<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 September 30, 1996
------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
--------------------- ---------------------
Commission file Number 0-10535
CITIZENS BANKING CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2378932
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Citizens Banking Center Flint, Michigan 48502
-------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(810) 766-7500
----------------------------------------------------
(Registrant's telephone number, including area code)
None
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes ___ No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 28, 1996
---------------------------- -------------------------------
Common Stock, No Par Value 14,358,697 Shares
(This report contains 23 pages)
<PAGE> 2
Citizens Banking Corporation
Index to Form 10-Q
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements . . . . . . . . . . . . . . . 3
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . 8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 22
Item 2 - Changes in Securities . . . . . . . . . . . . . . . . . . . . . 22
Item 3 - Defaults Upon Senior Securities . . . . . . . . . . . . . . . . 22
Item 4 - Submission of Matters to a Vote of Security Holders . . . . . . 22
Item 5 - Other Information . . . . . . . . . . . . . . . . . . . . . . . 22
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
CITIZENS BANKING CORPORATION AND SUBSIDIARIES
(in thousands) SEPTEMBER 30 December 31,
1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 135,494 $ 172,754
Money market investments:
Interest-bearing deposits with banks 212 10,090
Federal funds sold 35,000 50,000
Term federal funds and other 3,536 89,744
---------- ----------
Total money market investments 38,748 149,834
Securities available-for-sale:
U.S. Treasury and federal agency securities 348,702 346,485
State and municipal securities 200,697 213,491
Other securities 14,252 10,936
---------- ----------
Total investment securities 563,651 570,912
Loans:
Commercial 964,165 905,947
Real estate construction 34,168 33,984
Real estate mortgage 522,652 457,758
Consumer 1,016,231 970,755
Lease financing 51,107 60,069
---------- ----------
Total loans 2,588,323 2,428,513
Less: Allowance for loan losses (35,337) (34,771)
---------- ----------
Net loans 2,552,986 2,393,742
Premises and equipment 61,579 63,147
Intangible assets 66,287 70,385
Other assets 49,262 43,148
---------- ----------
TOTAL ASSETS $3,468,007 $3,463,922
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 491,622 $ 506,116
Interest-bearing 2,357,195 2,358,585
---------- ----------
Total deposits 2,848,817 2,864,701
Federal funds purchased and securities sold
under agreements to repurchase 145,311 130,556
Other short-term borrowings 33,022 15,468
Other liabilities 45,714 50,600
Long-term debt 85,356 105,411
---------- ----------
Total liabilities 3,158,220 3,166,736
SHAREHOLDERS' EQUITY
Preferred stock - No par value --- ---
Common stock - No par value 91,394 91,480
Retained earnings 219,027 202,219
Net unrealized gain (loss) on securities available-for-sale,
net of tax (634) 3,487
---------- ----------
Total shareholders' equity 309,787 297,186
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,468,007 $3,463,922
========== ==========
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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 Nine Months Ended
September 30, September 30,
(in thousands, except per share data) 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 55,808 $53,006 $163,590 $147,442
Interest and dividends on investment securities:
Taxable 5,945 5,919 18,120 16,777
Nontaxable 2,303 2,339 6,864 7,144
Money market investments 345 1,515 2,708 5,485
-------- ------- -------- --------
Total interest income 64,401 62,779 191,282 176,848
-------- ------- -------- --------
INTEREST EXPENSE
Deposits 23,901 23,448 71,755 64,116
Short-term borrowings 1,981 1,970 5,493 5,255
Long-term debt 1,320 2,316 4,723 5,518
-------- ------- -------- --------
Total interest expense 27,202 27,734 81,971 74,889
-------- ------- -------- --------
NET INTEREST INCOME 37,199 35,045 109,311 101,959
Provision for loan losses 3,021 1,504 6,563 4,504
-------- ------- -------- --------
Net interest income after provision for loan losses 34,178 33,541 102,748 97,455
-------- ------- -------- --------
NONINTEREST INCOME
Trust fees 3,044 2,974 9,274 8,473
Service charges on deposit accounts 2,707 2,506 7,625 7,256
Bankcard fees 1,546 1,304 4,338 3,824
Investment securities gains 21 15 80 119
Other 4,127 2,802 9,416 6,893
-------- ------- -------- --------
Total noninterest income 11,445 9,601 30,733 26,565
-------- ------- -------- --------
NONINTEREST EXPENSE
Salaries and employee benefits 17,258 16,712 51,217 48,028
Equipment 2,476 2,536 7,335 7,294
Occupancy 2,402 2,282 7,136 6,590
Intangible asset amortization 1,370 1,330 4,098 3,363
FDIC insurance premiums 1 68 8 2,981
Bankcard fees 1,020 785 2,683 2,122
Stationery and supplies 889 898 2,565 2,602
Postage and delivery 917 891 2,636 2,317
Other 5,857 5,085 17,189 15,838
-------- ------- -------- --------
Total noninterest expense 32,190 30,587 94,867 91,135
-------- ------- -------- --------
INCOME BEFORE INCOME TAXES 13,433 12,555 38,614 32,885
Income taxes 3,830 3,571 11,010 9,048
-------- ------- -------- --------
NET INCOME $ 9,603 $ 8,984 $ 27,604 $ 23,837
======== ======= ======== ========
NET INCOME PER SHARE:
Primary $ 0.65 $ 0.62 $ 1.88 $ 1.64
Fully Diluted $ 0.65 $ 0.61 $ 1.88 $ 1.63
======== ======= ======== ========
AVERAGE SHARES OUTSTANDING:
Primary 14,676 14,626 14,682 14,545
Fully Diluted 14,679 14,626 14,682 14,590
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</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
1996 1995
------------------------------- ------
THIRD Second First Fourth
(in thousands) QUARTER Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCK
Balance, beginning of quarter $ 92,677 $92,202 $91,480 $90,445
Exercise of stock options, net of shares purchased 138 475 722 1,035
Shares acquired for retirement (1,421) --- --- ---
-------- --------- -------- --------
Balance, end of quarter 91,394 92,677 92,202 91,480
-------- --------- -------- --------
RETAINED EARNINGS
Balance, beginning of quarter 213,182 207,667 202,219 195,743
Net income 9,603 9,260 8,741 9,759
Cash dividends (3,758) (3,745) (3,293) (3,283)
-------- --------- -------- --------
Balance, end of quarter 219,027 213,182 207,667 202,219
-------- --------- -------- --------
UNREALIZED GAIN (LOSS) ON SECURITIES
AVAILABLE-FOR-SALE
Balance, beginning of quarter (2,327) 278 3,487 424
Net unrealized gain (loss), net of tax benefit 1,693 (2,605) (3,209) 3,063
-------- --------- -------- --------
Balance, end of quarter (634) (2,327) 278 3,487
-------- --------- -------- --------
TOTAL SHAREHOLDERS' EQUITY $309,787 $ 303,532 $300,147 $ 297,186
======== ========= ======== =========
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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
Nine Months Ended
September 30,
(in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $27,604 $23,837
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 6,563 4,504
Depreciation and amortization 5,370 5,376
Amortization of intangibles 4,098 3,363
Net amortization on investment securities 1,225 2,215
Investment securities gains (80) (119)
Other (8,781) (1,614)
------- -------
Net cash provided by operating activities 35,999 37,562
------- -------
INVESTING ACTIVITIES:
Net decrease in money market investments 111,086 31,352
Securities available-for-sale:
Proceeds from sales --- 6,883
Proceeds from maturities 331,313 110,977
Purchases (331,537) (96,278)
Net increase in loans and leases (165,807) (81,803)
Purchases of premises and equipment (3,802) (5,432)
Net cash used for acquisition of banks --- (59,434)
------- --------
Net cash used by investing activities (58,747) (93,735)
------- -------
FINANCING ACTIVITIES:
Net decrease in demand and savings deposits (44,403) (141,968)
Net increase in time deposits 28,519 120,116
Net increase (decrease) in short-term borrowings 32,309 (20,236)
Proceeds from issuance of long-term debt 20,000 115,000
Principal reductions in long-term debt (40,055) (1,465)
Cash dividends paid (10,796) (9,487)
Proceeds from stock options exercised 1,335 1,202
Shares acquired for retirement (1,421) ---
------- -------
Net cash provided (used) by financing activities (14,512) 63,162
-------- -------
Net increase (decrease) in cash and due from banks (37,260) 6,989
Cash and due from banks at beginning of period 172,754 132,092
-------- --------
Cash and due from banks at end of period $135,494 $139,081
======== ========
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</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 nine month periods ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1996. The 1996 nine month results reflect nine 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 seven months of operations
for the same period in 1995. The transaction was accounted for as a purchase
and the four banks ("acquired banks") were merged into Citizens 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.
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 right to service originated mortgage loans sold
with servicing retained. In September 1996, the Corporation sold its
residential mortgage loan servicing operations to LaSalle Home Mortgage
Corporation. The transaction resulted in an immediate pre-tax gain of $1.55
million on mortgage loans serviced for other investors and an additional
deferred gain of $5.1 million on mortgage loans owned by Citizens. The
deferred gain will be recognized over the estimated life of the loans. As a
result of the sale, the statement has no material impact on the Corporation.
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
nine month periods ended September 30, 1996. This discussion should be read in
conjunction with the accompanying unaudited financial statements and notes
thereto appearing on pages 3 through 7 of this report and the Corporation's
1995 Annual Report on Form 10-K.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share data) 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------
FOR THE PERIOD
<S> <C> <C> <C> <C>
Interest income $64,401 $62,779 $191,282 $176,848
Net interest income 37,199 35,045 109,311 101,959
Provision for loan losses 3,021 1,504 6,563 4,504
Investment securities gains 21 15 80 119
Other noninterest income 11,424 9,586 30,653 26,446
Noninterest expense 32,190 30,587 94,867 91,135
Income taxes 3,830 3,571 11,010 9,048
Net income 9,603 8,984 27,604 23,837
Cash dividends 3,758 3,268 10,796 9,487
PER SHARE DATA
Net income:
Primary $ 0.65 $ 0.62 $ 1.88 $ 1.64
Fully diluted 0.65 0.61 1.88 1.63
Cash dividends 0.26 0.23 0.75 0.67
Book value (end of period) -- -- 21.51 20.08
Market value (end of period close) -- -- 28.63 30.38
FINANCIAL RATIOS (ANNUALIZED)
Return on average:
Shareholders' equity 12.50% 12.66% 12.23% 11.66%
Assets 1.11 1.05 1.07 0.99
Net interest margin (FTE) 4.85 4.70 4.78 4.80
Net loan charge-offs to average loans 0.46 0.25 0.32 0.15
Average equity to average total assets 8.87 8.31 8.74 8.46
Nonperforming assets to loans plus other real estate
(end of period) -- -- 0.73 1.03
Nonperforming assets to total assets (end of period) -- -- 0.54 0.74
BALANCE SHEET TOTALS Percent
Change
------
At Period End (September 30):
Assets 1.9 $3,468,007 $3,401,902
Loans 6.8 2,588,323 2,424,110
Deposits 2.8 2,848,817 2,771,152
Shareholders' equity 8.1 309,787 286,612
Average balances:
Assets 6.8 3,450,231 3,229,748
Loans 11.3 2,513,208 2,258,932
Deposits 7.2 2,856,798 2,665,390
Shareholders' equity 10.3 301,462 273,223
- --------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
PERFORMANCE SUMMARY
Selected financial data as of September 30, 1996 and 1995 and for the three and
nine month periods then ended are presented in the table on page 8. As shown,
earnings increased in 1996 resulting from higher net interest and noninterest
income. This improvement was offset in part by higher noninterest expense,
provision for loan losses and income taxes. The 1996 results reflect nine
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 seven
months of operations for the same period in 1995. The 1995 transaction was
accounted for as a purchase and the four banks ("acquired banks") were merged
into Citizens Bank headquartered in Flint, Michigan effective immediately after
the acquisition.
NET INTEREST INCOME
Net interest income and average balances and yields on major categories of
interest-earning assets and interest-bearing liabilities for the three and nine
months ended September 30, 1996 and 1995 are summarized on pages 11 and 12,
respectively. The effects of changes in average market rates of interest
("rate") and average balances ("volume") are quantified in the table below.
<TABLE>
<CAPTION>
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ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
Three Months Ended September 30 Nine Months Ended September 30
------------------------------------------------------------------------
1996 Compared With 1995 1996 Compared With 1995
------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
Net ------------------- Net -------------------
(in thousands) Change(1) Volume Rate(2) Change(1) Volume Rate(2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Money market investments:
Time deposits with banks $ 1 $ 2 $ (1) $ (126) $ (123) $ (3)
Federal funds sold (538) (418) (120) (1,719) (1,480) (239)
Term federal funds sold and
other (633) (627) (6) (932) (833) (99)
Investment securities:
Taxable 26 (182) 208 1,343 959 384
Tax-exempt (36) 38 (74) (280) (31) (249)
Loans 2,802 3,537 (735) 16,148 16,488 (340)
------ ------ ---- ------- ------- ------
Total 1,622 2,350 (728) 14,434 14,980 (546)
------ ------ ---- ------- ------- ------
INTEREST EXPENSE:
Deposits:
Demand (126) (24) (102) (259) 103 (362)
Savings (436) (166) (270) (880) (202) (678)
Time 1,015 1,339 (324) 8,778 7,018 1,760
Short-term borrowings 11 259 (248) 238 619 (381)
Long-term debt (996) (1,063) 67 (795) (820) 25
------ ------ ---- ------- ------- ------
Total (532) 345 (877) 7,082 6,718 364
------ ------ ---- ------- ------- ------
NET INTEREST INCOME $2,154 $2,005 $149 $ 7,352 $ 8,262 $ (910)
====== ====== ==== ======= ======= ======
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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.
9
<PAGE> 10
Favorable three and nine month volume related variances in net interest income
partially offset by a negative rate variance for the nine month period resulted
in increases in net interest income of $2,154,000 and $7,352,000 for the three
and nine months ended September 30, 1996 as compared with the same periods in
1995. The February 28, 1995 acquisition accounted for $5,335,000 of the volume
related increases when comparing the nine months ended September 30, 1996 with
the same period of 1995. Loan growth partially offset by time deposit growth
accounted for the remaining nine month as well as the three month volume
increases.
The net interest margin increased from 4.70% to 4.85% for the three months ended
September 30, 1996 as compared to the same period in the prior year due
primarily to a decrease in the cost of interest bearing liabilities from 4.24%
to 4.12% during these periods. This decline resulted from lower deposit costs
partially offset by higher long term debt costs. The overall yield on earning
assets increased one basis point for the three months ended September 30, 1996
compared to the same period in the prior year.
Yields on earning assets increased slightly to 8.23% from 8.18% for the nine
months ended September 30, 1996 as compared with the same period of 1995. This
improvement was primarily due to higher yields on residential real estate and
consumer loans and lease financing. The cost of interest bearing liabilities
increased to 4.15% from 4.07% for the nine months ended September 30, 1996 as
compared with the same period in 1995. This increase was attributable to higher
costs for time deposits and long-term debt partially offset by slightly lower
costs on demand and savings deposits and short term debt. These changes
resulted in a slight decline in the net interest margin to 4.78% from 4.80% for
the nine months ended September 30, 1996 compared with the same period of 1995.
If market rates were to shift significantly in 1996, corresponding changes in
funding costs would need to be considered to avoid a negative impact on net
interest income. The Corporation's policies in this regard are further
discussed in the section titled "Interest Rate Risk".
10
<PAGE> 11
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
1996 1995
------------------------------ ------------------------------
Three Months Ended September 30
(in thousands) AVERAGE AVERAGE Average Average
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 $ 186 $ 2 4.85% $ 74 $ 1 5.97%
Federal funds sold 27,839 303 4.33 55,242 841 6.04
Term federal funds sold and other 3,694 40 4.29 49,173 673 5.43
Investment securities(3):
Taxable 402,374 5,945 5.90 417,126 5,919 5.65
Nontaxable 174,175 2,303 8.18 172,195 2,339 8.40
Loans and leases:
Commercial 987,475 21,359 8.71 933,316 21,118 9.09
Real estate 528,952 10,941 8.27 441,282 9,175 8.32
Consumer 1,005,517 22,587 8.94 974,829 21,727 8.85
Lease financing 53,346 921 6.91 59,711 986 6.60
---------- ------- ---- ---------- ------- ----
Total earning assets(3) 3,183,558 64,401 8.25 3,102,948 62,779 8.24
------- -------
NONEARNING ASSETS
Cash and due from banks 128,538 144,705
Bank premises and equipment 62,189 63,840
Other nonearning assets 105,822 114,346
Allowance for loan losses (35,601) (34,194)
---------- ----------
Total assets $3,444,506 $3,391,645
========== ==========
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits $ 312,218 1,375 1.75 $ 316,530 1,501 1.88
Savings deposits 898,020 6,141 2.72 920,281 6,577 2.84
Time deposits 1,174,073 16,385 5.55 1,077,213 15,370 5.66
Repurchase agreements and other short-term
borrowings 176,192 1,981 4.47 155,296 1,970 5.03
Long-term debt 67,091 1,320 7.82 123,329 2,316 7.45
---------- ------- ---- ---------- ------- ----
Total interest-bearing liabilities 2,627,594 27,202 4.12 2,592,649 27,734 4.24
------- -------
NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS'
EQUITY
Demand deposits 464,414 466,115
Other liabilities 46,996 51,360
Shareholders' equity 305,502 281,521
---------- ----------
Total liabilities and shareholders' equity $3,444,506 $3,391,645
========== ==========
NET INTEREST INCOME $37,199 $35,045
======= =======
4.85% 4.70%
NET INTEREST INCOME AS A PERCENT OF EARNING ASSETS
- --------------------------------------------------------------------------------------------------------------------------------
</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 $1,447 and $1,500
for the three months ended September 30, 1996 and 1995,
respectively, based on a tax rate of 35%.
(3) For presentation in this table, average balances and the
corresponding average rates for investment securities are
based upon historical cost, adjusted for amortization of premiums
and accretion of discounts.
11
<PAGE> 12
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES/NET INTEREST INCOME/AVERAGE RATES
1996 1995
------------------------------- -------------------------------
Nine Months Ended September 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 $1,935 $ 83 5.73% $ 4,708 $ 209 5.92%
Federal funds sold 39,970 1,565 5.23 72,829 3,284 6.03
Term federal funds sold and other 26,518 1,060 5.36 46,342 1,992 5.75
Investment securities(3):
Taxable 419,808 18,120 5.76 402,042 16,777 5.57
Nontaxable 174,789 6,864 8.10 176,499 7,144 8.35
Loans and leases
Commercial 967,543 63,135 8.81 892,093 60,652 9.17
Real estate 503,857 31,615 8.37 427,825 26,532 8.27
Consumer 985,595 65,963 8.94 873,492 57,064 8.73
Lease financing 56,213 2,877 6.82 65,522 3,194 6.50
---------- ------- -------- ---------- -------- ----
Total earning assets(3) 3,176,228 191,282 8.23 2,961,352 176,848 8.18
------- --------
NONEARNING ASSETS
Cash and due from banks 137,137 140,788
Bank premises and equipment 62,536 61,355
Other nonearning assets 109,573 98,057
Allowance for loan losses (35,243) (31,804)
---------- ----------
Total assets $3,450,231 $3,229,748
========== ==========
INTEREST-BEARING LIABILITIES
Deposits:
Demand deposits $ 314,390 4,059 1.72 $ 307,287 4,318 1.88
Savings deposits 905,167 18,335 2.71 911,279 19,215 2.82
Time deposits 1,175,463 49,361 5.61 1,002,533 40,583 5.41
Repurchase agreements and other
short-term borrowings 159,047 5,493 4.61 142,634 5,255 4.93
Long-term debt 82,899 4,723 7.61 97,810 5,518 7.54
---------- ------- -------- ---------- ------- -------
Total interest-bearing liabilities 2,636,966 81,971 4.15 2,461,543 74,889 4.07
------- --------
NONINTEREST-BEARING LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits 461,778 444,291
Other liabilities 50,025 50,691
Shareholders' equity 301,462 273,223
---------- ----------
Total liabilities and shareholders'
equity $3,450,231 $3,229,748
========== ==========
NET INTEREST INCOME $109,311 $101,959
======== ========
NET INTEREST INCOME AS A PERCENT OF
EARNING ASSETS 4.78% 4.80%
- ------------------------------------------------------------------------------------------------------------------------------------
</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 $4,456 and $4,502 for
the nine months ended September 30, 1996 and 1995, respectively, based
on a tax rate of 35%.
(3) For presentation in this table, average balances and the corresponding
average rates for investment securities are based upon historical cost,
adjusted for amortization of premiums and accretion of discounts.
12
<PAGE> 13
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Management provides for possible loan losses at a rate considered appropriate
based on judgments regarding economic conditions, historical loss experience,
the size and composition of the loan portfolio, the amount and character of
nonperforming assets, estimated future net charge-offs and other factors. A
summary of loan loss experience during the three and nine months ended September
30, 1996 and 1995 is provided below. The provision for loan losses increased
$1,516,000 and $2,059,000 during the three and nine months ended September 30,
1996, respectively, as compared with the same periods in 1995. The allowance
for loan losses increased $1.4 million to $35.3 million at September 30, 1996 as
compared to September 30, 1995. The ratio of net loans charged off to average
loans outstanding increased 19 and 17 basis points for the three and nine months
ended September 30, 1996, respectively, as compared to the same periods in
1995. The increase was primarily due to the charge-off of a single commercial
credit. A corresponding amount was added to the provision for loan losses.
Excluding this isolated commercial credit, net loan charge-offs to average loans
outstanding would have been 26 and 25 basis points for the three and nine months
ended September 30, 1996, respectively, as compared to the same periods in
1995. Unusually high recoveries in the first nine months of 1995 also
contributed to the year to year variance.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for loan losses - beginning of period $ 35,256 $ 33,893 $ 34,771 $ 24,714
Allowance of Acquired Banks --- --- --- 7,235
Charge-offs 3,927 2,340 8,622 5,605
Recoveries 987 843 2,625 3,052
---------- ---------- ---------- ----------
Net charge-offs 2,940 1,497 5,997 2,553
Provision for loan losses 3,021 1,504 6,563 4,504
---------- ---------- ---------- ----------
Allowance for loan losses - end of period $ 35,337 $33,900 $ 35,337 $ 33,900
========== ========== ========== ==========
Loans outstanding at period end $2,588,323 $2,424,110 $2,588,323 $2,424,110
Average loans outstanding during period 2,575,289 2,409,138 2,513,208 2,258,932
Allowance for loan losses as a percentage of loans
outstanding at period end 1.37% 1.40% 1.37% 1.40%
Ratio of net charge-offs during period to average
loans outstanding (annualized) 0.46 0.25 0.32 0.15
Loan loss coverage (allowance as a multiple of net
charge-offs, annualized) 3.0 X 5.7 x 4.4 X 10.0 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 "Nonperforming Assets."
<PAGE> 14
NONINTEREST INCOME
A summary of significant sources of noninterest income during the three and
nine months ended September 30, 1996 and 1995 follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME Three Months Ended Nine Months Ended Percent
September 30, September 30, Change in 1996
------------------ ----------------- ----------------------
(in thousands) Three Nine
1996 1995 1996 1995 months months
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Trust fees $3,044 $2,974 $ 9,274 $ 8,473 2.4% 9.5%
Service charges on deposit accounts 2,707 2,506 7,625 7,256 8.0 5.1
Bankcard fees 1,546 1,304 4,338 3,824 18.6 13.4
Brokerage and investment fees 466 394 1,443 951 18.3 51.7
Other loan income 1,885 633 2,777 1,445 197.8 92.2
ATM network user fees 537 488 1,491 1,222 10.0 22.0
Cash management services 366 286 1,018 730 28.0 39.5
Safe deposit rentals 286 278 842 740 2.9 13.8
Investment securities gains 21 15 80 119 (40.0) (32.8)
Other, net 587 723 1,845 1,805 (18.8) 2.2
------- ------ ------- -------
Total noninterest income $11,445 $9,601 $30,733 $26,565 19.2% 15.7%
======= ====== ======= =======
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The nine months ended September 30, 1996 include the operations of the acquired
banks, as compared with seven months of operations for the same period in 1995.
Noninterest income for the three and nine months ended September 30, 1996
increased 19.2% and 15.7%, respectively, as compared to the same periods in
1995.
Excluding the impact of the 1995 acquisition for the nine month period ending
September 30, 1996, the following categories had significant increases when
compared to the same period in the prior year. Higher transaction volumes
increased bankcard fee income for both the three and nine months ended September
30, 1996. Brokerage and investment fees increased 18.3% and 39.3% for the three
and nine months ended September 30, 1996, respectively, as compared to the same
periods in 1995, the result of increased market penetration. Increased volume
and improved pricing strategies resulted in higher ATM network user fees for
both the three and nine months ended September 30, 1996. Cash management service
fees increased 28.0% and 34.0% for the three and nine months ended September 30,
1996 as compared to the previous year. This increase is volume related as
customers have responded to enhanced investment options which include various
money market funds from which the Corporation receives a management fee. Safe
deposit rental fees increased for both the three and nine month periods ended
September 30, 1996 as compared to the same periods in the prior year, as a
result of pricing increases.
In July 1996, the Corporation announced the sale of its residential mortgage
loan servicing operations to LaSalle Home Mortgage Corporation. The transaction
was completed in September and resulted in an immediate gain of $1.55 million on
mortgage loans serviced for other investors. An additional deferred gain of
$5.1 million on mortgages owned by Citizens will be recognized over the
estimated life of the loans. Excluding this gain, other loan income declined
for the three and nine months ended September 30, 1996 primarily due to fewer
sales of mortgage loans into the secondary market.
When excluding the impact of the 1995 acquisition, variances for the following
income categories were not significant: trust income, service charges on
deposits and other miscellaneous income.
14
<PAGE> 15
NONINTEREST EXPENSE
Significant changes in noninterest expense during the three and nine months
ended September 30, 1996 compared with the same period of 1995 are summarized in
the table below.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE Three Months Ended Nine Months Ended Percent
September 30, September 30, Changes in 1996
------------------ ----------------- ------------------
(in thousands) Three Nine
1996 1995 1996 1995 Months Months
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $17,258 $16,712 $51,217 $48,028 3.3% 6.6%
Equipment 2,476 2,536 7,335 7,294 (2.4) 0.6
Occupancy 2,402 2,282 7,136 6,590 5.3 8.3
Intangible asset amortization 1,370 1,330 4,098 3,358 3.0 22.0
FDIC insurance premiums 1 68 8 2,981 (98.5) (99.7)
Bankcard fees 1,020 785 2,683 2,122 29.9 26.4
Stationery and supplies 889 898 2,565 2,602 (1.0) (1.4)
Postage and delivery 917 891 2,636 2,317 2.9 13.8
Advertising and public relations 773 697 2,665 2,082 10.9 28.0
Taxes, other than income taxes 699 605 2,000 1,844 15.5 8.5
Other loan fees 872 502 2,448 1,327 73.7 84.5
Consulting and other professional fees 886 323 1,924 1,545 174.3 24.5
Legal, audit and examination fees 346 389 1,075 1,261 (11.1) (14.8)
------- ------- ------- -------
2,281 2,569 7,077 7,784 (11.2) (9.1)
------- ------- ------- -------
Total noninterest expense $32,190 $30,587 $94,867 $91,135 5.2% 4.1%
======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest expense reflects an increase of 5.2% and 4.1% for the three and
nine months ended September 30, 1996, respectively, when compared with the same
periods in 1995. Excluding the effect of the 1995 acquisition, noninterest
expense in the first nine months of 1996 increased a modest 3.2 %.
SALARIES AND EMPLOYEE BENEFITS
Excluding the effects of the 1995 acquisition, salaries and employee benefits
expense was $44,356,000 in the first nine months of 1996 as compared to
$42,294,000 in 1995, an increase of 4.9%. For the three months ended September
30, 1996 salary and employee benefits increased 3.3% as compared to the same
period in 1995. Cost savings attributable to staff reductions through attrition
partially offset the effects of normal merit increases. Management anticipates
that the ongoing consolidation of operational functions throughout the
Corporation will continue to mitigate the need to replace staff lost through
normal attrition.
The Financial Accounting Standards Board issued Statement No. 123, "Accounting
for Stock Based Compensation" in October 1995, effective for the Corporation's
year end 1996 financial statements. The Corporation does not intend to adopt
the recognition provisions of the Statement but will continue accounting for
stock options in accordance with Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" as permitted by the new Statement.
Therefore, adoption will not materially impact the Corporation.
OTHER NONINTEREST EXPENSE
Excluding the effect of the first quarter 1995 acquisition, other noninterest
expenses increased 1.25%. The most significant decline was the reduction of
FDIC (Federal Deposit Insurance Corporation) premiums. Effective June 1, 1995
FDIC assessments were reduced from 23 cents to 4 cents per $100 of deposits for
banks meeting the requirements of supervisory risk subgroup 1.A. "well
capitalized". Both of the Corporation's subsidiaries have sufficient capital to
maintain a "well capitalized" designation, (the FDIC's highest rating). On
December 11, 1995, the FDIC amended the assessment rate schedule to reduce
assessments on deposits for "well capitalized" banks to zero effective for the
first semiannual assessment period in 1996. Further regulatory changes could
impact the amount and type of assessments paid by the Corporation's subsidiary
banks.
15
<PAGE> 16
In October 1995, the Corporation announced the consolidation of its six Michigan
chartered banks into one bank called Citizens Bank. The consolidation, which
occurred in June 1996, will further streamline operations and reduce certain
costs but will retain local management and respective boards of directors. Also
in 1995, the Corporation announced its Process Improvement Project, a series of
productivity initiatives designed to increase revenues and reduce operating
expenses throughout the Corporation. The Corporation expects to achieve
financial benefits as a result of these initiatives.
Both loan fees and advertising and public relations expense increased
significantly for the three and nine months ended September 30, 1996 as compared
to the same periods in 1995. Excluding the impact of the 1995 acquisition for
the nine month period, loan fees increased $1,121,000 as compared to the prior
year. The three month period also increased $370,000 as compared to the prior
year. This increase is directly related to increased loan volumes resulting in
additional mortgage appraisal and processing fees expense. The additional
mortgage costs are more than offset by increases in mortgage application,
origination and processing income collected as a result of the large volume
increases. This related income is reflected in the Corporation's net interest
income. Advertising and public relations expenses increased during the three
and nine months ended September 30, 1996 as compared to the same period last
year, due in part to a promotional campaign related to the June 1996
consolidation of the Corporation's six Michigan banks.
Legal, audit and examination fees decreased for the three and nine months ended
September 30, 1996 as compared to the same periods in 1995 primarily due to a
reduction in loan collection related expenses. Stationery and supplies expense
declines during the three and nine months of 1996 as compared to the same period
in 1995 were the result of significant 1995 integration and conversion costs
associated with the acquisition. The large increases in consulting and other
professional services for the three and nine months of 1996 as compared to the
same period in 1995 resulted from deposit and loan product standardization and
from other ongoing Corporate automation initiatives.
When excluding the impact of the 1995 acquisition for the nine month period all
other expense categories which include equipment, occupancy, intangible asset
amortization, postage and other expense had insignificant changes for the three
and nine months ended September 30, 1996 when compared to the same period in the
prior year.
INCOME TAXES
Federal income tax expense increased $259,000 and $1,962,000 for the three and
nine months ended September 30, 1996, respectively, as compared to the same
periods of 1995 resulting from higher pre-tax earnings and a lower level of
tax-exempt interest income.
BALANCE SHEET
The Corporation had total assets of $3.468 billion as of September 30, 1996, an
increase of $4.0 million or 0.1% from $3.464 billion as of December 31, 1995.
Average earning assets comprised 92.1% of average total assets during the first
nine months of 1996 compared with 91.5% in the first nine months of 1995.
INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
Total average investments, including money market investments, comprised 20.9%
of average earning assets during the first nine months of 1996, compared with
23.8% for the same period of 1995. Average money market investment balances
decreased to 2.2% of total average earning assets during the first nine months
of 1996 from 4.2% during the corresponding period of 1995 as short term
investments were shifted to longer term investments and utilized to fund loan
growth.
LOANS
The Corporation extends credit primarily within the market areas of its Michigan
and Illinois banking subsidiaries. The loan portfolio is widely diversified by
borrowers and industry groups with no significant concentrations in any
industry. Total average loans increased 11.3% (7.4% excluding the effect of the
acquired banks) in the first nine months of 1996 compared with the same period
of 1995. The increases occurred in all loan categories.
16
<PAGE> 17
NEW ACCOUNTING STATEMENTS
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 sold with servicing
retained. In September 1996, the Corporation sold its residential mortgage
loan servicing operations to LaSalle Home Mortgage Corporation. As a result of
the sale, the Statement has no material impact on the Corporation.
In March 1995 the 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.
In June 1996 the Financial Accounting Standards Board issued Statement No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities". The Statement establishes accounting and reporting standards
to assist in determining when to recognize or derecognize financial assets and
liabilities in the financial statements after a transfer of financial assets has
occurred. The Corporation will adopt the Statement effective January 1, 1997
and does not expect the impact to be 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 September 30, 1996, loans considered to be impaired under the Statements
totalled $19.6 million (of which $10.9 million were on a nonaccrual basis).
Included within this amount is $7.0 million of impaired loans for which the
related allowance for loan losses is $0.4 million and $12.6 million of impaired
loans for which the fair value exceeded the recorded investment in the loan.
The average recorded investment in impaired loans during the quarter ended
September 30, 1996 was approximately $21.9 million. For the quarter ended
September 30, 1996, the Corporation recognized interest income of $0.4 million
which included $0.2 million of interest income recognized using the cash basis
method of income recognition.
At September 30, 1995, loans considered to be impaired under the Statements
totalled $20.6 million (of which $13.4 million were on a nonaccrual basis).
Included within this amount is $6.6 million of the impaired loans for which the
related allowance for loan losses is $1.4 million and $14.0 million of impaired
loans for which the fair value exceeded the
17
<PAGE> 18
recorded investment in the loan. The average recorded investment in
impaired loans during the quarter ended September 30, 1995 was approximately
$19.7 million. For the quarter ended September 30, 1995, the Corporation
recognized interest income of $ 0.4 million which included $0.2 million of
interest income recognized using the cash basis method of income recognition.
Nonperforming assets consist of nonaccrual loans, restructured loans, loans 90
days past due and still accruing interest, and other real estate owned. The
Corporation changed its nonperforming asset policy in the third quarter of 1995
to include loans 90 days past due and still accruing in the nonperforming asset
category. Previously these loans were considered underperforming assets. All
nonperforming asset disclosures contained in this filing have been adjusted to
reflect this change. Certain of these loans, as defined above, are considered
to be impaired under the Statements. The Corporation maintains policies and
procedures to identify and monitor nonaccrual loans. A loan (including a loan
impaired under the Statements) is placed on nonaccrual status when there is
doubt regarding collection of principal or interest, or when principal or
interest is past due 90 days or more and the loan is not well secured and in the
process of collection. Interest accrued but not collected is reversed and
charged against income when the loan is placed on nonaccrual status.
The table below provides a summary of nonperforming assets as of September 30,
1996, December 31, 1995 and September 30, 1995. Total nonperforming assets
amounted to $18.9 million as of September 30, 1996, compared with $21.1 million
as of December 31, 1995 and $25.1 million as of September 30, 1995. Overall,
nonperforming assets decreased from December 31, 1995 due to reduced levels of
nonaccrual loans and other real estate, resulting in a decrease in nonperforming
assets as a percentage of total loans plus OREO and total assets.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
SEPTEMBER 30, December 31, September 30,
(in thousands) 1996 1995 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NONPERFORMING LOANS
Nonaccrual:
Less than 30 days past due $ 6,163 $ 4,783 $ 5,248
From 30 to 89 days past due 1,457 784 1,574
90 or more days past due 9,022 13,057 15,628
------- ------- --------
Total 16,642 18,624 22,450
90 days past due and still accruing 637 432 109
Restructured 520 494 527
------- ------- --------
Total nonperforming loans 17,799 19,550 23,086
OTHER REAL ESTATE OWNED ("OREO")
1,086 1,568 1,980
------- ------- --------
Total nonperforming assets
$18,885 $21,118 $25,066
======= ======= =======
Nonperforming assets as a percent of total loans plus OREO 0.73% 0.87% 1.03%
Nonperforming assets as a percent of total assets 0.54 0.61 0.74
- ----------------------------------------------------------------------------------------------------------------
</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 September 30, 1996 such credits amounted to $8.3 million or 0.3
% of total loans, compared with $10.8 million or 0.5% at December 31, 1995 and
$14.1 million or 0.6% as of September 30, 1995. These loans are primarily
commercial and commercial real estate loans made in the normal course of
business and do not represent a concentration in any one industry.
18
<PAGE> 19
DEPOSITS
The Corporation gathers deposits primarily in its local markets and historically
has not relied on brokered funds to sustain liquidity. Average deposits
increased 7.2% (4.0 % excluding the 1995 acquisition effect) in the first nine
months of 1996 compared to the same period in 1995. The shift in customer
preferences from savings deposits to time deposit alternatives reflects changing
customer liquidity preferences and the desire for higher interest rates.
Management seeks to maintain core deposit stability by offering customers a wide
range of deposit products at competitive rates.
SHORT-TERM BORROWINGS AND LONG-TERM DEBT
On average, total short-term borrowings increased to $159.0 million during the
first nine months of 1996 compared with $142.6 million during the same period of
1995. Long-term debt accounted for $82.9 million or 3.1% of average
interest-bearing funds for the nine months ended September 30, 1996, compared
with $97.8 million or 4.0% for the same period in 1995. To finance the February
28, 1995 acquisition of the four banks, the Corporation's Parent company
obtained a $115 million seven year amortizing revolving credit facility. The
outstanding balance of $58.4 million at September 30, 1996 has a fixed rate of
7.65%. Of this amount, $51.4 million reprices in March 1997 and $7.0 million in
March 1998. 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 September 30, 1996.
CAPITAL RESOURCES
REGULATORY CAPITAL REQUIREMENTS
Bank holding companies, such as the Corporation, and their bank subsidiaries are
required by banking regulators to meet certain minimum levels of capital
adequacy. These are expressed in the form of 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
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 in excess
of all regulatory standards.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
CAPITAL RATIOS Regulatory
Minimum For
"Well SEPTEMBER 30, December 31, September 30,
Capitalized" 1996 1995 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk based capital:
Tier I 6.0% 9.2% 8.8% 8.7%
Total capital 10.0 10.5 10.0 10.0
Tier I leverage 5.0 7.2 6.7 6.5
- ----------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
COMMON AND PREFERRED STOCK
The Corporation maintains a stock repurchase program initiated in November
1987. During the third quarter of 1996, 49,000 shares were repurchased under
this program. Since inception, a total of 1,181,470 shares have been purchased
under this program at an average price of $15.26 per share. Most of these
shares were reissued in connection with a purchase acquisition in October 1993
and the Corporation's stock option plan.
OTHER
Total shareholders' equity was $309.8 million or $21.51 per share as of
September 30, 1996, compared with $297.2 million or $20.73 per share as of
December 31, 1995 and $286.6 million or $20.08 per share as of September 30,
1995. The Corporation declared cash dividends of $0.75 per share during the
first nine months of 1996, an increase of 11.9% over the $0.67 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
SEPTEMBER 30, December 31, September 30,
1996 1995 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Quarterly average:
Loans to deposits 90.4% 86.5% 86.7%
Liquid assets to deposits 11.9 17.0 16.5
Total long-term debt to equity 27.6 35.5 43.0
- ------------------------------------------------------------------------------------------
</TABLE>
The Corporation's quarterly average loan to deposit ratio increased to 90.4% at
September 30, 1996 from 86.5% at December 31, 1995 as loan growth exceeded
deposit growth. The Corporation's quarterly average liquid asset to deposits
ratio declined to 11.9% from 17.0% at December 31, 1995 due to loan growth and a
shift from U.S. treasury investments into Federal agency investments. 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 27.6% at September 30, 1996 from 35.5% at December 31,
1995. The parent will continue to service the scheduled principal and interest
payments with dividends from the Corporation's subsidiary banks. Management
believes that the Corporation has sufficient liquidity to meet presently known
cash flow requirements arising from ongoing business transactions.
20
<PAGE> 21
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
September 30, 1996 is illustrated in the following table. As presented, the
Corporation's interest rate risk position is well balanced in the less than one
year time frame with rate sensitive assets exceeding rate sensitive liabilities
by only $11.6 million. This position suggests that the Corporation's net
interest income may not be significantly impacted by changes in interest rates
over the next 12 months. Management is continually reviewing its interest rate
risk position and modifying its strategies based on projections to minimize the
impact of future interest rate 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
September 30, 1996 1-30 31-90 91-180 181-365 WITHIN 1-5 Over
(in millions) Days Days Days Days 1 YEAR Years 5 Years Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS
Loans and leases $827.5 $ 97.0 $ 145.0 $ 282.5 $1,352.0 $ 905.3 $331.0 $2,588.3
Investment securities 7.4 27.3 21.2 34.2 90.1 358.3 115.3 563.7
Short-term investments 38.7 --- --- --- 38.7 --- --- 38.7
Total $873.6 $ 124.3 $ 166.2 $ 316.7 $1,480.8 $1,263.6 $446.3 $3,190.7
====== ======= ======= ======= ======== ======== ====== ========
RATE SENSITIVE LIABILITIES
Deposits (2) $156.8 $ 264.7 $ 307.7 $ 461.5 $1,190.7 $ 985.4 $181.1 $2,357.2
Short-term borrowings 178.3 --- --- --- 178.3 --- --- 178.3
Long-term debt 22.5 --- 51.5 0.1 74.1 6.9 4.4 85.4
------ ------ ------- ------- -------- -------- ------ --------
Total $357.6 $ 264.7 $ 359.2 $ 461.6 $1,443.1 $ 992.3 $185.5 $2,620.9
====== ======= ======= ======= ======== ======== ====== ========
Period GAP (1) $516.0 $(140.4) $(193.0) $(144.9) $ 37.7 $ 271.3 $260.8 $ 569.8
Cumulative GAP 516.0 375.6 182.6 37.7 309.0 569.8
Cumulative GAP to
Total Assets 14.88% 10.83% 5.26% 1.09% 1.09% 8.91% 16.43% 16.43%
Multiple of Rate Sensitive
Assets to Liabilities 2.44 0.47 0.46 0.69 1.03 1.27 2.41 1.22
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) GAP is the excess of rate sensitive assets (liabilities).
(2) Includes interest bearing savings and demand deposits of $347 million
in the less than one year category, and $849 million in the over one
year category, based on historical trends for these noncontractual
maturity deposit types, which reflects industry standards.
21
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS--None
ITEM 2. CHANGES IN SECURITIES--None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES--None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--None
ITEM 5. OTHER INFORMATION--None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 3. Exhibits:
(11) Statement re: computation of per share earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K:
none
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITIZENS BANKING CORPORATION
Date November 6, 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)
22
<PAGE> 23
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
11 Statement Re: 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 Nine Months Ended
- -------------------------------------------------------------------------------------------------------------------
September 30, September 30,
(in thousands, except per share amounts) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INCOME: $9,603 $8,984 $27,604 $23,837
====== ====== ======= =======
PRIMARY EARNINGS PER SHARE:
Actual average shares outstanding 14,431 14,238 14,403 14,181
Net effect of the assumed exercise of stock options --
based on the treasury stock method using average
market price for the period 245 388 279 364
------ ------ ------ ------
Pro forma average shares outstanding 14,676 14,626 14,682 14,545
====== ====== ====== ======
Net Income Per Share $ 0.65 $ 0.62 $ 1.88 $ 1.64
====== ====== ====== ======
FULLY DILUTED EARNINGS PER SHARE:
Actual average shares outstanding 14,431 14,238 14,403 14,181
Net effect of the assumed exercise of stock options --
based on the treasury stock method using higher of
average or closing market price 248 388 279 409
Pro forma average shares outstanding 14,679 14,626 14,682 14,590
====== ====== ====== ======
Net Income Per Share $ 0.65 $ 0.61 $ 1.88 $ 1.63
====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JUL-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 135,494 135,494
<INT-BEARING-DEPOSITS> 212 212
<FED-FUNDS-SOLD> 38,536 38,536
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 563,651 563,651
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 2,588,323 2,588,323
<ALLOWANCE> 35,337 35,337
<TOTAL-ASSETS> 3,468,007 3,468,007
<DEPOSITS> 2,848,817 2,848,817
<SHORT-TERM> 178,333 178,333
<LIABILITIES-OTHER> 45,714 45,714
<LONG-TERM> 85,356 85,356
0 0
0 0
<COMMON> 91,394 91,394
<OTHER-SE> 218,393 218,393
<TOTAL-LIABILITIES-AND-EQUITY> 3,468,007 3,468,007
<INTEREST-LOAN> 163,590 55,808
<INTEREST-INVEST> 27,692 8,593
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 191,282 64,401
<INTEREST-DEPOSIT> 71,755 23,901
<INTEREST-EXPENSE> 81,971 27,202
<INTEREST-INCOME-NET> 109,311 37,199
<LOAN-LOSSES> 6,563 3,021
<SECURITIES-GAINS> 80 21
<EXPENSE-OTHER> 94,867 32,190
<INCOME-PRETAX> 38,614 13,433
<INCOME-PRE-EXTRAORDINARY> 27,604 9,603
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 27,604 9,603
<EPS-PRIMARY> 1.88 .65
<EPS-DILUTED> 1.88 .65
<YIELD-ACTUAL> 8.23 8.25
<LOANS-NON> 16,642 16,642
<LOANS-PAST> 637 637
<LOANS-TROUBLED> 520 520
<LOANS-PROBLEM> 8,300 8,300
<ALLOWANCE-OPEN> 34,771 35,256
<CHARGE-OFFS> 8,622 3,927
<RECOVERIES> 2,625 987
<ALLOWANCE-CLOSE> 35,337 35,337
<ALLOWANCE-DOMESTIC> 27,214 27,214
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 8,123 8,123
</TABLE>
