488 7,971
Noninterest expense 30,824 28,080
Income taxes 3,449 2,731
Net income 8,741 7,384
Cash dividends 3,293 2,963
PER SHARE DATA
Primary and fully diluted net income $ 0.60 $ 0.51
Cash dividends 0.23 0.21
Book value (end of period) 20.85 19.06
Market value (end of period close) 30.50 26.50
FINANCIAL RATIOS (ANNUALIZED)
Return on average:
Shareholders' equity 11.78% 11.40%
Earning assets 1.11 1.12
Assets 1.02 1.03
Net interest margin (Full taxable equivalent) 4.65 4.95
Net loan charge-offs to average loans 0.28 0.09
Average equity to average total assets 8.66 9.03
Nonperforming assets to loans plus other
real estate (end of period) 0.82 1.00
Nonperforming assets to total assets (end of
period) 0.58 0.70
<CAPTION>
BALANCE SHEET TOTALS Percent
At Period End (March 31) Change
--------
<S> <C> <C> <C>
Assets 3.7% $3,508,223 $3,384,595
Loans 6.0 2,487,431 2,347,541
Deposits 3.9 2,916,478 2,807,035
Shareholders' equity 11.3 300,147 269,571
Average balances
Assets 18.3 3,446,859 2,914,172
Loans 22.5 2,447,763 1,998,318
Deposits 17.5 2,848,356 2,424,378
Shareholders' equity 13.6 298,477 262,741
- --------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
PERFORMANCE SUMMARY
Selected financial data as of March 31, 1996 and 1995 and for the three month
periods then ended are presented in the table on page 8. As shown, earnings
increased in 1996 resulting from higher net interest and noninterest income.
This improvement was offset in part by higher noninterest expense, provision
for loan losses and income taxes. The 1996 first quarter results reflect three
months of operations for the four Michigan affiliates of Banc One Corporation
purchased at the close of business on February 28, 1995, as compared to one
month of operations for the same period in 1995. The 1995 transaction was
accounted for as a purchase and the four banks ( "acquired banks") were merged
into Citizens Commercial and Savings Bank headquartered in Flint, Michigan
effective immediately after the acquisition.
NET INTEREST INCOME
Net interest income and average balances and yields on major categories of
interest-earning assets and interest-bearing liabilities during the first three
months of 1996 and 1995 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>
- ---------------------------------------------------------------------------------------------------------
ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
1996 Compared With 1995
------------------------------------
Increase (Decrease)
Three Months Ended March 31 Due to Change in
Net ---------------------
(in thousands) Change(1) Rate(2) Volume
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Money market investments:
Time deposits with banks $ (126) $ (2) $ (124)
Federal funds sold (407) (80) (327)
Term federal funds sold 617 (74) 691
Investment securities:
Taxable 597 173 424
Tax-exempt (178) (90) (88)
Loans 10,645 433 10,212
--------- -------- ---------
Total 11,148 360 10,788
--------- -------- ---------
INTEREST EXPENSE:
Deposits:
Demand 111 (88) 199
Savings 177 (186) 363
Time 6,029 1,899 4,130
Short-term borrowings 164 (27) 191
Long-term debt 975 (43) 1,018
--------- -------- ---------
Total 7,456 1,555 5,901
--------- -------- ---------
NET INTEREST INCOME $ 3,692 $ (1,195) $ 4,887
========= ======== =========
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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.
Favorable volume related variances in net interest income partially offset by
negative rate variances resulted in an increase in net interest income of
$3,692,000 for the three months ended March 31, 1996 as compared with the same
period in 1995. The February 28, 1995 acquisition of the four new banks
accounted for $3,437,000 of the volume related increase when comparing the
three months ended March 31, 1996 with the same period of 1995. Yields on
earning assets increased from 8.02% to 8.18% for the three months ended March
31, 1996 as compared with the same period of 1995. Similarily, the cost of
interest bearing liabilities increased from 3.74% to 4.22% for the three months
ended March 31, 1996 as compared with the same period in 1995. This increase
was attributable to higher costs for time deposit accounts and to increased
amounts of average long-term debt utilized to finance the first quarter 1995
acquisition. Long-term debt comprised 3.8% of total funding sources during the
first quarter of 1996, compared with 2.1% for the same period of 1995. The
increased costs on interest bearing liabilities more than offset increased
yields on earning assets causing the interest spread on earning assets (the
difference between the average yield on earning assets and the average rate on
interest-bearing liabilities) to decrease from 4.28% in 1995 to 3.96% in 1996.
As a result, net interest margin decreased from 4.95% in 1995 to 4.65% in 1996.
If market rates were to shift significantly in 1996, corresponding changes in
funding costs would need to be considered to avoid a negative impact on net
interest income. The Corporation's policies in this regard are further
discussed in the section titled "Interest Rate Risk".
9
<PAGE> 10
<TABLE>
<Captionn>
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AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
1996 1995
---------------------------------- ------------------------------------
Three Months Ended March 31 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 $ 5,583 $ 80 5.79% $ 14,143 $ 206 5.91%
Federal funds sold 59,396 800 5.42 82,134 1,207 5.96
Term federal funds sold 66,457 905 5.49 20,096 288 5.82
Investment securities(3):
Taxable 409,556 5,788 5.67 385,004 5,191 5.43
Tax-exempt 174,447 2,260 8.01 181,985 2,438 8.28
Loans and leases:
Commercial 944,003 20,643 8.89 817,953 18,314 9.13
Real estate 475,067 9,981 8.40 404,815 8,309 8.21
Consumer 970,830 21,523 8.91 703,906 14,764 8.51
Lease financing 57,862 989 6.84 71,644 1,104 6.16
----------- --------- ---- ----------- -------- ----
Total earning assets(3) 3,163,201 62,969 8.18 2,681,680 51,821 8.02
--------- --------
NONEARNING ASSETS
Cash and due from banks 141,918 138,607
Bank premises and equipment 62,761 56,420
Other nonearning assets 113,912 65,131
Allowance for loan losses (34,933) (27,666)
----------- -----------
Total assets $ 3,446,859 $ 2,914,172
=========== ===========
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits $ 315,144 1,371 1.75 $ 278,712 1,260 1.83
Savings deposits 906,589 6,125 2.72 875,036 5,948 2.76
Time deposits 1,176,934 16,649 5.69 864,666 10,620 4.98
Short-term borrowings 147,209 1,722 4.71 131,220 1,558 4.82
Long-term debt 99,306 1,857 7.52 45,940 882 7.78
----------- --------- ---- ----------- -------- ----
Total interest-bearing liabilities 2,645,182 27,724 4.22 2,195,574 20,268 3.74
--------- --------
NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS'
EQUITY
Demand deposits 449,689 405,964
Other liabilities 53,511 49,893
Shareholders' equity 298,477 262,741
----------- -----------
Total liabilities and shareholders' equity $ 3,446,859 $ 2,914,172
=========== ===========
NET INTEREST INCOME $ 35,245 $ 31,553
========= ========
NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS 4.65% 4.95%
- ---------------------------------------------------------------------------------------------------------------------------------
</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 $1,488 and $1,511 for the three
months ended March 31, 1996 and 1995, respectively, based on a tax rate of
35%.
(3) For presentation in this table, average balances and the corresponding
average rates for investment securities are based upon historical cost,
adjusted for amortization of premiums and accretion of discounts.
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 three months ended March 31, 1996
and 1995 is provided below. The provision for loan losses increased $351,000
during the first quarter of 1996 compared with the same period of 1995. The
allowance for loan losses increased $1.9 million to $34.8 million at March 31,
1996 compared to March 31, 1995. The ratio of loans charged off to average
loans outstanding increased from 0.09% to 0.28%. First quarter 1996 gross
charge-offs increased $945,000 as compared to the same period in 1995 primarily
in the commercial and consumer portfolios and were not the result of
concentrations in any one segment of the portfolio. Unusually high recoveries
in the first quarter of 1995 also attributed to the variance.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended
March 31,
(In thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses - beginning of period $ 34,771 $ 24,714
Allowance of Acquired Banks --- 7,235
Charge-offs 2,452 1,507
Recoveries 750 1,054
Net charge-offs 1,702 453
Provision for loan losses 1,771 1,420
Allowance for loan losses - end of period $34,840 $32,916
Loans outstanding at period end $2,487,431 $2,347,541
Average loans outstanding during period 2,447,763 1,998,318
Allowance for loan losses as a percentage of loans outstanding at period end 1.40% 1.40%
Ratio of net charge-offs during period to average loans outstanding (annualized) 0.28 0.09
Loan loss coverage (allowance as a multiple of net charge-offs, annualized) 5.1 x 18.2 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 presently known risks in the loan portfolio.
Employment levels and other economic conditions in the Corporation's local
markets may have a significant impact on the level of credit losses.
Management has identified and devotes appropriate attention to credits which
may not be performing as well as expected. Nonperforming loans are further
discussed in the section entitled "Nonperforming Assets."
11
<PAGE> 12
Noninterest Income
A summary of significant sources of noninterest income during the first three
months of 1996 and 1995 follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Noninterest Income Three Months Ended Changes in 1996
March 31, ----------------
(in thousands) 1996 1995 Amount Percent
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust fees $3,154 $2,659 $ 495 18.6%
Service charges on deposit accounts 2,435 2,191 244 11.1
Bankcard fees 1,344 1,178 166 14.1
Brokerage and investment fees 398 255 143 56.1
Other loan income 518 373 145 38.9
ATM network user fees 462 363 99 27.3
Cash management services 279 213 66 31.0
Safe deposit rentals 273 220 53 24.1
Investment securities gains 52 91 (39) (42.9)
Other, net 625 519 106 20.4
------ ------ ------
Total noninterest income $9,540 $8,062 $1,478 18.3
====== ====== ======
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</TABLE>
The three months ended March 31, 1996 include the operations of the four
acquired banks, as compared with one month of operations for the same period
in 1995. Noninterest income in the first quarter of 1996 increased 18.3% from
the first quarter of 1995. Excluding the operations of the four acquired
banks, 1996 first quarter noninterest income increased 8.9%.
Excluding the impact of the newly acquired banks, the following categories had
significant increases. Brokerage and investment fees increased $125,000 or
49.3% as compared to the first quarter of 1995, the result of increased market
penetration. Other loan income increased primarily due to the Corporation
adopting Statement of Financial Accounting Standards (SFAS) No. 122,
"Accounting for Mortgage Servicing Rights." The adoption resulted in a gain
of approximately $83,000. See additional discussion under "Loans" within the
Balance Sheet section in this filing. Increased volume and improved pricing
strategies resulted in higher ATM network user fees. Cash management service
fees increased $49,000, or 23.0% as compared to the previous year. This
increase is volume related as customers have responded to enhanced investment
options which include various money market mutual funds from which the
Corporation receives a management fee. Other miscellaneous income increased
$151,000 or 38.7% as compared to the previous year, primarily from the
overall increase of fees from other services provided such as check ordering
services and exchanges on foreign currency. Excluding the three months of
operations of the acquired banks for 1996 and one month of operations for
1995, all other income categories reflected an average increase of 5.1%.
NONINTEREST EXPENSE
Significant changes in noninterest expense during the first quarter of 1996
compared with the same period of 1995 are summarized in the table below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Noninterest Expense Three Months Ended Changes in 1996
March 31, ----------------
(in thousands) 1996 1995 Amount Percent
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $16,758 $14,801 $1,957 13.2%
Equipment 2,424 2,245 179 8.0
Occupancy 2,352 2,045 307 15.0
FDIC insurance premiums 4 1,356 (1,352) (99.7)
Bankcard processing 772 664 108 16.3
Stationery and supplies 778 737 41 5.6
Postage and delivery 824 660 164 24.8
Taxes other than income taxes 654 675 (21) (3.1)
Advertising and public relations 944 595 349 58.7
Consulting and other professional fees 454 378 76 20.1
Legal, audit and examination fees 390 511 (121) (23.7)
Other loan fees 719 345 374 108.4
Other, net 3,751 3,068 683 22.3
------- ------- ------
Total noninterest expense $30,824 $28,080 $2,744 9.8
======= ======= ======
</TABLE>
12
<PAGE> 13
Including the full quarter effect of the acquired banks, first quarter 1996
noninterest expense increased 9.8% over the first quarter of 1995. Excluding
the effect of the acquisition, noninterest expense in the first quarter of 1996
increased a modest 0.8%.
SALARIES AND EMPLOYEE BENEFITS
Excluding the three month results of the acquired banks in 1996, and the one
month impact in 1995, salaries and employee benefits were $14,439,000 in the
first quarter compared to $13,971,000 in 1995, an increase of 3.3% Cost
savings attributable to staff reductions through attrition partially offset
the effects of normal merit increases. Management anticipates that the
ongoing consolidation of operational functions throughout the Corporation will
continue to mitigate the need to replace staff lost through normal attrition.
The Financial Accounting Standards Board issued Statement No. 123, "Accounting
for Stock Based Compensation" in October 1995, effective for the Corporation's
year end 1996 financial statements. The Corporation does not intend to adopt
the recognition provisions of the Statement but will continue accounting for
stock options in accordance with Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" as permitted by the new Statement.
Therefore, adoption will not materially impact the Corporation.
OTHER NONINTEREST EXPENSE
Excluding the 1996 and 1995 first quarter effect of the acquired banks, other
noninterest expenses decreased 6.1%. The most significant decrease was the
reduction of FDIC (Federal Deposit Insurance Corporation) premiums.
Effective June 1, 1995 FDIC assessments were reduced from 23 cents to 4 cents
per $100 of deposits for banks meeting the requirements of supervisory risk
subgroup 1.A. "well capitalized". All seven of the Corporation's subsidiaries
have sufficient capital to maintain a "well capitalized" designation, (the
FDIC's highest rating). On December 11, 1995, the FDIC amended the assessment
rate schedule to reduce assessments on deposits for "well capitalized" banks
to zero effective for the first semiannual assessment period in 1996.
Further regulatory changes could impact the amount and type of assessments
paid by the Corporation's subsidiary banks.
Legal, audit and examination fees, decreased 23.7% compared to the prior year,
primarily due to a reduction in loan collection related expenses. Intangible
taxes reflect a decrease of $90,000 or 13.4%, excluding the impact of the
acquired banks. This is due to the Michigan intangibles tax law change which
phases the tax to zero over a four year period, with a complete tax
elimination by 1998.
In October 1995, the Corporation announced the consolidation of its six
Michigan chartered banks into one bank called Citizens Bank. The
consolidation, expected to occur in June 1996, will further streamline
operations and reduce certain costs but will retain local management and
respective boards of directors. Also in 1995, the Corporation announced its
Process Improvement Project, a series of productivity initiatives designed to
increase revenues and reduce operating expenses throughout the Corporation. The
Corporation expects to achieve financial benefits as a result of these
initiatives.
Both loan fees and advertising and public relations expense increased
significantly in the first quarter of 1996 as compared to the same period in
1995. Excluding the impact of the acquired banks, loan fees increased $333,000
compared to prior year. This increase is directly related to increased loan
volumes resulting in additional mortgage appraisal and processing fees expense.
The additional mortgage costs are more than offset by increases in mortgage
application, origination and processing income collected as a result of the
large volume increases. This related income is reflected in the Corporation's
net interest income. Advertising and public relations expense, excluding the
impact of the acquired banks, increased $128,000 or 22.5%, compared to the first
quarter last year, due in part to an advertising campaign related to the June 1,
1996 consolation of the six Michigan banks. All other expense categories, when
excluding the impact of the acquired banks had insignificant changes compared to
the same period in the prior year. When including the impact of the acquired
banks, the increase in the "Other" expense category was due to the additional
intangible asset amortization resulting from the February 28, 1995 acquisition.
INCOME TAXES
Federal income tax expense increased to $3,449,000 for the first quarter of
1996 from $2,731,000 during the same period of 1995, an increase of $718,000
resulting from higher pre-tax earnings and a slightly lower level of
tax-exempt interest income.
13
<PAGE> 14
BALANCE SHEET
The Corporation had total assets of $3.508 billion as of March 31, 1996, an
increase of $55.7 million or 1.3% from $3.464 billion as of December 31, 1995.
Average earning assets comprised 91.9% of average total assets during the
first quarter of 1996 compared with 91.6% in the first quarter of 1995.
INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
Total average investments, including money market investments, comprised 22.7%
of average earning assets during the first quarter of 1996, compared with
25.1% for the same period of 1995. Average money market investment balances
decreased slightly to 4.1% of total average earning assets during the first
quarter of 1996 from 4.4% during the corresponding period of 1995.
LOANS
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
22.5% (5.1% excluding the effect of the acquired banks) in the first quarter of
1996 compared with the same period of 1995.
NEW ACCOUNTING STATEMENTS
The Corporation originates mortgage loans for sale to the secondary market,
and may sell the loans with servicing retained or released. Effective January
1, 1996, the Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 122, "Accounting for Mortgage Servicing Rights, an amendment of FASB
Statement No. 65." This statement requires services to capitalize the rights
to service originated mortgage loans. Prior to adoption of (SFAS) 122, only
purchased mortgage servicing rights were capitalized. Beginning in 1996, the
total cost of mortgage loans originated with the intent to sell is allocated
between the loan servicing right and the mortgage loan without servicing,
based on their relative fair values. The capitalized cost of loan servicing
rights is amortized in proportion to, and over the period of, estimated net
future servicing revenue.
Mortgage servicing rights are stratified based on predominant risk
characteristics of the underlying serviced loans, such as loan type, term, and
note rate, and periodically evaluated for impairment. Impairment represents the
excess of cost of an individual mortgage servicing rights stratum over its fair
value, and is recognized through a valuation allowance.
Fair values for individual stratum are based on the present value of estimated
future cash flows using a discount rate commensurate with the risks involved
(9.75% at March 31, 1996). Estimates of fair value include assumptions about
prepayment, default and interest rates, and other factors which are subject to
change over time. Changes in these underlying assumptions could cause the
fair value of loan servicing rights, and the related valuation allowance, to
change significantly in the future.
The unpaid principal balance of mortgage loans serviced for others, which are
not included on the balance sheets, was $227.8 million and $221.2 million at
March 31, 1996 and December 31, 1995, respectively. The balance of loans
serviced for others related to servicing rights that have been capitalized
(provided below) was $8.4 million at March 31, 1996. The remaining balance of
loans serviced for others also have servicing rights associated with them;
however, these servicing rights arose prior to adoption of FAS 122, and
accordingly, have not been capitalized on the balance sheet. The carrying
value and fair value of capitalized servicing rights consisted of the
following as of March 31:
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Unamortized cost $ 81,000
Valuation Allowance ---
---------
Carrying Value $ 81,000
=========
Fair Value $ 86,000
=========
</TABLE>
14
<PAGE> 15
An analysis of the activity for loan servicing rights in the first quarter of
1996 follows. There was no activity in the related valuation allowance during
the quarter.
<TABLE>
<CAPTION>
Unamortized Cost
<S> <C>
Balance at January 1 $ ---
Additions 83,000
Amortization (2,000)
--------
Balance at March 31 $ 81,000
=========
</TABLE>
In March 1995 Financial Accounting Standards Board issued Statement No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of". The Statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets. It also requires entities to review assets
being carried for potential impairment and to recognize the impairment loss if
one exists. The Corporation adopted the Statement effective January 1, 1996
and the impact was not material.
NONPERFORMING ASSETS
The Corporation adopted Financial Accounting Standards Board Statement
("SFAS") No. 114, "Accounting by creditors for Impairment of a Loan" and SFAS
118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition
and Disclosures" effective January 1, 1995. SFAS 114 requires creditors to
establish a valuation allowance for impaired loans. A loan is considered
impaired when management determines it is probable that all the principal and
interest due under the contractual terms of the loan will not be collected.
The impairment is measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's observable
market price, or the fair value of the collateral if the loan is collateral
dependent. The adoption of the Statements did not have a material effect on
the Corporation's financial position or results of operations nor did it
result in additional provisions for loan losses as the Corporation has
historically established valuation allowances based on the fair value of
collateral securing an impaired loan. In addition, as permitted by SFAS 118,
interest income on impaired loans continues to be recognized in a manner
consistent with prior income recognition policies. For all impaired loans,
other than nonaccrual loans, interest income is recorded on an accrual basis.
Interest income on impaired nonaccrual loans is recognized on a cash basis.
The Corporation measures impairment on all large balance nonaccrual commercial
and commercial real estate loans. Certain large balance accruing loans rated
substandard or worse are also measured for impairment. In most instances,
impairment is measured based on the fair value of the underlying collateral.
Impairment losses are included in the provision for loan losses. SFAS 114
does not apply to large groups of smaller balance homogeneous loans that are
collectively evaluated for impairment, except for those loans restructured
under a troubled debt restructuring. Loans collectively evaluated for
impairment include certain smaller balance commercial loans, consumer loans,
residential real estate loans, and credit card loans, and are not included in
the impaired loan data that follows.
At March 31, 1996, loans considered to be impaired under the Statements
totalled $17.0 million (of which $10.3 million were on a nonaccrual basis).
Included within this amount is $5.8 million of impaired loans for which the
related allowance for loan losses is $1.2 million and $11.2 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, 1996 was approximately $16.6 million. For the quarter
ended March 31, 1996, the Corporation recognized interest income of $446,000
which included $298,000 of interest income recognized using the cash basis
method of income recognition.
At March 31, 1995, loans considered to be impaired under the Statements
totalled $22.2 million (of which $11.7 million were on a nonaccrual basis).
Included within this amount was $8.0 million of impaired loans for which the
related allowance for loan losses was $1.4 million and $14.2 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, 1995 was approximately $17.1 million. For the quarter
ended March 31, 1995, the Corporation recognized interest income of $360,000
which included $198,000 of interest income recognized using the cash basis
method of income recognition.
15
<PAGE> 16
Nonperforming assets consist of nonaccrual loans, restructured loans, loans 90
days past due and still accruing interest, and other real estate owned. The
Corporation changed its nonperforming asset policy in the third quarter of
1995 to include loans 90 days past due and still accruing in the nonperforming
asset category. Previously these loans were considered underperforming
assets. All nonperforming asset disclosures contained in this filing have
been adjusted to reflect this change. Certain of these loans, as defined
above, are considered to be impaired under the Statements. The Corporation
maintains policies and procedures to identify and monitor nonaccrual loans. A
loan (including a loan impaired under the Statements) is placed on nonaccrual
status when there is 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.
The table below provides a summary of nonperforming assets as of March 31,
1996, December 31, 1995 and March 31, 1995. Total nonperforming assets
amounted to $20.3 million as of March 31, 1996, compared with $21.1 million as
of December 31, 1995 and $23.6 million as of March 31, 1995. Overall,
nonperforming assets decreased from December 31, 1995 due to improvements in
the nonaccrual category, resulting in a decrease in nonperforming assets as a
percentage of total loans plus OREO and total assets.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Nonperforming Assets
March 31, December 31, March 31,
(in thousands) 1996 1995 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming Loans
Nonaccrual
Less than 30 days past due $ 4,879 $ 4,783 $ 5,657
From 30 to 89 days past due 827 784 610
90 or more days past due 12,085 13,057 12,409
---------- ---------- --------
Total 17,791 18,624 18,676
90 days past due and still accruing 517 432 1,354
Restructured 502 494 394
---------- ---------- --------
Total nonperforming loans 18,810 19,550 20,424
OTHER REAL ESTATE OWNED ("OREO") 1,532 1,568 3,175
---------- ---------- --------
Total nonperforming assets $ 20,342 $ 21,118 $ 23,599
========== ========== ========
Nonperforming assets as a percent of total loans plus OREO 0.82% 0.87% 1.00%
Nonperforming assets as a percent of total assets 0.58 0.61 0.70
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1996 such credits amounted to $11.6
million or 0.5 % of total loans, compared with $10.8 million or 0.5 % at
December 31, 1995 and $21.0 million or 0.9% as of March 31, 1995. These loans
are primarily commercial and commercial real estate loans made in the normal
course of business and do not represent a concentration in any one industry.
DEPOSITS
The Corporation gathers deposits primarily in its local markets and
historically has not relied on brokered funds to sustain liquidity. Average
deposits increased 17.5% (4.0% excluding the one month first quarter 1995 and
three month first quarter 1996 effect of the acquired banks) in the first
quarter of 1996 over the same period in 1995. This is primarily due to the
full quarter impact of the banks acquired in the first quarter of 1995. The
shift in customer preferences from savings deposits to time deposit
alternatives reflects changing customer liquidity preferences and the desire
for higher interest rates. Management seeks to maintain core deposit
stability by offering customers a wide range of deposit products at
competitive rates.
16
<PAGE> 17
SHORT-TERM BORROWINGS AND LONG-TERM DEBT
On average, total short-term borrowings increased to $147.2 million during the
first quarter of 1996 compared with $131.2 million during the same period of
1995. Long-term debt accounted for $99.3 million or 3.8% of average
interest-bearing funds for the first quarter ended 1996, increasing from $45.9
million or 2.1% for the same period in 1995. To finance the February 28, 1995
acquisition of the four banks, the Corporation's Parent company obtained a
$115 million seven year amortizing revolving credit facility. The Corporation
has made principal payments reducing the outstanding balance to $78.5 million
at March 31, 1996. The revolving credit facility includes $58.5 million at a
fixed rate of 7.65%. Of this amount, $51.5 million reprices in March 1997 and
$7.0 million in March 1998. The remaining $20.0 million outstanding has a
variable interest rate based on a LIBOR index. The debt agreement allows the
Corporation to prepay the debt without penalty subject to certain
restrictions. The Parent company services the debt's principal and interest
payments with dividends from the subsidiary banks. The agreement also
requires the Corporation to maintain certain financial covenants. The
Corporation is in full compliance with all debt covenants as of March 31,
1996.
CAPITAL RESOURCES
REGULATORY CAPITAL REQUIREMENTS
Bank holding companies, such as the Corporation, and their bank subsidiaries
are required by banking regulators to meet certain minimum levels of capital
adequacy. These are expressed in the form of certain ratios. Capital is
separated into Tier I capital (essentially common stockholders' equity less
goodwill) and Tier II capital (essentially the allowance for loan losses
limited to 1.25% of risk-weighted assets). The first two ratios, which
are based on the degree of credit risk in the company's assets, provide for
weighting assets based on assigned risk factors and include off-balance sheet
items such as loan commitments and stand-by letters of credit. The ratio of
Tier I capital to risk-weighted assets must be at least 4.0% and the ratio of
Total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets
must be at least 8.0%. The capital leverage ratio supplements the risk-based
capital guidelines. Banks and bank holding companies are required to maintain
a minimum ratio of Tier 1 capital to adjusted quarterly average total assets
of 3.0%
The FDIC, the insurer of deposits in financial institutions, has adopted a
risk-based insurance premium system based in part on an institution's capital
adequacy. Under this system, a depository institution is classified into one
of three capital categories (well-capitalized, adequately capitalized or
undercapitalized) according to its risk-based capital and leverage ratios and
is required to pay successively higher premiums depending on its capital
levels and its supervisory rating by its primary regulator. It is the
Corporation's intention to maintain sufficient capital in each of its bank
subsidiaries to permit them to maintain a "well capitalized" designation (the
FDIC's highest rating).
As summarized below, the Corporation's risk based capital levels were well in
excess of all regulatory standards.
- --------------------------------------------------------------------
[CAPTION]
<TABLE>
CAPITAL RATIOS Regulatory
Minimum
For "Well MARCH 31, December 31, March 31,
Capitalized" 1996 1995 1995
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk based capital:
Tier I 6.0% 8.8% 8.8% 8.3%
Total capital 10.0 10.1 10.0 9.6
Tier I leverage 5.0 6.8 6.7 7.0
</TABLE>
- --------------------------------------------------------------------
COMMON AND PREFERRED STOCK
The Corporation maintains a stock repurchase program initiated in November
1987. During 1995 and the first quarter of 1996, no shares were purchased
under this program. A total of 1,132,470 shares have been purchased under
this program at an average price of $14.31 per share. These shares were
reissued in connection with a purchase acquisition in October 1993 and the
Corporation's stock option plan.
17
<PAGE> 18
OTHER
Total shareholders' equity was $300.1 million or $20.85 per share as of March
31, 1996, compared with $297.2 million or $20.73 per share as of December 31,
1995 and $269.6 million or $19.06 per share as of March 31, 1995. The
Corporation declared cash dividends of $0.23 per share during the first
quarter of 1996, an increase of 9.5% over the $0.21 per share declared during
the same period in 1995.
LIQUIDITY AND DEBT CAPACITY
The level of liquid assets available to meet ongoing funding needs and to
capitalize on opportunities for business expansion is closely monitored by
management. It is management's intent to maintain adequate liquidity so that
sufficient funds are readily available at a reasonable cost. Various
techniques are used by the Corporation to measure liquidity, including ratio
analysis. Some ratios monitored by the Corporation include: average loans to
deposits; total liquid assets (including cash, U.S. Treasury securities and
short-term investments) to total deposits; and, total long-term debt to
equity. These ratios are summarized in the table below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
KEY LIQUIDITY RATIOS
MARCH 31, December 31, March 31,
1996 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Quarterly average:
Loans to deposits 85.9% 86.5% 82.4%
Liquid assets to deposits 16.0 16.2 18.8
Total long-term debt to equity 28.5 35.5 45.8
- --------------------------------------------------------------------------------
</TABLE>
The Corporation's quarterly average loan to deposit ratio decreased to 85.9%
at March 31, 1996 from 86.5% at December 31, 1995. The 1995 acquisition was
funded from the proceeds of long-term debt financing of $115 million through
the Corporation's parent company. The long-term debt to equity ratio has
declined to 28.5% at March 31, 1996 from 35.5% at December 31, 1995. The
parent will continue to service the scheduled principal and interest payments
with dividends from the Corporation's subsidiary banks. Management believes
that the Corporation has sufficient liquidity to meet presently known cash
flow requirements arising from ongoing business transactions.
18
<PAGE> 19
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 March 31, 1996 is illustrated in the following table. As shown, the
Corporation had an asset sensitive position (more rate sensitive assets than
rate sensitive liabilities) of $66.0 million within the one-year time frame.
This position suggests that the Corporation has the potential to earn higher
net interest income during the next twelve months if market interest rates
were to rise. Conversely, if interest rates decline, the Corporation may
experience a decrease in net interest income. However, management is
continually reviewing its interest rate risk position and modifying its
strategies based on projections to minimize the impact of future interest rate
changes. Management also utilizes simulation modeling to evaluate the impact
of changes in interest rates and balance sheet strategies. Management uses
these simulations to develop strategies that can limit interest rate risk and
provide liquidity to meet customer loan demand and deposit preferences.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY
TOTAL
March 31, 1996 1-30 31-90 91-180 181-365 WITHIN 1-5 Over
(in millions) Days Days Days Days 1 YEAR Years 5 Years Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS
Loans and leases $801.2 $ 102.9 $ 136.5 $ 221.4 $1,262.0 $ 869.0 $352.5 $2,483.5
Investment securities 81.2 51.3 66.9 71.3 270.7 279.5 113.0 663.2
Short-term investments 57.7 --- --- --- 57.7 --- --- 57.7
------ ------- ------- ------- -------- -------- ------ --------
Total $940.1 $ 154.2 $ 203.4 $ 292.7 $1,590.4 $1,148.5 $465.5 $3,204.4
======
Rate Sensitive Liabilities
Deposits (2) $190.3 $ 250.1 $ 343.6 $ 508.9 $1,292.9 $ 978.5 $157.6 $2,429.0
Short-term borrowings 157.5 --- --- --- 157.5 --- --- 157.5
Long-term debt 2.6 20.0 --- 51.4 74.0 7.0 4.4 85.4
------ ------- ------- ------- -------- -------- ------ --------
Total $350.4 $ 270.1 $ 343.6 $ 560.3 $1,524.4 $ 985.5 $162.0 $2,671.9
====== ======= ======= ======= ======== ======== ====== ========
Period GAP (1) $589.7 $(115.9) $(140.2) $(267.6) $ 66.0 $ 163.0 $303.5 $ 532.5
Cumulative GAP 589.7 473.8 333.6 66.0 --- 229.0 532.5 ---
Cumulative GAP to
Total Assets 16.81% 13.51% 9.51% 1.88% 1.88% 6.53% 15.18% 15.18%
Multiple of Rate Sensitive
Assets to Liabilities 2.68 0.57 0.59 0.52 1.04 1.17 2.87 1.20
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) GAP is the excess of rate sensitive assets (liabilities).
(2) Includes interest bearing savings and demand deposits of $394 million in
the less than one year category, and $833 million in the over one year
category, based on historical trends for these noncontractual maturity
deposit types, which reflects industry standards.
19
<PAGE> 20
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 on April 16, 1996. There was no solicitation in opposition to
management's nominees for directors as set forth in the Corporation's Proxy
Statement dated March 14, 1996 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>
Edward P. Abbott 12,723,369 103,469 1,529,997
Hugo E. Braun Jr. 12,705,755 121,083 1,529,997
Jonathan E. Burroughs II 12,703,370 123,468 1,529,997
Lawrence O. Erickson 12,722,373 104,465 1,529,997
William J. Hank 12,722,683 104,155 1,529,997
Robert J. Vitito 12,723,385 103,453 1,529,997
</TABLE>
Total shares eligible to vote: 14,256,835
Broker non-votes included in non-voted shares above: none
ITEMS 5. OTHER INFORMATION--None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(11) Statement re: computation of per share earnings
(27) Financial Data Schedule
(b Reports on Form 8-K--None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIZENS BANKING CORPORATION
Date May 10, 1996 By /s/ John W. Ennest
-------------------- ------------------
John W. Ennest
Vice Chairman of the Board,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting
Officer)
(Duly Authorized Signatory)
20
<PAGE> 21
EXHIBIT INDEX
Exhibit
No. Description Page
- ------- ----------- ----
11 Computation of per share Earnings
27 Financial Data Schedule
<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
March 31,
(in thousands, except per share amounts) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
NET INCOME: $ 8,741 $ 7,384
======= =======
PRIMARY EARNINGS PER SHARE:
Actual average shares outstanding 14,356 14,129
Net effect of the assumed exercise of
stock options -- based on the treasury
stock method using average market price
for the period 319 348
------- -------
Pro forma average shares outstanding 14,675 14,477
======= =======
Net Income Per Share $ 0.60 $ 0.51
======= =======
FULLY DILUTED EARNINGS PER SHARE:
Actual average shares outstanding 14,356 14,129
Net effect of the assumed exercise of
stock options -- based on the treasury
stock method using higher of average or
closing market price 321 356
------- -------
Pro forma average shares outstanding 14,667 14,485
======= =======
Net Income Per Share $ 0.60 $ 0.51
======= =======
</TABLE>
21
<TABLE> <S> <C>
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<S> <C>
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0
0
<COMMON> 92,202
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</TABLE>
